2. Page 2
“Is this in the best long term interests of our investors?”
Our Primary Role: Stewardship
Our framework for answering this question:
Think and act long term
Be prudent in deploying our clients’ assets
Have an obsessive focus on research
3. Page 3
Simple, comprehensive suite of products
3
PSG Money Market
PSG Diversified
Income
PSG Balanced
PSG Flexible
PSG Equity
PSG SA Equity
Average Risk
Returns
PSG Global
Equity
PSG Stable PSG Global
Flexible
PSG Income
9. Page 9
Fund mangers can exercise own discretion, but
use the Buy List as their main tool for portfolio
construction. Fund managers take responsibility
for their fund’s performance.
PSG Asset Management: Equity process
FUNDS
BUY
LISTS
FUNDAMENTAL
ANALYSIS
IDEA GENERATION
INVESTMENT UNIVERSE
PHILOSOPHY Moat, Management & Margin of Safety
Local & Global Companies.
Proprietary screens, company results to find
potential opportunities.
Detailed analysis on potential opportunities in
terms of our investment philosophy.
Investment Committee determines domestic &
offshore buy lists by means of majority vote.
10. Page 10
EquitySA Equity
Flexible
Balanced
Stable
Diversified Income
Global Equity
Global Flexible
0%
20%
40%
60%
80%
100%
120%
EquityExposure
99%
92%
99%
99%
99%
99%
98%
93%
Process compliance
Our funds have a significant overlap with our Buy Lists
PSG AM Internal, 31/12/2015
Bubble Size = number of equity holdings
Conviction level Suggested weight
Buy High 6% - 10%
Buy Medium 3%-6%
Buy Low 0%-3%
Overlap with Buy List
Fund Equity Holding Overlap with PSGAM Buy Lists
15. Page 15
Our universe of opportunities
2015 2016
High quality/blue chip SA equities are expensive
Government bonds expensive
Property expensive
Offshore equities still a good opportunity
Growing opportunity in cyclical equities
Cash is under-appreciated
A review of what we said last year and our current thinking
16. Page 16
Asset allocation process
Based on thorough bottom-up research
Thorough bottom-up research
Fixed Income Investment
Committee
Equity Investment Committee Credit Investment Committee
Funds
Fund managers consider all opportunities on a risk-return basis
Buy lists calibrated for level of conviction
17. Page 17
2015 in review
• Our asset allocation has been spot on:
- Maximum offshore
- Very high levels of cash
• We were early into cyclical equities.
• A short term drawdown in part of the portfolio does not constitute a permanent
capital loss.
• We have been employing cash across the asset curve as opportunities arose in recent
months
20. Page 20
7.50
8.50
9.50
10.50
11.50
12.50
13.50
14.50
2012 2013 2013 2014 2014 2015 2015
Price Earnings ratio: Basket of cyclical stocks
Opportunities in equities: Cyclical shares
These companies are now trading at exceptionally attractive valuations
Source: PSG Asset Management Research; Bloomberg
10 year average
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17.00
19.00
21.00
23.00
25.00
27.00
2011 2012 2013 2014 2015
Where one should be careful: Selected blue chips
P:E of a basket of blue chips: Well beyond their 10-year average
Source: PSG Asset Management Research
10 year average
27. Page 27
PSG Equity Fund
Sector Allocation - Bias for mispriced quality, very attractively priced
COMPANY % PSG EQUITY
IMPERIAL HOLDINGS 7.50%
GLENCORE PLC 7.43%
FIRSTRAND LIMITED 5.80%
OLD MUTUAL PLC 5.46%
DISCOVERY HLDS LTD 4.96%
GRINDROD LIMITED 3.92%
HUDACO INDUSTRIES 3.49%
SOFTBANK CORP 3.41%
REUNERT LIMITED 3.18%
CAPITAL ONE FIN CORP 3.17%
In 2016 we have reduced our exposure to
global equities in favour of SA financials
There is little long-term risk in holding
companies which offer:
• Strong competitive positions
• Proven aligned management
• A margin of safety
10 Largest Equity Holdings
28. Page 28
PSG Flexible Fund
Sector Allocation
COMPANY % PSG EQUITY
BERKSHIRE HATHAWAY 7.59%
SAINSBURY J PLC 5.00%
FIRSTRAND LIMITED 4.22%
IMPERIAL HOLDINGS 4.07%
CAPITEC BANK HOLDINGS LTD 3.17%
OLD MUTUAL PLC 2.92%
GLENCORE PLC 2.91%
DISCOVERY HLDS LTD 2.59%
SUPER GROUP LIMITED 2.53%
GRINDROD LIMITED 2.37%
10 Largest Equity Holdings
% PSG EQUITY
Cash, Bond, Derivative & Money Market
30.51%
Non Equity Holdings
29. Page 29
PSG Balanced Fund
Sector Allocation
There is little long-term risk in holding
companies which offer:
• Strong competitive positions
• Proven aligned management
• A margin of safety
COMPANY
% PSG
BALANCED
FIRSTRAND LIMITED 3.76%
IMPERIAL HOLDINGS 3.56%
OLD MUTUAL PLC 3.35%
SUPER GROUP LIMITED 3.03%
REUNERT LIMITED 2.76%
DISCOVERY HLDS LTD 2.69%
CAPITEC BANK HOLDINGS LTD 2.23%
GLENCORE PLC 1.78%
NEDBANK GROUP LTD 1.57%
GROUP FIVE LIMITED 1.50%
10 Largest Equity Holdings
% PSG BALANCED
Bonds: + 7yrs 6.81%
Bonds: 3-7yrs 6.96%
Bonds: 1-3yrs 3.63%
Cash Instruments: 3-7yrs 6.09%
Cash Instruments: 1-3yrs 2.67%
Cash, Bond, Derivative & Money Market <1yrs 10.49%
Non Equity Holdings
30. Page 30
PSG Stable Fund
Sector Allocation
COMPANY
% PSG
BALANCED
BERKSHIRE HATHAWAY INC-CL B 2.40%
BROOKFIELD ASSET MANAGE-CL A 1.84%
FIRSTRAND LIMITED 1.77%
IMPERIAL HOLDINGS 1.73%
OLD MUTUAL PLC 1.61%
SAINSBURY J PLC 1.54%
COLFAX CORP 1.48%
SUPER GROUP LIMITED 1.47%
DISCOVERY HLDS LTD 1.39%
MICROSOFT CORP 1.37%
10 Largest Equity Holdings
% PSG BALANCED
Bonds: + 7yrs 8.35%
Bonds: 3-7yrs 7.21%
Bonds: 1-3yrs 4.43%
Cash Instruments: 3-7yrs 12.98%
Cash Instruments: 1-3yrs 18.53%
Cash, Bond, Derivative & Money Market <1yrs 13.15%
Non Equity Holdings
31. Page 31
Comments on Portfolio Positioning
• Bottom up stock selection
• Bias for quality
• Quality equities have been in very high demand and prices are high
• Distressed pricing in cyclical businesses, even good businesses
• We tend to be early
• We expect very good long term returns from our equity portfolios
33. Page 33
Conclusion
The context of the market backdrop is important:
• A long bull market in global equities
• Majority of shares are sharply down from their recent highs.
• Elevated valuations remain for quality defensives. We think they are overpriced.
• Cyclical businesses have got very cheap.
• We have been buyers of out-of-favour stocks that are mispriced:
• Mining & construction: Glencore, Anglo, Group 5.
• Cyclical SA inc businesses: Imperial, Reunert, Super Group.
• Financials: US and SA banks, Old Mutual, Discovery.
• We continue to see good opportunity within the global universe: Microsoft, Softbank.
• We do not expect rand weakness to support returns to the same extent going forward.
• We will be buyers of quality on the JSE when the margin of safety returns.
• Our portfolios are extremely attractively priced: in both relative and absolute terms.
34.
35. Page 35
Disclaimer
Disclaimer: Collective Investment Schemes in Securities (CIS) are generally medium to long-term investments. The value of participatory interests (units) or the
investment may go down as well as up and past performance is not a guide to future performance. CIS are traded at ruling prices and can engage in borrowing
and script lending. Fluctuations or movements in the exchange rates may cause the value of underlying international investments to go up or down. Where
foreign securities are included in a portfolio, the portfolio is exposed to risks such as potential constraints on liquidity and the repatriation of funds;
macroeconomic, political, foreign exchange, tax, settlement and potential limitations on the availability of market information. The portfolios may be capped at
any time in order for them to be managed in accordance with their mandate. Fees and Performance: Prices are published daily and available on the website
www.psg.co.za and in the daily newspapers. A schedule of fees and charges and maximum commissions is available on request from PSG Collective Investments
Limited. Commission and incentives may be paid and, if so, are included in the overall costs. Forward pricing is used. Different classes of Participatory Interest
can apply to these portfolios and are subject to different fees, charges and possibly dividend withholding tax and will thus have differing performances.
Performance is calculated for the portfolio and individual investor performance may differ as a result thereof. All performance data for a lump sum, net of fees,
include income and assumes reinvestment of income on a NAV-NAV basis. Source of performance: Figures quoted are from Morningstar Inc. Additional
information: Additional information is available free of charge on the website and may include publications, brochures, application forms and annual reports.
Company details: PSG Collective Investments Limited is registered as a CIS Manager with the Financial Services Board, and a member of the Association of
Savings and Investments South Africa (ASISA) through its holdings company PSG Konsult Limited. The management of the portfolios is delegated to PSG Asset
Management (Pty) Ltd, an authorized Financial Services Provider under the Financial Advisory and Intermediary Services Act 2002, FSP no 29524. PSG Asset
Management (Pty) Ltd and PSG Collective Investments Limited are subsidiaries of PSG Group Limited. Money Market: The PSG Money Market Fund maintains a
constant price and targeted at a constant value. The quoted yield is calculated by annualizing the average 7 day yield. A money market portfolio is not a bank
deposit account. Excessive withdrawals from the portfolio may place the portfolio under liquidity pressures and in such circumstances a process of ring-fencing
of withdrawal instructions and managed payouts over time may be followed. The total return to the investor is made up of interest received and any gain or loss
made on any particular instrument. In most cases the return will merely have the effect of increasing or decreasing the daily yield but in the case of abnormal
losses it can have the effect of reducing the capital value of the portfolio. Trustee: The Standard Bank of South Africa Limited, Main Tower, Standard Bank
Centre, 2 Hertzog Boulevard, Cape Town, 8001. Tel: 021 401 2443. Email: compliance-PSG@standardbank.co.za. Conflict of Interest Disclosure: The Fund may
from time to time invest in a portfolio managed by a related party. PSG Collective Investments Limited or the Fund Manager may negotiate a discount in fees
charged by the underlying portfolio. All discounts negotiated are re-invested in the Fund for the benefit of the investor. Neither PSG Collective Investments
Limited nor PSG Asset Management retains any portion of such discount for their own accounts. The Fund Manager may use the brokerage services of a related
party, PSG Securities Ltd.
PSG Collective Investments Limited does not provide any guarantee either with respect to the capital or the return of the portfolio and can be contacted on
0800 600 168 or e-mail, psgassetmanagement@psg.co.za
Notes de l'éditeur
Margin of safety – difference security is worth and the price you pay. Sufficient discount and your estimate of intrinsic value turns out to be correct – good investment. Vice versa. Key – lots of things know you don’t know – appraisals of IV as conservative as possible. Oscillates between fear and greed – price paid and intrinsic value as irrational. Buying early and buying wrong. Fear and uncertainty – best place to find bargains. Dislocation between the economic environment or the apparent prospects for that company. The investors in our funds often struggle with this – buying when the macro environment is poor. We often end up buying early – believe there is a margin of safety – just don’t know where the bottom is. However significantly more upside than downside – often multiples more. When a value investor gets its wrong – typically be because your estimate of intrinsic value tends to be wrong. Think you are buying with a margin of safety turns out to be wrong. Two examples from our past.
In practice. Buy low and sell high; buy when there is a margin of safety.
Below – above average companies below average prices.
Few companies below our conservative appraisals of fair value.
Essence of value investing.
P/E of the holdings in the fund = 9.3x at the end of December.
Core DNA of our team.
In 2015 more interested in domestic SA GDP; earnings were low; misunderstood by the market. Sold off aggressively on the fear of a deep recession; P/E around 8x – good companies in that basket : Imperial, Supergroup, Reunert; long term P/E of the market is around 14x; at least as good as the average company – significantly better; stand out opportunity.
We have felt that many of SA’s blue chip companies were expensive – high multiples on high earnings. Talked about this in previous forums like this. Remained expensive; include Naspers in this basket even more expensive. Remained expensive as the Rand has weakened – rand hedge stocks. Prefer to buy above average companies on low P/E’s than above average companies on high PE’s. Low P/E low embedded expectations – propensity typically work out better than you think. If you buy high P/E companies – hoping that the future works out even better than the lofty expectations baked into the share prices. History has suggested that this is not a winning strategy. If those companies disappoint even marginally, proper whack. A good example is Mr Price – disappointed in a trading update – stock was down 17% on the day. A good company is not always a safe investment.
