Equity Investment Strategy

Transcription

1 Equity Investment Strategy Channa Amaratunga Boston Asset Management 2 March 2006 Boston Capital 1

2 Reaping the Peace Dividend? (ASI) Jan Jan Mar May Jun Aug Oct Dec-05 2 March 2006 Boston Capital 2

3 Peace holds the key ASI up 272% since CFA signed on 22 Feb 2002; CAGR of approx. 39% Gains despite political uncertainty & natural disaster; peace has boosted corporate earnings and revived investor confidence ASI was however down 29% during 16 Nov Jan 2006 amidst fear of breakdown of CFA Few shares retain their value in such a downturn 2 March 2006 Boston Capital 3

4 High Event Risk to Market Best Case Scenario : 10% Set up Joint Mechanism / Interim Administration 50% estimated upside to market Expected Scenario : 70% Slow progress on talks / Status quo maintained 20-30% p.a. estimated returns on equities Worst Case Scenario : 20% War (threat) / Interest rates rise / GDP slows > 50% estimated downside to market 2 March 2006 Boston Capital 4

5 Investors are Unique Investors cannot be generalised Different risk tolerance and constraints Appetite for risk will differ widely Different strategies for different investors Know yourself / your client / limitations Invest funds that you will not need urgently in equity 2 March 2006 Boston Capital 5

6 Debt vs Equity? Key asset allocation decision Equity : Higher risk, higher return Debt : Usually lower risk, lower return; unless leveraged positions with mismatches Real estate and currency markets : Higher investment value required Mix dependent on individual circumstances Unit Trusts are option for smaller investor 2 March 2006 Boston Capital 6

7 Equity High Risk, High Return? 80 (%) (20) (40) ASI - % Chg (Excl Dividends) Avg 12m Tbill 2 March 2006 Boston Capital 7

8 Required Rate of Return on Equity Risk free rate is GoSL Treasuries Equity investing requires a premium to compensate for uncertainty of returns Higher premiums required for more volatile, more uncertain investments How much is market equity risk premium? Much debate; various methods of estimation Assuming 5% risk premium, current required rate of return on equity is approx. 16% p.a. 2 March 2006 Boston Capital 8

9 Interest Rates near Historic Lows 24 (%) Jan-93 Feb-95 Apr-97 Jun-99 Sep-01 Nov-03 Dec mth Tbill Rate 2 March 2006 Boston Capital 9

10 Lower Interest Rates boost Equities Lower interest rates attract increased domestic funds to equity investment Reduces opportunity cost of investment Reduces required rate of return on equity Reduces attractiveness of debt alternatives Reduced cost of debt raises corporate profitability Domestic, retail participation rising since 2002 amidst negative real returns on fixed income Rising interest rates will have reverse effect 2 March 2006 Boston Capital 10

11 Does the Market Really Matter? Stock selection remains the key especially in uncertain market conditions Investment style should deliver in all markets Pick the right stocks, back them for the long run, and the market will take care of itself As far as I m concerned the stock market doesn t exist - Warren Buffett High event risk will however impact returns 2 March 2006 Boston Capital 11

12 Common Sense Equity Investing Tips - 1 Focus on investment, not speculation Tilt the odds of gamble in our favour Adopt a strong defence; minimise mistakes Avoid big losses; the winners will naturally come Diversify risk in a focused & informed manner Avoid shot-gun approach; limit coverage Do your homework; ignorance is expensive Knowledge is power; seek undiscounted news 2 March 2006 Boston Capital 12

13 Common Sense Equity Investing Tips - 2 Cash is king Focus on dividend potential High dividend plays outperform in uncertainty Avoid trading on newspaper headlines Focus on future earnings; past is just a guide Undervalued asset plays require patience Likelihood of realisation or as a takeover target? Defensive sectors outperform in uncertainty Monopolistic, inelastic demand & strong brands 2 March 2006 Boston Capital 13

14 Common Sense Equity Investing Tips - 3 Fundamentals do matter Diversions from value can only occur in short term Bonus prediction is a rewarding art Should be unanticipated by market Avoid arbitrary & pre-defined sell/buy limits Always revisit investment rationale & take action Invest in what you know & stay focused Avoid unnecessary complexity; keep it simple 2 March 2006 Boston Capital 14

15 Qualities of a Successful Investor Patience Independent thinking Ability to stand by stocks if fundamentals are intact Disciplined investment style Enthusiasm and passion for finding out information (intellectual curiosity) Common sense 2 March 2006 Boston Capital 15

16 The Art of Investing Investing is an art, not a science Cannot quantify everything; imperfect information Willingness to accept losses is essential Every investment will not be profitable; important to learn from mistakes! Always ask yourself, what will drive the price up from current levels? Recognise that a good company may not always be a good investment! Enjoy yourself & have fun while investing! 2 March 2006 Boston Capital 16

17 Equity Investment Strategy Thank You Boston Asset Management 7A, Tower Building, Col - 4 Tel : [email protected] 2 March 2006 Boston Capital 17

18 Disclaimer This presentation is for information purposes only Descriptions of any company/security mentioned herein are not intended to be complete This presentation is not, and should not be construed as, an offer, or solicitation of an offer, to buy or sell any securities Individual circumstances should always be taken into account prior to investing Investment advice is time sensitive and may change Share prices may fluctuate drastically and prices can fall as well as rise within short or long periods 2 March 2006 Boston Capital 18