1. Senate Group Conference
November 2013

2. Navigating equity risk in a
contradictory market
Justin Floor
Investment Analyst

3. Agenda
The contradictory market context
Our equity approach
Investment opportunities:
Global technology companies
Platinum over gold
Pick n Pay over Shoprite

4. The contradictory market context

5. A global perspective

6. Zooming in on North America…

7. South America…

8. Euroland…

9. Asia…

10. And us?

11. South African economy looks particularly vulnerable
Source: UBS forecasts for 2013

12. … and the trend is negative
… risk of further sovereign credit rating downgrades

13. The paradox: equity market at all-time highs
Source: I-Net

14. Current market contradictions
Bad economic news is good news for markets
Low risk assets are now higher risk
Printing money causes no inflation
SA equities vastly more expensive than developed market champions
Despite low economic growth, SA assets most foreign-owned ever
Despite interest rates at record lows, SA consumer spend is weak
…excessive global monetary stimulus is to blame

15. Unprecedented central bank asset purchases…
Source: Bloomberg

16. End result is a different form of inflation…
Foreigners

17. In summary
Central bank policy is masking bleak economic fundamentals
Asset price valuations are unsustainably high in certain sectors
Risk of capital loss is higher than average
Equity risk is elevated!

18. Our equity approach

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

20. Value/price
Value and price through time
Intrinsic value
Market price
Time

21. Value/price
Why are equity prices so volatile?
Intrinsic value
Market price
Sometimes:
The environment seems terrible
Company results may be poor
People are overly pessimistic
Time

22. Value/price
Why are equity prices so volatile?
Or it’s the flows!
Intrinsic value
Market price
Other times:
The environment seems fantastic
Company results are great
People are overly optimistic
Sometimes: it’s just that alternatives seem worse!
Time

23. Value/price
The main equity risks
Buying when shares are above fair value
– ie not having an idea of valuation
Intrinsic value
Market price
Having to sell, when prices are below fair value
– ie short-term cash need
Time

24. Value/price
The main equity risks
Investing without a clear focus on valuations
- Either as an investor yourself or from the
manager who manages your money
Investing in equities when you
have a short-term time horizon
Time

25. Value/price
A philosophy for outperformance
and risk management
Intrinsic value
Market price
Time

26. Value/price
A philosophy for outperformance
Intrinsic value
Market price
Buy & then hold
Sell & then avoid
Time

27. we have done with this approach over the
last 9.5 years (to 31 October 2013)
8000
6000
4000
2000
Kagiso Equity Alpha Fund
Upper quartile fund to date
Median fund to date
Lower quartile fund to date
FTSE/JSE SWIX Index
0
May 04
May 05
May 06
Source: Morningstar & Kagiso Asset Management
*Inception: 26 April 2004
May 07
May 08
May 09
May 10
May 11
May 12
May 13

28. Top unit trust fund performance
Top 15 funds since inception*
South African EQ General
1 year to
31/10/2013
A.G.R.
3 years to
31/10/2013
Rank
A.G.R.
5 years to
31/10/2013
Rank
A.G.R.
Since inception to
31/10/2013
Rank
A.G.R.
Rank
Coronation Top 20 A
31.6
6
20.9
9
23.6
2
24.2
1
Prudential Equity A
30.7
8
19.9
12
20.8
11
23.1
2
Kagiso Equity Alpha
28.2
26
16.3
40
19.7
18
22.9
3
Foord Equity R
33.2
5
23.5
2
24.1
1
22.8
4
Prudential Dividend Maximiser A
28.5
24
18.3
20
19.7
20
22.6
5
Coronation Equity R
35.2
3
20.8
10
22.9
4
22.4
6
ABSA Select Equity
19.6
91
15.4
53
20.0
17
22.0
7
SIM Value R
24.7
50
16.2
42
20.5
13
21.8
8
SIM General Equity R
28.6
21
19.3
15
21.7
7
20.9
9
PSG Equity A
36.8
2
21.3
7
23.2
3
20.6
10
Nedgroup Inv Value R
18.5
97
15.0
56
20.8
10
20.6
11
Allan Gray Equity A
24.5
53
17.7
27
18.4
35
20.6
12
Nedgroup Inv Growth R
27.3
30
14.7
58
18.7
33
19.9
13
ABSA General R
25.3
44
17.2
37
19.1
26
19.6
14
Marriott Dividend Growth R
20.2
87
18.1
21
21.0
8
19.6
15
Mean/Count
23.4
114
15.8
91
17.8
84
19.0
48
Source: Morningstar
Based on lump sum, income re-invested, NAV-NAV
*Inception: 26 April 2004

29. Consistent top performance equity unit trust to 31 October 2013
Relative ranking over rolling 5-year periods since inception*
100
Top
quartile
75
Above
average
50
Below
average
25
Bottom
quartile
0
May 04
May 05
Source: Morningstar
*Inception: 26 April 2004
May 06
May 07
May 08
May 09
May 10
May 11
May 12
May 13

30. Investment opportunities

31. Global technology companies

32. Internet of things is coming
Source: Ericsson

33. Enabled by the rise of mobile broadband
Source: Ericsson Mobility Report, June 2013

34. Phones are no longer about voice
Global total data traffic in mobile networks, 2007-2013
Traffic does not include DVB-H, WiFi, or Mobile WiMax. Voice does not include VoIP, M2M traffic is not included.
Source: Ericsson Mobility Report, June 2013
1

35. Growth in mobile devices driving data demand

36. Preparing for a connected world
Simplicity
Reach

37. Global smartphone profit pool
Profit leadership perpetuates
investment in
scale, innovation and brand
Source: Company data, Barclays Research estimates, value as of 2012 year-end

38. Global IT is rapidly evolving

39. Microsoft is more than just Windows (and less
exposed to declining PC sales than many think)
Profit contribution by division
Entertainment
and Devices
Division
3%
Windows Division
28%
Microsoft Business
Division
46%
Server and Tools
23%

40. Who are the winners from these trends?
PE = 6.4x*
PE = 9.2x*
PE = 9.5x*
Apple
PE = 10.8x*
PE = 12.5x
versus
*adjusted for net cash and after accounting for tax
PE = 19.8x

41. Platinum over gold

42. Gold supply versus platinum supply
Source: GFMS
Increasing Supply
Decreasing Supply
Source: Johnson Matthey

43. Gold demand versus platinum demand
Fundamentally driven: price elastic
Source: GFMS
Source: Johnson Matthey
Fundamentally driven: price inelastic

44. Gold investment demand: very vulnerable
Source: GFMS

45. Autocat demand is depressed…
China
Europe
USA
5 years of contraction
- lowest level in 17 years
Running well below natural
replacement demand level
Does not need economic recovery
for vehicle sales to return to
replacement demand

46. Pick n Pay over Shoprite

47. Pick n Pay vs Shoprite: a clear winner, so far
Source: I-Net

48. Valuation differentials are stark
2.7x
2.1x
Premium on Shoprite non-SA is excessive
* Kagiso Asset Management estimates

49. Pick n Pay sales base is significant and stable
Pick n Pay’s robust sales indicative of brand strength^
^ Sunday Times Top Brands category winner

50. Pick n Pay: multiple initiatives to reduce costs
New OUTSIDE leadership
Centralising
distribution
SAP/IT
implementation
Centralised
buying
Reviewing
employee cost
Consolidating
regions
Loyalty
program

51. Pick n Pay vs Shoprite: divergent outlooks
Pick n Pay
Shoprite
SA’s leading retail brand
Significant sales base
Operational recovery within its control
Recent decisions a sign of change
Priced to perfection
Peak margins in SA
Excessive premium on Africa

52. In summary

53. In summary
Market contradictions abound
On-going monetary stimulus is distorting asset prices
Our investment philosophy aims to outperform while managing risk
- by focusing on valuations

54. 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.

55. Unconventional thinking. Superior performance
www.kagisoam.com

56. Performance record
Kagiso Equity Alpha Fund – peer mean benchmark
Year
Gross of
fees return1
Benchmark
return1, 2
Standard deviation3
Fund
Benchmark
Number of Internal
portfolios dispersion
Total
composite
assets (ZAR)
Total firm assets
(ZAR)
2003
R601,315,574
2004
R1,910,903,589
2005
37.3%
36.3%
1
-
R21,174,365
R4,607,698,321
2006
39.9%
34.5%
1
-
R26,858,449
R5,055,977,879
2007
26.1%
15.5%
1
-
R52,397,394
R11,044,952,842
2008
-22.4%
-21.8%
1
-
R6,860,772
R8,880,253,313
2009
36.2%
26.0%
1
-
R17,280,450
R17,724,883,532
2010
22.4%
18.3%
1
-
R271,868,341
R28,182,015,250
2011
4.9%
3.2%
14.1%
13.5%
1
-
R520,973,605
R34,476,214,389
2012
16.1%
21.2%
9.2%
10.3%
1
-
R737,508,679
R46,579,313,698
1
Annualised; Inception date: 26 April 2004;
3
Standard deviation annualised over previous 3 years; Performance is expressed in South African rand
2
Average performance in South African Equity General unit trust universe;
Figures to 31 December 2012 net of management fees, net of all applicable withholding taxes, trading expenses and custodial fees and gross of SA capital gains taxes
The retail management fee is: flat fee of 1.25% pa
Prepared and presented in compliance with the Global Investment Performance Standards (GIPS), independently verified
Source: Kagiso Asset Management

57. Our fund range
Pure equity
Unconstrained
Low equity
High income
High capital
protection
Medium equity
CPI + 5%
Capital protection
Lower volatility
High equity
Prudential
constraints
Equity
Alpha
Balanced
Protector
Stable
Low risk
Low - medium
Medium
Medium - high

58. Fund descriptions
Fund
Description
Kagiso Equity Alpha Fund
This is an unconstrained equity fund that aims to provide strong capital growth over the
long term and a total portfolio return that is in the top quartile for general equity funds.
Kagiso Balanced Fund
This fund is a Regulation 28 balanced fund and aims to provide investors with high,
long-term capital growth. The fund invests in equities, bonds and cash, both locally and
internationally.
Kagiso Stable Fund
A low equity fund that aims to provide total returns that are above inflation over the
medium term. It seeks to provide a high level of capital stability and to minimise loss
over any one-year period, within the constraints of Regulation 28.
Kagiso Protector Fund
This fund aims to provide steady capital growth and returns that are better than equity
market returns on a risk-adjusted basis over the medium to longer term. The fund is
Regulation 28 compliant.