Investec Value investing Alastair Mundy Portfolio Manager January 2016
Target audience This document is being provided for informational purposes for discussion with institutional investors and financial advisors only. Circulation must be restricted accordingly. Nothing herein should be construed as an offer to enter into any contract, investment advice, a recommendation of any kind, a solicitation of clients, or an offer to invest in any particular fund, product, investment vehicle or derivative. 2 Confidential Investec Asset Management
Value investing at Investec
Investment philosophy We employ a disciplined investment process, making long-term investments in cheap, out-offavour companies with appropriate balance sheets Out-of-favour Cheap Balance sheet / quality 4 Confidential Investec Asset Management
Company life cycles and share price cycles Earnings growth relative/return on capital Tension zone Overconfidence in trends Increased investment In favour/ expensive Decline extrapolated indefinitely Cutting capacity Fair value Company profitability Investor behaviour To be in our universe, shares must have underperformed by 50% from their peak relative to the FTSE All-Share Index. This peak must not have occurred in the last 2 years Tension zone Time Out-offavour/cheap 5 Confidential Investec Asset Management
Big value headwind UK Value vs. Growth price performance Source: Morgan Stanley, October 2015. Based on MSCI United Kingdom Value Index and MSCI United Kingdom Growth Index 6 Confidential Investec Asset Management
Momentum strategies have performed particularly strongly over the last three years Source: Morgan Stanley, September 2015. Based on Morgan Stanley momentum index 7 Confidential Investec Asset Management
Median UK stock valuations are expensive Median forward & trailing P/E Median dividend yield Median price to cash earnings Median price to book value Source: Morgan Stanley Research, November 2015 8 Confidential Investec Asset Management
The Future? Weighing up the scenarios Deflationary bust Goldilocks scenario Boom times/ Inflation control Direction of interest rates Continued disappointing economic growth. Rates not increased QE? Helicopter money? Slow and moderate increase in interest rates as economic growth recovers to normal levels Rates return to historic levels - a premium to inflation of 2%+ Impact on asset classes Bonds: Dependent on market views of new policies Equities: Low profits growth hits earnings and valuations Good for gold Bad for QE currencies Bonds: A gentle increase in yields? Equities: Already priced in via high valuations Bonds: Bad for bonds (high valuation) Equities: Bad for equities (high valuation) Good for gold Our probability Significant and rising. Investors appear to be minimising downside risks of this outcome Investors want to believe in this. Has been their central scenario for 6 years, but probability now falling Considered very low probability by all, but could be a consequence of further QE Little room for disappointment in central scenario 9 Confidential Investec Asset Management
Time for large caps? Mid caps have had a great run Large caps, particularly mega-caps have disappointed and been a natural source of funds However, many large companies are now focused on shrinking, not growing Mid caps in general may have squeezed profits to the maximum, large caps now have the opportunity to maximize their earnings power Source: Investec Asset Management, November 2015 250 230 210 190 170 150 130 110 90 70 50 FTSE 250 (TR)/FTSE 100 (TR) 10 Confidential Investec Asset Management
Shrinking to greatness checklist Check list New Management (majority) Internal External Acceptance of challenges / past failures Meaningful change in management incentives Focus on shrinking Actions backing words Commitment to cost-cutting Presence of activist shareholders Current Past Valuation support This is not a buy or sell recommendation for any particular stock 11 Confidential Investec Asset Management
The bank bears checklist They say Un-investable/opaque Regulatory burden increasing Fines are never-ending Government holdings create overhang No dividends We say They are far more transparent than 7 years ago and as transparent as they were for the preceding decade Regulators have had their pound of flesh, but politicians want to see increased bank lending. The regulatory push may be coming to an end The list of fines and forthcoming fines seems fairly comprehensive. Is there much downside disappointment to come? Typically discounted by the market and consequently provides a cheaper entry price Lloyds are now paying a dividend and they should grow quickly. Royal Bank dividend is likely to be reinstated within 18 months 12 Confidential Investec Asset Management
The bank bears checklist They say Valuations offer little excitement at book value Vulnerable to an economic downturn The challenger banks are growing strongly We say This valuation discounts no profitable growth in the future. Is this really likely? The UK centric banks have been stress-tested for a deep recession other sectors haven t But banking remains a highly oligopolistic market and the challengers typically win the least profitable customers Now that capital strength has almost been restored we can expect to see more price competition Most banks remain scarred from previous high growth experiences. High growth/ultra competitive strategies appear unlikely for now 13 Confidential Investec Asset Management
Portfolio breakdown % weight No. of Stocks UK Equities 81.8 31 International Equities * 8.1 12 Cash, Cash equivalents & Corporate Bonds 10.1 0 * The portfolio s US equity exposure is modified by short (i.e. seeking to benefit from a fall in value) futures positions held as follows: % weight International Equities 8.1 Short S&P 500 futures -3.3 Net international equity exposure 4.7 Gross international equity exposure 11.4 Portfolio concentration: top 10 = 51.6%, top 20 = 72.2%, top 30 = 83.6% The portfolio may change significantly over a short period of time. This is not a buy or sell recommendation for any particular security. Note: Excludes securities that individually account for less than 0.25% of the portfolio Source: Investec Asset Management, data as at 30 November 2015 14 Confidential Investec Asset Management
Top ten holdings Security Portfolio weighting % HSBC Holdings 8.2 GlaxoSmithKline 7.1 Royal Dutch Shell 6.4 BP 5.5 Grafton Group 4.8 Lloyds Banking Group 4.5 Royal Bank of Scotland Group 4.2 British American Tobacco 3.8 Tesco 2.9 Direct Line Insurance Group 2.8 The portfolio may change significantly over a short period of time. This is not a buy or sell recommendation for any particular stock. Source: Investec Asset Management, data as at 30 November 2015 15 Confidential Investec Asset Management
Investec UK Special Situations Fund % of Equity portfolio 80 70 60 50 40 30 FTSE 100 FTSE Mid 250 FTSE Small Cap/AIM/Fledgling International equities 20 10 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 The portfolio may change significantly over a short period of time. This is not a buy or sell recommendation for any particular security. Source: Source: Investec Asset Management, data as at 30 November 2015 16 Confidential Investec Asset Management
Is the opportunity set widening? FTSE 250 - Number of stocks upgraded by more than 5% vs. stocks downgraded by more than 5% Source: Liberum, November 2015 17 Confidential Investec Asset Management
% Investec UK Special Situations Fund A top long-term performer 300 Investec UK Special Situations A Acc Net 250 FTSE AllSh TR GBP 200 IA OE UK All Companies 150 100 50 0-50 -100 Jul-02 Jul-05 Jul-08 Jul-11 Jul-14 215.2 179.0 170.8 1 year 3 years p.a. 5 years p.a. 10 years p.a. Tenure Investec UK Special Situations A Acc Net (2.0%) 7.2% 8.0% 7.0% 9.2% Investec UK Special Situations I Acc Net (1.2%) 8.0% 8.8% 7.6%* 9.8%* FTSE AllSh TR GBP (0.6%) 8.1% 7.7% 6.1% 7.9% IA OE UK All Companies 4.8% 10.6% 9.0% 6.5% 8.5% Past performance should not be taken as a guide to the future, losses may be made. Data is not audited. Source: Morningstar, 30 November 2015, NAV based, income reinvested (inclusive of management fees but excluding any initial charge) net of UK basic rate tax, in GBP. Tenure: 31 July 2002. * This performance has been synthesised prior to the share class launch date based on the performance record of the A Acc share class. A Acc share launch date: 10 October 1988. I Acc share launch date: 01 June 2007. Fund ratings may be provided by independent rating agencies based on a range of investment criteria. For a full description of the ratings please see www.investecassetmanagement.com/ratings. 18 Confidential Investec Asset Management
Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Strong long-term performance Performance relative to benchmark 200% Investec UK Special Situations/IA All Companies 180% 160% 158.6 140% 120% 100% 80% Past performance figures are not audited and should not be taken as a guide to the future Source: Morningstar, dates to 30 November 2015, NAV based, income reinvested (inclusive of management fees but excluding any initial charge) net of UK basic rate tax, in GBP. 19 Confidential Investec Asset Management
Investec OEIC UK Special Situations Fund Key facts Portfolio manager Domicile Fund structure Objective Performance comparison index Alastair Mundy United Kingdom UK-based OEIC, Series i, UCITS compliant The Fund aims to provide a combination of income and long term capital growth, primarily through application of a contrarian approach to investment in UK equities and in derivatives the underlying assets of which are UK equities. FTSE All-Share Fund launch 02 October 1978 Fund size 1,115.5 million (30 November 2015) Share classes Ongoing charges Performance target* Charges taken from** A, I, S, B, R, J 0.85% (I-Share class) / 1.6% (A-Share class) 3% p.a. outperformance (gross) over rolling 3 years Capital Source: Investec Asset Management, December 2015 * Performance target may not necessarily be achieved, losses may be made. Subject to change without notification. ** The Fund s expenses are wholly or partially charged to the capital account, so capital will be reduced and any income payments will be increased to an equivalent extent. This could constrain future capital and income growth. Income may be taxable. Fund ratings may be provided by independent rating agencies based on a range of investment criteria. For a full description of the ratings please see www.investecassetmanagement.com/ratings. 20 Confidential Investec Asset Management
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Contact details Investec Asset Management Woolgate Exchange 25 Basinghall Street London EC2V 5HA United Kingdom Telephone: +44 (0)20 7597 1900 Email: enquiries@investecmail.com www.investecassetmanagement.com Outside the US, telephone calls may be recorded for training and quality assurance purposes. Issued by Investec Asset Management, January 2016 22 Confidential Investec Asset Management
Important information This communication is not for general public distribution. If you are a private investor and receive it as part of a general circulation, please contact us at +44 (0)20 7597 1900. The value of this investment, and any income generated from it, will be affected by changes in interest rates, general market conditions and other political, social and economic developments, as well as by specific matters relating to the assets in which it invests. The Fund s investment objective will not necessarily be achieved and investors are not certain to make profits; losses may be made. Past performance should not be taken as a guide to the future. Performance would be lower had initial charges been included and will vary between different share classes dependent upon their applicable charges. Returns to individual investors will vary in accordance with their personal tax status and tax domicile. Bond and Multi-asset funds may invest more than 35% of their assets in securities issued or guaranteed by an EEA state. All the information contained in this communication is believed to be reliable but may be inaccurate or incomplete. Any opinions stated are honestly held but are not guaranteed and should not be relied upon. This is not a buy, sell or hold recommendation for any particular security. The portfolio may change significantly over a short period of time. Where expenses are wholly or partially charged to the capital account, capital will be reduced and any income payments will be increased to an equivalent extent. This could constrain future capital and income growth. Income may be taxable. This communication is provided for general information only. It is not an invitation to make an investment nor does it constitute an offer for sale. The full documentation that should be considered before making an investment, including the Prospectus and Key Investor Information Documents, which set out the fund specific risks, is available from Investec Asset Management. This communication should not be distributed to private customers who are resident in countries where the Fund is not registered for sale or in any other circumstances where its distribution is not authorised or is unlawful. Please visit www.investecassetmanagement.com/registrations to check registrations by country. For Funds registered in Switzerland, the Prospectus, Key Investor Information Documents and Report & Accounts may be obtained free of charge from the Swiss Representative and Paying Agent, RBC Investor Services Bank S.A., Esch-sur-Alzette, Badenerstrasse 567, P.O. Box 101, CH-8066 Zurich. In the US, this communication should only be read by institutional investors, professional financial advisers and, at their exclusive discretion, their eligible clients, but must not be distributed to US Persons apart from the aforementioned recipients. THIS INVESTMENT IS NOT FOR SALE TO US PERSONS. Telephone calls may be recorded for training and quality assurance purposes. Issued by Investec Asset Management Limited, which is authorised and regulated by the Financial Conduct Authority, January 2016. Where MSCI data is shown, source: MSCI. The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is provided on an as is basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the MSCI Parties ) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages. www.msci.com Where FTSE data is shown, source: FTSE International Limited ( FTSE ) FTSE 2015. Please note a disclaimer applies to FTSE data and can be found at www.ftse.com/products/downloads/ftse_wholly_owned_non-partner.pdf Where fund ratings are shown they may be provided by independent rating agencies based on a range of investment criteria. For a full description of the ratings please see www.investecassetmanagement.com/ratings. 23 Confidential Investec Asset Management