These are the slides for a talk that I gave based on our investment approach. If you have any questions email me: keith.hodgskiss@psg.co.za

1. PSG INVESTMENT PHILOSOPHY AND
EQUITY SELECTION PROCESS
18 March 2014

2. Keith Hodgskiss
Bsc (Hons), RE5, RPE
Jnr Equity Trader / Portfolio Manager
Nearly 5 years investment experience

3. PSG’s Philosophy
Put risk (the probability of losing money) first and look for investments
with –
a sufficient margin of safety
an asymmetrical payoff range – little downside and sufficient upside
A long term view when assessing asymmetry and constructing our
portfolios with a bottom up approach
Investing at below intrinsic value –
High quality compounding return type companies preferably
Mean reverting companies with margin of safety

4. Quality vs Price
Overvalued and overbought
Trading below fair value

5. WE INVEST IN COMPANIES THAT:
Have a competent and
aligned management
team
Have a sustainable
competitive advantage
Can grow faster than the
market for a sustainable
period
Trade significantly below
our estimate of fair value
OR
Are not overpriced
Compounders
Mean reverters

6. The PSG equity selection process
Moat
ManagementMargin of Safety
QUALITY
PRICE

7. Moat
In terms of quantifying the moat, the most important metrics would be market
share, profit margins, returns on capital and free cash flows
Industries with sustainable competitive advantages tends to see stable market
shares (over many years) and quite often a small number of large players
Industries where new players enter and old players exit suggests that the barriers to
entry is not really large
Which factors do we look for?
A Supply or cost advantage – (weak moat)
A Government intervention advantage (tariffs, licenses (e.g. broadcast
rights), patents, regulation) – (semi-strong moat but not always enduring)
A demand advantage (through customer captivity) – (strong moat)
Economies of scale and a demand advantage – (the strongest moat)

8. Moat
Attractive industries quite often deliver high return on capital and have the
ability to sustain high returns over long periods
A company with a moat should be able to extract economic benefits in excess of
their competitors
Free cash flow is the final measure
Finally, quantitative evidence is combined with our qualitative understanding
(clear and understandable business model) of the moat to make a final
assessment

9. Moat example: Sasol
Clear and understandable business model
Sasol owns technology used to convert coal and natural gas into liquids

10. Management
We would score management by looking at their historic ability to deliver value to
shareholders as well as their incentive schemes.
Some of the measures include:
Historic total return
Improvements in margins, capital returns and free cash flow over time
The proportion of long term incentives in total management compensation
The metrics used to reward management (as an example, we prefer long term ROIC targets to
short term sales growth targets)
We also like to see an alignment of management with shareholders through direct
share ownership as having management share in long term dividend flows is more
important than annual bonuses.

11. Management example: Berkshire
Managed by individuals with proven track records
Long term value
created for
shareholders:
• SP: +21% p.a.
• NAV: +20% p.a.
$1,000 invested in
1965 is worth
more than $8m
today

12. Margin of safety
Here we are looking for evidence that the business is trading below our
estimate of fair value.
We utilise a wide range of valuation methods including the following:
Sum of the parts valuations
Discounted cash flows
Valuation metrics (PE ratio, dividend yield, price to book, price to tangible book, FCF
yields etc)
We look for asymmetrical pay-offs in our margins of safety calculations:
Ideally, little downside and significant upside from current prices.
Underlying business is growing but share price is staying flat

13. Margin of safety example:
J.P. Morgan Chase & Co.
Few years mired in controversy leading to a suppressed stock price.
PERFECT COMPOUNDING MEAN REVERTER?
1) Its consistent, above-average returns
2) the leading market positions across its four business lines
3) a time-tested management
4) track record of double-digit tangible book-value growth, before, during
and after the crisis
5) solid trends in investment banking fees
6) resolution of its legacy mortgage and litigation issues and
7) continued asset-quality improvement
8) low valuations

14. The best performing asset class
Long term capital growth
Dividend income with lower
tax
Investment diversification
Delayed taxation

15. PSG Paarl Stockbrokers
Direct online trading
Non - discretionary Accounts
Manage your own stock portfolio with a stockbroker . You also get access to the PSG
Online web site at no additional costs.
Discretionary Account
Your portfolio is managed by a qualified stockbroker who will make informed
investment decisions on your behalf.
Foreign Equity Account
By utilising an Asset Swop or Offshore Allowance
Gain exposure to international stocks and hedge against currency depreciation

16. PSG Paarl Stockbrokers
Personal Share Portfolio (PSP) within an RA, LA....
Local and foreign portfolio advantages
Investors have more control in the management of their retirement money
Tax efficient
Customers will get access to :
Trading in unlisted shares such as KWV, Agri, Channel Life and PSG Konsult
A watchlist and stock research
Notifications via SMS / email
Market Information / JSE prices
Corporate Calendar
Technical analysis program

17. PSG Online view

18. PSG Online view

19. Paarl Stockbrokers
A team with more than 18 years collective experience
Max vd Wath
B.Econ CFP
RPE, RE5
Principal
Snr Portfolio
Manager
HW de Jager
BComm (Hons)
Financial Analysis
RPE, RE5
Snr Portfolio
Manager
Kris Swart
BComm (Hons)
Financial Analysis
Jnr Portfolio
Manager
Stefan du Toit
MComm Cum
Laude
Jnr Portfolio
Manager
Keith Hodgskiss
Bsc (Hons)
RPE, RE5
Jnr Portfolio
Manager

20. Paarl/Wellington
Dick During Joan du PlessisEmile Jv Rensburg Wynie BothaNico Swart
Saretha FoucheAdri HorstmannLeon Jordaan

21. Questions?

22. THANK YOU
PLEASE REMEMBER TO COMPLETE THE
FEEDBACK FORM SHOULD YOU BE
INTERESTED IN ANY OF OUR SERVICES

23. Disclaimer
Collective Investment Schemes in Securities (Unit Trusts) are generally medium to long-term investments. The
value of participatory interests (units) may go down as well as up and past performance is not a guide to future
performance. Collective Investment Schemes are traded at ruling prices and can engage in borrowing and scrip
lending. A schedule of fees and charges and maximum commissions is available on request from PSG Collective
Investments Limited. Commissions and incentives may be paid and if so, are included in the overall costs.
Forward pricing is used. PSG Collective Investments Limited is a member of the Association for Savings and
Investment South Africa (ASISA).
The funds may from time to time invest in another fund managed by a related party, or in shares issued by
entities within the same group of companies as PSG Collective Investments Limited. A process is in place to
ensure the same selection criteria is applied when selecting the underlying funds or shares.
The information contained in this presentation is of a general nature and is not intended to address the
circumstances of any particular person. We do not purport to act in any way as an advisor and you should not
act upon this information without appropriate professional advice. PSG Konsult Ltd is an authorised financial
services provider.