The Investors Dilemma

Transcription

1 The new world of equity risk management The Investors Dilemma March 2015

2 Disclaimer Investment Manager: Perennial Investment Partners Limited ABN , AFSL No ( Perennial ). Sub Manager: Perennial Value Management Limited ABN , AFSL No Responsible Entity: IOOF Investment Management Limited ABN , AFSL No Whilst every effort has been made to ensure that the information in this presentation is accurate; its accuracy, reliability or completeness is not guaranteed. Perennial expressly advises that it shall not be liable in any way whatsoever for any loss or damage which may be suffered by any person relying upon such information or any opinion, analysis, recommendation or conclusion contained in this presentation or otherwise arising in connection with the content of, or any omission from, this presentation. The fact that particular securities may have been mentioned should not be interpreted as a recommendation to either buy, sell or hold those securities. The contents of this presentation were prepared for information purposes only. Accordingly, reliance should not be placed on this presentation as the basis for making an investment, financial or other decision. This information does not take into account your investment objectives, particular needs or financial situation. Investment in the Trusts must be accompanied by an application form. The current product disclosure statements, reference guides and application forms can be found on Perennial s website 2

3 About Perennial Value Investment Businesses Perennial Value AUD 8.2 billion Value Australian Shares AUD 7.3 billion AUD 19 billion FUM As at 28 th February 2015 Perennial Growth Perennial Fixed Interest Value Shares for Income AUD 240 million Value Smaller Companies AUD 572 million Value Wealth Defender AUD 21 million Focus on making money for our clients Source: Perennial Value 3

4 About Perennial Value Investment Manager for WDE Highly rated, experienced value style manager Commenced March 2000 with FUM $40m, grown to $8.2bn Financially strong (no debt) Diversified client base Powerful staff alignment with our investors Investment staff have majority ownership Staff have very significant investment in our funds Large, focused team of 14 investment professionals Very stable team, only 3 departures in 14 years Strong business, stable team 4

5 Perennial Value Management Investment Team John Murray Managing Director Years with PVM: 15 Years in the Industry: 30 Tony Oesterheld Senior Portfolio Manager Years with PVM: 7 Years in the Industry: 29 Insurance, Building Materials, Misc. Industrials Stephen Bruce Portfolio Manager/ Senior Equities Analyst Years with PVM: 14 Years in the Industry: 14 Banks, Healthcare, Telcos (large), Agl. Chem., Misc. Industrials Paul Durham Senior Equities Analyst Years with PVM: 14 Years in the Industry: 28 Resources (large), Steels, Gaming, Paper and Packaging, Misc. Industrials Dan Bosscher Portfolio Manager Years with PVM: 2 Years in the Industry: 19 Portfolio and Risk Management Grant Oshry Senior Small Cap Portfolio Manager/ Analyst Years with PVM: 11 Years in the Industry: 15 Small Caps Andrew Smith Small Cap Portfolio Manager/ Analyst Years with PVM: 6 Years in the Industry: 14 Small Caps Damian Cottier Senior Analyst/ Research Coordinator Years with PVM: 9 Years in the Industry: 9 Small Caps, Media, LPTs Scott Stewart Portfolio Manager Years with PVM: <1 Years in the Industry: 15 Portfolio and Risk Management Sam Berridge Equities Analyst Years with PVM: 2 Years in the Industry: 6 Small Caps, Resources (small) Terry Couper Equities Analyst Years with PVM: 7 Years in the Industry: 9 ESG, Transport, Consumer Staples, Utilities, Diversified Financials, Misc. Industrials William Wu Equities Analyst Years with PVM: 5 Years in the Industry: 3 Value Screen, Mining Services, Telcos (small), Contractors, Misc. Industrials Mike Zhang Derivatives Analyst Years with PVM: 1 Years in the Industry: 6 Derivatives Steven Yee Dealer Years with PVM: 5 Years in the Industry: 12 Equities Dealer

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7 Mar 00 Jun 00 Sep 00 Dec 00 Mar 01 Jun 01 Sep 01 Dec 01 Mar 02 Jun 02 Sep 02 Dec 02 Mar 03 Jun 03 Sep 03 Dec 03 Mar 04 Jun 04 Sep 04 Dec 04 Mar 05 Jun 05 Sep 05 Dec 05 Mar 06 Jun 06 Sep 06 Dec 06 Mar 07 Jun 07 Sep 07 Dec 07 Mar 08 Jun 08 Sep 08 Dec 08 Mar 09 Jun 09 Sep 09 Dec 09 Mar 10 Jun 10 Sep 10 Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12 Jun 12 Sep 12 Dec 12 Mar 13 Jun 13 Sep 13 Dec 13 Mar 14 Jun 14 Sep 14 Dec 14 Mar 15 Perennial Value Australian Shares Results $60, $50, PVAST Cum. Return: 342% $40, $30, S&P/ASX 300 Cum. Return: 216% $20, $10, $- Perennial Value Aust Shares Trust S&P/ASX 300 Accumulation Index Long term net outperformance of 261bps p.a. Source: Perennial Investment Partners Limited ABN AFSL Perennial Value Australian Shares Trust. Trust inception date is 31 March Past performance is not reliable indicator of future performance. The performance returns of the fund is net of fees and taxes applicable. The total returns are cumulative of income and capital. 7

8 Mar 02 Jun 02 Sep 02 Dec 02 Mar 03 Jun 03 Sep 03 Dec 03 Mar 04 Jun 04 Sep 04 Dec 04 Mar 05 Jun 05 Sep 05 Dec 05 Mar 06 Jun 06 Sep 06 Dec 06 Mar 07 Jun 07 Sep 07 Dec 07 Mar 08 Jun 08 Sep 08 Dec 08 Mar 09 Jun 09 Sep 09 Dec 09 Mar 10 Jun 10 Sep 10 Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12 Jun 12 Sep 12 Dec 12 Mar 13 Jun 13 Sep 13 Dec 13 Mar 14 Jun 14 Sep 14 Dec 14 Mar 15 Perennial Value Smaller Companies Results $40, $30, PVSC Cum. Return: 219% $20, $10, S&P/ASX Small Ords Cum. Return: 83% $- Perennial Value Smaller Companies Trust S&P/ASX Small Ordinaries Accumulation Index Long term net outperformance of 460bps p.a. 8

9 The Dilemma Investors need equity returns but wary of inherent risk of capital erosion Superannuation + Demography - Increasing numbers in draw down phase of superannuation; - Attitude to risk changes potentially more conservative, but - Longevity increasing, so mismatch with a conservative investment strategy Multi-Manager Portfolios - Seeking diversified pattern of returns - Managing peer risk (Superannuation) and avoiding mission impairment - Coping with a lower return world 9

10 We need the returns of a risky asset Australian asset class return Source: Credit Suisse Global Investment Returns Sourcebook

11 Risk management

12 Volatility destroys value and is more frequent in the modern era /-10% alternating return +/-5% alternating return +/-1% alternating return Number of days Source: Perennial; FINSIA Sequencing Risk: A Key Challenge to Creating Sustainable Retirement Income 12

13 Dynamic Protection - Assessing the Real Downside Potential 80.0% S&P/ASX 200 Index - 6 monthly rolling returns 70.0% 67.4% 60.0% 50.0% More than 90% of these are from zero to -20% 40.0% 30.0% 20.0% 10.0% 0.0% 16.4% 13.7% 2.5% -100% to -20% -20% to -5% -5% to 0% Greater than 0 Source: Bloomberg. Time period: 20 years ( ) 13

14 Key aspects of a solution

15 Objective The Company aims to outperform the S&P/ASX 300 Accumulation Index by investing in a diversified portfolio of Australian shares and using protection strategies to dynamically protect the portfolio through market cycles, thereby seeking to reduce the magnitude of significant negative returns in falling equity markets. 15

16 Risk management key aspects Market risk: the risk that negative drawdowns impair the investment return Behavioural risk: the risk that uncertain markets lead to poor decisions Inflation risk: allows an investor to pursue the higher return of a riskier asset Opportunity cost: provide convexity without sacrificing upside participation Transparency: understanding strategy, instruments and their effective management. Simplicity a key advantage 16

17 Available tools

18 Derivative overlay 18

19 Implementing protection where it matters most -5% -20% >90%of falls Traditional protected products preserve the piece least at risk at a relatively high cost Perennial Value seeks to protect the piece most susceptible to loss at a lower cost As markets fall, Perennial Value may adjust dynamic protection and/or increase cash Portfolio A (CPPI type product) No protection Protection level Perennial Value Wealth Defender - Note: Perennial Value will employ dynamic protection strategies meaning the level and type of strategy will vary at - Perennial Value s discretion between 0% and 50%. 19

20 What else is out there? Managed Futures - Good non-correlated returns but not a direct hedge - Volatility targeting - Vulnerable to gap risk Tail Risk funds - Hedge a large market move only and rely on correlations increasing in a crisis - Rare pay-off Income funds - Sacrifice upside participation for limited downside protection - Low volatility but low beta Smart beta - Transparent and low cost with decent long-term returns - Low correlation to the underlying market - High tracking error 20

21 Why now?

22 Nov-03 Mar-04 Jul-04 Nov-04 Mar-05 Jul-05 Nov-05 Mar-06 Jul-06 Nov-06 Mar-07 Jul-07 Nov-07 Mar-08 Jul-08 Nov-08 Mar-09 Jul-09 Nov-09 Mar-10 Jul-10 Nov-10 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Nov-12 Mar-13 Jul-13 Nov-13 Mar-14 Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Forward PE: Hunt for yield stretching valuations 17 Forward ASX200 PE ASX200 12m Fwd PE 10 yr av +1 std dev -1 std dev - Source: Bloomberg, Perennial, monthly to Feb 2015 spot 12 Mar

23 Macro looks mixed 60 Citigroup Economic Surprise Index G ISM Manufacturing PMI US PMI Eurozone PMI China PMI Source: Perennial Value, Bloomberg; Jan 15 23

24 Positive in the US 2.5 US Average Hourly Earnings Growth YoY% Source: Perennial Value Jan 15, Bloomberg 24

25 Deleveraging? What Deleveraging? * Source: McKinsey & Company DEBT AND (NOT MUCH) DELEVERAGING

26 Mar 10 May 10 Jul 10 Sep 10 Nov 10 Jan 11 Mar 11 May 11 Jul 11 Sep 11 Nov 11 Jan 12 Mar 12 May 12 Jul 12 Sep 12 Nov 12 Jan 13 Mar 13 May 13 Jul 13 Sep 13 Nov 13 Jan 14 Mar 14 May 14 Jul 14 Sep 14 Nov 14 Jan 15 and Europe? 5 Portugal CPI 2012=100 YoY Spain CPI YoY 2011=100 Italy CPI FOI Ex Tobacco YoY N Germany CPI YoY 2010= Source: Perennial Value, Bloomberg 26

27 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 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 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 The final burst from The Great Rally Australian Interest Rates & Sector Returns: % Capital loss period as yields rise Capital loss period as yields rise UBS Composite Bond m/m % return - rhs RBA Cash Rate 3 yr Govt Bond 10 yr Govt Bond 10 yr av m/m returns Source: Bloomberg, monthly to end Feb 2015, spot 10 Mar

28 Long Bond Trends: Fed vs ECB World Long Bonds: % Germany Japan Australia United States Fed signal conditional end to QE Strong US payrolls brings lift off into play Jan-06 Mar-06 May-06 Jul-06 Oct-06 Dec-06 Feb-07 May-07 Jul-07 Sep-07 Dec-07 Feb-08 Apr-08 Jun-08 Sep-08 Nov-08 Jan-09 Apr-09 Jun-09 Aug-09 Nov-09 Jan-10 Mar-10 May-10 Aug-10 Oct-10 Dec-10 Mar-11 May-11 Jul-11 Oct-11 Dec-11 Feb-12 Apr-12 Jul-12 Sep-12 Nov-12 Feb-13 Apr-13 Jun-13 Sep-13 Nov-13 Jan-14 Mar-14 Jun-14 Aug-14 Oct-14 Jan-15 Mar-15 Source: Bloomberg, Perennial, daily till 12 Mar 15

29 Where dynamic volatility management fits in a Client s Portfolio Suited to those investors: Seeking the yield of Australian shares but wary of risk to capital Close to retirement (sequencing risk) In retirement (longevity risk) 29

30 Perennial Value Wealth Defender Australian Shares Unit Trust Results Period to 28 February 2015 Since Inception* (%) Perennial Value Wealth Defender Shares 12.2 Shares Portfolio 13.4 Options Portfolio -1.2 S&P/ASX 300 Accumulation Index 11.3 Value Added/Detracted 0.9 Option portfolio annualised cost of protection 153bps so far - *Source: Perennial. Inception May Gross of fees and expenses. 30

31 March 2015 WEALTH DEFENDER EQUITIES The Investment Offer

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34 WDE A cheaper defensive stock Current listed defensives generally regarded as expensive WDE, as a listed stock, offers a cheaper exposure than this group of defensive stocks that typically make up the core of many self directed and SMSF client portfolios Downside cushioning Underlying prospective FY 16 PE 13.7x Underlying prospective FY 16 gross dividend yield 6.6% Source: Perennial Value, based on current Perennial Value Wealth Defender portfolio 34

35 Wealth Defender Equities Limited A unique LIC Proven long-term track record of Perennial Value Management Proven risk management team providing permanent, dynamic downside protection in a cost-effective manner Participation in long term market upside, downside protection Enhancing long term investor outcomes by cushioning losses during significant market falls Ex-Top 20 bias Provides minimum market yield plus franking credits Cheap defensive stock 35

36 Conclusion Risk matters sequencing, longevity There are a number of ways to embed risk management into portfolios whilst still retaining capital growth and limit drawdown Need for Equities 36

37 Zenith rates Wealth Defender RECOMMENDED LONSEC rates Wealth Defender RECOMMENDED The Zenith Investment Partners ( Zenith ) ABN rating (assigned 1 July 2014) referred to in this document is limited to General Advice (as defined by section 766B of Corporations Act 2001) and based solely on the assessment of the investment merits of the financial product on this basis. It is not a specific recommendation to purchase, sell or hold the relevant product(s), and Zenith advises that individual investors should seek their own independent financial advice before investing in this product. The rating is subject to change without notice and Zenith has no obligation to update this document following publication. Zenith usually receives a fee for rating the fund manager and product against accepted criteria considered comprehensive and objective. 37

38 More Information Meet with your Investment Specialist Website Brochure Video Trust flyer PDS 38