Clime Asset Management

Transcription

1 Clime Asset Management Investment Update Sydney December 2013 Presented by John Abernethy 1

2 10 facts about you 1. You re reading this now. 2. You re realising that it s a stupid fact. 4. You didn t notice I skipped three. 5. You re checking now. 6. You re smiling. 7. You re still reading this even though it s stupid 9. You didn t realise I skipped eight. 10. You re checking again and smiling how you fell for it again. 11. You re enjoying this. 12. You didn t realise there s only supposed to be ten facts. Integrity Transparency Conviction 2

3 Disclaimer The information contained in this document is published by the Clime Group. The information contained herein is not intended to be advice and does not take into account your personal circumstances, financial situation and objectives. The information provided herein may not be appropriate to your particular financial circumstances and we encourage you to obtain your own independent advice from your financial advisor before making any investment decision. Please be aware that investing involves the risk of capital loss and past results are not a reliable indicator of future performance and returns. Clime Asset Management Pty Limited (Clime), Select Asset Management Limited and its directors, employees and agents make no representation and give no accuracy, reliability, completeness or suitability of the information contained in this document and do not accept responsibility for any errors, or inaccuracies in, or omissions from this document; and shall not be liable for any loss or damage howsoever arising (including by reason of negligence or otherwise) as a result of any person acting or refraining from acting in reliance on any information contained herein. No reader should rely on this document, as it does not purport to be comprehensive or to render personal advice. Integrity Transparency Conviction 3

4 Agenda What Clime stands for and our investment focus Economic Update Investment Process with examples of businesses Special Announcement Integrity Transparency Conviction 4

5 What we stand for Integrity We believe that a manager must be true to label, our clients always come first Transparency We are the only fund manager in Australia that makes its investment methodology publicly available (via StocksInValue) Conviction We do not follow the herd Integrity Transparency Conviction 5

6 Investing philosophy absolute return value investors Absolute return Our target is to deliver a double digit return, regardless of the performance of the wider stock market. Sustainable return on equity We distinguish between profit and profitability. The profit of a company can be easily manipulated. However, it is the long-term profitability, as measured by Return on Equity, that is our focus at Clime. Value investment approach We identify the different between the value and share price of a business. Clime will only buy shares in attractive companies when they are offered in the market at a discount to our calculation of their assessed value. Integrity Transparency Conviction 6

7 Proof of our philosophy Clime Australian Value Fund rated by Lonsec^ 31 October 2013 Annualised Return 1 year 2 years 3 years 4 years 5 years CAVF Performance* 16.25% 14.86% 11.38% 10.47% 16.30% Absolute Return Target 12.00% 12.00% 12.00% 12.00% 12.00% CAVF Outperformance 4.25% 2.86% -0.62% -1.53% 4.30% *Annualised investment performance is after all applicable fees and taxes. Distributions are assumed to have been reinvested. Retail Units. Inception Date of Fund: 28 August Past performance is no guarantee of future returns. ^The Lonsec rating (assigned October 2012) presented in this document is published by Lonsec (who is Lonsec Limited ABN AFSL No and Lonsec Research Pty Ltd ABN , Corporate Authorised Representative of Lonsec Limited). The rating is a class service (as defined in the Financial Advisers Act 2008 (NZ)) or is limited to General Advice and based solely on consideration of the investment merits of the financial product(s). It is not a recommendation to purchase, sell or hold the relevant product(s), and you should seek independent financial advice before investing in this product(s). The rating is subject to change without notice and Lonsec assumes no obligation to update the relevant document(s) following publication. Lonsec receives a fee from the Fund Manager for researching the product(s) using comprehensive and objective criteria. For further information regarding Lonsec s ratings methodology, please refer to our website at Integrity Transparency Conviction 7

8 Economic Update Key themes and implications Integrity Transparency Conviction 8

9 Key themes continued tampering and little tapering Central Banks maintain massive support policies. QE continues as do historically low cash rate settings that distort bond and currency markets. Europe: Recession rolling into very low growth cycle. The ECB alerts markets to a heightened risk of deflation. High unemployment means social unrest is a real risk. US witnessing mild upturn in housing, jobs and consumer sentiment. The federal debt limit comes back in January. QE continues and continues. US energy sector is important. China s growth is now based on the emerging middle class. This growth phase is from internal factors (consumption) rather than external (trade). Australia: Resources capital cycle boom past its peak. Economic growth will slow with fiscal contraction in $A weakness is essential but not certain. Japan remains a major trouble spot for the world in Japan has been jolted into action so far so good - but will it work? Integrity Transparency Conviction 9

10 Observations, predictions and risks in the longer term 1. The Western world has a significant aging population problem; 2. Japan will never repay its national debt; 3. In fact most of Europe will never repay their national debt; 4. There must be a great international bond restructure at some point; 5. Growth in USA will stall unless the manufacturing base returns; 6. China becomes the largest world economy by 2025; 7. China s moves from exporting deflation to exporting inflation; 8. Japan may implode if targeted inflation of 2% is achieved; 9. Free Trade Agreements are found to be illogical given Monetary policy settings; 10. Australia s Superannuation system will be totally restructured; and 11. Australia voted the most potentially dynamic developed economy of 2020 due to China. Integrity Transparency Conviction 10

11 Who in the G20 can balance a budget? World s 20 Largest Economies 2013F (Percentage share of total world nominal GDP in US$) Sources: International Monetary Fund, World Economic Outlook Database, April 2013; Austrade F = Forecast GDP of the world s 186 economies: US$74,172 billion GDP of Asia-Pacific Economic Cooperation s 21 member economies: US$42,505 billion (57.3% of world s nominal GDP) Integrity Transparency Conviction 11

12 World growth is dominated by Asia Real GDP Growth by Economic Grouping (Average Growth Rate %: and 2013F-2018F) Source: International Monetary Fund, World Economic Outlook Database, April 2013; Austrade F = Forecast 1. Composed of 27 economies in Asia. 2. ASEAN-5 = Indonesia, Thailand, Malaysia, Philippines and Vietnam. 3. Composed of 17 economies in Europe. Integrity Transparency Conviction 12

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14 The aging world population is slowing growth Dependency Ratio (over 65s as a % of 20-64s) Source: Capital Economics, United Nations Integrity Transparency Conviction 14

15 Australian GDP growth a standout since the GFC 115.0% Australia 110.0% 105.0% USA Japan 100.0% UK 95.0% Euro Area 90.0% Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Australia Euro Area USA UK Japan Australian GDP compared with major economies Source: ABS, RBA, Thomson Reuters Integrity Transparency Conviction 15

16 Australia s government debt is not a problem General Government Net Debt 2013 (As a percentage of GDP) Source: International Monetary Fund (IMF) Fiscal Monitor database, April 2013, Statistical Tables 4 and 8; Austrade 1. International Monetary Fund (IMF) staff estimates and projections. Projections are based on staff assessment of current policies. 2. Gross debt as a percentage of GDP. Integrity Transparency Conviction 16

17 The explosion in Central Bank balance sheets Central Bank balance sheets (2008=100) Source: Central Banks, Thomson Datastream Integrity Transparency Conviction 17

18 USA and German bonds correcting 10-year Government bond yields (US, Germany and Japan) Source: Thomson Reuters Integrity Transparency Conviction 18

19 Sub prime bonds continue to rally 10-year Government bond yields (Portugal, Spain, Italy and Ireland) Source: Capital Economics, Thomson Reuters Integrity Transparency Conviction 19

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21 European unemployment is still rising Unemployment Rate Advanced Economies Source: Thomson Reuters Integrity Transparency Conviction 21

22 Europe s recession has lasted five years Euro area seasonally adjusted real GDP Source: Markit Economics Integrity Transparency Conviction 22

23 Europe s Industrial base is debased! Industrial production (Jan 2008=100) Source: Thomson Datastream Integrity Transparency Conviction 23

24 How will European Government debt ever be repaid? Public debt (as % of GDP) Source: Capital Economics, Thomson Datastream Integrity Transparency Conviction 24

25 Italy, Greece, Portugal and Spain remain in default category Government s estimated financing needs (2014 & 2015, % of GDP) Source: Capital Economics, IMF Integrity Transparency Conviction 25

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27 US income inequality back to the 1920 s Income of top 10% (as a % of total) Source: Capital Economics, Saez & Piketty Integrity Transparency Conviction 27

28 Margin lending in US equities is back to 2000 levels Integrity Transparency Conviction 28

29 US debt ceiling in historic context WW2 levels Net US federal debt (as a % of GDP) Source: Capital Economics, Whitehouse.gov Integrity Transparency Conviction 29

30 US budget is improving. but it has to! $700bn deficit 10% deficit US Federal budget balance (as a % of GDP) Source: Thomson Datastream, Capital Economics Integrity Transparency Conviction 30

31 The aging population US budget may never balance US Federal spending (as a % of GDP) Source: Capital Economics, Congressional Budget Office Integrity Transparency Conviction 31

32 The emergence of US energy Integrity Transparency Conviction 32

33 But the US trade account is disappointing Monthly Trade Balance ($bn) Integrity Transparency Conviction 33

34 US private employment 2% growth in 12 years US private employment (in thousands) Source: Bloomberg Integrity Transparency Conviction 34

35 US employment participation is low and falling United States Labour Market Source: Thomson Reuters Integrity Transparency Conviction 35

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37 Japan s 2013 refinancing task at 60% of GDP was impossible Gross financing needs in 2013 Source: IMF, DB Global Markets Research Integrity Transparency Conviction 37

38 The Asian Century Asian economic resurgence to continue Source: Australian Government White Paper Integrity Transparency Conviction 38

39 Asian growth driving world growth 40% 26% Asian Economic Growth GDP Valuation (Current International Dollar Billion)1based on Purchasing Power Parity Source: International Monetary Fund, World Economic Outlook, April 2013; Austrade 1. An international dollar would buy in the cited country a comparable amount of goods and services a US dollar would buy in the United States. This term is often used in conjunction with Purchasing Power Parity (PPP) data. Integrity Transparency Conviction 39

40 This is REAL China s trade has grown by 60% in 5 years Merchandise Trade ($bn, seas. adj.) Source: CEIC, Capital Economics Integrity Transparency Conviction 40

41 Understanding China s trade flows US trade deficit Australia trade surplus Trade Surplus ($bn, 12m sum) Source: CEIC, Thomson Datastream, Capital Economics Integrity Transparency Conviction 41

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43 Australia exports to China are important and Japan significant 45% of our exports Exports by destination Source: ABS Integrity Transparency Conviction 43

44 Export volumes forecast to rise The pay-off from the capex boom will be a sharp boost to export volumes Source: ABS, UBS estimates Integrity Transparency Conviction 44

45 The boom in resource capital expenditure.is over Engineering Construction Activity in Australia Value of Work Yet to be Done 1 (A$ Billion) Source: Australian Bureau of Statistics, Cat. No , Engineering Construction Activity, Australia, Dec 2012 (Released 03 Apr 2013), Austrade 1. The value of outstanding work for the project at the end of the period. Rise and fall and other cost variations can lead to increases or decreases in the value of work yet to be done. 2. Includes water storage supply, sewerage and drainage, pipelines, recreation, telecom, and other heavy industry. Integrity Transparency Conviction 45

46 Australian household debt stable but interest burden needs a review $1.1tn of residential debt Includes households without debt Household finances* Source: ABS Integrity Transparency Conviction 46

47 Credit growth still weak except for housing Credit growth by sector Source: APRA, RBA Integrity Transparency Conviction 47

48 House prices surging with unemployment increasing Australian & Sydney House Prices & Y Australian Unemployment RPRI HOME VALUE IDX - AUSTRALIA : Australia RPRI HOME VALUE IDX - SYDNEY : Australia RPRI HOME VALUE YLD - AUSTRALIA : Australia (RH Scale) RPRI HOME VALUE YLD - SYDNEY : Australia (RH Scale) S UNEMPLOYMENT RATE (LABOUR FORCE SURVEY ESTIMATE) : Australia S Integrity Transparency Conviction 48

49 Inflation risk explained Non-tradables and tradables inflation Source: ABS, RBA Integrity Transparency Conviction 49

50 Investment Process With examples and model portfolio Integrity Transparency Conviction 50

51 Investment Process 1.Quantitative: Value Based Focus on Fundamental Quality & Valuation Market Capitalisation & Liquidity considerations Filters define the Investment Universe 2.Qualitative: Insight Driven Industry & Competitive Advantage Business Model & Capital Structure Management meetings, /year Thorough Transparent Repeatable 3.Portfolio Construction Asset Allocation driven by Opportunities & Macro Economic Overview Built Company by Company Dynamic weight management via Margin of Safety Integrity Transparency Conviction 51

52 Broader equity market. Rerating without earnings Last 2 years - Short term Prices can diverge from Earnings & Valuation Source: Thomson Reuters, IRESS, Clime Asset Management Long term Prices can not diverge from Fundamentals Last 20 years

53 Woolworths: Our process in action (~4%) Deweight range Buy range Leverage to long term population growth Enduring competitive position Network effects of scale Strong margins Source: Clime Asset Management, StocksInValue Integrity Transparency Conviction 53

54 Woolworths: Our process in action (~4%) Source: Clime Asset Management, StocksInValue Audited Financial Accounts FY 2010 FY 2011 FY 2012 FY 2013 FY Totals (Millions) Net Profit inc. Abnormals less Pref Divs Dividends on Ordinary Shares Only % of Dividends Franked % % % % % Grossed up Dividends Retained Profits Change in Reserves Abnormal Gains (Loss) Normalised Earnings Opening Equity New Ordinary Share Capital Ordinary Capital Buybacks Closing Ord. Equity Ex Minorities Normalised ROE 36.90% 40.60% 25.00% 31.20% 37.10% 34.2% Operating Cash Flow Normalised IRR Cash Flows EBIT Margin 5.70% 5.90% 6.20% 6.10% 6.10% Integrity Transparency Conviction 54

55 Telstra: A maturing idea (5% to 3.5% of portfolio) Deweight range Buy range Strong competitive position & network advantage Strong dividend payer in absence of reinvestment opportunity Strong cashflow Source: Clime Asset Management, StocksInValue Integrity Transparency Conviction 55

56 Telstra: A maturing idea (5% to 3.5% of portfolio) Source: Clime Asset Management, StocksInValue Audited Financial Accounts FY 2010 FY 2011 FY 2012 FY 2013 FY Totals (Millions) Net Profit inc. Abnormals less Pref Divs Dividends on Ordinary Shares Only % of Dividends Franked % % % % % Grossed up Dividends Retained Profits Change in Reserves Abnormal Gains (Loss) Normalised Earnings Opening Equity New Ordinary Share Capital Ordinary Capital Buybacks Closing Ord. Equity Ex Minorities 12, Normalised ROE 44.20% 42.10% 34.00% 36.00% 52.30% 41.70% Operating Cash Flow Normalised IRR Cash Flows EBIT Margin 25.70% 26.00% 22.20% 22.70% 24.90% Integrity Transparency Conviction 56

57 Major Banks: Popular today, forward returns look poor. (~14% to 9.2%) Banks v's All Ords Accumulation Total Return Index ASX ALL ORDINARIES - RI (RH Scale) AUS.AND NZ.BANKING GP. - RI (RH Scale) WESTPAC BANKING - RI (RH Scale) COMMONWEALTH BK.OF AUS. - RI (RH Scale) NATIONAL AUS.BANK - RI (RH Scale) Source: ThomsonReuters, StocksinValue, Clime Asset Management S

58 Banks: Non conforming loans Major bank housing loans approved outside serviceability criteria Source: APRA, UBS estimates Note: data based on Major banks and compiled on a 6 month basis to Sep-13

59 Banks: provisions to total loans Major bank provisions to total loans Source: Clime Asset Management, Major bank company reports

60 Big Four banks, Telstra and Woolworths Normalised ROE ANZ CBA NAB WBC WOW TLS 19.50% 24.00% 19.50% 21.00% 35.00% 45.00% Distributed 14.50% 20.00% 15.50% 16.00% 26.00% 42.00% Reinvested 5.00% 4.00% 4.00% 5.00% 9.00% 3.00% Required return 11.50% 11.50% 11.70% 11.50% 11.70% 13.00% FY14 intrinsic value $34.32 $69.18 $35.37 $33.95 $35.84 $4.27 Future valuations Source: Clime Asset Management, StocksInValue Integrity Transparency Conviction 60

61 The CALLS for Weakening $A towards 85 cents 2. Sharp and further deterioration in the Australian fiscal budget outlook 3. QE tapers in US but needed in Europe. So $US up and Euro down. 4. Covert discussions concerning bond debt restructuring commence 5. Bonds weaken across the world particularly in sub-prime European markets 6. US economic growth lifts but hampered by appreciating $US 7. Japan QE causes trade tension in Asia 8. China s consider revaluation of their currency to ease cost pressures 9. Inflation in Australia emerges in 2014 from China revaluation 10. Equity markets confronted by sharply weaker bonds Integrity Transparency Conviction 61

62 New Clime International Equity Fund Contact Darren Katz for further information and expressions of interest Integrity Transparency Conviction 62

63 Integrity Transparency Conviction 63

64 Clime Asset Management Absolute return value asset managers Services Individually managed accounts Clime managed funds Self managed super funds 64