Transcript HFS.Seminar.June.2010 - Hayden Financial Services

Investors’
Seminar
June 2010
Disclaimer
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publication may impact on the accuracy of the information. Neither HFS d nor any member of HFS accepts responsibility for any
inaccuracy or for investment decisions or any other actions taken by any person on the basis of the information included. Past
performance is not a reliable indicator of future performance.
Neither HFS nor any member of HFS guarantees the performance of the Funds, the repayment of capital or any particular rate of
return. The performance of any unit trust depends on the performance of its underlying investment which can fall as well as rise and
can result in both capital losses and gains. Consequently, due to market influences, no assurance can be given that all stated
objectives will be achieved.
The Boxes to Tick
Realistic Goals
Structure/Strategy (Tax etc)
Super Fund Admin
Asset Mix 1 -Cash/TermDs needed
Asset Mix 2–Growth Section (LHS)
Stock-Picker Selection
Investors’ Seminar
June 2010
Today’s Seminar addresses events
over the past year and:
1. How they affect:
 Structure & Strategy
 Asset Mix
 Specific Investment Selection
2. What changes are needed
Issues to Address
June 2010
Structure Matters – The 3 major reviews Ripoll/Bowen, Cooper and Henry
Asset Mix Considerations – Sovereign
Debt Crisis & the GFC
Specific Investments – Economic
Conditions including Sovereign Debt,
China etc
Structure –
Government Policy
Henry/Rudd review
Simplify Tax………no
Complicate super vs non-super……no
Ripoll/Bowen
Fiduciary, transparency; commissions; opt-in
Cooper Review
My Super; SuperStream;
SMSF – minimal change
Structure – What
Changes are needed?
Super & Pensions – planning for retirement unchanged
Tax & Centrelink Matters
SMSFs - Trust Deeds
- Investment Placement and monitoring
Asset Mix Issues
June 2010
Sovereign Debt & the GFC
Globalisation
The Market Economy
GFC Evolution
Recap on the Global Financial Crisis :
 Debt – Western Consumers; Deleveraging
 Sub-Prime in US; CDOs–and inter-bank transfers
 Negative Cycle –Profits Drop; Unemployment
increases; Consumer Confidence drops etc
***********************
The Solution - Governments stimulating their
economies. They had to borrow to do this!
Hence now we have Sovereign Debt problems.
[5]
One of my favourite quotes:
Europe - Key Economic Facts
Country
GDP (EUR bn)
Unemployment
1051
20.1%
Current Account Deficit/GDP
‘Experience is the
best teacher, but itsRate**
lessons are not cheap.
Therefore2010
we **
2009*
2009***
should avoid paying for the same lesson twice. Actually, there is no need for
investors
to make1521
the same mistake more
than once, there-3.1%
being no shortage
of
Italy
8.3%
-2.5%
possible new mistakes to choose from.’
Spain
-5.3%
-3.8%
Robert Keavney, Centric Wealth, July 2009
Belgium
338
11.8%
0.5%
-0.2%
Greece
237
11.3%
-10.9%
-8.6%
Portugal
164
10.1%
-9.9%
-8.9%
Ireland
164
13.4%
-2.8%
-0.8%
* Eurostat
** The Economist Intelligence Unit as at 29 April 2010.
*** OECD Data & Magellan Asset Management
10
[6]
Europe - Debt and Deficits
Country
Govt. Debt/GDP*
External Debt/GDP **
2009
2009
2009*
2010***
Italy
115.8%
119.0%
-5.3%
-5.3%
Spain
53.2%
168.5%
-11.2%
-11.5%
Belgium
96.7%
258.3%
-6.0%
-6.6%
Greece
115.1%
171.0%
-13.6%
-9.4%
Portugal
76.8%
233.0%
-9.4%
-8.5%
Ireland
64.0%
987.0%
-14.3%
-12.5%
* Eurostat.
** The World Bank Quarterly External Debt Statistics & Magellan Asset
Management Ltd.
*** The Economist Intelligence Unit as at 29 April 2010.
Fiscal Deficit/GDP
[13]
Massive government borrowing needs…
Forecast Annual Budget Deficits
Total, Billions of USD
United States
Percentage Of GDP
2010
2011
2012
2010
2011
2012
1,550
1,270
828
10.6%
8.3%
5.1%
Europe
995
987
633
5.4%
5.9%
4.4%
United Kingdom
207
215
150
9.3%
9.4%
6.6%
Japan
312
368
389
8.2%
9.4%
7.3%
3 YEAR TOTAL
7,904
Source: Eurostat, IMF, National Sources, Bloomberg.
Forecast balances converted into US Dollars using spot exchange rates on 12 May 2010
[14]
… financed by a limited savings pool
Forecast Current Account Surplus Positions
Total, Billions of USD
2010
2011
2012
China
493
580
702
Germany
73
93
114
Japan
56
78
91
Total, other surplus countries
405
489
576
3 YEAR TOTAL
Source: International Monetary Fund, World Economic Outlook, April 2010
3,751
Sovereign Debt
Governments are powerful because they can
tax their constituents. But there is a limit.
Government Debt can be reduced by:
 Increasing Tax
 Decreasing Spending (but some areas are
limited)
Economic Cycles
Consider some long-term cycles
 Developed Nations – slower but some
growth
 Emerging Nations – good potential
The Wealth effect revisited
Magellan Infrastructure
[34]
Why Infrastructure – Increasing Opportunity Set
Canada faces a $60b annual
infrastructure deficit.
Investment needs for urban
roads and bridges are $66b
over 10 years.
The EU has infrastructure needs that run into trillions of
dollars. The energy sector is estimated to require $1.2 trillion
over the next 20 years.
The ASCE estimates US
infrastructure
investment needs to be
$2.2 trillion over the
next 5 years.
The developing economies
of East Asia need to invest
$165b pa over the next 5
years
Latin America need
projected at $71b
The govt of India estimates that it
will need to invest approximately
$250b over the next 5 years.
Source:
Deloitte, World Bank, ASCE, McGill University, ProjectFinance,
A&L Goodbody Consulting, Government of India
Wealth jumped
850%
Household wealth as a multiple of annual disposable income
750%
650%
550%
450%
350%
1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008
8
8
Source: ABS, RBA, Access Economics
Projections
What are the key timeframes:
 0-2 years – no projections needed.
Cash and Term Deposits cover all goals
in this time frame
 2-8 years – not necessary to invest in
this timeframe if we can have a 10 year
focus which incorporates better returns
 10+ years – the key goals. Again we
use the Tim Farrelly Projections
Asset
Mix
Australian Shares
Term Deposits
International Shares
Property
Cash
10 Year Forecasts as at Mar-09
Asset
Dividend Earnings Sentiment Central
PE
Yield*
Growth
Australian Equities
7.3%
1.5%
5.4%
14.2%
9.5 x
International Equities
4.4%
1.0%
7.7%
13.1%
8.4 x
Listed Property Trusts
9.3%
1.1%
2.0%
12.4%
10.8 x
Fixed Interest
4.2%
0.0%
0.0%
4.2%
24.0 x
Residential Property (Syd)
2.3%
4.5%
-0.8%
6.0%
43.5 x
*Includes expected currency gain
Forecast
farrelly’s
10 Year Forecasts as at Mar-07
Asset
Dividend Earnings Sentiment Central
PE
Yield*
Growth
Australian Equities
4.9%
1.6%
-0.1%
6.4%
16.2 x
International Equities
3.5%
3.0%
0.5%
7.0%
17.8 x
Listed Property Trusts
5.2%
2.2%
-3.1%
4.3%
19.2 x
Fixed Interest
5.8%
0.0%
0.0%
5.8%
17.1 x
Residential Property (Syd)
2.0%
3.0%
0.0%
5.0%
50.0 x
*Includes expected currency gain
Forecast
farrelly’s
Asset
Mix
Australian Shares
Term Deposits
International Shares
Property
Cash
Asset Mix - Decision 1
What are the CashFlow Needs for:
 Next 2 Years
 Next 7-10 Years & Beyond
Need Cash and Term Deposits - this section is
structured to be “Consumed”
Security – eg Government Guarantee; Return of the $
invested at the designated time; Only after “signing off”
this section of the bucket do we then look at LHS of
the bucket
Asset Mix – the
Growth Section
AS
IS
P
TD
Cash
Asset Mix - Decision 2
The LHS Side of the Bucket. The Goals are:
 Main Goal - Long-Term Total Returns – 10 Year
Targets
 Sub Goal – replenish the Cash
Volatile Returns are not a concern
Income is not a focus – maximising returns is the goal.
A business that reinvests is not any less attractive than
one that pays out all profit as a dividend.
The Hayden Asset
Allocation Model
Invest in 3 ways – profit, rent or interest
*************
Inclusions - Cash & Term Deposits; Australian &
International Shares; Property when attractive
Exclusions - Structured Funds; Mortgage Trusts ; Hybrids;
Fixed Interest Pools; Loans; Mezzanine Funds; Second Tier
Debt; Hedge Funds; Bond Funds; Balanced/Conservative
etc; Tax-driven investments; Alternatives
*************
Technical/Academic Paper due out soon
Specific Investments
within asset sectors
Australian/International Shares
We have a 10 year plus time frame so we are
sharing in the profits generated by the business
– ie either dividends and/or capital growth
generated by higher profits
We want a good portfolio and we want it
monitored and changed when needed
Best way - contract Specialist Stock-pickers
Asset Mix – the
Growth Section
AS
IS
P
TD
Cash
Research Process
Fund manager research focuses on the four ‘Ps’
PEOPLE
PROCESS
Background, qualifications
& track record.
Stated investment policies
& strategies.
PORTFOLIO
Do the securities held
reflect stated investment policies
& strategies ?
PERFORMANCE
Returns generated relative
to to the risks taken.
How Many Managers
-ie stock-pickers?
Obtain diversification – ie different
processes and different people/perspectives
Not too many that we dilute the best
performers
Around 3-5 in both Australian and
International Shares
Specialist Stock-picker
AS
IS
P
TD
Cash
XYZ Manager
Specific Investments
We, via the Specialist Stock-pickers, want :
** the best performing businesses over a 10+
year time frame
We want to buy these on the stock-market
Most stock-market participants are looking for the
best 1 year performers. Their time frame may be
shorter, eg 3 months,or……even intra-day!
This can be to our advantage. Avoid the noise.
Is a Stock-Picker Needed?
The three choices:
Index Funds
Choose Your Own Stocks
Contract a High-Quality Stock-Picker
Are some businesses better than others? Yes – either in a
better Industry and/or having better Management.
Do some people have specialised skills and resources to be
able to find and then analyse businesses? Is it worthwhile
paying them to do this? Yes
Choosing a Stock-Picker
What makes a quality stock-picker
Consider their processes
We are agreeing to buy a selected portfolio of shares
and then contracting them to Manage it
We can see the underlying investments. We can
address each holding and ask them why they part-own
that business and what are the key factors that would
lead them to sell that business
The business must have High Profit Margins or High
Turnover and Reasonable Profit Margins – and this
advantage must be sustainable.
What Investments
do we own?
The contracted Fund Managers (Specialist
Stock-pickers) build a portfolio that we
indirectly own.
We want managers that have:
High Conviction portfolios (some
businesses are better than others)
Low TurnOver (trading often has a goal to
lower volatilty but not necessarily maximise
long-term returns)
The Buffett Overlay
The businesses that we part-own (via our specialist
Fund Managers) should or must meet these criteria:
We want Good Businesses – ie those with a Durable
Competitive Advantage
We want to avoid Poor Businesses - ie those where
price is the major motivating factor in the consumer’s
decision to buy their product or service.
Analyse specific
Investments
We can address the holdings of the
Managers –
 The Buffett Overlay
 The expected profits going forward
 Our comfort factor in being a part-owner
The Strategy Going
Forward
Review our goals
Consider Cash/Term Deposits and then the
allocation to Australian and International
Shares
Analyse the Managers via:
a) Their holdings
b) Their ongoing skill-set
What could go
wrong?
Lower Returns in LHS
Volatility
Underlying businesses (ie our investments)
become long-term laggards
************
Do we need to define the risks? It is not
volatility nor short-term underperformance.
The key risks are those that will prevent us
from achieving our goals.
A Sound Solid Plan
Transparency.
Logical and Rational.
Well reasoned and justifiable on historical and
theoretical basis.
Contract wise people with Integrity and Mutual
Goals.
Realistic Goals – specify long-term and shortterm goals. Inflation must be considered in goal
setting.
Asset
Mix
Australian Shares
Term Deposits
International Shares
Property
Cash
Asset Mix – the
Growth Section
AS
IS
P
TD
Cash
Specialist Stock-picker
AS
IS
P
TD
Cash
XYZ Manager
Switching
Changes to Lifestyle or Financial Goals
Asset Sector Changes – eg if the 10 year return
differential is significant;
Switching of Fund Managers – may be needed at any
time. NB we are retaining the same asset sector
exposure –eg to shares – but changing the portfolio
and ongoing monitoring responsibility
The Boxes to Tick
Realistic Goals
Structure/Strategy (Tax etc)
Super Fund Admin
Asset Mix 1 -Cash/TermDs needed
Asset Mix 2–Growth Section (LHS)
Stock-Picker Selection
Peace-of-mind for
Investors
1. Part-own a lot of great businesses. We
have a diversified portfolio of businesses
across locations, industries and via size.
2. Employing (contracting) some very wise
people to monitor and change our
portfolio of businesses when necessary.