Agenda Business Overview Philosophy and Process: Maintaining and Growing the Purchasing Power of Savings First Avenue Investment Outcomes: 4yr Anniversary 2 Investing in the highest order of value
Business Overview
Why First Avenue Our higher purpose To be the best, not the biggest, to our clients – and not everything to everyone Alignment of Interests Quality Client Experience Culture of Excellence Staff ownership of firm Direct access to key Specialist equity-only (85%) individuals manager Co-investment with clients Thought pieces/Insight One philosophy, one (no P.A trading) Letters process (Intrinsic value) Long term performance Annual Investment Limited product set incentives (20yr structure) Forum 4 Investing in the highest order of value
R Billions Steadily bolstering our commerciality Assets Under Management 10.000 11.000 12.000 13.000 14.000 15.000 5 1.000 2.000 3.000 4.000 5.000 6.000 7.000 8.000 9.000 - Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Assets Under Management Growth Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Investing in the highest order of value Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Investing, clearly. Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15
Client Concentration & Client Flows Progressing well in reducing concentration risk Client Concentration Net Flows (millions) 2011 1,661 2012 2,131 2013 1,210 2014 1,521 2015 1,700 6 Investing in the highest order of value
Business Strategy & Vision Building on a solid foundation for decades to come Inception (2011) Present (2015) 2020 Market segment Institutional 100% 75% Retail 0% 25% c.50% Client geography South Africa 100% 100% Global 0% 0% >40% Equity products 2 South Africa 2 2 0 Global 0 1 0 GBAM Collaborations 0 2 Investing, clearly. 7 Investing in the highest order of value
Aligning business retention with client interest Changed equity vesting structure from 5yrs to 20yrs Effective Ownership Year Year Year Year Year Year Year Year Year 1 2 3 4 5 6 7 …. 13 … 20 Old structure 0% 0% 33% 66% 100% 100% 100% 100% 100% New structure 0% 0% 0% 0% 0% 25% 29% 54% 80% • Old structure placed the business at risk for a revolving door every 3-5 years • New structure closes the revolving door as the pay-out now starts from year 6 with retention benefits for the long term • Better matches talent conversion and ownership • The client, individual, and business all win 8 Investing in the highest order of value
Corporate Social Investment The First Avenue Institute OBJECTIVE Expose young, previously disadvantaged girls (age 7 – 18) to fields of Science, Technology, Engineering and Mathematics Ongoing Learning Winter School Corporate Visits Life Skills and Mentorship • Initially 10 learners • South African National • The Voice Clinic • Mentors from industry Space Agency (SANSA) (presentation, public • Hosted by UJ Faculty of • Full bursary and confirmed speaking and Engineering and Built assistance provided to communication) • Discussions with Sasol, Environment for 1 week exceptional students • DreamTeam CSIR, Mark Shuttleworth each year • Support from University Foundation, Shell and (relationship of New Hampshire Cell C development, business and social etiquette) 9 Investing in the highest order of value
Philosophy and Process: Maintaining and Growing the Purchasing Power of Savings
Compound Effects of Inflation The primary obstacle to wealth creation Source: BNP Paribas Cadiz, First Avenue Analysis 11 Investing in the highest order of value
Equities The biggest beneficiary of low interest rates since 2005 Performance of Bonds, Cash and Equities vs Inflation, 1985 - 2015, Indexed (1985=100) 16,000 Bonds CASH 14,000 ALSI Inflation Indexed Return (1985=100) 12,000 10,000 8,000 6,000 4,000 2,000 0 Dec 84 Dec 85 Dec 86 Dec 87 Dec 88 Dec 89 Dec 90 Dec 91 Dec 92 Dec 93 Dec 94 Dec 95 Dec 96 Dec 97 Dec 98 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 12 Investing in the highest order of value
Yet Up to 2004 There was nothing between bonds and equities Performance of Bonds, Cash and Equities vs Inflation, 1985 - 2004, Indexed (1985=100) 3,000 Bonds CASH ALSI 2,500 Inflation Indexed Return (1985=100) 2,000 1,500 1,000 500 0 13 Investing in the highest order of value
Marrying Inflation and Investment Philosophy Has enormous advantages in creating wealth Cumulative Return: Unit Trust Quartiles, Inflation and SA Equity 1 st Quartile: Top Performing 18,000 1,352,422 SA Equity Stocks* Inflation 16,244 Capitec 16,000 Average of Equity Funds in 4th Quartile Howden Africa Average of Equity Funds in 3rd Quartile 14,000 Average of Equity Funds in 2nd Quartile EOH Holdings 12,000 Famous Brands Price 10,000 PSG Group 8,000 Naspers 6,000 Hosken Cons. Inv. Mr Price Group 4,000 3,658 Aspen Pharmacare 2,000 1,289 559 Afrocentric 20 0 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 * First Avenue portfolio holdings shown in bold 14 Investing in the highest order of value
Monetary Policy & Economic Growth Trade Off Always build an ark rather than predict a storm Strong markets have occurred because: Stocks are far more sensitive to both low rates and the Fed’s promises (lower for longer) than they are to the real economy. Easy money disproportionately allocated to unproductive activities (e.g. share buy backs, M&A) than expanding the productive base of the real economy If systemic risks of 2008 have receded, why is the Fed Funds rate still at zero? Taylor Rule implies short term (Fed Fund) rates today should be at 3.75% The Fed has abandoned the Taylor Rule to set monetary policy, and is continually moving its own goal posts for when it would raise rates Exposing the markets to volatility of anticipating (voting) on a rates increase In the long term, share prices will reflect the votes investors cast on the quality of businesses (the arc) to withstand macro shocks (the storm ) 15 Investing in the highest order of value
But inflation is transitory and risk is to the upside Stocks Easily Clear Hurdle of Low Inflation 16 Percentage (%) 10.00 12.00 14.00 16.00 0.00 2.00 4.00 6.00 8.00 1-Sep-95 1-Mar-96 1-Sep-96 1-Mar-97 JSE All Share Index Earnings Yield vs. CPI Inflation CPI Inflation Earning Yield - ALSI 1-Sep-97 1-Mar-98 1-Sep-98 1-Mar-99 1-Sep-99 1-Mar-00 1-Sep-00 1-Mar-01 1-Sep-01 1-Mar-02 1-Sep-02 1-Mar-03 1-Sep-03 1-Mar-04 1-Sep-04 1-Mar-05 1-Sep-05 1-Mar-06 1-Sep-06 Investing in the highest order of value 1-Mar-07 1-Sep-07 1-Mar-08 1-Sep-08 1-Mar-09 1-Sep-09 1-Mar-10 1-Sep-10 1-Mar-11 1-Sep-11 Investing, clearly. 1-Mar-12 1-Sep-12 1-Mar-13 1-Sep-13 1-Mar-14 1-Sep-14 1-Mar-15
Intrinsic Value Investing Creates the best link between the present to the future Is the Competitive Advantage Sustainable? 1 Long term viability of the business model (economic moat) Consistency of capital allocation (stewardship) Intrinsic Value Intrinsic Growth Present Future Cyclically Adjusted Earnings Partial Value Asset Value Is the Share Price Lower than Future Value? 2 Buy (Sell) when future value is greater(lower) than share price Reliability of assumptions (margin of safety) 17 Investing in the highest order of value
Net Asset Value Based Investing Requires “a greater fool” to be on other side of your trade Price Versus Book Value per Share – Delta EMD 80 Price • Established in 1919 Book Value Per Share • Once the lowest cost producer of electrolytic manganese 70 dioxide (EMD) to companies such as Duracell • Negatively affected by anti-dumping duties, higher 60 electricity prices and excess capacity from local suppliers to batter manufacturers ZAR per Share 50 • Currently discontinuing all business lines and selling tangible assets 40 30 20 10 0 FY-00 FY-01 FY-02 FY-03 FY-04 FY-05 FY-06 FY-07 FY-08 FY-09 FY-10 FY-11 FY-12 FY-13 FY-14 18 Investing in the highest order of value
Net Asset Value Based Investing Price to book losing effectiveness as indicator of value 19 Investing in the highest order of value
Cyclically Adjusted Price Earnings Investing Requires “a greater fool” to be on other side of your trade Price Earnings Ratio, WBHO, 2001 - 2015 35 30 25 20 15 Ave PE: 11.1x 10 5 0 Jun 01 Nov 01 Apr 02 Sep 02 Feb 03 Jul 03 Dec 03 May 04 Oct 04 Mar 05 Aug 05 Jan 06 Jun 06 Nov 06 Apr 07 Sep 07 Feb 08 Jul 08 Dec 08 May 09 Oct 09 Mar 10 Aug 10 Jan 11 Jun 11 Nov 11 Apr 12 Sep 12 Feb 13 Jul 13 Dec 13 May 14 Oct 14 20 Investing in the highest order of value
Intrinsic Value Investing Recognizes that Replacement value is in the minds of the customer Asset Value, CAPE and Intrinsic Value, Naspers 3,000 2,450 2,500 2,000 Market Price: R1,800 ZAR 1,500 1,000 752 500 112 0 Asset Value EPV Intrinsic Value Asset Value Cyclically Intrinsic Value Adjusted Earnings 21 Investing in the highest order of value
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