Investors’ SeminarOctober 2008

Overview of Current Markets Projections and Predictions What to do now; in the short- term and the long-termLogical, rational, rock-solid plans and actions

Disclaimer

This is not Advice. Please see Mark before considering any changes. Mark will put any recommendations in writing

The information contained in this presentation has been prepared for general use only and does not take into account your personal investment objectives, financial situation or particular needs. Before you make any decision about whether to invest in a financial product, you should obtain and consider the Product Disclosure Statement of the financial product.

The information provided by HFS has been done so in good faith and has been derived from sources believed to be accurate at the time of compilation. Changes in circumstances, including unlawful interference and unauthorised tampering, after the date of publication may impact on the accuracy of the information. Neither HFS nor any member of HFS accepts responsibility for any inaccuracy or for investment decisions or any other actions taken by any person on the basis of the information included. Past performance is not a reliable indicator of future performance.

Neither HFS nor any member of HFS guarantees the performance of the Funds, the repayment of capital or any particular rate of return. The performance of any unit trust depends on the performance of its underlying investment which can fall as well as rise and can result in both capital losses and gains. Consequently, due to market influences, no assurance can be given that all stated objectives will be achieved.

Current Markets – the current crisis explained Debt – Western Consumers Sub-Prime in US CDOs – and inter-bank transfers Lower Consumer and Business Confidence Deflation; Inflation; Stagflation

Its even worse in the UK!

‘on Wall Street, the most unnerving stock market reports since the 1930’s depression became daily more dismal’ –

‘The next recession won’t look like any that has preceded it in recent decades. We are so heavily indebted that a slump would quickly turn into a Latin American style depression’ –

‘this economic convulsion is unprecedented in the post world war 2 era’ –

‘This time it is different. This time the market won’t be so quick to bounce back. Who can look at the world now and not conclude that things have changed dramatically?’ –

It’s different this time? It’s different this time?

Time June 1, Time June 1, 19701970

Newsweek, September 7 1998Newsweek, September 7 1998

Forbes September 4, Forbes September 4, 19891989

Fortune, September 28 1998Fortune, September 28 1998

Why are we investors – ie what are our goals Short-term goals; Long-term goals Goals need to be re-considered. Write them down. Probably only change slightly.

Success is measured over set time period.

Why?

The power of compounding. If you double your money every year :Start with $100k then after 10 years your $100k becomes $102.4m

“The stockmarket is a giant distraction from the business of investing” – John Bogle

Sharemarket quotes: “...voting machine......long-term it is weighing machine”“transfers wealth from the impatient to the patient”“good TV”

Investor or Trader

Are either of these important for achieving our goals:Picking the bottom?The time-frame to recover?

Warren Buffett – average returns1965-2007 – 21.1%pa (doubles every 3.4 years!) vs market return of 10.3%pa.

The goal is to never overpay for assets. Buy them cheaply.

When markets recover it can When markets recover it can happen quickly happen quickly

Investors’ SeminarOctober 2008

Structure Asset Mix Specialist Stock-Pickers

All investment decisions need to address these 3 areas:

AssetMix

Australian SharesInternational Shares

Property

Term Deposits Cash

The Bucket:RHS – security; return of the $ invested; it is to be “consumed”LHS – Achieve long-term goals - a sub-goal : Replenish cash (RHS) - major goal– total returns– growth or income

Asset ClassHistorical

Long-term Real Return

Risk of a Negative Return

% p.a 1 Year 3 Year 5 Year 10 Year 20 YearCash - Domestic 0 - 1 n/a n/a n/a n/aFixed Interest - Australian 0 - 3 2% 1%Fixed Interest - International 1 - 2 9% 3%

Property Securities 3 - 5 14% 14%

Shares - Australian 5 - 8 27% 9%Shares - International 5 - 9 22% 14%

n/a

0%

0%

1

8%

4%

0%

0%

0%

3%

1%

0%

0%

0%

0%

0%

The Facts of InvestmentThe Facts of Investment

TESTING PERIOD

HFS

“The market can stay irrational for longer than an Investor can stay solvent” – JK Gailbraith

The HFS model is fine.

Clearly defined goals for each section of the bucket.

X

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B

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Y

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D

I

P ISAS

Skill set and processes to analyse; filter and compare the businessesSpecialist Stock-pickersConcentrated Portfolios – Quality BusinessesAll Ords; MSCI; etc – basically define the sea in which to fish. We do not want to own a bit of every business.Can hold Cash – ie Fund Managers can whilst they are awaiting value.

The LHS Side

Invest in 3 ways – profit, rent or interestWhat do we own – shares or businesses. Our goals are long-term returnsWe aim to part-own businesses. The means to do that is via shares. How to value a business for immediate sale of part of it – sharemarket. More due diligence is needed if buying or selling the whole business.

Investing is not rocket-science. Too many people complicate it.HFS Model – stay to the core asset classes.Contract specialist Managers that invest in businesses or properties and ensure transparency. Only invest in what you understand. What do we really own? Who monitors these investments?

We do not “own” Ausbil or EleyG. We contract them to buy businesses (shares) on our behalf.

What do we own?

$100 to Ausbil = $14 of BHP, $9 Westpac

$100 to Eley G = $3 Seek; $3 Primary Health Care

$100 to Hunter Hall = $5 Vallourec; $4 Woongjin ThinkBig

Now to the stock-picker skills needed

A closer look at Step 3 – ICVR stock filters

IIndustryRating

INDUSTRY

ProductsSupply & DemandKey Macro-economic variablesGrowth RateStructure

Barriers to entryReturn on CapitalGovernment interventionSustainability

CCompanyQuality

COMPANY QUALITY

Industry positioningBarriers to entryRecurring- revenueGrowth ratesMarginsReturn on Equity

Free Cash FlowDividend historyManagement- experience and track recordManagement- incentives and stake in equityCorporate StrategyCorporate- GovernanceBalance sheet- strength

VCompanyValuation

VALUATION

Enterprise Value / EBITDA

Market Cap. / Free Cash Flow

Stock Price / Cash EPS

Stock Price / Dividend PS

Market Cap. / Book Value

RCompany

Risk Rating

RISK RATING

Key macro-economic & weather- sensitivitiesKey customers and suppliersGovernment influenceLevel of recurring- revenue Barriers to entry

Balance sheet- strengthFree Cash FlowCorporate StrategyCorporate -GovernanceMarket –CapitalisationShare liquidityMajor shareholders

Case Study - BHP

Industry: Score 7/10Strong global demand for resources still forecast for next 12 months at least. Signs of a “super cycle”.

Company: Score 9/10Leading producer of iron ore, copper, coal, oil, nickel and other base metals. Debt free. Strong management. Active capital management initiatives.

Valuation: Score 8/10Trading on around 9.7 times earnings compared to current market multiple of 16

Risk: Score 7/10Main risks are commodity prices and curbed global demand particularly from China.

Where do Shares and Property returns come from?

Income or dividends+

Growth in profitsFundament

als

P/Es; ie how much to pay for $1 of profit/rent

+Changes in sentiment

If a share rises 5% in one day…

1 day

Dividends 0%

Earnings growth 0%

Sentiment +5%

Total Return +5%

Impact of sentiment 100%

In the long run fundamentals dominate

1 day

I Year

10years

25years

Dividends 0% 4% 4% 4%

Earnings growth 0% +10% +5% +5%

Sentiment +5% +14% +3% +0.5%

Total Return 5% 28% 12% 9.5%

Impact of sentiment 100% 50% 25% 5%

Summary1. Don’t chase past returns2. The long term is easier to forecast than the short term3. In the short term expect the unexpected4. When prices fall, future returns go up5. Forecasting can identify good and bad periods to invest6. Be wary of residential property7. Equities offer good long-term returns8. Diversification within portfolio is essential

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The wealth surge has been significant

200%

300%

400%

500%

600%

700%

800%

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Private wealth to GDP

farrelly’s

If inflation stays low PEs will be in the 14 to 18 range?

0

5

10

15

20

25

-5% 0% 5% 10% 15% 20%

Australian inflation

All O

rds

PEAustralian Equities-PEs vs Inflation 1961-2005

Profits and the sharemarket… rise and fall together

Index based at 10,000 in 1985

Source: ABS 5676.0 Gross operating earnings, All Ordinaries index, Bloomberg. Earnings to 31 March 2008. All Ordinaries index to 20 August 2008.Past performance is no indication of future performance.

Corporate profits

All ordinaries share price index0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

Dec-85 Dec-93 Dec-01 Dec-09

Average annual total returns after inflation

Australian long term returns1900-2007

%

1950-2007

%

1950s%

1960s%

1970s%

1980s%

1990s%

2000-2007

%

Real bond returns 1.3 0.6 -6.3 0.9 -5.1 2.1 10.1 3.1

Real equity total returns 7.9 6.9 9.0 10.6 -4.2 8.6 9.0 10.2

Real equity capital gains 2.0 1.5 2.4 4.6 -10.6 4.0 4.6 6.1

Income compounding

effect5.9 5.4 6.6 6.0 6.4 2.6 4.4 4.1

Source: ABN AMRO / London Business School :‘Global Investment Returns Yearbook 2008’Past performance is not a reliable indicator of future performance.

Average annual total returns after inflation

US long term returns1900-2007

%

1950-2007

%

1950s%

1960s%

1970s%

1980s%

1990s%

2000-2007

%

Real bond returns 1.9 2.1 -2.2 -1.0 -1.7 7.2 5.7 5.8

Real equity total

returns6.5 7.6 15.7 5.6 -0.7 11.0 14.2 -0.4

Real equity capital

gains2.1 4.1 10.3 2.4 -4.5 6.6 11.7 -1.9

Income compounding

effect4.4 3.5 5.4 3.2 3.8 4.4 2.5 1.5

Source: ABN AMRO / London Business School :‘Global Investment Returns Yearbook 2008’Past performance is not a reliable indicator of future performance.

Source: ABN AMRO / London Business School :‘Global Investment Returns Yearbook 2008’Past performance is not a reliable indicator of future performance.

Average annual returns after inflation

World long term returns

1900-2007

%

1950-2007

%

1950s%

1960s%

1970s%

1980s%

1990s%

2000-2007

%

Real bond returns 1.7 3.3 -0.4 0.7 1.5 6.5 6.7 5.6

Real equity total

returns5.8 7.8 18.0 5.4 0.6 13.4 7.9 1.3

Real equity capital

gains1.5 4.4 12.8 1.9 -3.3 9.6 5.6 -0.6

Income compounding

effect4.3 3.4 5.2 3.5 3.9 3.8 2.3 1.9

Now Specialise Trade

20 1010

2 -- 10

2 -- 10

10 20 10

Advantages of Trade & Globalisation

Investors’ SeminarOctober 2008

Structure Asset Mix Specialist Stock-Pickers

Summary to consider:

…….May 2007………

Banks Freeze

Downward Cycle starts

Consumer and Business Confidence Drops; Profits Drop; Unemployment Increases…..

• Inflation

What are Bad Scenarios

– No - Governments to win

Economics was not meant to be easy:Too many variables. Interest rates – boost or inflationary?Save or Spend – good or bad?Human behaviour!!

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“More information is rarely what is needed. A greater understanding of the information available is required.”See past the noise. What affects our plans.

Transparency. Logical. Foundation for achieving our goals.Sound plan – historically and theoretically.Liquidity; sentiment (**) vs Globalisation; productivity/ingenuity

A Sound Solid Plan

Only worry about those things you can controlContact me by phoneRemember the Goals!

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Cash

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Investors’ DecisionsHFS’ Decisions