Agenda Business Overview Philosophy and Process: Maintaining - - PowerPoint PPT Presentation

• Business Overview
• Philosophy and Process: Maintaining and Growing the

Purchasing Power of Savings

• First Avenue Investment Outcomes: 4yr Anniversary

Agenda

2 Investing in the highest order of value

Business Overview

• Direct access to key

individuals

• Thought pieces/Insight

Letters

• Annual Investment

Forum

• Specialist equity-only

manager

• One philosophy, one

process (Intrinsic value)

• Limited product set
• Staff ownership of firm

(85%)

• Co-investment with clients

(no P.A trading)

• Long term performance

incentives (20yr structure) 4 Investing in the highest order of value

To be the best, not the biggest, to our clients – and not everything to everyone

Alignment of Interests Quality Client Experience Culture of Excellence

Why First Avenue

Our higher purpose

Assets Under Management

Steadily bolstering our commerciality

Investing, clearly. 5 Investing in the highest order of value

• 1.000

2.000 3.000 4.000 5.000 6.000 7.000 8.000 9.000 10.000 11.000 12.000 13.000 14.000 15.000 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 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 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 R Billions

Assets Under Management Growth

Client Concentration & Client Flows

Progressing well in reducing concentration risk

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Client Concentration

Net Flows (millions)

2011 1,661 2012 2,131 2013 1,210 2014 1,521 2015 1,700

Business Strategy & Vision

Building on a solid foundation for decades to come

Investing, clearly. 7 Investing in the highest order of value 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 South Africa 2 2 2 Global 1 GBAM Collaborations 2

Aligning business retention with client interest

Changed equity vesting structure from 5yrs to 20yrs

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• 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

Effective Ownership

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 …. Year 13 … Year 20 Old structure 0% 0% 33% 66% 100% 100% 100% 100% 100% New structure 0% 0% 0% 0% 0% 25% 29% 54% 80%

Corporate Social Investment

The First Avenue Institute

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• Initially 10 learners
• Hosted by UJ Faculty of

Engineering and Built Environment for 1 week

• Support from University
• f New Hampshire

Expose young, previously disadvantaged girls (age 7 – 18) to fields of Science, Technology, Engineering and Mathematics Winter School OBJECTIVE Corporate Visits Life Skills Ongoing Learning and Mentorship

• South African National

Space Agency (SANSA) confirmed

• Discussions with Sasol,

CSIR, Mark Shuttleworth Foundation, Shell and Cell C

• The Voice Clinic

(presentation, public speaking and communication)

• DreamTeam

(relationship development, business and social etiquette)

• Mentors from industry
• Full bursary and

assistance provided to exceptional students each year

Philosophy and Process: Maintaining and Growing the Purchasing Power of Savings

Compound Effects of Inflation

The primary obstacle to wealth creation

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Source: BNP Paribas Cadiz, First Avenue Analysis

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Equities

The biggest beneficiary of low interest rates since 2005

2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 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 Indexed Return (1985=100)

Performance of Bonds, Cash and Equities vs Inflation, 1985 - 2015, Indexed (1985=100)

Bonds CASH ALSI Inflation

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Yet Up to 2004

There was nothing between bonds and equities

500 1,000 1,500 2,000 2,500 3,000 Indexed Return (1985=100)

Performance of Bonds, Cash and Equities vs Inflation, 1985 - 2004, Indexed (1985=100)

Bonds CASH ALSI Inflation

Marrying Inflation and Investment Philosophy

Has enormous advantages in creating wealth

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3,658 559 20 1,289 16,244

2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 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

Price

Cumulative Return: Unit Trust Quartiles, Inflation and SA Equity

SA Equity Inflation Average of Equity Funds in 4th Quartile Average of Equity Funds in 3rd Quartile Average of Equity Funds in 2nd Quartile

1st Quartile: 1,352,422

Top Performing Stocks* Capitec Howden Africa EOH Holdings Famous Brands PSG Group Naspers Hosken Cons. Inv. Mr Price Group Aspen Pharmacare Afrocentric

* First Avenue portfolio holdings shown in bold

Monetary Policy & Economic Growth Trade Off

Always build an ark rather than predict a storm

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• 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)

Investing, clearly. 16 Investing in the highest order of value

0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00 16.00 1-Sep-95 1-Mar-96 1-Sep-96 1-Mar-97 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 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 1-Mar-12 1-Sep-12 1-Mar-13 1-Sep-13 1-Mar-14 1-Sep-14 1-Mar-15 Percentage (%)

JSE All Share Index Earnings Yield vs. CPI Inflation

Earning Yield - ALSI CPI Inflation

Stocks Easily Clear Hurdle of Low Inflation

But inflation is transitory and risk is to the upside

• Is the Competitive Advantage Sustainable?
• Long term viability of the business model

(economic moat)

• Consistency of capital allocation

(stewardship) 17 Investing in the highest order of value

Intrinsic Value Investing

Creates the best link between the present to the future

1

Asset Value

Cyclically Adjusted Earnings

Intrinsic Growth

• Is the Share Price Lower than Future Value?
• Buy (Sell) when future value is

greater(lower) than share price

• Reliability of assumptions (margin of safety)

2

Partial Value Intrinsic Value Present Future

Net Asset Value Based Investing

Requires “a greater fool” to be on other side of your trade

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10 20 30 40 50 60 70 80 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 ZAR per Share

Price Versus Book Value per Share – Delta EMD

Price Book Value Per Share

• Established in 1919
• Once the lowest cost producer of electrolytic manganese

dioxide (EMD) to companies such as Duracell

• Negatively affected by anti-dumping duties, higher

electricity prices and excess capacity from local suppliers to batter manufacturers

• Currently discontinuing all business lines and selling

tangible assets

Net Asset Value Based Investing

Price to book losing effectiveness as indicator of value

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Cyclically Adjusted Price Earnings Investing

Requires “a greater fool” to be on other side of your trade

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5 10 15 20 25 30 35 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

Price Earnings Ratio, WBHO, 2001 - 2015

Ave PE: 11.1x

Intrinsic Value Investing Recognizes that

Replacement value is in the minds of the customer

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112 752 2,450 500 1,000 1,500 2,000 2,500 3,000 Asset Value EPV Intrinsic Value ZAR

Asset Value, CAPE and Intrinsic Value, Naspers

Market Price: R1,800

Asset Value Cyclically Adjusted Earnings Intrinsic Value

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Note: Dividend per share includes special dividends; Source: Bloomberg, First Avenue analysis

AVI: Intrinsic Value Investing

Looks to the business, not a greater fool for reward

FY End Price (ZAR) Capital Gain Dividend per Share (ZAR) Dividend Yield Cumulative Dividend Yield on 1998 Price Average Inflation Cumulative Inflation 1997

3.42 0.30 8.8% 8.8%

8.6% 8.6% 1998

1.34

• 61%

0.30 22.4% 17.5%

6.9% 15.5% 1999

1.69 26% 0.30 17.8% 26.3%

5.1% 20.6% 2000

3.48 106% 0.30 8.6% 35.1%

5.3% 25.9% 2001

5.39 55% 0.38 7.1% 46.2%

5.7% 31.6% 2002

7.58 41% 0.53 7.0% 61.7%

9.2% 40.8% 2003

8.38 11% 0.54 6.4% 77.5%

5.8% 46.6% 2004

9.95 19% 0.80 8.0% 100.9%

1.4% 48.0% 2005

13.20 33% 1.01 7.7% 130.4%

3.4% 51.4% 2006

13.80 5% 0.55 4.0% 146.5%

4.7% 56.1% 2007

19.71 43% 1.50 7.6% 190.3%

7.1% 63.2% 2008

12.95

• 34%

0.80 6.2% 213.7%

11.5% 74.7% 2009

17.00 31% 0.88 5.2% 239.4%

7.1% 81.8% 2010

22.10 30% 1.75 7.9% 290.6%

4.3% 86.1% 2011

31.20 41% 1.25 4.0% 327.1%

5.0% 91.1% 2012

50.00 60% 3.83 7.7% 439.1%

5.6% 96.7% 2013

59.45 19% 2.60 4.4% 515.1%

5.7% 102.4% 2014

61.25 3% 3.00 4.9% 602.8%

6.1% 108.5%

Current 84.06 37% 5.27 6.3% 756.9% 4.2% 112.7%

Outperformance on Intrinsic Value is Pure Alpha

It is risk premium for low P/B and low P/E strategies

23 Investing in the highest order of value Testing of outperformance by factor in the US (1970-2009)

• And risk premium has a way of coming to bite you hard (e.g. bankruptcy)

Plenty Inflation Fighting Businesses in SA

Our funds are packed with JSE “Quality”

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Iceland NSE India BSE India Hong Kong Shanghai Swiss South Africa NYSE NASDAQ Taiwan Australia Deutsche Börse Shenzhen Brazil TMX Tokyo BME Spain Euronext Korea

5 10 15 20 25 30 5 10 15 20 25 30 35 Return on Equity Market Cap as % of Top 19 World Exchanges

Return on Equity of Top 19 World Exchanges

Average ROE of First Avenue Portfolio = 26.7% Average ROE w/out South Africa = 11.2%

Beware of Confusing Risk for Value

Pure Alpha vs Unwind of Risk Premium

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Generalised GDP Growth Cycle

Peak Growth Peaking Low Low High Distress

Median GDP Growth

Uncertainty Outperformance by High Quality Stocks

  

China US EUROPE

Resilience of High Quality Portfolio

Handles bouts of uncertainty very well

Source: Bloomberg, First Avenue analysis

26 Investing in the highest order of value Fund vs Benchmark Return on 25 Worst Down Days – Feb, 2011 – Feb, 2015

(3.50) (3.00) (2.50) (2.00) (1.50) (1.00) (0.50)

• 11-Jun-13

05-Jan-15 20-Jun-13 22-Sep-11 04-Aug-11 08-Aug-11 10-Mar-11 12-Dec-13 18-Aug-11 15-Mar-11 03-Jun-13 18-Apr-11 04-Oct-11 14-Jan-15 01-Dec-14 15-Oct-14 04-Apr-12 10-Oct-14 24-Jun-13 05-Jul-13 29-Sep-11 09-Dec-14 23-May-13 22-Sep-14 28-Aug-13 SWIX General Equity Composite

First Avenue Investment Outcomes: 4 yr. Anniversary (Jan 2011-Feb 2015)

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How many out of the 75 general equity unit trusts in SA doubled their investor’s money over the past 4 years?

Which Managers Deliver Alpha in SA?

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Which Managers Deliver Alpha in SA?

Investing in the highest order of value

How many out of the 75 general equity unit trusts in SA doubled their investor’s money over the past 4 years? Just 8 out of 75 11% of managers

8 67

10 20 30 40 50 60 70 80 90 100 110 120 130

5 7 9 11 13 15

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Investec Value

SA General Equity Fund Performance (48 months ending Jan, 2015)

Momentum Value

Foord Eq. Coronation Top 20 Prudential Eq. First Avenue Old Mutual Investors Kagiso Equity Alpha Allan Gray Eq. Nedgroup Rainmaker

Which Managers Deliver Alpha in SA?

Source: BNP Paribaz Cadiz Unit Trust Analysis, Morningstar, First Avenue analysis

PSG Eq. Risk (Volatility) Return (net of fees)

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Portfolio Performance

As at 28 Feb 2015

Risk/Return period General Equity Composite** SWIX Relative Since inception* cumulative 113.6% 106.8% 6.8% Since Inception* Annualised 20.4% 19.5% 1.0% 3 year p.a. 21.6% 21.3% 0.3% 1 year p.a. 22.0% 21.4% 0.6% 3m 7.3% 7.0% 0.4% Annualised Volatility since Inception* 12.6% 14.0%

• 1.4%

Annualised Risk Adjusted Return since Inception* (Ann Return / Ann Vol) 162.0% 139.1% 22.9%

* Inception Feb 2011, ** Performance numbers are gross of fees

Questions

Disclaimer

First Avenue Investment Management is an Authorised Financial Service Provider (FSP 42693) The content of this presentation and any information provided may be of a general nature and may not be based on any analysis of the investment objectives, financial situation or particular needs of the client (as defined in the Financial Advisory Intermediary Services Act). As a result, there may be limitations as to the appropriateness of any information given. It is therefore recommended that the client first obtain the appropriate legal, tax, investment or other professional advice and formulate an appropriate investment strategy that would suit the risk profile of the client prior to acting upon such information and to consider whether any recommendation is appropriate considering the client’s own objectives and particular needs. Any opinions, statements and any information made, whether written, oral or implied are expressed in good faith.

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Appendix

We Distinguish between Value and Risk

To differentiate between investing and speculating

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BIL

RISK & UNCERTAINTY

• Compounding, incremental returns
• High probability of stocks gravitating

to fair value

• Capital returns to shareholders
• Infrequent opportunities
• 50% smaller investment universe
• Holding period critical
• Lumpy, cyclical returns
• Low probability of stocks gravitating

to fair value

• Rights issues, recapitalizations
• Frequent and plentiful opportunities
• Large investment universe
• Timing critical

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Organizational Structure

Combats “diseconomies” of information

Board of Directors Investment Team (4 Analysts) Business Ops & Fund admin Outsource Partners Hlelo Giyose (CIO)

International Investment Advisory Board Group of Boutique Asset Managers

• 1 external board member
• 4 board meetings annually
• *2 independent directors (2016,

2017

• Flat management structure
• *4 Analysts report into CIO
• Outsourced partners report into

Business Operations Manager