ASX INVESTMENT VIDEOS

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1 ASX INVESTMENT VIDEOS Simple stock selection strategies SPEAKER: Julia Lee, Bell Direct LOCATION: Sydney DATE: March 2014 DISCLAIMER: The views, opinions or recommendations of the presenters are solely their own and do not in any way reflect the views, opinions, recommendations, of ASX Limited ABN and its related bodies corporate ( ASX ). Information and material presented at the seminar is for educational purposes only and does not constitute financial product advice. Investors should obtain independent advice from an Australian financial services licensee before making investment decisions. No responsibility is accepted by ASX for any loss or damage arising in any way (including due to negligence) from anyone acting or refraining from acting as a result of this information or material. Copyright 2014 ASX Operations Pty Limited ABN All rights reserved 2013.

2 Simple stock selection strategies Julia Lee Equities Analyst

3 Disclaimer The information in this presentation is of a general education nature only. It does not take into account the investment objectives, financial situation or needs of any individual investor. Before making an investment decision we recommend that you consult a professional advisor. The Bell Direct service is provided by Third Party Platform Pty Limited trading as Bell Direct (ABN ) an Australian Financial Services licensee (AFSL314341) and a Participant of the ASX Limited Group.

4 Looking at asset pricing studies Standard is to adjust asset pricing studies for size, value & momentum. Source: Multifactor Explanations of Asset Pricing Anomalies, Eugene F Fama and Kenneth R French, Source: On Persistence in Mutual Fund Performance, Mark M Carhart, 1997.

5 Three strategies 1. Value effect 2. Size effect 3. Momentum effect Source: Multifactor Explanations of Asset Pricing Anomalies, Eugene F Fama and Kenneth R French, 1996.

6 Value effect Tendency for value stocks to outperform stockmarket benchmarks over the long term Value stocks can be identified by low Price to earnings (Basu 1983) Price to book (Kleim 1983)

7 Scanning for value Market cap greater than 500M P/E less than 15.5 P/B less than 1.3 Results: IFZ, SVW, SWM, CNU, ZIM, PMV, AWE, AQA, NGC, TPI, BEN, CIN Source: Bell Direct website, strategy builder. Morningstar

8 Value ETF RVL (Russell Value ETF) 50 blue-chips Value based on low price to earnings multiples RVL up 11% year (ASX 200 up 7% year) Top holdings 21/3/14: CBA, WBC, ANZ, TLS, BHP, WPL, WDC, NAB, WRT, ORI QOZ (Betashares Fundamental Indexed ETF) Overweight value stocks Underweight growth stocks Top holdings 24/3/14: BHP, CBA, WBC, NAB, ANZ, TLS, WES, WOW, SUN, QBE Source: Russell.com Source: Betashares.com.au

9 Size effect Tendency for small cap stocks to outperform large cap stocks Source: Banz (1981). Fama and French (1993)

10 Size effect in Australia Large cap stocks have been outperformers High dividend payers tend to be more mature companies 1 yr 5 yr 10 yr ASX 50 12% 93% 149% ASX % 90% 140% Small ords -2% 63% 61% Source: IRESS, ASX 50 Accumulation Index, ASX 200 Accumulation Index, Small Ordinaries Accumulation Index: 20 March March 2014

11 Momentum effect Stocks with strong past price performance tend to continue to outperform Stocks with poor past price performance tend to continue to underperform

12 Both price & earnings momentum Stronger momentum signal given when both prices and earnings are moving in the same direction Source: Momentum Studies Louis KC Chan, Narasimhan Jegadeesh & Josef Lakonishok, 1996.

13 Scanning for stocks P/E ratio less than 15.5 P/B ratio less than 1.3 HY earnings more than 5% the prior year Results: TAM, POZ, CNU, ZIM, TPI, AYD, TXP, CIN Source: Bell Direct website, strategy builder. Morningstar

14 Australian market Strong value effect Strong momentum effect better with shorting losers Weak or no size effect Source: Size and Book to market Factors in Australia, Michael O Brien, Tim Brailsford and Clive Gaunt, Source: Size, Book to Market and Momentum Effects in the Australian Stock Market, Michael O Brien, 2008.

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