Netwealth portfolio construction series - How to find undervalued investment opportunities in the market

Netwealth educational webinar series

August 2016

ValueInvesting 101How, what & when

Housekeeping

• This webinar is being recordedSlides will be sent to you after the webinar.

• Enter your questions in the question boxWe will get to them during at the end of the webinar.

• Posting to social? Make sure to use #netwealthinvest or tweet @netwealthInvest.

Disclaimer

This webinar and information has been prepared and issued by Netwealth Investments Limited (Netwealth), ABN 85 090 569 109, AFSL 230975. It contains factual information and general financial product advice only and has been prepared without taking into account the objectives, financial situation or needs of any individual. The information provided is not intended to be a substitute for professional financial product advice and you should determine its appropriateness having regard to you or your client’s particular circumstances. The relevant disclosure document should be obtained from Netwealth and considered before deciding whether to acquire, dispose of, or to continue to hold, an investment in any Netwealth product.While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), no person, including Netwealth, or any other member of the Netwealth group of companies, accepts responsibility for any loss suffered by any person arising from reliance on this information.

Meet today’s speaker

Roger MontgomeryChief Investment OfficerMontgomery Investment Management

© Montgomery Investment Management Pty Ltd 2013. All Rights Reserved. 5

August 2016

Roger MontgomeryChief Investment Officer

Value Investing 101How, What & When


What matters most?#1 Returns


What matters most?#2 The Profile of Returns


AgendaWith Montgomery

• An investing framework

• How businesses create & destroy wealth

• Dangers of chasing yield

• Where are we now?

• Examples of quality businesses.


Businesses not stocks. Value not price. Companies within a

Montgomery portfolio should display The Three P’s: Premium

quality economics, bright Prospects, and be available at a Price

below our estimate of its intrinsic value. If few opportunities are

available, move to the safety of cash.

Investment PhilosophyThe Framework


Are you gambling on up or down, or investing in a business?


- The best business to own; - employ large amounts of incremental capital at very high

rates of return, over an extended period.

- High returns typically result from;- competitive advantages

- To understand future returns; - understand what drives competitive advantage and how long

it might last

- The most valuable competitive advantage;- ability to raise prices even in the face of excess capacity

Good versus BadFill your portfolio with these









“Growth benefits the investor only when each dollar

used to finance the growth creates over a dollar of

long term market value.”

Warren Buffett 1982

Good versus Bad growthIs there such a thing as bad growth?


Good growthA dollar retained and converted


Bad growthA dollar retained and NOT converted


No growthValue destroyed


CorrelationPrice always follows value in the long run









Low interest rates have made millionaires feel

poor…

& Chasing yield is their

mistake


Growing Income versus YieldHow to put yourself in danger


Thrown basic investing in the bin…

so missing out on…


Growing incomeIn the real world






NOT growing incomeIn the real world









THE WORLD HAS CHANGED

Last 30 years Next 30 years Implications for investors

• Interest rates fall from high to low. 10 Yr UST from 15% in 1981 to 1.36% 2016

• Corporate profit margins increased from all-time lows to all-time highs;

• Developed-market private and public debt increased;

• Culminated in credit-fuelled emerging-market miracle (particularly in China); and

• Productivity gains from internet, mobile et.al.

• Global demographics favourable, thanks to baby-boomer generation.

• Interest rates to move sideways (at best) or upwards (more likely);

• Corporate profit margins to be competed/cycled away, consistent with history;

• Period of developed-market deleveraging;

• Emerging market growth to continue slowing (at best), with high risk of financial crisis; and

• Demographics tailwind turning to headwind in US, Europe, China & Australia.

• Average future equity returns likely lower than in the past;

• Generated “alpha” to become relatively larger share of total return;

• Active management required to capture alpha;

• Downside protection more important given heightened financial risks and volatility.


Downside Protection with good Upside Capture


1) Lower interest rates ahead2) Credit fuelled growth ahead3) Productivity improvements ahead from internet, automation, telecomms.4) P/E 7x…1981 was a brilliant time to invest

1) Higher interest rates ahead2) LT Credit cycle ended3) Productivity declining 4) US economy at full employment5) (3) + (4) = weaker margins6) P/E 18x… how can the opposite picture in 2016 also be a brilliant time to invest?

1981

2016

So how can it be?1981 v 2016









Think Quality & Long-TermGrow your wealth


Growth and income.


Growth and income.

1) REA Group commenced uploading ads under the new All Premiere product range in May and June 2015. subscribers for the All Premiere package receive a significant discount off the normal Premiere advertisement price, the revenue impact of growth in Premiere ad volumes is less than the raw volume numbers suggest.

2) 1 August depth listings were 10% higher than the same week a year ago. Highlight listings were slightly above the same time last year. More expensive Premiere listings were 38% higher than the same week last year.

3) REA depth ad prices increased by 10-15% from July 1. REA Asia subsidiary IPP rolled out major price increases over the past two months. Had no impact on ad volumes, with volumes staging the typical post-Ramadan comeback over the past three weeks.

4) Total domestic for sale listings remain at low levels. Average weekly for sale listings remain well below long term historic norms.


Weekly Depth Ad volumes.


Growth and income.


1) VTG generates circa $1b of sales for TLS on an annual basis2) virtually all profits from commissions on phone/internet plans & credit, bonus

payments for targets/sales rankings relative to other, Telstra stores and bonus for customer satisfaction (NPS scores).

3) Originally, expected stores to generate EBITDA of $250k p.a at maturity. Mngmnt now expect most stores to be earning $1m-$2m EBITDA p.a.

Growth and income.


ROIC’s exceeding cost of capital via incremental improvements as TLS stores became an increasingly larger part of the asset/earnings base.

FY13 FY14 FY15Revenue LFL's 9% 5% 26%EBITDA LFL's 25% 23% 37%

So what’s driving this? TLS stores = higher sales per dollar of assets and stronger marginsAcquiring stores @2xEBITDA

helps but LFL also increasing!

Growth and income.


Welcome from the Montgomery Team.


Communication and Education

http://www.rogermontgomery.com/

https://www.youtube.com/watch?v=410E5jJA_p0

© Montgomery Investment Management Pty Ltd 2013. All Rights Reserved. 40PAGE 40© M O N T G O M E R Y I N V E S T M E N T M A N A G E M E N T P T Y L T D 2 0 1 6 . A L L R I G H T S R E S E R V E D .

Thank You and to Learn More


August 2016

Roger MontgomeryChief Investment Officer

Thank YouHow, What & When

Questions & Answers

Disclaimer

This webinar and information has been prepared and issued by Netwealth Investments Limited (Netwealth), ABN 85 090 569 109, AFSL 230975. It contains factual information and general financial product advice only and has been prepared without taking into account the objectives, financial situation or needs of any individual. The information provided is not intended to be a substitute for professional financial product advice and you should determine its appropriateness having regard to you or your client’s particular circumstances. The relevant disclosure document should be obtained from Netwealth and considered before deciding whether to acquire, dispose of, or to continue to hold, an investment in any Netwealth product.While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), no person, including Netwealth, or any other member of the Netwealth group of companies, accepts responsibility for any loss suffered by any person arising from reliance on this information.

Economy & Finance

Netwealth portfolio construction series - How to find undervalued investment opportunities in the market