The Great Muddle Through Wayne McGauley Head of Retail, IML March 2014 1
Agenda Intro to IML The Great Muddle Through Investment strategy Portfolio focus for clients Summary 2
Agenda Intro to IML The Great Muddle Through Investment strategy Portfolio focus for clients Summary 3
About IML Boutique manager established in 1998 Circa $5bln FUM retail and institutional clients Disciplined and consistent true to label value style Owned by IML investment staff and Treasury Group (TRG) Large investment team with experienced leadership Market leading performance over 15 years 4
Investment Philosophy: focus on quality We seek to buy and own: Companies with a competitive advantage, with recurring earnings, run by capable management, that can grow,...at a reasonable price. 5
Retail Investor Needs Capital preservation Reasonable capital growth Income focused 6
IML - Meeting the expectations of a Value Manager Feature Reasonable Capital growth over time Resilience in falling markets Low volatility Consistent income Tax effective IML 7 This is what differentiates IML
The IML experience capture the ups, avoid the downs 6.00% Total Return 1yr to Jan14 4.00% Benchmark +10.58% 2.00% IML +12.94% 0.00% -2.00% -4.00% -6.00% Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Portfolio Benchmark 8 IML Australian Share Fund monthly returns v benchmark, As at 31 January 2014
Annualized Return IML 15 year history - looking to smooth volatility 12 Risk/Return Since IM L Inception 07/1998 to 01/2014 Investors Mutual WS Australian Share Fund Value Investing 11 10 9 S&P/ASX 300 - Total Return 8 9 10.5 11 11.5 12 12.5 13 13.5 14 Annualized Standard Deviation Source: Factset as at 31st January 2014
Agenda Intro to IML The Great Muddle Through Investment strategy Portfolio focus for clients Summary 10
Australian household debt deleveraging ongoing 11 Source: Factset as at 31 Dec 2013
Australian mortgage equity withdrawal. 12
Deleveraging ongoing 13
QE = monetary madness 14
Australian 10 year bond yields...driving equities 12.0% Australia 10Y Treasury Yield 12.0% 11.0% 11.0% 10.0% 10.0% 9.0% 9.0% 8.0% 8.0% 7.0% 7.0% 6.0% 6.0% 5.0% 5.0% 4.0% 4.00 4.0% 3.0% 3.0% 2.0% '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 2.0% 15 Source: RBC, January 2014
Looking Back Over History S&P/ASX Return Composition Calendar Year Dividend Return 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 3% 4% 4% 4% 4% 4% 4% 5% 5% 4% 5% 5% 4% EPS change 6% 2% 4% 19% 22% 14% 9% -15% -12% 18% 4% -10% 6% PE change 0% -14% 5% 3% -4% 4% 3% -31% 49% -17% -18% 27% 9% Total Return 10% -9% 15% 28% 23% 24% 16% -38% 37% 2% -11% 20% 20% Source: Factset 16
PE s expanded. Source: Factset 17
EPS revisions 18
The Great Muddle Through US: slow and patchy recovery Europe: ongoing sovereign debt issues China: slowing to more sustainable levels Record low interest rates and large quantitative easing Lacklustre global economic outlook set to continue, supported by Central Bank liquidity measures 19
Global GDP. Source: OECD, CBA 20
OECD Composite Leading Indicators Source: OECD, CBA 21
Australian Economy Economy patchy Consumer and business confidence volatile Employment and wage growth soft Interest rates set to stay low Federal Government fiscal consoliation 22
Misery Index 23 Source: CBA as at 31 May 2013
Employment - participation rate falling 24
Real savings rate relatively low 25
Unit Labor Cost in Manufacturing 26
Mining Investment 8% Mining investment, % of GDP 7% 6% 5% 4% 3% 2% 1% 0% 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 Sources: ABS; Butlin (1964, 1985); RBA; Withers, Endres and Perry (1985). As at 30 June 2013 27
Australia s demographics working age of population declining 28
Australia s demographics number of retirees growing 29
Overall Outlook Economic growth to a muddle through Volatility remains a risk Earnings growth for most companies will be much harder to achieve Bonds markets driving equity markets Very selective environment! 30
Agenda Intro to IML The Great Muddle Through Investment strategy Portfolio focus for clients Summary 31
The dilemma of the Australian Market Sector distribution- ASX 300 Index 44% 39% Financials Materials Other 17% Source :IML as at 30 December, 2013 32
IML Australian Share Fund Sector positioning 39% Investors Mutual Australian Share Fund Sector Weights As at 31st January 2014 34% 29% 24% 19% 14% 9% 4% -1% IMAS Sector Weights % ASX300 Sector Weights % 33
Banks PEs historic v today 17 Major bank forward PEs 16 15 14 13 12 11 10 9 8 7 Oct-98 Oct-99 Oct-00 Oct-01 Oct-02 Oct-03 Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 CBA NAB WBC ANZ 34 Source: Factset as at 30 September 2013
Banks - Credit Growth 35 Source : Shaw
Banks - interest payments to disposable income 36 Source: RBA & company data as at 30 September 2013
Basis Points Banks - bad debts 400 Bad Debt Charges 350 300 250 200 150 100 50-1988 1993 1998 2003 2008 2013 ANZ CBA NAB WBC 37 Source: RBA & company data as at 30 September 2013
Resources - focus on quality only Supply side not supportive stockpiles and pipelines Demand side lackluster Competitive suppliers Cost pressures 38
Resources - China s fixed asset investment declining YTD fixed asset investment 39
Resources - Chinese house prices Source: Factset as at 31 st December 2013 40
41 Resources - the supply side
The case against cyclicals Earnings expectations too high downgrades appearing De-leveraging ongoing Inflation in essential household items Fiscal consolidation Employment and wage growth not evident First home buyers not active 42
IML s focus - very stock specific environment: Acquisitions Restructuring New products Contracted growth Market share gains 43
Agenda Intro to IML The Great Muddle Through Investment strategy Portfolio focus for clients Summary 44
Portfolio focus for clients Active management large and uneven dispersion of EPS High Quality portfolio (low beta) Recurring income and growing overtime Portfolio that is resilient 45
Annualized Return IML 15 year history - looking to smooth volatility 12 Risk/Return Since IM L Inception 07/1998 to 01/2014 Investors Mutual WS Australian Share Fund Value Investing 11 10 9 S&P/ASX 300 - Total Return 8 46 10.5 11 11.5 12 12.5 13 13.5 14 Annualized Standard Deviation Source: Factset as at 31st January 2014
Risk - there is a meaningful difference 47 Source: Morningstar as at 31st
Australia... highest yielding stock market Country Dividend Yield (Next 12m) Australia 4.7% United States 2.2% United Kingdom 4.0% Germany 3.0% Japan 1.7% China 1.4% 48 Source: Factset as at Feb 2014
Income - the least volatile component of investment returns 70% S&P/ASX300 20 years to Sep 2013 Return Composition 100% Risk Composition 94% 60% 58% 80% 50% 40% 42% 60% 30% 20% 40% 10% 20% 6% 0% Capital Return Income Return 0% Capital Standard Deviation Income Standard Deviation 49 Source: IRESS
Income - important & consistent component to returns IML Australian Share Fund Income Growth Total Return 1 year +4.34% +8.60% +12.94% 3 years p.a. +5.13% +7.57% +12.70% 5 years p.a. +5.20% +9.46% +14.66% Since Inception p.a. (June 1998) +5.00% +6.62% +11.62% As at 31 January 2014 85%+ of income is underpinned by franked dividend yield ^% Performance per annum. *Fund returns are calculated net of management fees, and assuming all distributions are re-invested. Investors should be aware that past performance is not indicative of future performance. Returns can be volatile, reflecting rises and falls in the value of underlying investments. **The benchmark for this Fund is the S&P/ASX 300 Accumulation Index. 50
Why income/yield is so important Income/Yield - Key Attributes Downside protection a sustainable yield provides a floor to share prices Lower levels of volatility high yielding stocks are inherently less volatile Immune to investor sentiment income is the reliable component of the total return Reliable Cashflow predictable and growing in nature 51
First Rule of Investing 100-10% +11% 90 80-30% +43% 70 60-50% +100% 50 52
Outperforming in Down Markets - IML Reliable and Repeatable 100% 90% 87% 80% 70% 70% 60% 50% 54% 55% 47% 52% 40% 30% 20% 10% 0% IML Australian Share Value A Value B Value C Value D Style Neutral 53 Source: Morningstar Monthly returns since inception as at 31st December 2013
Downside protection critical for clients 54 Source: Morningstar Direct as at 31st December 2013
Downside protection - this is why it is critical 55
Agenda Intro to IML The Great Muddle Through Investment strategy Portfolio focus for cleints Summary 56
Conclusion Low return, volatile environment Invest in quality companies that are not heavily reliant on the economic cycle Many cyclical stocks remain unattractive Value present in many quality industrial stocks that pay consistent dividends 57
IML Australia Share Fund: Performance ASX300 IML Outperformance 6 months +5.01% +5.60% +0.59% 1 year +10.58% +12.94% +2.36% 3 years p.a. +7.32% +12.70% +5.38% 5 years p.a. +12.76% +14.66% +1.89% Since Inception p.a. (circa 15 years - June 1998) +8.85% +11.62% +2.77% As at 31 January 2014 58
IML - Meeting the expectations of a Value Manager Feature Reasonable Capital growth over time Resilience in falling markets Low volatility Consistent income Tax effective IML 59 This is what differentiates IML
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