3. Our Investment philosophy
We are prudent value investors
Valuation based approach to pricing of assets
• Use known facts (historical and current data), rather than trying to
forecast the future
• Use long run anchors of where assets should be priced and buy when
the current valuation is below the fair value.
Construct portfolios on risk conscious basis
Consistent philosophy & unemotional application of process will lead to
consistent performance
4. Asset Allocation in practice
First step – establish a long run fair value for each asset class
4
5. Long Run Equilibrium Assumptions for South African Assets
Term Inflation Default Property risk Equity risk
premium premium premium premium premium
9.00
8.00
8.00
6.75
7.00
Increasing Real Returns
6.00
5.00
5.00
4.00 3.50
2.75
3.00 2.50
2.00
1.00
0.00
Cash Index-linked Government Corporate Property Equity
Bonds Bonds Bonds (A)
Increasing risk
Source: Prudential Portfolio Managers 5
6. Asset Allocation in practice
First step – establish a long run fair value for each asset class
Second step – compare the current valuation to these long run anchors
• Looking for significant relative mis-pricing of assets
• Identifying situations where:
• perceptions of risk temporarily shift
• price moves exaggerate fundamental developments
• fundamental expectations themselves subject to biases
6
7. Current SA returns vs. equilibrium
Increasing Real returns
Increasing risk
Source: Prudential Portfolio Managers – 05.11.2012
8. Investment Process Overview
The local Asset Allocation team, in conjunction with Prudential’s global teams, decides on
exposure to individual markets, asset allocation, government vs corporate bonds and currencies
Bi-weekly Asset
Quarterly GMF
Allocation Asset Allocation Team meetings in
meetings
Marc Beckenstrater London
David Knee
Ad-hoc discussions Intra-quarterly
Michael Moyle teleconferences
in response to
market movements Albert Arntz with London and
Singapore
Grace Debeila
9. Global Asset Allocation Specialists
Global
Tactical Asset Allocation Team
South African Team London Team Asian Team
John Betteridge Kelvin Blacklock
David Knee Director of Portfolio Management CIO, GAA
Head of Fixed Income Group
Head of TAA Joanna Ong
Dave Fishwick Investment Director
Head of Global Macro Team
Marc Beckenstrater
Riki Frindos
Chief Investment Officer Tony Gaughan
Managing Director Investment Director
Head of Global Macro Team
Michael Moyle Nicholas Ferres
Head of Real Return Eric Lonergan Investment Director
Macro Team Member
Albert Arntz Rajagopal Raman
Portfolio Manager Jenny Rodgers Quantitative Analyst
Global Equity Analysis
Grace Debeila Amod Shah
Juan Nevado
TAA Analyst Director of Strategy and Economics
Junior Portfolio Manager
Tony Finding Florence Yap
Analyst Product Manager
11. Investors paying very high price for supposed risk free assets
UK Earnings Yield versus Real Required Rate of Return on 10Y Government Bond
16.0%
UK EY1 UK 10yr Real Bond Yield
14.0%
12.0%
10.0%
8.0%
Real Yield %
6.0%
4.0%
2.0%
0.0%
-2.0%
31-Jan-90
31-Jan-91
31-Jan-92
31-Jan-93
31-Jan-94
31-Jan-95
31-Jan-96
31-Jan-97
31-Jan-98
31-Jan-99
31-Jan-00
31-Jan-01
31-Jan-02
31-Jan-03
31-Jan-04
31-Jan-05
31-Jan-06
31-Jan-07
31-Jan-08
31-Jan-09
31-Jan-10
31-Jan-11
31-Jan-12
Source: Datastream , Factset and Bloomberg – 30.09.2012 Growth pessimism at multi-decade high
12. Current global valuation relative to equilibrium
Source: M&G Investments and Prudential Portfolio Managers – 05.11.2012
13. FTSE/JSE All Share Index
Price and Earnings
Source: I-Net Bridge, Bloombergs, Prudential Estimates
14. 0.0
0.5
1.0
1.5
2.0
3.0
3.5
4.0
4.5
2.5
Jan 80
Jan 81
Jan 82
Jan 83
Jan 84
Source: Bloomberg 30.09.2012
Jan 85
Jan 86
Jan 87
Jan 88
SA Price to Book
Jan 89
Jan 90
Jan 91
Jan 92
Jan 93
World and SA Price to Book
Jan 94
Jan 95
Jan 96
Jan 97
World Price to Book
Jan 98
Jan 99
Jan 00
Jan 01
Jan 02
Jan 03
Jan 04
Jan 05
Jan 06
Jan 07
Jan 08
Jan 09
Jan 10
Jan 11
Jan 12
15. Average annual long-term (>10year) Treasury yields
14%
12%
10%
8%
6%
Average: 5%
4%
2% 10/10/2012
2.6%
1800 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000
Source: BofA Merrill Lynch Global Equity Strategy; US Treasury Composite; Haver
17. -2.5
-1.5
-0.5
0.5
1.5
2.5
0
1
2
-1
-2
Jan 01
Apr 01
Source: Bloomberg
Jul 01
Oct 01
Jan 02
Apr 02
Jul 02
Oct 02
Jan 03
Apr 03
Jul 03
Oct 03
SA Bond Valuation
Jan 04
Apr 04
SA10 less Equilibrium
Jul 04
Oct 04
Jan 05
Apr 05
Jul 05
Oct 05
Jan 06
Std Dev -1
Apr 06
Jul 06
Oct 06
Jan 07
Apr 07
Jul 07
Oct 07
Jan 08
Std Dev +1
Apr 08
Jul 08
Oct 08
Jan 09
Apr 09
Jul 09
Oct 09
Jan 10
Apr 10
Jul 10
Oct 10
Jan 11
Apr 11
Jul 11
Oct 11
Jan 12
Apr 12
Jul 12
Oct 12
20. 0.0
0.5
1.0
2.0
2.5
3.0
3.5
4.0
4.5
5.0
1.5
5.5
Jan 02
Apr 02
Jul 02
Oct 02
Jan 03
Apr 03
Jul 03
Oct 03
Jan 04
Apr 04
Jul 04
Oct 04
Jan 05
Apr 05
Jul 05
Oct 05
Source: I-Net Bridge and Prudential Portfolio Managers 30.09.2012
Jan 06
Apr 06
Jul 06
Oct 06
Jan 07
Apr 07
Jul 07
Oct 07
Jan 08
Apr 08
Jul 08
Oct 08
Inflation Linked Bond Yields vs Equilibrium
Jan 09
Inflation Linked Bond Yield
Apr 09
Jul 09
Oct 09
Jan 10
Apr 10
Jul 10
Prudential equilbruim for Inflation Linked Bonds
Oct 10
Jan 11
Apr 11
Jul 11
Oct 11
Jan 12
Apr 12
Jul 12
21. 100
200
300
400
500
600
700
800
900
0
01 Jan 25
01 Jan 28
01 Jan 31
01 Jan 34
01 Jan 37
01 Jan 40
01 Jan 43
01 Jan 46
US BBB Spreads
01 Jan 49
01 Jan 52
01 Jan 55
01 Jan 58
01 Jan 61
01 Jan 64
SA A Spreads
01 Jan 67
Source: Morgan Stanley, Moody’s, The Yield Book, NBER , Bloomberg/Merrill Lynch
01 Jan 70
01 Jan 73
01 Jan 76
Global Credit Valuations Still Elevated
01 Jan 79
01 Jan 82
01 Jan 85
01 Jan 88
01 Jan 91
01 Jan 94
01 Jan 97
01 Jan 00
01 Jan 03
01 Jan 06
01 Jan 09
01 Jan 12
SA = 141
US = 245
23. SA Listed Property Investment Case
PPM Multi-Asset class funds have recently sold property and purchased downside protection
After these events our funds are broadly neutral weight the asset class
(i.e. balanced marginally overweight and real return underweight)
Negative
• Absolute valuation expensive relative to historical levels
• Weak office property fundamentals (high albeit stable vacancy factors)
• Operating cost pressures
Positive
• Property return prospects look reasonable against cash
• Recovery in distribution growth expected in the coming year
• Stable or improving retail and industrial property fundamentals
25. 70
80
90
100
120
130
140
150
160
170
110
Dec 69
Dec 70
Dec 71
Source: I-Net Bridge
Dec 72
Dec 73
Dec 74
Dec 75
Dec 76
Dec 77
Dec 78
Dec 79
Dec 80
Dec 81
Dec 82
Dec 83
Dec 84
Dec 85
Dec 86
Dec 87
Dec 88
Dec 89
Dec 90
Dec 91
Rand Real Effective Exchange Rate
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
26. Risk – Return
9%
Dividend Maximiser
8% Fund
SA Equity
7% Balanced
Fund SA Property
Annualised Real Return
6%
Inflation Foreign Equity
5% Plus Fund
Enhanced
4% Income
Fund Foreign Bonds
3% SA Bonds
SA ILBs
2% SA Cash Foreign Cash
1%
0%
0.0% 2.5% 5.0% 7.5% 10.0% 12.5% 15.0% 17.5% 20.0% 22.5% 25.0%
Annualised Standard Deviation
Source: INet Bridge, Prudential
28. Enhanced Income Strategic Benchmark
Strategic Asset Indicative
Asset Class Allocation Ranges
SA Cash 50% 0 to 100%
SA ILBs 10% 0 to 100%
SA Government Bonds 10% 0 to 100%
SA Corporate Bonds 15% 0 to 75%
SA Property 5% 0 to 25%
International Fixed Income 10% 0 to 20%
of which:
Government Bonds 5% 0 to 20%
Corporate Bonds 5% 0 to 20%
International Cash 0%
Equity 0% 0 to 10%
Total 100%
Source: Prudential Portfolio Managers
29. Enhanced Income Fund
Performance (after fees) to 30 September 2012
ALBI
Fund STEFI
1-3 Years
3 months 3.6% 1.7% 1.4%
6 months 6.7% 4.7% 2.8%
12 months 11.5% 9.2% 5.6%
3 years 10.6% 8.9% 6.3%
Since inception 1 July 2009 (ann.) 10.7% 8.8% 6.2%
Source: Prudential Portfolio Managers, Morningstar
30. Enhanced Income Fund
Asset Allocation as at 30 September 2012
Fund Asset Allocation Strategic Asset Allocation
60.0%
50%
50.0% 48%
40.0%
35%
30.0%
23%
FRN
20.0%
15%
12%
10% 10% 9% 10%
10.0%
5% 5%
2% 1% 0%
0% 0%
0.0%
SA Cash SA ILBs SA Government SA Corporate SA Property Foreign Bonds Foreign Cash Foreign Equity
Bonds Bonds
Source: Prudential Portfolio Managers
32. Inflation Plus Fund Objectives
Prime objective
• Outperform inflation by 5% per annum before fees over rolling 3
year periods
Secondary objective
• Aim for no capital loss over a rolling 12 month period.
(Best efforts; not guaranteed)
33. 10.9%
323.4
15.1%
187.3
494.0
5.7%
Sep-12
Jun-12
Mar-12
Dec-11
Sep-11
Jun-11
Mar-11
Dec-10
Sep-10
Jun-10
Mar-10
Dec-09
Sep-09
Performance since inception to 30 September 2012
Jun-09
Inflation
Mar-09
Dec-08
Sep-08
Jun-08
Mar-08
Dec-07
Objective
Sep-07
Jun-07
*Objective CPI+6% until 31 July 2009, CPI+5% from 1 August 2009.
Mar-07
Dec-06
Sep-06
Jun-06
Mar-06
Pru Inflation Plus
Dec-05
Sep-05
Jun-05
Mar-05
Dec-04
Sep-04
Jun-04
Inflation Plus Fund
Mar-04
Dec-03
Sep-03
Jun-03
Mar-03
Dec-02
Sep-02
Jun-02
Mar-02
Dec-01
Sep-01
Jun-01
400
480
440
360
320
280
240
200
160
120
80
R100 Initial Investment
35. Inflation Plus Fund
Asset Allocation as at 30 September 2012
Fund Asset Allocation Strategic Asset Allocation
35.0%
32%
30.0% Total Equity 28.9%
Total Foreign 24.4%
26%
25.0%
23%
20.0%
18%
16%
15.0% 14%15%
13%
10.0% 9% 8%
8% 8% 8%
5.0% 4%
0.0%
SA Equity Foreign Equity SA Property SA Bonds Foreign Bonds SA IL Bonds SA Cash
37. Investment process
Stages Asset
Equity Bonds
Allocation
1. Value Assessment Equilibrium Spreads
Valuation Screens
anchors Inflation
2. Understanding Real return Long run ROE, Balance Sheet
analysis, inflation, ROA, margins Cash Flow
the Fundamentals
risk premium (DDM) analysis
3. Portfolio Construction Exposure to risky assets
4. Monitor and Control Unintended Bets and Drift
A rigorous, consistent process across asset classes which exploits mispricing opportunities
prudently.
38. We have 2 objectives in the Dividend Maximiser
1. To provide our clients with a dividend yield greater than that of the market
2. To grow our clients capital and dividends in-line with the market
39. Standard Bank – An example of the type of company that meets our objectives,
at the right price
DY = 2%
DY = 3%
Standard Bank Share Price
DY = 4.5%
Standard Bank in 1984
Dividend = R 4.50
Div Yield = 2 % = Implied Price of R225
Div Yield = 3 % = Implied Price of R150
Div Yield = 4.5% = Implied Price of R100
Source: I-Net Bridge
40. JSE and Dividend Growth
63000
Over long periods, reinvested dividends are the
53000 major part of your return.
R100 invested in 1969 in the JSE will have
43000 grown to over R62 000 in 43 years, the majority
of which is dividends.
33000
23000
13000
3000
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
-7000
Source: Prudential Portfolios Managers
41. Cumulative Performance Since inception
1200 1034
19.6%
Dividend Maximiser
1100
1000 Excess Return per year = 3.8%
727
900
16.4%
800 681
15.8%
JSE All Share
700
600 General
Price Index
Equity Unit
500 Trust Mean
400
300
Inflation
207
200 5.7%
100
0
Jul-99
Dec-99
May-00
Oct-00
Mar-01
Aug-01
Jan-02
Jun-02
Nov-02
Apr-03
Sep-03
Feb-04
Jul-04
Dec-04
May-05
Oct-05
Mar-06
Aug-06
Jan-07
Jun-07
Nov-07
Apr-08
Sep-08
Feb-09
Jul-09
Dec-09
May-10
Oct-10
Mar-11
Aug-11
Jan-12
Jun-12
Inflation ALSI General Equity Unit Trust Mean Prudential Dividend Maximiser A
Source: Morningstar and Prudential Portfolio Managers
42. The risk benefits of a focus on dividends
Domestic Equity Value Sector - 5 years to 30 September 2012
12.0%
Nedgroup Inv Value R
11.0%
10.0%
Prudential Dividend
Annual return (%)
Maximiser A
9.0%
SIM Value R
8.0%
7.0%
Momentum Value A
Cadiz Mastermind A
6.0%
MET Equity Value A Investec Value R
STANLIB Value A
5.0%
Sasfin Value
4.0%
Old Mutual Value R
3.0%
2.0%
14.0% 15.0% 16.0% 17.0% 18.0% 19.0% 20.0%
Risk (annualised standard deviation %)
Source: Morningstar
44. Dividend Maximiser Fund Composition – Sector
as at 30 September 2012
Source: Prudential Portfolio Managers
45. Top Holdings and Actives
as at 30 September 2012
Top 10 Holdings Top 5 Overweight Positions
METROFILE
MTN GROUP LTD 8.5%
SASOL LTD 7.9% OLD MUTUAL PLC
BHP BILLITON PLC 6.9% ABSA GROUP LTD
ANGLO AMERICAN PLC 5.8% GOLDFIELDS LTD
OLD MUTUAL PLC 5.1% STANDARD BANK
STANDARD BANK 4.9% Top 5 Underweight Positions
BRITISH AMERICAN TOBACCO 3.9% FIRSTRAND LTD
NASPERS LTD-N 3.5% ANGLOGOLD ASHANTI
ABSA GROUP LTD 3.5% REMGRO LTD
RICHEMONT-DR 3.3% NAMPAK LTD
53.3% STEINHOFF INTL
46. Fund Holdings Summary
• Resources
• Maintain preference for diversified mining companies over single commodity stocks
» overweight Anglo American, BHP Billiton, Exxaro
» underweight Kumba Iron Ore, ACL, ARI, ASR
• Fund remains underweight platinum
» holding in Lonmin
• Overweight Mondi
• Overweight Sasol
• Financials
• Fund has moved overweight domestic banks
» active positions in ABSA and Standard Bank
» overweight to Nedbank taken through Old Mutual
• Maintain overweight positions in global financials Investec and Old Mutual
47. Fund Holdings Summary
• Industrials
• Core positions in cheap interest rate sensitive stocks such as Imperial, Supergroup and AVI
• Expensive Shoprite, Massmart and Truworths
• Overweight Richemont
• Special situation: Metrofile / Adcock / Netcare
• Selection of recovery stocks Sun International and selected construction stocks
50. How does the Prudential Dividend Maximiser Fund differ from the
Dividend Plus Index?
FTSE/JSE Dividend Plus Index:
• FTSE/JSE launched the Dividend Plus Index in August 2006. The Dividend Plus is a
yield weighted index designed to select and measure the performance of the higher
yielding shares on the JSE.
• The index selects the top 30 high yield instruments based on a one year forecast
dividend yield.
Prudential Dividend Maximiser Fund:
• Considers not only the forecast dividend yield, but also the cash generating ability of
a company and it’s valuation.
• Position sizes in the fund are then calculated after considering these factors, and
based off the General Equity Unit Trust Mean. We do NOT weight according to
dividend yield.
