FPI Convention

21 June 2012

Equity exposure for your clients

Gavin WoodChief Investment Officer, Kagiso Asset Management

21 June 2012

Agenda

What is equity exposure?

Why is it necessary?

Understanding value and price

Equity risk

Active managers

What is equity exposure?

Equity exposure

= a share,

which is a set portion of a business, which generally:

is reasonably-sized, is well-managed, has customers and staff

has been around & succeeded to make a profit for awhile,

pays its shareholders a dividend

= a collection of such shares

… which is equity exposure

Why is it necessary?

Returns in the long-term vs inflation

10

100

1,000

10,000

100,000

1,000,000

Jan 60 Jan 64 Jan 68 Jan 72 Jan 76 Jan 80 Jan 84 Jan 88 Jan 92 Jan 96 Jan 00 Jan 04 Jan 08 Jan 12

Cumulative asset class returns (1964 - May 2012)

Cash CPI Equities Bonds

Understanding value and price

Value and price through time

Market price

Intrinsic value

Why are equity prices so volatile?

Market price

Intrinsic value

Sometimes:

The environment seems terrible

Company results may be poor

People are overly pessimistic

Why are equity prices so volatile?

Market price

Intrinsic value

Other times:

The environment seems fantastic

Company results are great

People are overly optimistic

The value of shares is linked to profits and profits are extracted from GDP

The long-term US equity market experience

*Shiller modelSource: GMO, Standard & Poor’s, Federal Reserve – as of 31/12/2005

Equity risk

It sometimes feels like this…

Or this…

Or this…

Equity risk

Theoretical measures:

Beta, volatility, tracking error…

Neat and mathematical, but not that practical

The main equity risks

Market price

Intrinsic value

Buying when shares are above fair value

– ie not having an idea of valuation

Having to sell, when prices are below fair value

– ie short-term cash need

The main equity risks

Investing without a clear focus

on valuations

- Either as an expert yourself or

from the manager who

manages your money

Investing in equities when you

have a short-term time horizon

Active managers

- are they worth their fees?

How has the market done?

Source: Morningstar, INet

How has the market done?

Source: Morningstar, INet

The average manager hasn’t kept up (after fees)

Source: Morningstar, INet

But the best manager has consistently added huge value

Source: Morningstar, INet

And the top 5 managers have all justified their fees

Source: Morningstar, INet

A philosophy for outperformance

Market price

Intrinsic value

Buy & then hold Sell & then avoid

Market price

Intrinsic value

A philosophy for outperformance

The big trade in the Satrix40 last week

Sell

Buy

In summary

In summary

Equity exposure is about investing in operating businesses

- aiming to grow profits and pay dividends

Investors need it to avoid inflation’s erosion and to grow in real terms

Equity prices move widely around a stable, growing intrinsic value

Main equity risks: not focusing on valuation

a short time horizon

Active managers can outperform after fees, by focusing on valuations:

Buy (& hold) when prices are low

Sell (& avoid) when prices are high

Disclaimer

Kagiso Asset Management (Pty) Limited (‘Kagiso’) is a licensed financial services provider under the Financial Advisory and Intermediary Services Act No. 37 of 2002 (‘FAIS’) (FSP No. 784) and is approved by the Registrar of Financial Services Providers (www.fsb.co.za), Reg No. 1998/015218/07. Kagiso is a member of the Association of Savings and Investments SA (ASISA). ‘The Firm’ refers to Kagiso Asset Management, which is a subsidiary of Kagiso Tiso Holdings. This comprises all discretionary portfolios managed by Kagiso. For the periods from 2002 through 2004, as well as for the calendar year ended 2008, Kagiso Asset Management has been GIPS verified by KPMG. A copy of the verification report is available upon request. The availability of a complete list and description of all of the firm’s composites is available upon request. Internal dispersion is calculated using the equal –weighted standard deviation of all portfolios that were included in the composite for the entire year. Additional information regarding policies for calculating and reporting returns is available upon request. Kagiso has prepared and presented this report in compliance with the Global Investment Performance Standards (GIPS).

Kagiso takes no responsibility for any information contained herein or attached hereto unless such information is issued under the signature of a FSB-approved representative or key individual (as these terms are defined in FAIS) and is strictly related to the business of Kagiso. Such information is not intended to nor does it constitute financial, tax, legal, investment or other advice, including but not limited to ‘advice’ as that term is defined in FAIS. Kagiso does not guarantee the suitability or potential value of any information found in this communication. The user of this communication should consult with a qualified financial advisor before relying on any information found herein and before making any decision or taking any action in reliance thereon. The user of any of this information should be aware that market fluctuations and changes in rates of exchange may have an effect on the value, price or income of investments. As the performance of financial markets fluctuates, an investor may not retain the full amount invested. Past performance is not necessarily a guide to future investment performance. Investments into a collective investment scheme are generally a medium- to long-term investment. This communication contains proprietary and confidential information, some or all of which may be legally privileged. It is for the intended recipient only. If an error of any kind has misdirected this communication, please notify the author by replying to this communication and then deleting the same. If you are not the intended recipient you must not use, disclose, distribute, copy, print or rely on this communication. Kagiso is not liable for any variation effected to this communication or any attachment hereto unless such variation has been approved in writing by a FSB-approved representative or key individual of Kagiso.

Kagiso Asset Management (Pty) Ltd, Fifth Floor, MontClare Place, Cnr Campground and Main Roads, Claremont 7708, PO Box 1016 Cape Town 8000, Tel +27 21 673 6300, Fax +27 86 675 8501, E-mail: info@kagisoam.com, www.kagisoam.com.

Kagiso Asset Management

Unconventional thinking. Superior performance

www.kagisoam.com