Investec Value Fund - Southwood Financial Planning...28 Confidential | Investec Asset Management...

Investec Value Fund

John Biccard

13 August 2015

2 Confidential | Investec Asset Management22542

Summary

● We are facing a deflationary collapse in which only gold and cash will protect you

Too much debt

low real growth and deflation

continued printing of money

currency wars

gold is the only winner


Summary cont.

● On a bottom up basis we find very little to buy

● Consensus is that we have left the problems of the GFC behind us – we disagree

● The major problem is the level of debt. Japan and the ECB are printing money as a result, China is devaluing its currency but the US is going the other way

● The US will eventually have to follow and resume QE

● This will be the catalyst for a higher gold price

Value Fund positioning

SA Equities 50%

Offshore Equities 30%

Cash 20%


1471.8%1396.1%1310.9%

0.0%

500.0%

1000.0%

1500.0%

2000.0%

2500.0%

May-97 Oct-98 Mar-00 Aug-01 Jan-03 Jun-04 Nov-05 Apr-07 Sep-08 Feb-10 Jul-11 Dec-12 May-14

Investec Value R FTSE/JSE All Share TR ZAR (ASISA) South African EQ General

Investec Value FundPerformance

Cumulative performance in ZAR

R100 000 invested on inception* =

Past performance should not be taken as a guide to the future, losses may be made. Data is not audited.

* Manager change date 01 January 2001.

Source: Morningstar, dates to 31 July 2015, NAV based, inclusive of all annual management fees but excluding any initial charges, gross income reinvested, fees are not applicable to market indices, w here funds have an international allocation this is subject to dividend w ithholding tax, in South African Rand.

Annualised performance is the average return per year over the period. Individual investor's performance may vary depending on actual investment dates. Highest and Low est returns are those achieved during any single calendar year over the period specif ied.

R 1.5mR 1.4mR 1.3m


On a bottom up basis, we find nothing to buyHoldings in top twenty stocks

Source: Investec Asset Management

Share % of Benchmark Our holdings PE

SAB 9.22 0 23.0

BHP Billiton 9.15 0 16.0

Naspers 7.51 0 86.0

Richemont 7.02 0 23.0

MTN 6.48 0 15.5

Anglo American 4.63 0 16.0

Sasol 4.59 0 11.0

British American Tobacco 2.87 0 18.0

Standard Bank 2.53 0 15.5

Old Mutual 2.42 0 13.0

FirstRand 2.32 0 15.0

Steinhoff 2.11 0 19.0

Sanlam 1.85 0 16.5

Remgro 1.84 0 19.0

Aspen 1.81 0 30.0

Bidvest 1.47 0 17.5

Woolworths 1.07 0 23.0

Shoprite 1.05 0 23.0

Mondi 1.03 0 16.5

Investec 0.89 0 17.0

71.86% 0%


One slide which encapsulates the marketImplats vs Coronation market cap

Source: I-Net Bridge as at 24 July 2015

Market cap: R28,4mMarket cap: R30,2m

50,000

100,000

150,000

200,000

250,000

Jun-

05

Dec

-05

Jun-

06

Dec

-06

Jun-

07

Dec

-07

Jun-

08

Dec

-08

Jun-

09

Dec

-09

Jun-

10

Dec

-10

Jun-

11

Dec

-11

Jun-

12

Dec

-12

Jun-

13

Dec

-13

Jun-

14

Dec

-14

Jun-

15

Implats

Coronation

Why we own gold (18% of the portfolio)


AngloGold AshantiDown 85% from 10 year high


10,000

20,000

30,000

40,000

50,000

60,000

Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15

Debt levels continue to climb…

Greece is not just an outlier...


Selected Eurozone countries’ total debt

Source: The 16th Geneva Report on the World Economy. Authors’ calculations based on national accounts data. Ireland is excluded as an outlier

Total debt (% of GDP)


Chinese total debt and breakdown

Source: The 16th Geneva Report on the World Economy. Authors’ calculations based on national account data


The history of US government debt – unprecedented peacetime levels

Source: Congressional Budget Office, 13 May 2015

US Federal debt held by the public


Total debt in the US is the highest in history

Source: Source: Source: The 16th Geneva Report on the World Economy. Authors’ calculations based on national accounts data

US total debt by sector (% of GDP)


World debt

Source: Geneva reports on the World Economy. Calculations based on OECD, IMF and national accounts data

World total debt ex-financials (% of GDP)

Despite what you read in the headlines, US growth remains very lacklustre…


Today’s big secular trends

Source: BofA Merrill Lynch Global Investment Strategy, Global Financial Data

Minimal Growth - US nominal GDP growth since 1900

… and inflation continues to fall


US headline inflation is non-existent

Source: Thomson Reuters Datastream, National Bureau of Economic Research, 13 May 2015

US headline inflation rate


Fed’s adjusted 5-10 year forward breakeven inflation rate drops

Source: Bloomberg, Gavekal Data/Macrobond, 17 October 2014

Fed’s adjusted 5 year, 5 year forward breakeven inflation rate (FED5YEAR INDEX on Bloomberg)

… therefore depressing nominal GDP growth and prompting more QE


So, 100% of the market believes the Fed will hike rates, but

● 1Q15, nominal GDP growth was + 3%

● Since the beginning of the US expansion (mid 2010) US nominal GDP has averaged 3.9% and the range has been 3.3% to 4.7%

● So, a rate rise here will be unprecedented (also need to think about current level of asset prices and debt)

Since 1948, there have been 118 Fed rate hikes

116 of these were when nominal GDP >4.5%

(and 112 of these were when nominal GDP >5.5%)

2 were when nominal GDP <4.5%, (one reversed

one month later)


Gold shares’ earnings are highly geared to the gold price

R11/US Dollar assumed as at July 2015

AngloGold and Gold Fields’ earnings sensitivities

Gold price* FY15 (cps) PE

AngloGold(8000c)

$1000 -1278 -

$1300 1304 6.1

$1600 3883 2.1

Gold Fields(3500c)

$1000 (398) -

$1300 106 34.6

$1600 610 5.8

Why we own platinum (20% of the portfolio) and no other commodities


Anglo American PlatinumDown 80% from all time high


20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000



LonminDown 98% from 10 year high


10,000

20,000

30,000

40,000

50,000

60,000

70,000



Aquarius PlatinumDown 99% from 10 year high


2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000



Kumba Iron OreDown 82% from 10 year high


10,000

20,000

30,000

40,000

50,000

60,000

70,000

Nov

-06

Ma

y-07

Nov

-07

Ma

y-08

Nov

-08

Ma

y-09

Nov

-09

Ma

y-10

Nov

-10

Ma

y-11

Nov

-11

Ma

y-12

Nov

-12

Ma

y-13

Nov

-13

Ma

y-14

Nov

-14

Ma

y-15

Why underweight China centric commodities?


China's investment share of GDP is already considerably higher than it was in Japan and Korea

Source: Thomson Reuters, Credit Suisse research, 2 December 2014


Supply greater than demand

Source: Metalytics, UNCTAD, company filings, UBS estimates, 13 April 2015

Seaborne iron ore – major producers & demand


100 years of iron ore

Source: Vale, Bloomberg and Citi Research 27 January 2015

Iron Ore Price (Real US$, 1900-2014)

The prospects for China centric commodities is in contrast to the prospects for platinum


Platinum vs iron ore – diverging prospects

Iron Ore Platinum

1. Current market situation Large surplus Deficit

2. Major end users China infrastructureGlobal industrial users –autocats dominate

3. Structural changes? NoPerhapsNegative: Electric vehiclesPositive: Hydrogen vehicles

4. Current price vs cost curve$50 vs $20 (cash cost) in Australia

$970 vs $1100(majority in SA)


SA platinum recovering but below 10 years ago

Source: UBS Research, 13 April 2015

South Africa's platinum mine production (koz)


The numbers – multi decade low valuations…

Source: Investec Asset Management as at July 2015

Amplats Implats Lonmin Aquarius

Share price (c) 25500 4650 1250 122

Market cap (R’b) 69,0 29,0 7,5 1,8

Net cash (debt) (R’b) (12,0) (6,0) (2,0) 0,9

Enterprise value (R’b) 81,0 35,0 9,5 0,9

Estimated replacement cost (R’b) 145 105 70,0 10,0

EV/Replacement cost 55% 33% 14% 9%

Capex last 5 years (R’b) 37,5 28,3 10,7 1,7

Capex as a % of EV 48% 80% 110% 190%


Aquarius PlatinumA closer look

As at July 2015

Enterprise value (EV) R0,9bn

Ounces produced 185 000

EV/PGM ounce produced R4,860

Current basket price per PGM ounce + R21,000

EV/revenue = 0.2x

vsPick ‘n Pay = 0.4xShoprite = 0.8xMr Price = 4.0xAspen = 5.2xTencent = 13.5x


Implied long term margin is 2%, but history says closer to 20%

*Unusual operating expense

Aquarius Operating Margin Amplats Operating Margin

-60

-40

-20

0

20

40

60

80

'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14% 29.3 0.0 10.1 42.9 55.1 58.4 -15.1 20.2 20.8 -13.5 -36.6 -4.0

%

*

Average (+14.0%)

-60

-40

-20

0

20

40

60

80

'99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14% 36.4 56.1 52.4 46.4 23.1 21.8 25.3 42.2 40.9 34.5 2.4 15.8 15.7 0.6 0.0 3.4

%

*

Average (+26.1%)

Why we don’t own anything else


NaspersUp 25 times over the last 10 years


50,000

100,000

150,000

200,000

250,000



Aspen Pharmacare HoldingsUp 20 times over the last 10 years


10,000

20,000

30,000

40,000

50,000


Portfolio positioning


Investec Value FundTop ten holdings

Source: Investec Asset Management, data as at 31 July 2015

Domestic % of fund

AngloGold Ashanti 10.6

Impala Platinum 7.6

Sappi 7.2

Anglo Platinum 7

Gold Fields 6.8

Arcelormittal South Africa 5.6

Lonmin 2.7

Aquarius Platinum 2.3

Illovo 2

Hulamin 1.5

53.3%

Offshore % of offshore

Centamin 11.3

Sodastream 9.2

Japan Steel Works 8.7

Exedy 6.3

Nuflare Technology 5.9

Canon 5.2

T&D Holdings 4.9

Toyo Engineering 3.7

Palladium ETF 3.7

JC Penny 3.6

62.5%


Comparison to 2008 – Déjà vu?

Source: Investec Asset Management

June 2008 September 2008 % change April 2015 June 2015 % change

Oil ($) 140 98 -30 67 52 -22

Iron ore n/a n/a n/a 60 52 -13

Copper (c) 390 288 -26 288 236 -18

Platinum ($) 2069 1011 -51 1145 980 -14

S+P500 1280 1166 -9 2067 2067 0

S+P500 subsequent returns

6 months -32% ?

1 year -10% ?

3 years -3% ?


This is not an academic exercise…… the Portfolio Manager’s portfolio

Total gold exposure: 52%

AngloGold28%

Centamin15%

Other SA golds (GFI, DRD)5%

Global Value Fund15%

Cash12%

Value Fund8%

Transhex5%

Other Small Cap4%

Aquarius4%

Sappi4%


Conclusion

● We have been underperforming for 4 years – the longest downcycle for value since 1995 –1999

● The valuation gaps between the cheapest and most expensive stocks is as big as we have ever seen

● We believe we are reaching the end of the cycle – we are seeing signs of capitulation selling and the demise of value managers

● Our portfolio reflects our high conviction level – we have seen this cycle before and we will be around to see the beginning of the next up-cycle

Thank you

www.investecassetmanagement.com

Biographies

Appendix A


Biographies

Additional slides

Appendix B


Full retreat

Source: Bloomberg, NBER; Minack Advisors , 15 June 2015

Central Bank policy rates


Slowdown in Chinese economy is evident

Source: BCA Research July 2015


Low oil prices have not deterred supply



Peripheral bonds: less margin of safety



Oil: Iran is a major overhang



U.S. equities are heavily geared



Disclaimer

This document or any of its content may not be in whole or in part, be copied, modified, distributed, retransmitted, redistributed, or released to any third party. The user represents and warrants that it will not use or permit the use of the document or any of its content for any purpose other than authorised internal use and warrants that it will not, without the prior written consent of Investec Asset Management, directly or indirectly redistribute, or knowingly facilitate redistribution of, all or any portion of the document.

All information and opinions provided are of a general nature and are not intended to address the circumstances of any particular individual or entity. We are not acting and do not purport to act in any way as an advisor or in a fiduciary capacity. No one should act upon such information or opinion without appropriate professional advice after a thorough examination of a particular situation. We endeavour to provide accurate and timely information but we make no representation or warranty, express or implied, with respect to the correctness, accuracy or completeness of the information and opinions. We do not undertake to update, modify or amend the information on a frequent basis or to advise any person if such information subsequently becomes inaccurate. Any representation or opinion is provided for information purposes only.

Investec Asset Management will not be held liable or responsible for any direct or consequential loss or damage suffered by any party as a result of that party acting on or failing to act on the basis of the information provided by or omitted from this document. This document may not be amended, reproduced, distributed or published without the prior written consent of Investec Asset Management.

In the event that specific collective investment schemes in securities (unit trusts) are mentioned please refer to the relevant fact sheet in order to obtain all the necessary information in regard to that unit trust.

Collective Investment Schemes in Securities (CIS) are generally medium to long term investments. The value of participatory interests may go down as well as up and past performance is not necessarily a guide to the future. CIS are traded at ruling prices and can engage in borrowing and scrip lending. A schedule of charges, fees and adviser fees is available on request from the manager. Additional adviser fees may be paid and if so, are subject to the relevant FAIS disclosure requirements. Forward pricing is used. The scheme trustee is FirstRand Bank Ltd (011) 371 2111.

Certain Investec Asset Management funds are offered as long-term insurance policies issued by Investec Assurance Limited, a registered insurer in terms of the Long-term Insurance Act.

Investec Asset Management is an authorised financial services provider.

Investec Value Fund - Southwood Financial Planning...28 Confidential | Investec Asset Management...

Documents

Transcript of Investec Value Fund - Southwood Financial Planning...28 Confidential | Investec Asset Management...