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

Dr Adrian Saville Chief Investment Officer CannonAssets

What Makes The World’s Greatest Investors? What Makes The World’s Greatest Investors?

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(Annualised %)

Cannon Asset Managers and McGregor BFA, note inception dates vary

22.0 17.5 19.6 11.5 18.4 17.4 10.4 10.3 16.5 19.0 11.2 5.9 11.4

0.0 5.0 10.0 15.0 20.0 25.0

Cannon All Equities Market Cannon SuperDogs FINDI Cannon Allocator Equity-Cash Index Cannon Global Equity FTSE All World Index Cannon High Yield Cannon Balanced Cannon Equi-weighted CPI CPI + 5%

Our Track Record

NAME THE GREATEST INVESTOR OF ALL TIME?

0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0 100.0 US Funds Global Funds International Funds International Small Cap Funds Emerging Markets Funds

Actively Managed Funds Beating the Benchmark (%) (2003-2008)

One Year Three Years Five Years

SPIVA (Standard & Poor’s)

Fail

Active Investing: The Evidence

What Do Outperforming Investors Have In Common?

Organisational Factors Value Value Value Unconstrained Contrarian Patient Disciplined

Organisational Factors

Canadian Investment Review – David Finstad 2005

Owner Owner Managed Managed

Own Cooking

AUM

Product Size Fewer Company Visits Low Turnover Consistency

Outperforming Firms Have The Following In Common

Value Value Value

• 8.0
• 6.0
• 4.0
• 2.0

0.0 2.0 4.0 6.0 8.0 10.0 12.0 Quintile 5 Quintile 4 Quintile 3 Quintile 2 Quintile 1 Average Five-Year Excess Return (%)

• 4.3
• 1.9

1.1 9.8

McGregor BFA; DRKW Macro Research (2007); updated by Cannon Asset Managers (2012)

• 4.7

Returns to High & Low PE Stocks (1975–2010)

Annualised Alpha (%)

What Drives High Investment Returns

• 8.0
• 6.0
• 4.0
• 2.0

0.0 2.0 4.0 6.0 8.0 10.0 12.0 Quintile 5 Quintile 4 Quintile 3 Quintile 2 Quintile 1 Average Five-Year Excess Return (%)

• 4.3
• 1.9

1.1 9.8

McGregor BFA; DRKW Macro Research (2007); updated by Cannon Asset Managers (2012)

• 4.7

Returns to High & Low PE Stocks (1975–2010)

• Returns come from the most attractively priced stocks

Annualised Alpha (%)

High PE High PE Stocks Stocks Low PE Low PE Stocks Stocks

What Drives High Investment Returns

• 8.0
• 6.0
• 4.0
• 2.0

0.0 2.0 4.0 6.0 8.0 10.0 12.0 Quintile 5 Quintile 4 Quintile 3 Quintile 2 Quintile 1 Average Five-Year Excess Return (%) Average Five-Year Excess Earnings (%)

McGregor BFA; DRKW Macro Research (2007); updated by Cannon Asset Managers (2012)

Returns to High & Low PE Stocks (1975–2010)

• Cannon domestic PE 11.0x versus market PE 13.6x
• Cannon global PE 10.2x versus market PE 15.3x

High PE High PE Stocks Stocks Low PE Low PE Stocks Stocks

Annualised Alpha (%)

• 4.7
• 4.3
• 1.9

1.1 9.8

• 6.8

1.0

• 1.1

0.6 8.5

What Drives High Investment Returns

• 8.0
• 6.0
• 4.0
• 2.0

0.0 2.0 4.0 6.0 8.0 10.0 12.0 Quintile 5 Quintile 4 Quintile 3 Quintile 2 Quintile 1 Average Five-Year Excess Return (%) Average Five-Year Excess Earnings (%)

McGregor BFA; DRKW Macro Research (2007); updated by Cannon Asset Managers (2012)

Returns to High & Low PE Stocks (1975–2010)

Annualised Alpha (%)

• 4.7
• 4.3
• 1.9

1.1 9.8

PE 29 PE 29 PE 9 PE 9

• 6.8

1.0

• 1.1

0.6 8.5

What Drives High Investment Returns

PE 10 PE 10 PE 19 PE 19

• Cannon domestic PE 11.0x versus market PE 13.6x
• Cannon global PE 10.2x versus market PE 15.3x

CAPE Ratio (x)

Bloomberg, Cannon Asset Managers

Unsustainable Valuations Among The Popular Story Stocks

Unconstrained

ifabt.com; Fama-French indices (1928-2010)

8 9 10 11 12 13 18 20 22 24 26 28 30 Total Market ($1,722) Small Value Index ($21,081) Small Growth Index ($1,578) Small Cap Index ($5,580) Large Value Index ($3,415) Large Growth Index ($1,119) S&P 500 Index ($1,721) Annualised Return (%) Volatility (Annualised Standard Deviation) (%)

Fama- French indices (1928- 2010) $1 Invested in 1928

Be Able To Go Anywhere In The Market

• 100

200 300 400 500 600 700 800 900 1 000 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

Companies by Market Cap (R'mn, 2012)

Greater opportunity lies here, but information is thinnest

Cannon Asset Managers (2012)

Small Caps Are An Example Of Not Looking Like The Benchmark

R200bn manager allocates 4% AUM 24% Life HealthCare (#40, R33bn) 42% Uranium One (#60, R19bn) 80% Coronation (#80, R10bn)

• 100

200 300 400 500 600 700 800 900 1 000 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

Companies by Market Cap (R'mn, 2012)

Greater opportunity lies here, but information is thinnest

Cannon Asset Managers (2012)

Small Caps Are An Example Of Not Looking Like The Benchmark

Large Mid Small Market Price-Earnings (x) 14.4 13.2 12.8 Market Price to Book (x) 2.2 1.8 1.6

R200bn manager allocates 4% AUM 24% Life HealthCare (#40, R33bn) 42% Uranium One (#60, R19bn) 80% Coronation (#80, R10bn)

• 100

200 300 400 500 600 700 800 900 1 000 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

Companies by Market Cap (R'mn, 2012)

Greater opportunity lies here, but information is thinnest

Cannon Asset Managers (2012)

Small Caps Are An Example Of Not Looking Like The Benchmark

Large Mid Small Cannon Weight (%) 40.4 14.9 44.7 Market Weight (%) 82.1 14.6 3.3

R200bn manager allocates 4% AUM 24% Life HealthCare (#40, R33bn) 42% Uranium One (#60, R19bn) 80% Coronation (#80, R10bn)

Cannon Asset Managers (2012), Conduit Capital (2012)

Incorporated on the 2nd 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

Conduit Capital

Contrarian

• 10

10 20 30 40 50 5 10 15 20 25 30 (%)

CAPE Ratio versus Subsequent Three-Year Return

CAPE Multiple (times)

Optimism Euphoria Acceptance

Cannon Asset Managers; estimate based on data at start of 2012Q4

Suspicion Pessimism

Cannon CAPE Ratio Market CAPE Ratio

Go Against Emotion

Cannon Asset Managers and McGregor BFA

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

Go Against Emotion

60 80 100 120 140 Sep-09 Feb-10 Jul-10 Dec-10 May-11 Oct-11 Mar-12 Aug-12 Index - Sep 09 = 100 S&P 500 Index Shanghai Composite Index

Data from Bloomberg (2012), analysis Cannon Asset Managers (2012)

When Investors Are Too Excited They Overpay

Data from Bloomberg (2012), analysis Cannon Asset Managers (2012)

CAPE Ratio (x)

Guess What’s Popular At The Moment?

5 10 15 20 25 30 1987 1990 1993 1996 1999 2002 2005 2008 2011 FTSE-JSE Industrial 25 Index FTSE-JSE Industrial Index

Data from Sharedata (2012), analysis Cannon Asset Managers (2012)

Ironically, Mr Price Isn’t Such A Bargain

Mr Price, 34.2 Aveng, 12.0 M&R, 9.4 WBHO, 8.7 Group5, 2.9 Stefanutti, 1.9 BasRead, 1.0

Market Cap of Mr Price versus South African Construction Firms (R'bn)

JP Morgan, Cannon Asset Managers (2012)

40 80 120 160 200 2000 2002 2004 2006 2008 2010 2012 Rand (bn) Market Cap Order Book

The Order Book Is Building

Patient

Pzena Analysis (Sanford C. Bernstein & Co, & Robert Shiller)

Holding Period Standard Deviation of Returns Annualized (%) Probability of Loss Nominal (%) (1871 – 2011) Monthly 14.3 38.0 Annual 19.6 29.0 5 Years 8.1 11.0 10 Years 5.1 3.0

What Works In Investing

Cannon Asset Managers (2012), Pinnacle Technology (2011) Annual Report

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

Pinnacle: Established & Robust

Disciplined

Ibbotson Associates & PIMCO 1981-1990

12.5 0.8

• 4.1

4.2

• 8
• 4

4 8 12 16

Pre-hiring Post hiring Pre-firing Post-firing

3 yr excess returns (%)

Timing Investment Managers Pre-hiring Post-hiring Pre-firing Post-firing

• S&P 500 earned 16% p.a.
• Magellan Fund earned 22% p.a.
• Average Magellan Investor earned 13% p.a.

Investors’ Timing Is Very Poor

Managers Can’t Style Time Either

“In the aggregate, funds do not possess any ability to time the style factors.”

LSV Asset Management, Mutual Fund Styles, 2002

Cannon Has It All

Stick With The Strategy Happy To Wait Invest Against The Crowd Can Go Anywhere Deep Value Good Business Structure

971% 971% 576% 576%

Cannon Asset Managers and McGregor BFA

The Result ….

200 400 600 800 1000 1200 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 (%) Cannon All Equities ALSI

Market Cannon Equity Cannon Flexible Price-Earnings Ratio (x) 13.6 11.0 11.1 Dividend Yield (%) 3.0 3.6 3.5 Price-Book Ratio (x) 2.1 1.6 1.7 HEPS growth (real) (%) 14.5 24.9 22.7

What We Offer

“… according to Morningstar, Cannon Equity is the most true-to-label value fund in South Africa …”

Stephen Cranston Investor’s Notebook (Financial Mail; September 2012)

Q & A

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