Perpetual Investments
SHARE-PLUS LONG SHORT
FUND WEBINAR
IOOF ADVICE
8 May 2013
AGENDA
• Overview
• Process
• Portfolio & Performance
• Why Short
• Appendix
− Biographies
− Equities team
− April 2010 enhancements
2
OVERVIEW
STRATEGY OVERVIEW
A 125/25 long short Australian equities strategy
Launched in March 2003 and changes to investment guidelines and process in April 2010
FUM: ~$176 million*
Objective: to provide long term capital growth and income through investment in both long
and short positions of predominantly but not limited to Australian listed companies
Benchmark: S&P/ASX 300 Accumulation Index
The process is based on extensive bottom up fundamental company research and active
stock selection and leverages heavily off the proven long only Perpetual Investments
process
Portfolio Manager, Paul Skamvougeras and Analyst, Anthony Aboud
− specialist skills and extensive experience in managing long/short strategies
− previously worked together at Ellerston Capital
− work closely with the broader equities team
As at 31/12/2012.
4
ADVANTAGES
Greater investment opportunities
Making the most of all investment ideas,
not just those that we believe will go up
Cash can be used
as a defensive strategy
Provides some protection against
falling markets
Lower correlation with sharemarket
returns than long-only funds
Can take advantage of
rising and falling markets
Shorting not easily accessed
by individual investors
Access to Perpetual’s proven research
and investment expertise
Daily liquidity
5
PROCESS
LONG: PHILOSPHY AND PROCESS
Companies must pass four quality criteria:
• Sound management
Quality
• Conservative debt
• Quality of business
• Recurring earnings
Perpetual universe
• Flexible approach
Company valuation
• Recognises the different nature of companies
• Analysts must clearly articulate the methodology used and
the reasons
Stock rank
Portfolio manager responsibility, within the framework of:
• Analyst stock ranks
Portfolio construction
• Perpetual’s philosophy
• Risk controls and guidelines
• Monitoring framework
7
SHARE-PLUS LONG SHORT FUND – LONG
STOCK SELECTION AS AT 31 MARCH 2013
Market
450+ stocks
Perpetual Quality
Universe
250 stocks
36
stocks
Source: Perpetual and FactSet.
8
Fund
SHORT: PHILOSOPHY
THE PHILOSOPHY THAT UNDERPINS OUR SHORT POSITIONS IS:
We short to
make money in
an absolute
sense not a
relative sense
9
We do not short
the index, we
short companies
We short for
alpha generation,
not beta timing
We do not short
with hedging or
pairing in mind
SHORT: PROCESS
THE PROCESS WE USE TO IDENTIFY AND INVEST IN SHORT POSITIONS IS:
Eliminate
companies
which do
not make
liquidity
constraints
Review
companies
outside
Perpetual
Quality
Universe
(poor
quality)
Review
companies
that are in the
Perpetual
Quality
Universe with
a rank ‘4’or ‘5’
(expensive)
Identify companies that
have red flags:
- Insider selling,
senior management
(CEO/CFO) leaving
unexpectedly
- Strange acquisition
- Surprise equity
raising
- Promotional
management
- Cash flow not
matching accrual
earnings
10
Undertake
independent
analysis and
valuation
Positions
may be
strategic
(longer
term) or
tactical
(shorter
term)
Identify
where we
are
materially
different
from market
and prove
whether we
are right
SHORT: TYPES
TYPE OF SHORT
PHILOSOPHY
EXAMPLE
COMPANIES
1
Complicated accounts
Poorly analysed with a lot of analysts relying on
management guidance. Key is to identify where market is
too bullish
Allco, Babcock &
Brown, Leighton
2
Expensive with
deteriorating quality
Identifying top of cycle, lower quality business model,
increasing competition
Wotif, Billabong
3
Structural decline
Early identification of a company which has structurally
declining revenue. Market underestimates operating
leverage
Fairfax, Myer, Flight
Centre
4
Flawed business model
This is where we believe there is an unsustainable
business model or strategy.
Babcock & Brown
Infrastructure,
Macquarie
Infrastructure Group
11
SHORT: RISK MANAGEMENT
• The main risks in the shorting process are:
− that the price of the shorted stock rises
− the liquidity of the shorted stock is compromised
• These risks are managed by the following guidelines:
− an absolute limit of 2.5% of NAV per short position (due to market movement, this can be
increased by 0.5% of the Fund’s NAV)
− the use of a 10% soft stop loss limit on each short position
− a liquidity constraint on short positions such that the number of shares of an individual short
position cannot exceed 3 times the daily trading volume
− short positions can only be established in stocks within the S&P/ASX 300 Index at the time of
opening the position
• These guidelines are monitored daily by the portfolio manager and/or the Investment
Administration team and action taken if required
12
SHORT SIDE
LONG SIDE
OVERALL
INVESTMENT GUIDELINES
13
Asset class exposures
Australian shares: 90 – 125%
Short positions in Australian shares: 0 – 25%
Australian shares (net): 65 – 100%
Cash: 0 – 35%
Max stock weights
+/-5% above index
(where price change occurs, these limits can be extended to 7.5%)
Maximum holding of a company
15% of the fully diluted issued capital across all of Perpetual’s managed equity portfolios
Weighting to resources
+/- 15% from index weight
Allowable number of stocks
30 to 80
Maximum allocation to offshore
listed stocks
20%
(currency hedges may be used from time to time)
Investable universe
S&P/ASX 300 Index
Maximum stock weights
2.5% of the Fund’s NAV (due to market movement, if this increases to 3% or more the
position must immediately be brought back below 2.5%)
Stop loss limit
10%
Stock market price limit
50 cents or greater
Allowable number of stocks
0 to 60
Liquidity
Number of shares of an individual short position cannot exceed 3 times the daily trading
volume
PORTFOLIO CONSTRUCTION
EXPOSURE RANGES
MIN
MAX
TYPICAL
Share exposure – Long
90%
125%
110 - 115%
Share exposure – Short
0%
25%
10 - 20%
Share exposure – Net
65%
100%
90 – 95%
Cash
0%
35%
5 – 10%
Number of stocks – Long
30
80
35 – 45
Number of stocks – Short
0
60
10 – 20
POSITIONING WILL BE A FUNCTION OF WHERE WE SEE INVESTMENT OPPORTUNITIES
IF WE SEE MORE OPPORTUNITIES ON THE SHORT SIDE, OUR NET POSITION WILL BE LOWER
14
SHARE-PLUS LONG SHORT FUND
PROCESS AS AT 31 MARCH 2013
LONG SIDE
SHORT SIDE
Traditional stock picking
process based on quality
and value
Opportunistic stock picking
process
=
Exposure = 90 – 125%
Exposure = 0 – 25%
Net equity
exposure = 65 – 100%
Currently,
Number of stocks = 36
Exposure = 102.6%
Currently,
Number of stocks = 20*
Exposure = -18.7 %
Currently,
Cash exposure = 18.5%
Net equity exposure = 83.9%
Source: Perpetual. *Does not include SPI futures.
15
+
PORTFOLIO
PORTFOLIO
SHARE-PLUS LONG SHORT FUND
NET PERFORMANCE FOR PERIODS ENDING 31 MARCH 2013
FUND %
INDEX %
EXCESS %
3 months
8.4
8.0
+0.3
1 year
28.9
19.2
+9.8
2 years p.a.
12.6
5.7
+6.9
3 years p.a.
12.0
5.0
+6.9
4 years p.a.
18.2
13.3
+5.0
5 years p.a.
7.8
2.9
+4.9
7 years p.a.
7.1
3.9
+3.2
10 years p.a.
12.8
10.2
+2.6
Since inception p.a. (14/03/2003)
13.0
10.7
+2.3
Source: Perpetual & Datastream. Numbers may not be whole due to rounding. Performance figures shown are net fees / pre tax for the Wholesale SHARE-PLUS Long Short Fund. Index used is
the S&P/ASX 300 Accumulation Index.
17
SHARE-PLUS LONG SHORT FUND
MONTHLY EXCESS RETURNS (NET) TO 31 MARCH 2013
3.0%
Rising markets
Falling markets
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
-0.5%
-1.0%
Apr-12
Source: Perpetual & RBC.
18
May-12
Jun-12
Jul-12
Aug-12
Sep-12
Oct-12
Nov-12
Dec-12
Jan-13
Feb-13
Mar-13
SHARE-PLUS LONG SHORT FUND
1 YEAR ATTRIBUTION TO 31 MARCH 2013
AVERAGE ALLOCATION
101.1%
-16.2%
15.0%
Long portfolio
Short portfolio
Cash
TOP 10
CONTRIBUTORS
Magellan Financial
Group
Insurance Australia
Group
Newcrest Mining
POSITION
CONTRIBUTION TO EXCESS RETURN
11.7%
2.0%
-1.7%
CONTRIBUTION TO EXCESS RETURN
CONTRIBUTION
TOP 10 DETRACTORS
%
POSITION
CONTRIBUTION
%
Overweight
+4.5
New Hope Corp.
Overweight
-1.2
Overweight
+2.1
Ten Network Holdings
Overweight
-0.9
Not held
+1.0
CSL
Not held
-0.9
Crown
Overweight
+0.8
Alumina
Overweight
-0.7
News Corp.
Overweight
+0.6
Carsales.Com
Short
-0.7
Worleyparsons
Short
+0.6
Orica
Overweight
-0.6
Iluka Resources
Not held
+0.6
Overweight
-0.6
Short
+0.5
Underweight
-0.5
Overweight
+0.5
Rio Tinto
Commonwealth Bank Of
Australia
Seek
Short
-0.4
Not held
+0.5
Flight Centre
Short
-0.4
NRW Holdings
Treasury Wine Estates
Fortescue Metals
Group
Source: FactSet. Performance figures shown are pre fees / pre tax. Calculated using FactSet buy & hold methodology. For indicative use only – may not match RBC official data.
19
SHARE-PLUS LONG SHORT FUND
PORTFOLIO POSITIONING AS AT 31 MARCH 2013
TOP 10 OVERWEIGHTS
TOP 10 UNDERWEIGHTS
UNDERWEIGHT %
Aurizon Holdings
+4.7
ANZ Banking Grp
-3.1
Rio Tinto
+4.0
CFS Retail Property Trust
-2.7
Insurance Australia Grp
+3.7
Commonwealth Bank of Australia
-2.5
Orica
+3.6
CSL
-2.4
Not held
Crown
+2.7
Monadelphous Group
-2.3
Short
Henderson Group PLC.
+2.4
Navitas
-2.1
Short
News Corporation
+2.2
Carsales.Com
-1.9
Short
Oil Search
+2.2
Amcor
-1.9
Short
Harvey Norman Holdings
+2.2
WorleyParsons
-1.9
Short
New Hope Corporation
+2.1
ALS
-1.8
Short
Source: FactSet.
20
OVERWEIGHT %
Ex-index
Short
SHARE-PLUS LONG SHORT FUND
TOP HOLDINGS AS AT 31 MARCH 2013
TOP 10 LONG
Source: FactSet.
21
WEIGHT %
TOP 5 SHORT
WEIGHT %
BHP Billiton
10.0
CFS Retail Property Trust
-2.3
Westpac Banking Corporation
7.9
Monadelphous Group
-2.2
Commonwealth Bank of Australia
6.3
Navitas
-1.9
National Australia Bank
6.0
Carsales.Com
-1.8
Rio Tinto
6.0
ALS
-1.5
Telstra Corporation
5.7
Aurizon Holdings
5.3
Insurance Australia Grp
4.6
Orica
4.3
Wesfarmers
3.3
SHARE-PLUS LONG SHORT FUND – LONG SIDE
HOLDINGS BY MARKET CAP AS AT 31 MARCH 2013
90.0%
18
stocks
Fund
Benchmark
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
7
stocks
10.0%
0.0%
Source: FactSet.
22
S&P/ASX
top 50
S&P/ASX
mid cap
9
stocks
2
stocks
S&P/ASX
101-200
S&P/ASX
201-300
Ex-index
Cash
SHARE-PLUS LONG SHORT FUND
EXPOSURE – HISTORICAL
130%
110%
90%
70%
Long
50%
Short
Cash
30%
Net
10%
-10%
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Dec-11
Jan-12
Feb-12
Mar-12
Apr-12
May-12
Jun-12
Jul-12
Aug-12
Sep-12
Oct-12
Nov-12
Dec-12
Jan-13
Feb-13
Mar-13
-30%
Source: FactSet as at 31/03/2013. Data represents historical exposure from April 2012 when product enhancements were implemented.
23
SHARE-PLUS LONG SHORT FUND – LONG ONLY
FUNDAMENTALS AS AT 31 MARCH 2013
FUND
INDEX
P/E Ratio
14.4
14.2
Dividend Yield
4.2%
4.5%
1.9
1.8
35.7%
42.3%
11.7
9.8
13.6%
13.8%
Price/Book
Net Debt/Equity
Interest Cover
ROE
Source: Perpetual FactSet fundamental model. Fundamentals reported accounts for the Long portion of the portfolio only. Index used is the S&P/ASX 300.
24
IMPORTANT NOTE
This presentation has been prepared by Perpetual Investment Management Limited
(PIML) ABN 18 000 866 535, AFSL 234426. It is general information only and is not
intended to provide you with financial advice or take into account your objectives,
financial situation or needs. You should consider, with a financial adviser, whether the
information is suitable for your circumstances. The views expressed in the
presentation are the opinions of the author at the time of writing and do not constitute
a recommendation to act. Any information referenced in the presentation is believed to
be accurate at the time of compilation and provided by Perpetual in good faith. To the
extent permitted by law, no liability is accepted for any loss or damage as a result of
any reliance on this information.
The PDS for Funds issued by PIML, should be considered before deciding whether to
acquire or hold units in the Funds. The PDS can be obtained by calling 1800 022 033
or visiting our website www.perpetual.com.au.
No company in the Perpetual Group (Perpetual Limited ABN 86 000 431 827 and its
subsidiaries) guarantees the performance of any fund or the return of an investor's
capital. The total returns shown for Perpetual Funds have been calculated using exit
prices after taking into account all of Perpetual's ongoing fees and assuming
reinvestment of distributions. No allowance has been made for taxation. Past
performance is not indicative of future performance.
25
APPENDIX
BIOGRAPHIES
PAUL SKAMVOUGERAS
Portfolio Manager, SHARE-PLUS Long Short /
Pure Equity Alpha
ANTHONY ABOUD
Equities Analyst
• Paul rejoined Perpetual Investments in February 2010 as
a Portfolio Manager, having previously spent seven years
at Perpetual.
• Anthony joined Perpetual Investments in February 2012
to work with Paul Skamvougeras on the Pure Equity
Alpha fund and the SHARE-PLUS Long-Short Fund.
• Between stints at Perpetual, Paul spent seven years
working at CPH/Ellerston Capital, where he had portfolio
management responsibilities for an Australian long/short
strategy for the first four years and a global long/short
strategy for the last three years. Paul also recruited and
managed two analysts within his team.
• Anthony has 13 years experience outside of Perpetual,
most recently at Ellerston Capital where for two years he
was the Portfolio Manager for the Ellerston Capital Global
Equity Management Fund. Prior to this role, he spent 3
years as an analyst working on a long/short strategy.
Prior to joining Ellerston Capital, Anthony worked as an
Analyst at UBS Investment Bank for 8 years.
• Paul gained international experience, spending 18 months
in London, as well as expertise in investing and trading
various asset classes ranging from equities, commodities,
currencies and fixed interest.
• Paul has a Bachelor of Economics from Macquarie
University and is a Member of the Institute of Chartered
Accountants.
27
THE LARGE AND EXPERIENCED TEAM
AUSTRALIAN EQUITIES
Matt Williams
Charlie Lanchester
Paul Skamvougeras
Jack Collopy
Nathan Parkin
Vince Pezzullo
Sean Cunningham
Maryanne Drewe
Garry Laurence
Andrew Blakely
Andrew Corbett
Alex Hurrell
Anthony Aboud
Joshua Hain
Rosemary Tan
PROPERTY SECURITIES
Anthony Cay
Tim Koroknay
Orion Jandera
DEALING
Chris Murray
Nick Corkill
Nathan Hughes
BUSINESS
Michael Gordon
Gemma Dooley
TITLE
Head of Equities / Portfolio Manager
Deputy Head of Australian Equities / Portfolio Manager
Portfolio Manager
Portfolio Manager / Analyst
Portfolio Manager / Analyst
Portfolio Manager / Analyst
Senior Analyst
Analyst
Analyst
Analyst
Analyst
Analyst
Analyst
Analyst
Analyst (on maternity leave from July 2012)
PERPETUAL (YRS)
19
13
9*
11
8^
5
15
9
4
4
4
6
<1
3
2
EXPERIENCE (YRS)
22
19
17
13
19
18
21
28
9
20
20
6
13
5
7
Portfolio Manager / Analyst
Property Analyst
Senior Property Analyst (on maternity leave from December 2011)
16
5
6
16
15
19
Head Dealer - Equities
Dealer - Equities
Dealing Administrator
5
2
2
11
4
8
Group Executive - Perpetual Investments (starting Jan 2013)
General Manager - Investment Research & Institutional Business
<1
3
30
19
As at 31/12/2012. *Seven years experience between 1994 to 2001 and rejoined in Feb 2010. ^Six years experience between 1997 to 2003 and rejoined in Oct 2010.
28
PRODUCT ENHANCEMENTS
APRIL 2010
DESCRIPTION
OLD PROCESS
NEW PROCESS
Separate managers of long and short sides
Yes
No
Long portfolio mirrors the Australian Share Fund (ASF)
Yes
No
Short positions can be established in stocks held in the ASF
No
Yes
S&P/ASX 200 ex ASF
S&P/ASX 300
Monthly
Daily as required
2%
None
Top 20 stocks: 5%
Stocks 21-100: 2%
Stocks 101-200: 0.5%
None
Maximum absolute short position for a stock
None
2.5% (of the Fund’s NAV)
Stop loss limit on each short position
None
10%
None
Number of shares of an
individual short cannot
exceed 3 times the daily
trading volume
30 to 50
10 to 20
Short universe
Trading of short positions
Maximum short exposure to any single industry group
Maximum relative underweight short position to the benchmark for a stock
Liquidity constraint on each short position
Typical number of short positions held
29