A truffle is a scarce, valuable and highly sought-after, edible fungus. Truffles grow underground and are notoriously difficult to find. Searching for truffles is carried out with specially trained pigs called Truffle Hogs. Presentation to: 9 November 2012
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A truffle is a scarce, valuable and highly sought-after, edible fungus. Truffles grow underground and are notoriously difficult to find. Searching for truffles is carried out with specially trained pigs called Truffle Hogs.
Presentation to:
9 November 2012
Agenda
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1. Introduction
2. The Seven Deadly Sins
3. Truffle Insights
Truffle
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• Founded by:• Louis van der Merwe (ex CEO: RMB Asset Management)• Hannes van der Westhuyzen (ex Head: Global Trading,
Nedbank Capital)• Charles Booth (ex CIO: RMB Asset Management)
• Licensed in March 2009 (FSP no 36584: Categories I, II and IIA); Section 13B approved
• Building a quality boutique to manage co-investor assets
The Truffle message
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• Values: Alignment Fairness
• Value: Maximising benefit by delivering sustainable alpha over
time Minimising costs by offering a competitive fee
Performance: Truffle General Equity1
(period ending 31 October 2012)
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1 after management fees *Since 1 Jan 2011
12-months *Annualised since inception Annualised Std Dev 0%
5%
10%
15%
20%
21.6%
15.4%
9.8%
18.6%
11.8%11.4%
3.0% 3.6%
Truffle General Equity Alsi Outperformance
Performance: Truffle Flexible1
(period ending 31 October 2012)
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1 after management fees*Since 1 Jan 2011
12-months *Annualised since inception Annualised Std Dev 0%
5%
10%
15%
20%
25%22.9%
18.6%
6.2%
10.8% 11.5%
1.0%
12.1%
7.1%
11.0%
Truffle Flexible CPI+5% Outperformance
ALSI
Performance: Truffle Balanced1
(period ending 31 October 2012)
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1 after management fees*Since 1 Nov 2011
*Annualised since inception Annualised Std Dev 0%
5%
10%
15%
20%20.5%
6.1%
9.7%
1.0%
10.8%9.6%
Truffle Balanced CPI+4% Outperformance
ALSI
The Seven Deadly Sins
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Source: Behavioural InvestingJames Montier (2007)
Other sources:The Warren Buffet WayFooled by Randomness
Triumph of the Optimists
Forecasting (Pride)
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• A test:• Answer the following questions, by• giving a range for each answer• that you believe has a 90% probability of
being correct• Example...
Source: Behavioural investing, James MontierTest: Russo & Schoemaker (1989)
Forecasting (Pride)
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i. Martin Luther King’s age at deathii. Length of the Nile River (km)iii. No of countries that are members of OPECiv. No of books in the Old Testamentv. Diameter of the moon (km)vi. Weight of an empty Boeing 747 (kg)vii. Year in which Wolfgang Amadeus Mozart was bornviii. Gestation period of Asian elephant (days)ix. Air distance from London to Tokyo (km)x. Deepest (known) point in the ocean (m)
Forecasting (Pride)
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i. 39 yearsii. 6,738 kmiii. 13 countriesiv. 39 booksv. 3,476 kmvi. 176,901 kgvii. 1756viii. 645 daysix. 9590 kmx. 11,033 m
Forecasting (Pride)
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Russo & Schoemaker results:• Sample = 1000• < 1% got >9 answers correct!!
Forecasting is difficult to CONSISTENTLY get right
We can easily deceive ourselves
Truffle: Bottom-up, fundamental research with minimal macro views
Illusion of Knowledge (Gluttony)
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• Belief: the more information I have the more knowledge I have
• Belief: I need to know more than everybody else to outperform
• More information may increase our confidence rather than our accuracy (Pride)
• Truffle: Focus on long term normalised fundamentals (cut out short term noise) and keeps the process simple
Meeting companies (Lust)
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• Lust after information (previous point)• The truth: we’re lousy at spotting liars
Enron, Worldcom, Madoff, Tannenbaum…………… Lance Armstrong
• Truffle: can add benefit outside of Top40, but we believe in talking to competitors, suppliers and clients as well as management
Thinking you can outsmart everyone else (Envy)
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• Belief: now that I understand X, I can outsmart everyone else
• I don’t have to outrun the lion….
• Truffle: our experience tells us we are not smarter than everyone else. It is not what you DO know that gets you, it what you DON’T know!
• Our risk and construction process limits our active positions
Short time horizons (Greed)
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• I want to double my money, NOW!• Short time horizon and overtrading• Must manage expectations
• Truffle: it is time IN the market, not TIMING the market.
• It takes time for fundamentals to normalise
Short time horizons (Greed)
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Jan-80 Jan-82 Jan-84 Jan-86 Jan-88 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan-1810
100
1000
10000 Earnings vs Price over Long Term
BIL PriceBIL EarningsPIK PricePIK Earn-ings
Believing everything you read (Sloth)
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• We all love a story, but do your homework!• We have a tendency to obey figures of authority• Test: do intrinsic values correlate with movement
in share price?
• Truffle: >95% of our research is our own
Group-based decisions (Wrath)
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• Group decisions are better than individual decisions?
• Belief: in a group we offset each others’ biases
• Truffle: common valuation philosophy, but individual responsibilities
Truffle insights
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Truffle insights
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The value of an equity is a function of:• Normalised earnings• Normalised yield relative• Market yield
Truffle insights
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Dec-92 Dec-94 Dec-96 Dec-98 Dec-00 Dec-02 Dec-04 Dec-06 Dec-08 Dec-10 Dec-12100
1000
10000 All Share Index Earnings Indexed to 1993=100
Truffle insights
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Dec-92 Dec-94 Dec-96 Dec-98 Dec-00 Dec-02 Dec-04 Dec-06 Dec-08 Dec-10 Dec-12100
1000
10000 INDEX EARNINGS Indexed to 1993=100
All Share Index Resource Index
Truffle insights
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Dec-92 Dec-94 Dec-96 Dec-98 Dec-00 Dec-02 Dec-04 Dec-06 Dec-08 Dec-10 Dec-12100
1000
10000 INDEX EARNINGS Indexed to 1993=100
Consumer Services Resource Index
Truffle insights
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What can we conclude:• Resource earnings have not underperformed
the ALSI • Resource earnings have not underperformed
the more defensive sectors (consumer services)• Defensive sectors also exhibit cyclicality in
earnings
Truffle insights
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Dec-92 Dec-94 Dec-96 Dec-98 Dec-00 Dec-02 Dec-04 Dec-06 Dec-08 Dec-10 Dec-12100
1000
10000 INDEX EARNINGS Indexed to 1993=100
Consumer Services Resource Index
Consumer Services Normalised Earnings Normalised Resource Earnings
Truffle insights
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Truffle Investment Process:• We do not extrapolate to establish normalised
earnings• We compare historic vs projected ROE• Detailed financial modelling
Truffle insights
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Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-133%
5%
7%
9%
11%
13%
1000
10000
100000
Earnings Yield vs Index Value Resources
Earnings Yield Index Value
Truffle insights
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Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-133%
5%
7%
9%
11%
13%
15%
1000
10000
100000
Normalised Earnings Yield vs Index Value Resources
Normalised Earnings Yield
Index Value
Truffle insights
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Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-133%
5%
7%
9%
11%
13%
1000
10000
100000
Earnings Yield vs Index Value Consumer Services
Earnings Yield Index Value
Truffle insights
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Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-133%
5%
7%
9%
1000
10000
100000
Normalised Earnings Yield vs Index Value Consumer Services
Normalised Earnings Yield Index Value
Truffle insights
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Dec-92 Dec-94 Dec-96 Dec-98 Dec-00 Dec-02 Dec-04 Dec-06 Dec-08 Dec-10 Dec-120.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Normalised Yield RelativeResources vs Consumer Services
Normalised Yield Relative Price Relative
Conclusion
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• Sector ratings do change over a 3 – 5 year period
• The relative attractiveness of resources (cyclicals) vs consumer services (defensives) has never been as extreme since 1997
Thank you-The Truffle Hogs
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Truffle Asset Management is a registered Financial Services Provider (FSP Number: 36484). Registered for Categories I, II and IIA.
This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorised or to any person to whom it would be unlawful to make such offer or solicitation, and is only intended for the use by the original recipient/addressee. If further distributed by the recipient, the recipient will be responsible to ensure that such distribution does not breach any local investment legislation or regulation.
Prospective investors should inform themselves and take appropriate advice as to any applicable legal requirements and any applicable taxation and exchange control regulations in the countries of their citizenship, residence or domicile which might be relevant to the subscription, purchase, holding, exchange, redemption or disposal of any investments.
Opinions expressed are current opinions as of the date appearing in this material only. The information is confidential and intended solely for the use of Truffle’s client’s and prospective clients, and other specific addressee’s. It is not to be reproduced or distributed to any other person except to the client's professional advisers. This document is not for distribution in the United States.
While information obtained is from sources we believe to be up to date and reliable, Truffle does not guarantee the accuracy or completeness thereof. Truffle does not accept any liability for inaccurate or incomplete information contained, or for the correctness of any opinions expressed.
Past performance is not an indication of future performance
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