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  • 8/13/2019 Pitchbook Strategy

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    Stewardship of Capital Compounding of Wealth___ 2013

    Strictly confidential 1

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    Introducing River Valley Asset Management Our investment philosophy

    Our investment strategy and approach

    Our investment process

    2trictly confidential

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    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

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    Introducing River Valley Asset Management Our investment philosophy

    Our investment strategy and approach

    Our investment process

    4trictly confidential

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    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

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    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

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    Introducing River Valley Asset Management Our investment philosophy

    Our investment strategy and approach

    Our investment process

    7trictly confidential

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    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.

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    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

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    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

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    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

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    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

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    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

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    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

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    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.

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    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%.

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    Introducing River Valley Asset Management Our investment philosophy

    Our investment strategy and approach

    Our investment process

    20trictly confidential

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    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

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    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

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    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

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    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

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    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.

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