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PSG Equity Fund Update

PSG Equity Fund Update. Shaun le Roux May 2012. The tale of two worlds on the JSE. Performance Commentary. Our process generates high conviction buys on a long term view and as a result will differ widely from the index. Short term under-performance is inevitable.

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PSG Equity Fund Update

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  1. PSG Equity Fund Update Shaun le Roux May 2012

  2. The tale of two worlds on the JSE

  3. Performance Commentary Our process generates high conviction buys on a long term view and as a result will differ widely from the index. Short term under-performance is inevitable. Our strict focus on quality and margin of safety will protect portfolios in tough markets. Be aware of timing differences resulting from offshore equity.

  4. PSGAM: Investment Process Structured process (‘the 3 M’s”) Detailed analysis High conviction Buy List

  5. Investment Process Philosophy Investment Universe Idea Generation Proprietary screens, track on the Idea Board FundamentalAnalysis Detailed analysis: does stock meet our investment criteria of the 3M’s Buy List Investment Committee determines Buy List Portfolio Construction Fund manager implements Buy List at own discretion after taking into consideration fund mandate

  6. Equity Team - Research Domestic Buy List Offshore Buy List

  7. PSGAM: Portfolio Segmentation Compounding Returns (CR) Mean reversion (MR) Long term holding. Value of growth in franchise Ruthless on valuation. High margin of safety Moat

  8. The Beauty of High Growth Compounders Value High Growth Low Weak Strong Moat

  9. PSGAM: Our Domestic Equity Investment Universe Conviction positions (2%+) Entry/exit within 10 days 50% of ave daily trade PSGAM #stocks Equity FUM (R’m) March 2012

  10. Portfolio Construction April 2012

  11. Attribution 2011: Good breadth (70%) Hurt by AGL, BIL Hurt by very low defensive domestic Offshore added value

  12. High Level View of our Buy List Sold most of our large cap compounders: still see value in Steinhoff Conviction positions in large cap mean reverters: Anglo, BHP, Sasol Selected mid and small cap compounders still offer reasonable to good value: Brimstone, Nampak, Kagiso Media, EOH, Capevin,, Advtech, Adcorp. Significant margin of safety in mid and small cap mean reverters: Tongaat, Grindrod, Eqstra. Full use of offshore allowance: Built conviction in cheap compounders: Tesco, Berkshire, eBay, Labcorp, Heineken.

  13. PSG Equity: Top Holdings

  14. Major Portfolio Changes 2011/2012 Sells MTN Tiger Brands BAT SAB Miller Naspers Buys Nampak Brimstone Tongaat Grindrod Tesco, eBay, Labcorp, Heineken

  15. The Opportunity: Selected Global Stocks PSGAM research capability Pass offshore stocks through the same process Backdrop: Low growth in the West Disenchantment with equities Provides the opportunity to buy global blue chips at excellent prices. Significantly cheaper than SA blue chips.

  16. Example: ING vs Standard Bank

  17. Example: Shoprite vs Tesco

  18. The Opportunity: higher quality Resources

  19. MTN: why we sold Contrarian buying opportunity? Appropriate risk premium? Margin of safety No longer assymetrical pay-off profile.

  20. Stocks: Conviction Bets

  21. Anglo Moat: aggressive move down cost curve, Tier 1 assets. Management: strategic re-focus, alignment with shareholders. Margin of safety: Attractive discount to intrinsic value based on value of assets and through-the-cycle returns to shareholders

  22. Nampak The “New” Nampak: Only owns and invests in companies with a sustainable competitive advantage. - only bevcan in SA, 1 of 2 in glass SA Has a very effective management team that is aligned with shareholders. Has the opportunity to partner with multi-nationals and invest in growth opportunities, particularly in Africa. Generates strong cash flows and pays an attractive dividend (6% fwd dividend yield). Still trades at an attractive discount to fair value.

  23. Brimstone Attractive portfolio of assets with strong competitive positioning. Management have excellent track record of delivering value to shareholders. Opportunity to do deals at discounts. Should you then trade at a discount to value of assets? Buy at a 23% discount to value of assets.

  24. eBay World’s largest online marketplace ( almost 15% of global ecommerce market). PayPal has leadership position in global payments (roughly 18% of global online payment business). e-commerce is growing significantly faster than traditional commerce. The divide between online and offline retailing is blurring. Marketplaces grew revenue by 16% in 2011. Paypal grew revenue by 28% in 2011. Very well positioned for explosive growth in mobile payments and mobile shopping. Asymmetrical pay-off. 20% of share price made up of cash. Fwd PE 13 (at purchase) Very little value attributed to Paypal opportunity.

  25. Tesco Strong moat in the UK. Current difficult trading conditions provides opportunity to acquire world class business with good long term growth prospects at a fantastic price.

  26. Labcorp One of 2 large US clinical laboratory testing businesses. Lab testing is a small, but indispensible part of health care costs Lab testing is set to grow due to an demographic, scientific and regulatory changes in the US. There are significant benefits to scale, LabCorp is a large player and consolidation is set to continue in a fragmented market Opportunity to acquire a business with an outstanding track record in an exciting industry at 14x earnings. Payout yield (buybacks) = 7.6% Free cash flow yield = 8.6%

  27. PSG Equity Fund – The Opportunity • Leverage the PSG Asset Management team and process: • Culture of research • Depth of team • Structured investment process • Offshore research capability and experience • Significantly larger investment universe The PSG Equity Fund is a high conviction view of our Buy List

  28. Questions?

  29. Appendix

  30. PSG Equity Fund – other salient information

  31. Investment Philosophy – The 3 M’s Moat Margin of safety Manage-ment

  32. Moat: a strong focus on business models • Some form of sustainable competitive advantage • Clear and understandable business model • Positive free cash flow, which is distributed to shareholders in the form of dividends

  33. Moat: A story of Compounding Moat High Return on capital business Opportunity to reinvest in business Moat

  34. Moat: which factors are we looking for? • Supply or cost advantage – (weak moat) • Government intervention advantage (tariffs, licenses (e.g. broadcast rights), patents, regulation) – (semi-strong moat but not always enduring) • A demand advantage (through customer captivity) – (strong moat) • Economies of scale and a demand advantage – (the strongest moat) Source : Value Investing, Bruce Greenwald et al, 2001

  35. Management Aligned with shareholders Owners and managers we would like to partner with Proven track records Honest and transparent financial reporting

  36. Margin of safety • Price versus value • Avoid permanent capital loss • Price impacts future returns

  37. Consistent Conservative Contrarian Questions?

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