pitchbook strategy
TRANSCRIPT
-
8/13/2019 Pitchbook Strategy
1/25
Stewardship of Capital Compounding of Wealth___ 2013
Strictly confidential 1
-
8/13/2019 Pitchbook Strategy
2/25
Introducing River Valley Asset Management Our investment philosophy
Our investment strategy and approach
Our investment process
2trictly confidential
-
8/13/2019 Pitchbook Strategy
3/25
An investment management house targeted at creating steady longterm compounding of wealth for our investors
Our solution is bespoke and fully transparent to our investors
The people behind RVAM Homiyar Vasania, CEO, Fund Manager:
Mar 2000- Sep 2012: A very senior member of the Emerging Market team of Morgan StanleyInvestment Management (MSIM); the last 5 years as a Managing Director
MSIM EM team manages about USD 25 bln of assets and has been in the business since 1987
A total of 18 years in the investment business with extensive coverage of Asian markets
In his last role he directly managed a portfolio of over USD 5 bln. and his Asian team managed atotal of USD 12 bln.
Jamshed Desai, Fund Manager:
Over 5 years as a member of the Emerging Market team of Rexiter Capital Management (a part of
State Street). Rexiters EM team managed USD 4 bln of assets
Jamshed has 19 years of experience in investment management
3trictly confidential
-
8/13/2019 Pitchbook Strategy
4/25
Introducing River Valley Asset Management Our investment philosophy
Our investment strategy and approach
Our investment process
4trictly confidential
-
8/13/2019 Pitchbook Strategy
5/25
Most market participants do not have duration on their side Most market intermediaries make money on higher flows, not
necessarily higher return for clients. Investment advisors interest not fully aligned to investors
Multiple levels of separation between investment advisor andinvestor portfolio
Access to products is skewed by conflict of interest
Investment process often does not combine clear-sighted topdown and bottom up analyses
These create opportunities for return-focused entities with
longer investment horizons
5trictly confidential
-
8/13/2019 Pitchbook Strategy
6/25
1. Invest in businesses we understand and that aregenerating a high, sustainable and growing poolof economic value
2. Ensure a high seniority on claim to this value
3. Management integrity is as important as theirability
4. Willing to wait to buy it at the right price
5. An understanding of long term macro economic
cycles is the foundation on which the businessesare analyzed
6. Sell when the first five points weaken
6trictly confidential
-
8/13/2019 Pitchbook Strategy
7/25
Introducing River Valley Asset Management Our investment philosophy
Our investment strategy and approach
Our investment process
7trictly confidential
-
8/13/2019 Pitchbook Strategy
8/25
-
8/13/2019 Pitchbook Strategy
9/259
Growth wasartificially boosted Helped by a strongdrop in interestrates. US 10y T-billrates fell from 14to 1.8 over ___?? Inflation nevercame up becauseof the inclusion ofnew capacity inlabour, land andcapital from theinclusion of the EMcountries likeChina.Technology-ledimprovement inproductivity also
helped.
In the past 3 decades
Will be a lowgrowth lowinterest rateenvironment
As the tail wind froma drop in interestrates is gone World still has sparecapacity in both EMand DM
Going forward
Asian growth w illremain robust though lower than
in the past
In thisenvironment of
low growththe hiddensource ofgrowth is
corpor te c shflow
Going forward Our opportunity set
Dividend will forma larger part oftotal return
Dividend returnsreduce volatility oftotal return
Growingopportunity set toinvest in stockswith improvingcash generation.
-
8/13/2019 Pitchbook Strategy
10/25
Today, cost of money is at a multi-century low Over the last 30 years, we have had the largest drop in the cost of money which has
led to one of the longest and quickest leveraging cycles the world has ever seen
10
US total debt (% of GDP)
0%
50%
100%
150%
200%
250%
Oct-49
Oct-52
Oct-55
Oct-58
Oct-61
Oct-64
Oct-67
Oct-70
Oct-73
Oct-76
Oct-79
Oct-82
Oct-85
Oct-88
Oct-91
Oct-94
Oct-97
Oct-00
Oct-03
Oct-06
Oct-09
year
Strictly confidential
-
8/13/2019 Pitchbook Strategy
11/25
This had created a strong tailwind for high growth unsustainable,unprecedented and probably un-replicable Bond and equity returns in the 1980-2000 period were way off the charts compared
to long term (50yr) returns. Bond returns have remained high since then, but equityreturns have started normalizing.
Bond returns in the period 1940-1980, when rates went up from a bottom similar totodays, were very poor both in absolute terms and relative to equity returns. Webelieve that the world could be going into a similar phase.
Hence we believe that it will be difficult to continue achieving these returns,particularly from the bond markets
Global Total Returns in USD (%p.a.)Time US UK Japan Germany
Period Equity Bonds Equity Bonds Equity Bonds Equity Bonds
Last 100 years 9.5 7.4 8.5 5.1 2.5 6.2
Last 50 years 9.7 8.0 10.4 7.5 9.2 10.0 9.2 9.1
1940-49 9.0 2.7 5.2 -0.2 -25.6 -32.3 -10.8 -21.51950-59 19.3 0.4 17.2 3.4 33.9 6.0 25.9 5.9
1960-69 7.8 2.8 6.7 3.4 13.0 12.3 7.3 7.1
1970-79 5.8 6.1 9.3 8.6 16.9 11.2 10.3 16.7
1980-89 17.5 12.8 20.0 10.4 27.7 14.9 16.1 8.4
1990-1999 18.2 8.0 14.9 10.2 -0.9 11.0 10.5 5.4
2000-2009 -0.9 6.6 1.6 5.4 -4.1 2.8 2.7 9.6
2010-now 9.3 9.5 3.9 5.4 0.7 8.5 -0.1 3.0
11trictly confidential
-
8/13/2019 Pitchbook Strategy
12/25
The balancing factor on leverage-led growth is normally an increasein inflation. However, in the 1980-2012 period, inflation keptsurprising on the downside. This was because of: Inclusion of China, India and Asean in the global supply equation. These markets
dramatically increased the global supply of labour, land and capital
Productivity gains lead by technological changes in the developed world
We believe inflation remains only a low level concern in the mediumterm because: The impact of the above deflationary factors still persists, though at a weaker level.
In addition, there exists cyclical spare capacity from the developed world, especiallyin terms of labour and land.
Therefore central banks will continue to have leeway to further
increase leverage and keep cost of funds low
12trictly confidential
-
8/13/2019 Pitchbook Strategy
13/25
-
8/13/2019 Pitchbook Strategy
14/25
Corporate sales and earnings growth will continue to slow down but so will capital expenditure and therefore leverage
Operating margins are expected to remain stableMSCI Asia ex JP: Sales growth
(30)
(20)
(10)
0
10
20
30
40
97A 98A 99A 00A 01A 02A 03A 04A 05A 06A 07A 08A 09A 10A 11A 12F 13F
Sales growth(%)
MSCI Asia ex JP: FCF / Sales
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
97A 98A 99A 00A 01A 02A 03A 04A 05A 06A 07A 08A 09A 10A 11A 12F 13F
Op cashflow/Sales(x)
MSCI Asia ex JP: Sales (US$bn) MSCI Asia ex JP: Net debt to equity
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
97A 98A 99A 00A 01A 02A 03A 04A 05A 06A 07A 08A 09A 10A 11A 12F 13F
Net debt to equity(%)
(10.0)
(5.0)
0.0
5.0
10.0
15.0
20.0
25.0
97A 98A 99A 00A 01A 02A 03A 04A 05A 06A 07A 08A 09A 10A 11A 12F 13F
Capex/Sal es FCF/Sal es(%)
14trictly confidential
-
8/13/2019 Pitchbook Strategy
15/25
Corporates are becoming more cash generative across the world. Free cash flow across
the world now exceeds dividend payouts an unprecedented situation
Hence dividend will be a large source of value, more so in the current environment
MSCI Asia ex JP: Free cash flow (US$bn) MSCI Asia ex JP: Free cash flow yield
MSCI Asia ex JP: Dividends (US$bn) MSCI Asia ex JP: Dividend yield
(50)
0
50
100
150
200
250
97A 98A 99A 00A 01A 02A 03A 04A 05A 06A 07A 08A 09A 10A 11A 12F 13F
Free cash flow(US$bn)
(1)
0
1
2
3
4
5
6
7
8
97A 98A 99A 00A 01A 02A 03A 04A 05A 06A 07A 08A 09A 10A 11A 12F 13F
FCF yield(%)
0
20
40
60
80
100
120
140
97A 98A 99A 00A 01A 02A 03A 04A 05A 06A 07A 08A 09A 10A 11A 12F 13F
Dividends (US$bn)(US$bn)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
97A 98A 99A 00A 01A 02A 03A 04A 05A 06A 07A 08A 09A 10A 11A 12F 13F
Div yield(%)
15trictly confidential
-
8/13/2019 Pitchbook Strategy
16/25
Dividend contribution to total return since2000 has been nearly 40%. All the rest wasfrom EPS growth.
In the expected lower growth environment,this contribution will further increase
This means over 40% of total return will notbe susceptible to the market pricingmechanism
Currency moves and change in valuationhave had a negligible contribution
PE, which is the strongest driver of shortterm price moves and volatility, is irrelevantin the long term
The high yield portfolio naturally has alower beta than the market as the yield actslike an anchor around which the capital
value needs to fluctuate The Asian high yield basket has
outperformed other high yield basketshandsomely
16trictly confidential
-
8/13/2019 Pitchbook Strategy
17/25
We believe that the universe of stocks with strong cash flow, dividend and moderate but stable growth is
growing. It represents an better opportunity than investment grade bonds for investors with a longerduration
Also, dividend yields have only been higher than long bond yields in rare crisis situations. Today we havea similar situation without a major crisis a huge source of opportunity.
17trictly confidential
-
8/13/2019 Pitchbook Strategy
18/25
18
This strategy beats market returns in the long term. More importantly it does it
with a much lower volatility. DPS volatility is much less than EPS and CEPS
volatility (though higher than BPS volatility). Current 3.2% DY for AsiaXJ in in a 3
sigma event would fall to 2.4%.
-
8/13/2019 Pitchbook Strategy
19/25
-
8/13/2019 Pitchbook Strategy
20/25
Introducing River Valley Asset Management Our investment philosophy
Our investment strategy and approach
Our investment process
20trictly confidential
-
8/13/2019 Pitchbook Strategy
21/25
Provides steady long term returns Returns give optionality on upside compared to a bond heavy portfolio, but
with similar risk
Portfolio managed directly by professionals with long investmentmanagement history (over 35 years combined) and large networkof corporate contacts
Portfolio managers interests aligned with investors No product pushing Skin in the game in terms of own money and performance incentive
Minimizes use of investors time dealing with multipleintermediaries
Clear calibration and statement of risk
Concise and consolidated reporting
Analysis and control of direct and indirect costs. Our scaleeconomies will reduce transaction costs substantially
Creates a financial think tank to bounce off and whet ideas relatedto tactical investments
21trictly confidential
-
8/13/2019 Pitchbook Strategy
22/25
Sector and geography agnostic as long as the securities fit our initialinvestment philosophy and the defined pools. In practice, could have a about70% exposure to Asia
Exposure to about 40 businesses (either through the debt or the equityroute)
Maximum exposure of 8% to a particular security
At any point of time identifying and having an exposure to 2-3 broad
themes. This becomes the medium-term bedrock on which the portfolio iscreated
A strong analytical process that will include An initial investment report on each security purchased. Quarterly maintenance
write-ups
Target entry and exit price - action/ review when these are hit
Quantification of sector and country exposure
22trictly confidential
-
8/13/2019 Pitchbook Strategy
23/25
We recommend a maximum leverage of 50% on the overall portfolio. The normalleverage would be in the 20% range
Cash is an investment option. We will exercise judgment in maintaining tactical cashbalances. Short duration IG bonds will be used as cash proxies
Ability to short the market tactically when views are strongly negative and markets areeuphoric. To only use index shorts. Shorts limited to 50% of the portfolio
23trictly confidential
-
8/13/2019 Pitchbook Strategy
24/25
A. Stick to the principles stated earlier.
B. Company analysis based on :A. Growth potential
B. Pricing power
C. Look for companies with moats (in terms of brands, technology,
distribution network, government monopolies, etc.)
D. Analyze market stability in terms of competitive, technological and
regulatory disruptions
E. Cost structure and movement on that.
F. Operating and financial leverage
G. Tax regime and changes in that.
H. Unit prof itabil ity
I. Capital intensity and capital efficiency
J. Liabi li ty analysesK. Cash generation and use of cash
L. Hierarchy of claim in the capital structure and where to enter
C. Valuation :A. Based on intrinsic value and market comps
B. Have clear buy and sell triggers. Review/action at that trigger point
C. Pure valuation a very strong trigger but only at extreme situations
D. Idea generation from :A. Running regular data screens
B. Whetting of ideas being generated by other intermediaries
C. multiple company meetings
E. DocumentationA. Documentation of complete thought process when initiating a position
B. Regular review documentation
F. Sell trigger :A. Business thesis breaking down
B. Management becomes suspect
C. Target valuat ion
D B C
Buy/Ignore E
Initiation process
BRegular
Valuation
Triggers
Maintenance
E
Buy/Sell/Hold
24trictly confidential
-
8/13/2019 Pitchbook Strategy
25/25
Business volatility Differentiate between risk related to business volatility and stock volatility. The
former is clearly more important than the latter
Business deterioration is a red flag for further review and/or action
During extreme stock price dislocation strong, intensive business review will be thebedrock of risk management. The corrective mechanism will be based more on thisthan on price movement.
Stock/ portfolio volatility Stock volatility is important from the perspective of the leverage taken.
Manage margin call, refinancing and interest rate risks for the leverage. Carry outregular sensitivity analysis and stress test of the portfolio.
Low exposure to the stock markets price discovery mechanism. The bond portfoliois less volatile and the dividend income portfolio has lower beta (volatility) than themarket
Also, half the expected return comes from the payouts (dividend and interest), which
do not carry market risk. Here the risk is only at the business and management level. Regular portfolio rebalancing is an integral part of the risk management process.
Manage market beta by the judicious and infrequent use of index shorts. Themaximum short exposure to be limited to 50% of the portfolio.
25