PSG investment philosophy and equity selection process

PSG INVESTMENT PHILOSOPHY AND EQUITY SELECTION PROCESS

18 March 2014

Keith HodgskissBsc (Hons), RE5, RPE

Jnr Equity Trader / Portfolio Manager

Nearly 5 years investment experience

PSG’s PhilosophyPut risk (the probability of losing money) first and look for investmentswith –

a sufficient margin of safety

an asymmetrical payoff range – little downside and sufficient upside

A long term view when assessing asymmetry and constructing ourportfolios with a bottom up approach

Investing at below intrinsic value – High quality compounding return type companies preferably

Mean reverting companies with margin of safety

Quality vs Price

Overvalued and overbought

Trading below fair value

WE INVEST IN COMPANIES THAT:

Have a competent and aligned management team

Have a sustainable competitive advantage

Can grow faster than the market for a sustainable period

Trade significantly below our estimate of fair value

OR

Are not overpriced

Compounders

Mean reverters

The PSG equity selection process

Moat

ManagementMargin of Safety

QUALITY

PRICE

MoatIn terms of quantifying the moat, the most important metrics would be marketshare, profit margins, returns on capital and free cash flows

Industries with sustainable competitive advantages tends to see stable market shares (over many years) and quite often a small number of large players

Industries where new players enter and old players exit suggests that the barriers toentry is not really large

Which factors do we look for?

A Supply or cost advantage – (weak moat)

A 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)

MoatAttractive industries quite often deliver high return on capital and have the ability to sustain high returns over long periods

A company with a moat should be able to extract economic benefits in excess of their competitors

Free cash flow is the final measure

Finally, quantitative evidence is combined with our qualitative understanding (clear and understandable business model) of the moat to make a final assessment

Moat example: SasolClear and understandable business model

Sasol owns technology used to convert coal and natural gas into liquids

ManagementWe would score management by looking at their historic ability to deliver value toshareholders as well as their incentive schemes.

Some of the measures include:Historic total return

Improvements in margins, capital returns and free cash flow over time

The proportion of long term incentives in total management compensation

The metrics used to reward management (as an example, we prefer long term ROIC targets to short term sales growth targets)

We also like to see an alignment of management with shareholders through directshare ownership as having management share in long term dividend flows is moreimportant than annual bonuses.

Management example: Berkshire

Managed by individuals with proven track recordsLong term value created for shareholders:• SP: +21% p.a.• NAV: +20% p.a.

$1,000 invested in 1965 is worth more than $8m today

Margin of safetyHere we are looking for evidence that the business is trading below ourestimate of fair value.

We utilise a wide range of valuation methods including the following: Sum of the parts valuations

Discounted cash flows

Valuation metrics (PE ratio, dividend yield, price to book, price to tangible book, FCF yields etc)

We look for asymmetrical pay-offs in our margins of safety calculations:Ideally, little downside and significant upside from current prices.

Underlying business is growing but share price is staying flat

Margin of safety example: J.P. Morgan Chase & Co.

Few years mired in controversy leading to a suppressed stock price.

PERFECT COMPOUNDING MEAN REVERTER?

1) Its consistent, above-average returns2) the leading market positions across its four business lines3) a time-tested management4) track record of double-digit tangible book-value growth, before, during

and after the crisis5) solid trends in investment banking fees6) resolution of its legacy mortgage and litigation issues and 7) continued asset-quality improvement8) low valuations

The best performing asset class

Long term capital growth

Dividend income with lower tax

Investment diversification

Delayed taxation

PSG Paarl StockbrokersDirect online trading

Non - discretionary AccountsManage your own stock portfolio with a stockbroker . You also get access to the PSG Online web site at no additional costs.

Discretionary AccountYour portfolio is managed by a qualified stockbroker who will make informed investment decisions on your behalf.

Foreign Equity AccountBy utilising an Asset Swop or Offshore Allowance

Gain exposure to international stocks and hedge against currency depreciation

PSG Paarl StockbrokersPersonal Share Portfolio (PSP) within an RA, LA....

Local and foreign portfolio advantages

Investors have more control in the management of their retirement money

Tax efficient

Customers will get access to :Trading in unlisted shares such as KWV, Agri, Channel Life and PSG Konsult

A watchlist and stock research

Notifications via SMS / email

Market Information / JSE prices

Corporate Calendar

Technical analysis program

PSG Online view

PSG Online view

Paarl StockbrokersA team with more than 18 years collective experience

Max vd WathB.Econ CFPRPE, RE5Principal

Snr Portfolio Manager

HW de JagerBComm (Hons)

Financial AnalysisRPE, RE5

Snr Portfolio Manager

Kris SwartBComm (Hons)

Financial Analysis

Jnr Portfolio Manager

Stefan du ToitMComm Cum

Laude

Jnr Portfolio Manager

Keith HodgskissBsc (Hons)RPE, RE5

Jnr Portfolio Manager

Paarl/Wellington

Dick During Joan du PlessisEmile Jv Rensburg Wynie BothaNico Swart

Saretha FoucheAdri HorstmannLeon Jordaan

Questions?

THANK YOU

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DisclaimerCollective Investment Schemes in Securities (Unit Trusts) are generally medium to long-term investments. The value of participatory interests (units) may go down as well as up and past performance is not a guide to future performance. Collective Investment Schemes are traded at ruling prices and can engage in borrowing and scrip lending. A schedule of fees and charges and maximum commissions is available on request from PSG Collective Investments Limited. Commissions and incentives may be paid and if so, are included in the overall costs. Forward pricing is used. PSG Collective Investments Limited is a member of the Association for Savings and Investment South Africa (ASISA).

The funds may from time to time invest in another fund managed by a related party, or in shares issued by entities within the same group of companies as PSG Collective Investments Limited. A process is in place to ensure the same selection criteria is applied when selecting the underlying funds or shares.

The information contained in this presentation is of a general nature and is not intended to address the circumstances of any particular person. We do not purport to act in any way as an advisor and you should not act upon this information without appropriate professional advice. PSG Konsult Ltd is an authorised financial services provider.