Citywire Wealth Manager Retreat 2011 Special Situations investing and dealing with potential value traps Alastair Mundy – Portfolio Manager Investec UK Special Situations Fund and Investec Global Special Situations Fund
Citywire Wealth Manager Retreat 2011Special Situations investing and dealing with potential value traps
Alastair Mundy – Portfolio Manager Investec UK Special Situations Fund and Investec Global Special Situations Fund
Performance
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PeriodSector ranking
1 year 30/288
3 years 20/268
5 years 36/238
10 years 17/158
Investec UK Special Situations Fund10 years
Past performance should not be taken as a guide to the future and there is no guarantee that this investment willmake profits; losses may be made. Source: Lipper, dates to 30.09.11, NAV based, (inclusive of all annual management fees but excluding any initial charges), net of UK basic rate tax, in sterling.
102.0
53.3
59.2
-40.%
-20.%
0.%
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40.%
60.%
80.%
100.%
120.%
140.%
Sep-01 Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11
Per
cent
age
gro
wth
Investec UK Special Situations A Acc Net (MF) IMA UK All Companies sector
FTSE All Share index
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-2
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12 14 16 18 20 22 24
Ann
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ed p
erfo
rman
ce %
cha
nge
Annualised standard deviation
Investec UK Special Situations A GBP Acc Net
Funds in this quadrant have exhibited below average risk and above average returns
Investec UK Special Situations Fund Attractive 10 year risk vs. return
Past performance should not be taken as a guide to the future and there is no guarantee that this investment willmake profits; losses may be made. Source: Lipper to 30.09.11, annualised, NAV based, (inclusive of all annual management fees but excluding any initial charges), income (net of UK basic rate tax) reinvested, in sterling. Chart axes converge on IMA UK All Companies. sector averages. Performance refers to the A Acc share class.
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Investec UK Special Situations Fund Low correlation with other funds and high alpha over 10 years
Past performance should not be taken as a guide to the future and there is no guarantee that this investment willmake profits; losses may be made. Lipper to 30.09.11, annualised, NAV based, (inclusive of all annual management fees but excluding any initial charges), income (net of UK basic rate tax) reinvested, in sterling. Correlation data are based on the relative returns of the funds in the IMA UK All Companies sector vs. the average fund against the FTSE All Share over the ten year period to end 30.09.11. Chart axes converge on sector averages. Performance refers to the A Acc share class
This chart illustrates the correlation of our outperformance against the FTSE All-Share index with the outperformance of the average fund in the sector against the FTSE All-Share index, compared with the alpha of the funds.
It indicates that the correlation of our outperformance is very low relative to most other high alpha funds (i.e. we outperform at different times to other high alpha funds) and that we are an ideal fund to blend with other funds to create an optimal portfolio.
-6.0
-4.0
-2.0
2.0
4.0
6.0
8.0
-0.2 0.0 0.2 0.4 0.6 0.8 1.0
Alp
ha (y
axi
s)
Correlation (x axis)
Investec UK Special Situations A GBP Acc Net
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Investec Global Special Situations FundSince inception performance versus IMA Global Growth sector
Past performance should not be taken as a guide to the future and there is no guarantee that this investment willmake profits; losses may be made. Source: Lipper to 30.09.11, NAV based, A Acc shares, inclusive of all annual management fees but excluding any initial charges, net of UK basic rate tax, in sterling.
Period Sector ranking
1 year 47/210
3 years 24/186
Since inception 9/16918.97
-4.87
-40%
-30%
-20%
-10%
0%
10%
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40%
Dec
-07
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-08
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08
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-11
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-11
Per
cent
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wth
From 17/12/2007 to 30/09/2011
Investec Global Special Situations Fund
IMA Global Growth sector
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-10
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Ann
ualis
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erf
% c
hang
e
Annualised standard deviation
Investec Global Special Situations Fund Attractive risk versus return since launch
Past performance should not be taken as a guide to the future and there is no guarantee that this investment willmake profits; losses may be made. Source: Lipper to 30.09.11, annualised, NAV based, (inclusive of all annual management fees but excluding any initial charges), income (net of UK basic rate tax) reinvested, in sterling. Chart axes converge on IMA Global Growth sector averages. Performance refers to the A Acc share class.
Funds in this quadrant have exhibited above average returns and below average risk
Investec Global Special Situations
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-15
-10
-5
0
5
10
-0.2 0.0 0.2 0.4 0.6 0.8 1.0
Alp
ha (y
axi
s)
Correlation (x axis)
Investec Global Special Situations Fund Low correlation with other funds and high alpha over 3 years
Past performance should not be taken as a guide to the future and there is no guarantee that this investment willmake profits; losses may be made. Source: Lipper. Correlation data are based on the relative returns of the funds in the IMA Global Growth sector vs. the average fund against the MSCI World over the 3 year period to 30.09.11. Alpha data are based on Jensen’s alpha and are annualised. Axes are through the average points of the data series
Investec Global Special Situations This chart illustrates the correlation of our outperformance against the MSCI World index with the outperformance of the average fund in the sector against the MSCI World index, compared with the alpha of the funds.
It indicates that the correlation of our outperformance is very low relative to most other high alpha funds (i.e. we outperform at different times to other high alpha funds) and that we are an ideal fund to blend with other funds to create an optimal portfolio.
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How is our investment approach different?
Patience Long waiting periods and long holding periods
Value Committed value investors….we will not chase new paradigms
Contrarian A focus solely on out of favour companies for our buy ideas
Bottom-up We are stock pickers with strong risk controls
Market agnostic Our portfolio is constructed without reference to equity market levels
Downside aware We spend as much time worrying about what might go wrong as about what might go right
Focus on long term performance We are comfortable to struggle in the short-term and explain ourselves in the search for superior long term performance
Evolution and improvement A continual programme of navel-gazing
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Building a contrarian portfolio
Portfolio construction
Analyst research
Balance sheet/ Valuation/ Challenge consensus
UK: FTSE 350 IndexGlobal: MSCI World Index, Mkt.Cap. > $1bn
Stock universe
Identifies out of favour stocks
Stage 1
Stage 2
Stage 3
Contrarian
screen
Fundamental
research
Risk control
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Contrarian screening – an illustration
Source: Bloomberg, Investec Asset Management, June 2011
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CRH/MSCI World
7-year moving average
MAV + 2 st.dev.
MAV + 2 st.dev.
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(i.e.
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7-year moving average (MAV)
Avoiding Value Traps
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Bad things do happen
● History supports investing in out of favour shares
● However, there are many examples of falling knives not recovering
● What strategies do we employ to reduce our chances of catching these falling knives?
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1. Play the averages
● We are not trying to get everything right. Bad things do happen.
● Too much fear can result in paralysis
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2. Patience
● Allow shares to fall significantly before purchase
● Benefits:
− This typically allows us to avoid buying in favour momentum stocks before they collapse...
− ...and also ensures that we can be more aware of the negatives when we are analysing the stocks
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3. Make sure they are cheap
● Buying fallen knives alone is not sufficient – valuation is a key requirement
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4. Scenario testing
● Make sure that a number of different outcomes are tested to ensure the company’s balance sheet is appropriate
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5. Establish your circles of competence
● We cannot hope to be experts on everything
● Some subjects are harder than others
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6. Watch market share moves
● Industries which exhibit large moves in market shares of its competitors suggest that companies are more likely to implode
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7. Consider capacity
● Is it easy for capacity to exit the industry? Are incumbents involved in a race to the bottom?
● Can capacity enter the industry easily and put a lid on returns?
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8. Look for early warning signs
● Analysts continue to focus on the P & L, but sometimes the greatest clues are in the balance sheet
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What doesn’t work for us in spotting value traps
1. Meeting management
● They stretch the truth well and are typically very plausible
● They cannot provide inside information
● They really do believe conditions will improve...but belief is not always enough
2. Forecasting the future
● Forecasting the future is very difficult and can lead to the risk of over-confidence and the refusal to consider other alternatives
3. Buy all falling knives
● Might work...but will provide many sleepless nights
Current Thoughts
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Trailing PE Ratio - Median Stock
FTSE350 ex-Investment Trusts
Median FTSE 350 Price Earnings ratio tells a different story...
Source: Morgan Stanley, 31.08.11
The median stock looks far less attractive...
Equities cheap
Equities expensive
...and assumes the current level of profitability is sustainable
P/E
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...especially as corporate profitability is high
*Post-Tax with IVA CCAA adjSource: BEA, Nomura Strategy research, February 2011, relates to US market and consensus estimates
US profit share of US GDP*
Corporate profitability low
Corporate profitability high
Mean reversion could come through increases in: labour costs, interest costs, tax rates, capital expenditure and raw materials
Appendix
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The Investec Contrarian Strategy is all about‘doing something different’.
We employ a disciplined investment strategy, going against the herd to make long-term investments in cheap, out-of-favour companies with good balance
sheets
The result is an equity strategy that has delivered alpha with relatively low volatility and relatively low correlation
Investment philosophy
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Global Contrarian screen Stage 1 Stage 2 Stage 3
Source: Factset, as at 30.06.11For illustrative purposes only. This is not a buy or sell recommendation for any particular stock.
# st devs Coefficient
below 7 yr Current / 7yr of Ind EV/ EV/ Price/ Div
Company Name average AVG Variation Country Name Sales EBIT Earnings Yld
PostNL N.V. -3.44 -43.31% 12.60% Netherlands Industrials 0.88 7.68 6.81 9.74
Tokyo Electric Power Co. Inc. -3.19 -85.96% 26.97% Japan Utilities 1.48 - - 8.97
Staples Inc. -2.83 -35.48% 12.55% United States Consumer Discretionary 0.52 8.06 12.74 2.53
Esprit Holdings Ltd. -2.73 -61.96% 22.71% Hong Kong Consumer Discretionary 0.80 5.01 7.23 6.90
Carrefour S.A. -2.70 -28.73% 10.63% France Consumer Staples 0.30 15.51 47.82 3.81
Cisco Systems Inc. -2.62 -34.96% 13.33% United States Information Technology 1.70 6.74 12.20 1.54
UBI Banca -2.58 -71.07% 27.52% Italy Financials - - 18.31 3.86
Bank of New York Mellon Corp. -2.58 -30.91% 11.98% United States Financials - - 12.14 2.03
Sony Corp. -2.45 -35.17% 14.38% Japan Consumer Discretionary 0.26 8.18 - 1.18
Koninklijke Philips Electronics N.V. -2.40 -21.80% 9.07% Netherlands Industrials 0.60 6.88 12.43 4.23
Medipal Holdings Corp. -2.38 -42.04% 17.65% Japan Health Care 0.04 11.67 100.51 2.53
Yellow Media Inc. -2.30 -75.47% 32.88% Canada Consumer Discretionary 2.88 9.26 4.66 27.08
Ricoh Co. Ltd. -2.27 -39.54% 17.40% Japan Information Technology 0.58 21.06 33.69 3.71
Panasonic Corp. -2.26 -33.99% 15.07% Japan Consumer Discretionary 0.35 14.56 28.13 1.02
Telekom Austria AG -2.24 -39.26% 17.50% Austria Telecommunication Services 1.55 17.86 21.61 8.52
Nokia Corp. -2.22 -66.89% 30.17% Finland Information Technology 0.25 5.23 9.66 8.95
Suzuken Co. Ltd. -2.19 -34.03% 15.53% Japan Health Care 0.06 5.81 17.81 2.70
OPAP S.A. -2.17 -50.73% 23.41% Greece Consumer Discretionary 0.56 3.23 6.44 14.33
Celesio AG -2.16 -52.36% 24.26% Germany Health Care 0.19 7.81 9.78 3.64
Banco de Sabadell S.A. -2.15 -46.39% 21.59% Spain Financials - - 9.63 4.26
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Investec UK Special Situations Fund Portfolio breakdown
● We have US Dollar and Euro hedges in place equivalent to 5.5% and 11.2% of the portfolio, respectively
● Portfolio concentration: top 10 = 48.0%, top 20 = 68.1%, top 30 =78.3%
The portfolio may change significantly over a short period of time.This is not a buy or sell recommendation for any particular security.Source: Investec Asset Management, data as at 30.09.11
% weight
No of Stocks
UK Equities 81.3 44
Corporate Bonds 1.2
Internationally listed gold shares 2.8 5
Other internationally listed stocks 7.1 9
Cash 7.6
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Investec UK Special Situations FundActive positions as at 30 September 2011
Top 15 overweight positions Top 10 underweight positions
The portfolio may change significantly over a short period of time. This is not a buy or sell recommendation for any particular stock. Data as at 30.09.11. Source: Investec Asset Management*Index is FTSE All Share
SecurityOverweight Established
Fund weighting
(%)
Index* weighting
(%)
Active position
(%)Signet Jewelers Ltd. 2006 4.40 0.00 4.40
GlaxoSmithKline PLC 2004 7.66 4.32 3.35
Grafton Group PLC 2008 3.26 0.00 3.26
Travis Perkins PLC 2007 3.22 0.12 3.10
Kingspan Group PLC 2009 2.55 0.00 2.55
Unilever PLC 2003 4.00 1.69 2.32
BT Group PLC 2003 3.05 0.86 2.19
QinetiQ Group PLC 2010 2.17 0.05 2.12
C&C Group PLC 2009 1.73 0.00 1.73
Avon Products Inc. 2010 1.72 0.00 1.72
Cable & Wireless Worldwide PLC
2011 1.54 0.05 1.48
Pfizer Inc. 2008 1.47 0.00 1.47
CRH PLC 2011 1.47 0.00 1.47
Charter International PLC 2008 1.52 0.09 1.43
AstraZeneca PLC 2005 3.78 2.46 1.32
Security
Fund weighting
(%)
Index* weighting
(%)
Active position
(%)Rio Tinto PLC 0.00 2.71 -2.71
BG Group PLC 0.00 2.66 -2.66
BHP Billiton PLC 0.00 2.34 -2.34
Diageo PLC 0.00 1.98 -1.98
Standard Chartered PLC 0.00 1.95 -1.95
Anglo American PLC 0.00 1.88 -1.88
BP PLC 2.89 4.66 -1.77
SABMiller PLC 0.00 1.60 -1.60
Reckitt Benckiser Group PLC 0.00 1.51 -1.51
National Grid PLC 0.00 1.45 -1.45
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Source: Factset, 30.09.11. Weighting in Mediobanca is net of a -1.23% short position in Assicurazioni Generali (the gross weighting in Mediobanca is 2.68%).
Investec Global Special Situations Fund Top 20 equity holdings
Stock %
Medtronic Inc. 2.13
Newmont Mining Corp. 2.10
ENI S.p.A. 2.09
Lagardere S.C.A. 2.02
GlaxoSmithKline PLC 2.01
Vivendi 1.96
Yamaha Corp. 1.93
Pfizer Inc. 1.90
Dell Inc. 1.85
Carrefour S.A. 1.84
Reed Elsevier PLC 1.74
Barrick Gold Corp. 1.70
Konica Minolta Holdings Inc. 1.60
Zimmer Holdings Inc. 1.59
Kinross Gold Corp. 1.58
Sapporo Holdings Ltd. 1.55
CRH PLC 1.51
SK Telecom Co. Ltd. ADS 1.48
Mediobanca Banca di Credito Finanziario S.p.A. 1.46
Avon Products Inc. 1.45
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Investec Global Special Situations FundActive sector allocation as at 30 September 2011
Active sector allocation
The portfolio may change significantly over a short period of time.Source: Factset, 30.09.11.
-10.91
-5.86
-3.54
-3.06
0.85
1.36
3.10
3.37
5.85
8.84
-15 -10 -5 5 10
Financials
Energy
Utilities
Industrials
Information Technology
Consumer Staples
Materials
Health Care
Telecommunication Services
Consumer Discretionary
%
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A highly experienced and motivated investment team
Investment team has an average of 13 years’ experience
A highly experienced and motivated investment team
1
1
12
1
3
7
5
8
6
11
6
2
19
6
6
15
17
17
20
23
Alessandro Dicorrado
Michael du Plessis
Jo Slater
Leo Li Liao
Steve Woolley
David Lynch
Celia Duncan
Peter Lowery
Mark Wynne-Jones
Alastair Mundy
Years with Investec
Years experience
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Important information
This document is not for general public distribution. If you are a private investor and receive it as part of a general circulation, please contact us.
The information discusses general market activity or industry trends and should not be construed as investment advice. The economic and market forecasts presented herein reflect our judgment as at the date shown and are subject to change without notice. These forecasts will be affected by changes in interest rates, general market conditions and other political, social and economic developments. There can be no assurance that these forecasts will be achieved. Investors are not certain to make profits; losses may be made.
The information contained in this document is believed to be reliable but may be inaccurate or incomplete. Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
This communication is provided for general information only. It is not an invitation to make an investment nor does it constitute an offer for sale and is not a buy, sell or hold recommendation for any particular investment.
In the U.S., this communication should only be read by institutional investors, professional financial advisers and, at their exclusive discretion, their eligible clients, but must not be distributed to U.S. persons.
In Australia, this document is provided for general information only to wholesale clients (as defined in the Corporations Act 2001). It is not an invitation to make an investment nor does it constitute an offer for sale.
Outside the U.S., telephone calls may be recorded for training and quality assurance purposes. Issued by Investec Asset Management Ltd (IAM), October 2011. IAM is authorised and regulated by the Financial Services Authority.