You the Speculator. Roger Montgomery Chief Investment Officer. July Montgomery Investment Management Pty Ltd All Rights Reserved.

Size: px

Start display at page:

Lily Waters
5 years ago
Views:

You the Speculator July 2014 Roger Montgomery Chief Investment

The information contained in this presentation is current as at July 2014 unless otherwise specified and is provided Montgomery Investment Management Pty Limited ABN 73 139 161 701, AFSL 354 564

2 The information contained in this presentation is current as at July 2014 unless otherwise specified and is provided Montgomery Investment Management Pty Limited ABN , AFSL (Montgomery) and is intended solely for holders of an Australian financial services licence or other wholesale clients (as defined in the Corporations Act 2001 (Cth). It should be regarded as general information only, rather than as advice. It has been prepared without taking account of any person s objectives, financial situation or needs. Because of that, each person should, before acting on any such information, consider its appropriateness, having regard to their objectives, financial situation and needs. Fundhost Limited is the issuer of the The Montgomery [Private] Fund and The Montgomery Fund (The Funds) and the Responsible Entity for The Montgomery Fund. Offers of interests in The Funds are contained in the current relevant information memorandum (IM) and product disclosure statement (PDS) issued by Fundhost which is available on our website The relevant PDS should be considered before making any decision whether to acquire or continue to hold units in The Funds. Past performance is not a reliable indicator of future performance. In preparing this presentation, Montgomery has relied on publicly available information and sources believed to be reliable. However, the information has not been independently verified by Montgomery. While due care and attention has been exercised in the preparation of the presentation, Montgomery gives no representation, warranty (express or implied) as to the accuracy, completeness or reliability of the information. The information in this presentation is also not intended to be a complete statement or summary of the industry, markets, securities or developments referred to in the presentation. Any opinions expressed in this presentation, including as to future matters, may be subject to change. Opinions as to future matters are predictive in nature and may be affected by inaccurate assumptions or by known or unknown risks and uncertainties and may differ materially from results ultimately achieved. Montgomery Investment Management Pty Ltd All Rights Reserved. 2

3 Who is Montgomery? Australian and NZ Equities Funds Manager Founded by Roger Montgomery in 2010 Staff of 9, including investment team of 7 $520m Funds Under Management 2 Funds: The Montgomery Fund The Montgomery [Private] Fund Montgomery Investment Management Pty Ltd All Rights Reserved. 3

4 Framework To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights or inside information. What s needed is a sound framework for making decisions and the ability to keep emotions from corroding that framework. Montgomery Investment Management Pty Ltd All Rights Reserved. 4

1 Investing, not speculating Today, the world s gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side.

6 1 Investing, not speculating Today, the world s gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. That s enough to fit comfortably within a baseball infield. At $1,750 per ounce gold s price as I write this its value would be $9.6 trillion. Warren Buffett, February 2012 You can fondle it, but it won t respond. Montgomery Investment Management Pty Ltd All Rights Reserved. 6

7 1 Investing, not speculating What does US$9.6 trillion buy? 400m acres of US crop land (revenue $200b p.a.) 16 ExxonMobils (individual income $40b p.a.) With $1 trillion left over Or, a cube of gold that produces nothing. Montgomery Investment Management Pty Ltd All Rights Reserved. 7

8 1 Investing, not speculating In 100 years... US crop land will have produced mountains of corn, wheat, cotton and beef ExxonMobil will have produced trillions in dividends and hold assets worth many more trillions (times16) 100 years of rent from all real estate in Manhattan The cube of gold will remain an impotent cube of gold. You can still fondle it of course! Montgomery Investment Management Pty Ltd All Rights Reserved. 8

9 2 Businesses, not stocks - The best business to own = the one that can employ large amounts of incremental capital at very high rates of return, over an extended period - High returns typically result from competitive advantages - To understand future returns, understand what drives competitive advantage and how long it might last - The most valuable competitive advantage = the ability to raise prices even in the face of excess capacity Montgomery Investment Management Pty Ltd All Rights Reserved. 9

Large capital, low returns Montgomery Investment

11 Over the long-run, price correlates with business performance Simplistic advice such as: Invest for the long-term and It s time in the market, not timing is unhelpful in this context time is the enemy of a business with poor economics. Montgomery Investment Management Pty Ltd All Rights Reserved. 11

12 years no growth 15 years no growth 16 years negative growth

consistency of dividends or dividend yield.

12 12 years no growth 15 years no growth 16 years negative growth Conventionally defined blue-chips are not safe by virtue of size, consistency of dividends or dividend yield. Time is the enemy of the mediocre business when measured by opportunity cost and inflation. Purchasing power is destroyed and a real loss is realised. 12 Montgomery Investment Management Pty Ltd All Rights Reserved. 12

2 Great businesses, not rising stocks Montgomery

17 Our Framework Step 1. Screen the universe using machines Quality Analysis of all listed companies using 37 different financial ratios Ratios converted into quality and performance scores Value Earnings forecasts for all listed companies produced by machine Forecasts converted into estimate of company value Step 2. Detailed analysis of the best candidates Does the company exhibit competitive advantages? Over what future period do we expect these advantages to persist? ( Competitive Advantage Period ) What do we think the stock is worth? What does the market think the stock is worth? Montgomery Investment Management Pty Ltd All Rights Reserved. 17

18 Searching for high quality and financially strong businesses Quality and performance matrix Categories Selected financial parameters 1 Arithmetic averages Quality and performance scores are calculated automatically, using 37 individual financial ratios Improving performance Improving credit quality A1 B1 C1 A2 B2 C2 A3 B3 C3 A4 B4 C4 A5 B5 C5 A1 - B3 Others Net debt to total capital Normalised ROE Free cash flow yield -4.8% 2.1% 3.9% 5.4% 19.1% 16.5% The methodology is based on published academic work, adapted and improved by Montgomery Companies within the A1-B3 range are stronger across a range of financial metrics relevant to future investment performance 1 Listed companies with market capitalisation above $250 million; analysis current as at August 2013 Montgomery Investment Management Pty Ltd All Rights Reserved. 18

A1-B3 quality score requirement 40% or more of a GICS sector will typically fall within the quality requirements By number of

19 Distribution of Quality and Performance Scores All ASX Listed Companies ASX companies by quality and performance 1 (per cent) A1-B3 ratings by GICS sector 1 (per cent of market cap) Around 25% by number and 60% by value of ASX-listed companies fall within the A1-B3 quality score requirement 40% or more of a GICS sector will typically fall within the quality requirements By number of companies By market capitalisation 1 Analysis current as at August 2013 Montgomery Investment Management Pty Ltd All Rights Reserved. 19

20 Key Principles Only consider companies that are high quality Companies with weak/no profitability are not eligible Companies with poor/deteriorating economics are eliminated early Companies with potential problems are vetoed by the investment team Buy good companies when they are trading below our estimate of their intrinsic value Hold cash when we can t find enough of these Montgomery Investment Management Pty Ltd All Rights Reserved. 20

22 Competitive Advantage Period Competitive advantage period: The period of time during which the company can generate excess returns on new investments Montgomery Investment Management Pty Ltd All Rights Reserved. 22

23 Competitive Advantages a quick aside We should be able to see evidence of competitive advantages in historical financials ROE = Earnings Sales x Sales Assets x Assets Equity Margins Asset Turnover Leverage If the company s high ROE stems from high margins, focus your analysis on a consumer advantage. If the company s high ROE stems from a high turnover ratio, focus your analysis on a production advantage. For companies that are high in both, consider how the advantages interact; consider network effects. If the company s high ROE stems solely from high asset leverage, be sceptical of the existence of any competitive advantage. Montgomery Investment Management Pty Ltd All Rights Reserved. 23

24 Bad growth? Growth benefits the investor only when the business in point can invest at incremental returns that are enticing in other words, only when each dollar used to finance the growth creates over a dollar of long-term market value. Buffett, 1982 Montgomery Investment Management Pty Ltd All Rights Reserved. 24

30 Good and bad growth Value of future dividend growth - If ROE is high, then (ROE/Required Return) 2 is >$1. Each $1 of reinvestment creates >$1 of value for shareholders - If ROE is less than required return, then each $1 of reinvestment creates <$1 of value: Reinvestment destroys shareholder value; and Owners would be better off if all profits were paid out as dividends Montgomery Investment Management Pty Ltd All Rights Reserved. 30

31 When to exit? - The performance of the business declines - The value of the business declines - The price rises well above the value - The value of the business is no longer expected to rise at a satisfactory rate - You are fully invested, but have found something superior Montgomery Investment Management Pty Ltd All Rights Reserved. 31

32 Your goal Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now. You must also resist the temptation to stray from your guidelines: if you aren t willing to own a stock for ten years, don t even think about owning it for ten minutes. Put together a portfolio of companies whose aggregate earnings march upward over the years, and so too will the portfolio s market value. Warren Buffett, 1997 Montgomery Investment Management Pty Ltd All Rights Reserved. 32

35 Does it work? The Montgomery Fund Data to 04-Jul-14 TMF inception Date 17-Aug-12 Time from Inception (yrs) 1.88 Return Since Inception (p.a.) TMF 21.6% S&P/ASX300 Accumulation Index 18.2% Small Cap Ords Accumulation Index 2.3% TMF S&P/ASX300 Accumulation Index Small Cap Ords Accumulation Index TMF Outperformance (p.a.) Vs S&P/ASX300 Accumulation Index 3.4% Vs Small Cap Ords Accumulation Index 19.3% 1.2 TMF Sharpe Ratio SR vs S&P/ASX300 Accumulation Index 0.36 SR vs Small Cap Ords Accumulation Index 1.90 SR vs Cash 1.66 Standard Deviation of Returns (p.a.) TMF 9.9% S&P/ASX300 Accumulation Index 11.3% Small Cap Ords Accumulation Index 14.4% Maximum Drawdown TMF 8.9% S&P/ASX300 Accumulation Index 10.6% Small Cap Ords Accumulation Index 20.7% 0.8 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Montgomery Investment Management Pty Ltd All Rights Reserved. 35

Montgomery Investment Management Should clients reduce their direct share exposure?

Montgomery Investment Management Should clients reduce their direct share exposure? David Buckland CEO Scott Phillips Head of Distribution The information contained in this presentation is current as at