What Makes The Worlds Greatest Investors? What Makes The Worlds - PowerPoint PPT Presentation

What Makes The World’s Greatest Investors? What Makes The World’s Greatest Investors? Dr Adrian Saville Chief Investment Officer CannonAssets

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Cannon Asset Managers and McGregor BFA, note inception dates vary (Annualised %) 10.0 15.0 20.0 25.0 0.0 5.0 22.0 Cannon All Equities 17.5 Market 19.6 Cannon SuperDogs 11.5 FINDI 18.4 Cannon Allocator 17.4 Equity-Cash Index 10.4 Cannon Global Equity 10.3 FTSE All World Index 16.5 Cannon High Yield 19.0 Cannon Balanced 11.2 Cannon Equi-weighted Our Track Record 5.9 CPI 11.4 CPI + 5%

NAME THE GREATEST INVESTOR OF ALL TIME?

Active Investing: The Evidence Actively Managed Funds Beating the Benchmark (%) (2003-2008) 100.0 90.0 One Year Three Years Five Years 80.0 70.0 60.0 50.0 40.0 Fail 30.0 20.0 10.0 0.0 US Funds Global Funds International Funds International Small Cap Emerging Markets Funds Funds SPIVA (Standard & Poor’s)

What Do Outperforming Investors Have In Common? Organisational Factors Value Value Value Unconstrained Contrarian Patient Disciplined

Organisational Factors

Outperforming Firms Have The Following In Common Own Consistency Cooking Owner Owner Low AUM Managed Managed Turnover Fewer Product Company Size Visits Canadian Investment Review – David Finstad 2005

Value Value Value

What Drives High Investment Returns Returns to High & Low PE Stocks (1975–2010) 12.0 9.8 10.0 Average Five-Year Excess Return (%) 8.0 6.0 Annualised Alpha (%) 4.0 2.0 1.1 0.0 -2.0 -1.9 -4.0 -4.3 -4.7 -6.0 -8.0 Quintile 5 Quintile 4 Quintile 3 Quintile 2 Quintile 1 McGregor BFA; DRKW Macro Research (2007); updated by Cannon Asset Managers (2012)

What Drives High Investment Returns Returns to High & Low PE Stocks (1975–2010) 12.0 9.8 10.0 Average Five-Year Excess Return (%) 8.0 6.0 Annualised Alpha (%) 4.0 2.0 1.1 0.0 -2.0 -1.9 -4.0 -4.3 -4.7 -6.0 -8.0 Quintile 5 Quintile 4 Quintile 3 Quintile 2 Quintile 1 High PE High PE Stocks Stocks Low PE Low PE Stocks Stocks Returns come from the most attractively priced stocks • McGregor BFA; DRKW Macro Research (2007); updated by Cannon Asset Managers (2012)

What Drives High Investment Returns Returns to High & Low PE Stocks (1975–2010) 12.0 9.8 10.0 8.5 Average Five-Year Excess Return (%) 8.0 Average Five-Year Excess Earnings (%) 6.0 Annualised Alpha (%) 4.0 2.0 1.1 0.6 0.0 1.0 -1.1 -2.0 -1.9 -4.0 -4.3 -4.7 -6.0 -6.8 -8.0 Quintile 5 Quintile 4 Quintile 3 Quintile 2 Quintile 1 High PE Stocks High PE Stocks Low PE Low PE Stocks Stocks Cannon domestic PE 11.0x versus market PE 13.6x • Cannon global PE 10.2x versus market PE 15.3x • McGregor BFA; DRKW Macro Research (2007); updated by Cannon Asset Managers (2012)

What Drives High Investment Returns Returns to High & Low PE Stocks (1975–2010) 12.0 9.8 10.0 8.5 Average Five-Year Excess Return (%) 8.0 Average Five-Year Excess Earnings (%) 6.0 Annualised Alpha (%) 4.0 1.1 PE 10 PE 10 2.0 PE 19 PE 19 0.6 0.0 1.0 -1.1 -2.0 -1.9 -4.0 -4.3 -4.7 -6.0 -6.8 -8.0 Quintile 5 Quintile 4 Quintile 3 Quintile 2 Quintile 1 PE 9 PE 9 PE 29 PE 29 Cannon domestic PE 11.0x versus market PE 13.6x • Cannon global PE 10.2x versus market PE 15.3x • McGregor BFA; DRKW Macro Research (2007); updated by Cannon Asset Managers (2012)

Unsustainable Valuations Among The Popular Story Stocks CAPE Ratio (x) Bloomberg, Cannon Asset Managers

Unconstrained

Be Able To Go Anywhere In The Market Fama- 13 Small Value Index French ($21,081) indices 12 (1928- Annualised Return (%) 2010) Small Cap Index 11 ($5,580) $1 Total Market Large Value Invested 10 ($1,722) Index ($3,415) in 1928 S&P 500 Index Small Growth ($1,721) Index ($1,578) 9 Large Growth Index ($1,119) 8 18 20 22 24 26 28 30 Volatility (Annualised Standard Deviation) (%) ifabt.com; Fama-French indices (1928-2010)

Small Caps Are An Example Of Not Looking Like The Benchmark 1 000 Companies by Market Cap (R'mn, 2012) 900 800 700 R200bn manager allocates 4% AUM 600 24% Life HealthCare (#40, R33bn) 42% Uranium One (#60, R19bn) 500 80% Coronation (#80, R10bn) 400 300 Greater opportunity lies here, but information 200 is thinnest 100 - BTI AGL SOL KIO AMS OML IMP REM BVT INL WHL ASR CSO LHC REI ABL LBH RDF CPI SPP CCO LON HYP RLO TON PSG HCI MUR TKG NHM TRE GND SAC VKE EMI OCE ATNP RBW PAM BLU HDC EOH ZSA EQS PAN PMM GRF RBX GBG LHG MRF BEL MIX CLR OCT DAW HWN YRK SNU SFN APK ELR DGC MST ART TPC CGR BSS OLG RLF TSX CND JSC PKH ASO MOR CNL 1TM Cannon Asset Managers (2012)

Small Caps Are An Example Of Not Looking Like The Benchmark 1 000 Companies by Market Cap (R'mn, 2012) 900 800 700 R200bn manager allocates 4% AUM 600 24% Life HealthCare (#40, R33bn) 42% Uranium One (#60, R19bn) 500 80% Coronation (#80, R10bn) 400 300 Greater opportunity lies here, but information 200 is thinnest 100 - BTI AGL SOL KIO AMS OML IMP REM BVT INL WHL ASR CSO LHC REI ABL LBH RDF CPI SPP CCO LON HYP RLO TON PSG HCI MUR TKG NHM TRE GND SAC VKE EMI OCE ATNP RBW PAM BLU HDC EOH ZSA EQS PAN PMM GRF RBX GBG LHG MRF BEL MIX CLR OCT DAW HWN YRK SNU SFN APK ELR DGC MST ART TPC CGR BSS OLG RLF TSX CND JSC PKH ASO MOR CNL 1TM Large Mid Small Market Price-Earnings (x) 14.4 13.2 12.8 Market Price to Book (x) 2.2 1.8 1.6 Cannon Asset Managers (2012)

Small Caps Are An Example Of Not Looking Like The Benchmark 1 000 Companies by Market Cap (R'mn, 2012) 900 800 700 R200bn manager allocates 4% AUM 600 24% Life HealthCare (#40, R33bn) 42% Uranium One (#60, R19bn) 500 80% Coronation (#80, R10bn) 400 300 Greater opportunity lies here, but information 200 is thinnest 100 - BTI AGL SOL KIO AMS OML IMP REM BVT INL WHL ASR CSO LHC REI ABL LBH RDF CPI SPP CCO LON HYP RLO TON PSG HCI MUR TKG NHM TRE GND SAC VKE EMI OCE ATNP RBW PAM BLU HDC EOH ZSA EQS PAN PMM GRF RBX GBG LHG MRF BEL MIX CLR OCT DAW HWN YRK SNU SFN APK ELR DGC MST ART TPC CGR BSS OLG RLF TSX CND JSC PKH ASO MOR CNL 1TM Large Mid Small Cannon Weight (%) 40.4 14.9 44.7 Market Weight (%) 82.1 14.6 3.3 Cannon Asset Managers (2012)

Conduit Capital Incorporated on the 2 nd of September 1998 Investment Case Dividend yield 10.0% and earnings yield of 15.7% • Doubled HEPS for six month ended February 2012 • Cash on balance sheet exceeds market cap • Cannon Asset Managers (2012), Conduit Capital (2012)

Contrarian

Go Against Emotion CAPE Ratio versus Subsequent Three-Year Return 50 Cannon CAPE Ratio 40 Market CAPE Ratio 30 (%) 20 10 0 -10 5 10 15 20 25 30 CAPE Multiple (times) Pessimism Suspicion Acceptance Optimism Euphoria Cannon Asset Managers; estimate based on data at start of 2012Q4

Go Against Emotion Market Sentiment CAPE Ratio (x) Historical 3 Year Real Return (%) p.a. Pessimism < 13.1 14.6 Suspicion 13.1 - 14.5 12.0 Acceptance 14.5 – 17.0 11.8 Optimism 17.0 – 18.8 4.6 Euphoria >18.8 -1.5 Cannon Asset Managers and McGregor BFA

When Investors Are Too Excited They Overpay 140 120 Index - Sep 09 = 100 100 80 60 Sep-09 Feb-10 Jul-10 Dec-10 May-11 Oct-11 Mar-12 Aug-12 S&P 500 Index Shanghai Composite Index Data from Bloomberg (2012), analysis Cannon Asset Managers (2012)

Guess What’s Popular At The Moment? 30 FTSE-JSE Industrial 25 Index FTSE-JSE Industrial Index 25 20 CAPE Ratio (x) 15 10 5 0 1987 1990 1993 1996 1999 2002 2005 2008 2011 Data from Bloomberg (2012), analysis Cannon Asset Managers (2012)

Ironically, Mr Price Isn’t Such A Bargain Market Cap of Mr Price versus South African Construction Firms (R'bn) BasRead, 1.0 Stefanutti, 1.9 Group5, 2.9 WBHO, 8.7 Mr Price, 34.2 M&R, 9.4 Aveng, 12.0 Data from Sharedata (2012), analysis Cannon Asset Managers (2012)

The Order Book Is Building 200 160 120 Rand (bn) 80 40 0 2000 2002 2004 2006 2008 2010 2012 Market Cap Order Book JP Morgan, Cannon Asset Managers (2012)

Patient

What Works In Investing Holding Period Probability of Loss Standard Deviation of Returns Nominal (%) Annualized (%) (1871 – 2011) Monthly 14.3 38.0 Annual 19.6 29.0 5 Years 8.1 11.0 10 Years 5.1 3.0 Pzena Analysis (Sanford C. Bernstein & Co, & Robert Shiller)

Pinnacle: Established & Robust Leading provider of communication and IT products and services to African continent Compellingly priced, high quality investment Net profit CAGR of 34% over 12 years • Average ROE of 24% over 5 years • 15 percent of shares being repurchased • PE of 10x • Cannon Asset Managers (2012), Pinnacle Technology (2011) Annual Report

Disciplined