Investors’
Seminar
September 2011
Disclaimer
This is not Advice. Please see Mark before considering any changes. Mark will put any recommendations in writing
The information contained in this presentation has been prepared for general use only and does not take into account your personal
investment objectives, financial situation or particular needs. Before you make any decision about whether to invest in a financial
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The information provided by HFS has been done so in good faith and has been derived from sources believed to be accurate at the
time of compilation. Changes in circumstances, including unlawful interference and unauthorised tampering, after the date of
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.
Investors’ Seminar
September 2011
Will I achieve my goals?
Will we achieve our goals?
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
Non – investment
Matters
1. Goals – realistic cashflow needs
2. Structure & Strategy
Super & Pensions
Tax & Centrelink Matters
3. Super Fund Admin
SMSFs vs Wholesale/Retail/Industry etc
Investors’ Seminar
September 2011
The Current Environment
 Governments have high debt levels
 Governments have the financial burden of dealing with aging populations
(ie pension liabilities)
 Globally the Stimulus Funds have not been spent on productive assets or
infrastructure
 Households over-leveraged from years of easy credit sourced from rising
house prices
The Current Drivers
 Fear prevails – affecting both the Market and the Economy
 Consumers are restrained – becoming net savers
 Inflation vs deflation – less topical now
Investors’ Seminar
September 2011
Historical Data
Forecasts
Hayden Asset Allocation Model
Specific Investment Selection
Bad case scenarios
Investors’ Seminar
September 2011
Historical Data
How far back to go?
Is old “data” relevant in today’s world?
Predictive Data
Theory; Reasoned Rational Approach
Historical Data
Lonsec
Asset Classes - Historical Characteristics to
30 June 2011
Returns (%p.a.)
Australian
Equities
Global
Equities
Australian
Fixed
Interest
% pa
Cash
% pa
Australian
Listed
Property
% pa
% pa
5 years
2.4
-4.6
-10.3
6.5
5.6
10 years
7.2
-3.2
2.1
6.2
5.4
15 years
9.2
3.5
6.0
7.1
5.5
20 years
10.0
5.6
6.9
8.0
5.9
% pa
Probability of a Negative 12 month Return
Probability (%)
Australian
Equities
Global
Equities
Australian
Listed
Property
Australian
Fixed
Interest
Cash
19
34
17
2
0
Return
Return on
on Investment
Investment of
of $100,000
$100,000 December
December 1979-2010
1979-2010
$80
$80
1800
1800
1600
1600
$60
$60
1400
1400
$50
$50
1200
1200
Capital
tal Valu
Valuee (000’s
(000’s))
Capi
Income (000’s)
(000’s)
Income
$70
$70
1000
1000
$40
$40
800
800
$30
$30
600
600
$20
$20
400
400
$10
$10
200
200
$0
$0
00
80
80 82
82 84
84 86
86 88
88 90
90 92
92 94
94 96
96 98
98
Industrials
Industrials --Dividends
Dividends
Industrials
Industrials --Capital
Capital Value
Value
Source:
Source: MLC
MLC
Data:
Data:Industrials
Industrials represented
represented by
byS&P/ASX
S&P/ASX200
200 Industrials
Industrials Price
Price Index
Index(All
(All
Industrials
IndustrialsPrice
PriceIndex
Index used
used prior
prior to
to April
April2000)
2000)
00
22
44
66
Term
TermDeposits
Deposits -- Interest
Interest
Term
TermDeposits
Deposits -- Capital
Capital Value
Value
88
10
10
Yield
Yield of
of Investments
Investments from
from December
December 1979-2010
1979-2010
20%
20%
18%
18%
16%
16%
14%
14%
12%
12%
10%
10%
8%
8%
6%
6%
4%
4%
2%
2%
0%
0%
80
80 82
82 84
84 86
86 88
88 90
90 92
92 94
94 96
96 98
98
00
22
44
66
88
10
10
Year
YearEnded
Ended31
31December
December
Industrials
IndustrialsIndex
Index --Spot
SpotYield
Yield
Source:
Source: MLC
MLC
Data:
Data:Industrials
Industrialsrepresented
representedby
byS&P/ASX
S&P/ASX200
200Industrials
IndustrialsAccum
AccumIndex
Index(All
(All
Industrials
IndustrialsAccum
AccumIndex
Indexused
usedprior
priorto
toApril
April2000)
2000)
Term
TermDeposits
Deposits --Spot
SpotYield
Yield
Accumulation
Accumulation Indices
Indices
Value
Value of
of $100,000
$100,000 invested
invested December 1979 -2010
-2010
$7,000,000
$7,000,000
$6,000,000
$6,000,000
Industrials
Industrials$5,494,998
$5,494,998
4.4
times
4.4 times
$5,000,000
$5,000,000
$4,000,000
$4,000,000
$3,000,000
$3,000,000
$2,000,000
$2,000,000
$1,000,000
$1,000,000
All
AllOrds
Ords $3,433,928
$3,433,928
3.6
3.6times
times
Resources
Resources$2,915,472
$2,915,472
2.4
2.4times
times
$0
$0
79
79 81
81 83
83 85
85 87
87 89
89 91
91 93
93 95
95 97
97 99
99 01
01 03
03 05
05 07
07 09
09
Source:
Source: MLC
MLC
Australian long term returns
Average annual total returns after inflation
19002007
%
19502007
%
Real bond returns
1.3
0.6
-6.3
0.9
-5.1
2.1
10.1
3.1
Real equity total returns
7.9
6.9
9.0
10.6
-4.2
8.6
9.0
10.2
Real equity capital gains
2.0
1.5
2.4
4.6
-10.6
4.0
4.6
6.1
5.9
5.4
6.6
6.0
6.4
2.6
4.4
4.1
1950s 1960s 1970s 1980s 1990s
%
%
%
%
%
20002007
%
Income compounding
effect
Source: ABN AMRO / London Business School :
‘Global Investment Returns Yearbook 2008’
Past performance is not a reliable indicator of future performance.
Forecasts
Lonsec – August 2011
Asset Class 10 Year Forecasts
Asset Class
Yield
% pa
Growth
% pa
Total
% pa
Australian Equities
4.0
6.0
10.0
Global Equities
2.5
7.0
9.5
Australian Listed Property
6.0
2.5
8.5
Australian Fixed Interest
6.0
0
6.0
Cash
5.5
0
5.5
CPI
2.8
Wages Price Data
3.9
Investors’ Seminar
September 2011
Historical Data
Forecasts
Hayden Asset Allocation Model
Specific Investment Selection
Bad case scenarios
Hayden Asset
Allocation Model
Australian Shares
Term Deposits
International Shares
Property??
Cash
The Hayden Asset
Allocation Model
Segmentation Bar
RHS – Cash and Term Deposits
LHS – 10+ Year Focus
Never need to address the best investment for say 2 to 8
years.
Never need to predict the return of Growth assets over the
short-term.
We do need dividends etc to replenish the RHS – but
regularity is not relevant. It can be zero for 1 or 2 years
(most unlikely because the businesses will not exist if they do
not make profits).
Asset Mix - Decision 1
The Segmentation Bar – ie vertical bar that segregates
the short-term RHS and the LHS
RHS - Return of the $ invested at the designated time;
has a 0-2 year focus.
CashFlow Needs are the main determinator.
Cash and Term Deposits - this section is structured to
be “Consumed”
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.
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
Hayden Asset Allocation
Model – Growth (LHS)
AS
IS
P
TD
Cash
Specific Investments
for the LHS
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
Drilling down further
AS
IS
P
TD
Cash
XYZ Manager
Is a Stock-Picker Needed?
The three choices:
1. Index Funds …*
2. Choose Your Own Stocks …#
3. Contract a High-Quality Stock-Picker
* 3 is preferred because some businesses better than others- ie
either in a better Industry and/or better Management.
# 3 is preferred because some people have specialised skills
and resources in finding and then analysing businesses? It
is worthwhile contracting these skills.
Choosing a Stock-Picker
A quality stock-picker is contracted for
Their selected portfolio of shares and
Their skills in monitoring and changing that
portfolio
For each underlying investments we can ask them why
they part-own that business and what are the key
factors that would lead them to sell that business
The investee businesses must either have High Profit
Margins or High Turnover and Reasonable Profit
Margins. And this advantage must be sustainable.
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.
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
The Buffett Overlay
The businesses that we part-own (via our specialist
Fund Managers) should, or must, meet these criteria:
We want to select 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.
Best & worst performing companies
S&P/ASX 100 for the year ended 31 July 2011
Best stocks
%
Worst stocks
%
Iluka Resources
222.91
BlueScope Steel Limited
-51.90
Lynas Corporation
182.89
Seven West Media Ltd
-48.27
Atlas Iron Limited
101.49
OneSteel Limited
-40.97
Fortescue Metals Group
47.09
Fairfax Media Limited
-40.34
PanAust Limited
43.86
Harvey Norman
-37.71
Alumina Limited
40.65
David Jones Limited
-37.50
Challenger Limited
38.92
Billabong
-35.42
Charter Hall Office
35.51
Myer Holdings Limited
-33.04
ConnectEast Group
32.50
Goodman Fielder
-32.58
Boart Longyear
32.35
Paladin Energy Limited
-31.95
Average
77.82
Average
-38.97
Top 100 companies by market capitalisation % returns for the year ended 31 July 2011.
Source: IRESS. Past performance is no indication of future performance.
Australian equities have a significant sector bias vs global
equities…
[8]
Sector weights as at 30 June 2010
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
S&P/ASX200
Materials
Energy
Source: Bloomberg
Financials
S&P 500
Consumer Discretionary & Staples
S&P Global 1200
Industrials & Utilities
Health Care
IT & Telecommunications
Investors’ Seminar
September 2011
Historical Data
Forecasts
Hayden Asset Allocation Model
Specific Investment Selection
Bad case scenarios
Investors’ Seminar
September 2011
What is our greatest fear?
“running out of money”
“not achieving lifestyle goals”
“losing money”
…..readily addressed; we need patient capital;
there is no value-add by counting it daily
…..need the faith to leave it; let it grow; leave it
in a Bank, a Property, a Business etc
Investors’ Seminar
September 2011
The Fear:
Not achieving our goals (including running out of
money)
What’s needed:
The “tap” turned on at a reasonable rate
Reasonable long-term returns
Bad case scenarios:
Share Prices “crash”; Dividends reduce; Cash and Term
Deposit Rates are very low
Investors’ Seminar
Bad Scenarios
Cash and Term Deposit Rates are very low – not a
concern – liquidity and security the RHS’ focus
Dividends reduce – zero for one year is no concern;
Some businesses will survive (ie some employment)
hence some Earnings
Share Prices “crash”- What part is “noise” – relatively
minor and what part is “fundamental” – changing the
economy.
Good Businesses will still generate Earnings. This will
show partly as Dividends; partly in increased future
Dividends; and partly an increased intrinsic value of the
Business.
Illustrating the
Bad Case Scenarios
Cash and Term Deposit Rates - zero
Dividends reduce – NB Still will be some dividends (ie
any surviving business will pay dividends
most years)
Share Prices “crash”- The LHS will never be zero – there
will always be some businesses
Asset
Mix
Australian Shares
Term Deposits
International Shares
Property??
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 if a change to skill level or portfolio
integrity. In switching Managers we retain the
same asset sector exposure –eg to shares.
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 portfolio of businesses that is well
diversified across locations, industries
and size.
2. Employing (contracting) some very wise
people to monitor and change our
portfolio of investee businesses when
necessary.