Post on 17-Jul-2020
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
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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%
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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
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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%
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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)
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AngloGold AshantiDown 85% from 10 year high
Source: I-Net Bridge as at 27 July 2015
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...
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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)
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Chinese total debt and breakdown
Source: The 16th Geneva Report on the World Economy. Authors’ calculations based on national account data
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The history of US government debt – unprecedented peacetime levels
Source: Congressional Budget Office, 13 May 2015
US Federal debt held by the public
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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)
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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…
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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
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US headline inflation is non-existent
Source: Thomson Reuters Datastream, National Bureau of Economic Research, 13 May 2015
US headline inflation rate
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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
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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)
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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
$1600 610 5.8
Why we own platinum (20% of the portfolio) and no other commodities
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Anglo American PlatinumDown 80% from all time high
Source: I-Net Bridge as at 27 July 2015
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15
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LonminDown 98% from 10 year high
Source: I-Net Bridge as at 27 July 2015
10,000
20,000
30,000
40,000
50,000
60,000
70,000
Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15
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Aquarius PlatinumDown 99% from 10 year high
Source: I-Net Bridge as at 27 July 2015
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15
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Kumba Iron OreDown 82% from 10 year high
Source: I-Net Bridge as at 27 July 2015
10,000
20,000
30,000
40,000
50,000
60,000
70,000
Nov
-06
Ma
y-07
Nov
-07
Ma
y-08
Nov
-08
Ma
y-09
Nov
-09
Ma
y-10
Nov
-10
Ma
y-11
Nov
-11
Ma
y-12
Nov
-12
Ma
y-13
Nov
-13
Ma
y-14
Nov
-14
Ma
y-15
Why underweight China centric commodities?
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China's investment share of GDP is already considerably higher than it was in Japan and Korea
Source: Thomson Reuters, Credit Suisse research, 2 December 2014
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Supply greater than demand
Source: Metalytics, UNCTAD, company filings, UBS estimates, 13 April 2015
Seaborne iron ore – major producers & demand
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100 years of iron ore
Source: Vale, Bloomberg and Citi Research 27 January 2015
Iron Ore Price (Real US$, 1900-2014)
The prospects for China centric commodities is in contrast to the prospects for platinum
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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)
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SA platinum recovering but below 10 years ago
Source: UBS Research, 13 April 2015
South Africa's platinum mine production (koz)
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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%
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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
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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
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NaspersUp 25 times over the last 10 years
Source: I-Net Bridge as at 27 July 2015
50,000
100,000
150,000
200,000
250,000
Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15
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Aspen Pharmacare HoldingsUp 20 times over the last 10 years
Source: I-Net Bridge as at 27 July 2015
10,000
20,000
30,000
40,000
50,000
Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15
Portfolio positioning
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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%
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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% ?
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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%
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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
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Biographies
Additional slides
Appendix B
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Full retreat
Source: Bloomberg, NBER; Minack Advisors , 15 June 2015
Central Bank policy rates
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Slowdown in Chinese economy is evident
Source: BCA Research July 2015
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Low oil prices have not deterred supply
Source: BCA Research July 2015
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Peripheral bonds: less margin of safety
Source: BCA Research July 2015
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Oil: Iran is a major overhang
Source: BCA Research July 2015
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U.S. equities are heavily geared
Source: BCA Research July 2015
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