Investors

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Investors Seminar May 2009
Is it the Best or Worst of Times
If Best of Times Significant Growth in LHS of
Bucket If Worst of Times we can still
achieve Specific goals
Part-owning Specific Businesses is good investing
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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 product, you should obtain and
consider the Product Disclosure Statement of the
financial product. 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.
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Investors Seminar May 2009

• Goals
• Structure
• Asset Mix
• Specialist Stock-Pickers
• But first a quick overview of the economy and
  Markets

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The current crisis

• Debt Western Consumers Deleveraging
• Sub-Prime in US CDOsand inter-bank
  transfers
• Fear replaced Greed in Markets
• Banking Crisis near collapse
• Lower Consumer and Business Confidence
• Negative Cycle Profits Drop Unemployment
  increases Consumer Confidence drops etc

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MARKET STATISTICS
Bottom Up Consensus Earnings Forecasts
AS AT 12th March 2009 PE 2009 (E) PE 2010 (E) EPS GROWTH 2009 (E) EPS GROWTH 2010 (E)
MARKET 10.6x 10.2x -18.5 4.6
Financials 9.2x 8.7x -13.3 5.2
- Banks 9.4x 9.0x -14.0 4.3
- REITS 6.1x 6.5x -25.1 -5.8
Industrials 10.8x 10.3x -13.0 5.3
Resources 14.4x 13.5x -29.3 7.0
- Div Metals Mining 12.7x 12.3x -32.7 2.8
Source Ausbil calculation based on consensus
broker earnings forecasts
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MARKET VALUATIONS
Dividends at risk but value evident
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AUSTRALIAN UNEMPLOYMENT
Rising expectations
Source Butlin, ABS, Deutsche Bank
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Adam Smiths Invisible Hand

very busy at present
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Asset Mix
Term Deposits Cash
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Asset Mix the Growth Section
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Specialist Stock-pickers
Fund Manager XYZ
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Goals

• Short-term goals Long-term goals
• Realistic Goals are needed. Write them down
• Then we can plan the investments
• Inflation must be considered in goal-setting
• Review the Goals.
• Ensure all stake-holders know the goals eg a
  90yo should still set 10 year goals for
  investments and ensure beneficiaries are aware of
  these goals.

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Structure and Strategy Issues

• Tax, Centrelink.next Tuesdays Budget?
• Cashflow - Lifestyle Goals
• The choice of holding investment funds in Super
  vs Outside Super. Preservation Age or Limits
• Choice of Super Fund (Admin and Trustee Role)
  SMSF vs FChoice vs Wrap

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Asset Mix - Decision 1

• What are the CashFlow Needs for
• Next 2 Years
• Next 5 Years Beyond
• Need Cash and Term Deposits - this section is
  structured to be Consumed
• Security eg Government Guarantee
• Return of the invested at the designated time
• Only after signing off this section of the
  bucket do we then look at LHS of the bucket

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Asset Mix - Decision 2

• The LHS Side of the Bucket. The Goals are
• Long-Term Total Returns 10 Year Targets
• Sub-goal replenish the Cash
• Logical, Rational Investments
• 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.

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The Hayden Asset Allocation Model
Invest in 3 ways profit, rent or interest
Inclusions - What is in
Hayden AAM Cash Term Deposits Australian
International Shares Property when
attractive Exclusions -What is Excluded -
Mortgage Trusts Hybrid Investments Fixed
Interest Pooled Investments Loans to Companies
or Property Syndicates Mezzanine Funds Second
Tier Debt Hedge Funds Bond Funds
Balanced/Conservative etc Structured Funds
Tax-driven investments Alternatives
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Stock-Picking - Decision 1

• The three choices
• Index Funds
• Choose Your Own Stocks
• Contract a Quality Stock-Picker
• A key question Are some businesses better than
  others? Yes either in a better Industry or
  having better Management.
• The business must have High Turnover or High
  Profit Margins and this advantage must be
  sustainable.

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Top 100 companies by market capitalisation
returns for the year ended 28 February 2009.
Source IRESS. Past performance is no indication
of future performance. year ended 28 February
2009
Best stocks   Worst stocks  
Origin Energy 61.52 BabcockBrown -98.23
Iluka Res 33.88 ING Industrial Fund -96.14
Santos Ltd 22.68 Boart Longyear -95.23
Oil Search Ltd 15.94 Babcock Brown Infr -94.58
AGL Energy Ltd 13.88 Goodman Group -94.07
Arrow Energy 9.43 Asciano Group -91.26
Fosters Group 4.75 Macquarie Office -88.62
Metcash Limited 1.95 Mount Gibson Iron -86.44
CSL Limited -1.32 Futuris Corporation -86.32
Cochlear Limited -1.40 OZ Minerals -83.80
Average 16.13 Average -91.47
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Stock-Picking - Decision 2
The aim We are buying a portfolio of shares
and then contracting them to Manage it. We can
see the underlying investments. We can address
each holding and ask the Manager why they
part-own that business and what are the key
factors that would lead them to sell that
business What makes a quality stock-picker
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Research Process
Fund manager research focuses on the four Ps

PROCESS
PEOPLE
Stated investment policies strategies.
Background, qualifications track record.
PERFORMANCE
PORTFOLIO
Returns generated relative to to the risks taken.
Do the securities held reflect stated investment
policies strategies ?
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Investment Process - Overview
Value for Money
Management Industry
Quantitative Assessment
Qualitative Assessment
Stock Score
Portfolio Construction SCOPE
Score (50)
Score (50)

• Disciplined
• Common-sense
• Simplicity

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Investment Process - Quantitative
Database
Information
Financial Model
Quantitative Score

• Company visits
• Management
• Competitors
• Broker Research
• Published Info
• Macro-economic

• Profit Loss
• Balance Sheet
• Cashflow
• By Division
• 3 Year Horizon

• 120 EGG Models
• 40 Broker Models
• Industry Best

/-
/
High
EPS Growth
-/-
-/
Low
High
Low
Price/Earnings Ratio
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Investment Process - Qualitative
Information
Qualitative Scorecard
Qualitative Score

• Manager experience
• Company Visits
• Management
• Employees
• Competitors
• Published Research
• Media sources
• Macro-economic

• Management Track Record
• Capital Management
• Shareholder Alignment
• Strategic Plan
• New entrants
• Power of Buyers
• Power of Suppliers
• Rivalry of Incumbents
• Regulatory Change
• Industry Growth Rate

• Statistical ranking

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Ausbil Current Holdings
  BHP 11.8 WBC 10.2 CBA 7.9 NAB 6.7 TLS 6.5 QBE
4.3 RIO 4.2 CSL 3.3 WPL 3.1 AGK 3.0 Other 27
stocks 37.8 Cash 1.2   100.0
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Ausbil - Visually
Ausbil Holdings
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Eley Griffiths and Challenger Microcap
Challenger
Eley Griffiths
Cash
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Platinum Int. Current Holdings
Microsoft Corp 3.3 Mitsubishi UFJ
Fin 3.2 Cisco Systems Inc 3.1 Siemens
AG 2.7 Denso Corp 2.3 Hutchinson
Whampoa 2.1 Sanofi-Aventis SA 2.1 Anglogold
Ashanti 2.0 Henkel AG CO 2.0 Samsung
Electronics 2.0 Other 27 stocks 37.7 Cash
Shorts 37.5 100
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Hunter Hall Magellan - Visually
D
Magellan - MFF
Hunter Hall - GET
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The Buffett Overlay
An ongoing method of analysing our Managers We
want the businesses that we part-own (via our
specialist Fund Managers) to meet these
criteria A Good Business must have Durable
Competitive Advantage A Good Business will never
have Price is the single most important
motivating factor in the consumers decision to
buy its Product/Service
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10 Year Forecasts as at
Includes expected currency gain
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Pessimistic 10 year forecastsas at February 2009
Asset Dividend Yield EPS Growth PE Effect Pessimistic case
Australian Equities 6.72 -2.0 0.01 5.7
World Equities - Currency 3.42 1.0 -1.0 0.01 3.4
LPTs 7.0 -3.3 -2.0 1.7
Bonds 4.2 4.2
Cash 1.0 1.0

1. PE at 10, 8.5
2. Divs cut by 30 and then continue to slowly
   decline
3. LPT divs reduce by 33 over ten years after
   further 30 cut.

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10 Year Forecasts as at
Includes expected currency gain
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Summary - farrellys

• Dont chase past returns
• The long term is easier to forecast than the
  short term
• In the short term expect the unexpected
• When prices fall, future returns go up
• Forecasting can identify good and bad periods to
  invest
• Be wary of residential property
• Equities offer good long-term returns
• Diversification within portfolio is essential

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• Are either of these important for achieving our
  goals?
• Picking the bottom?
• The time-frame to recover
• The goal is to never overpay for assets. Buy
  them cheaply.

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The market can stay irrational for longer than
an Investor can stay solvent JK Gailbraith

• The HFS model is fine.
• Clearly defined goals for each section of the
  bucket.
• Avoid the Noise.
• Consider the vested interest of any party that
  comments.

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Specialist Stock-pickers
Some key points Concentrated Portfolios
Quality Businesses Indexes what relevance All
Ords MSCI etc basically define the sea in
which to fish. We do not want to own a bit of
every business. Can hold Cash ie Fund Managers
can hold Cash whilst they are awaiting a better
buying opportunity for a business they want to
eventually part-own.
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Australian long term returns
Average annual total returns after inflation
1900-2007 1950-2007 1950s 1960s 1970s 1980s 1990s 2000-2007
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
Income compounding effect 5.9 5.4 6.6 6.0 6.4 2.6 4.4 4.1

Source ABN AMRO / London Business School
Global Investment Returns Yearbook 2008 Past
performance is not a reliable indicator of future
performance.
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Components of a Sound Plan
Transparency Logical and Rational Sound plan
historically and theoretically Contract People
with Integrity, Trust, and Mutual Goals Long-term
Returns are the key goal For LHS We need the
best strategy for next 10 years. No need to
predict short-term (it determines the path rather
than the destination)
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Investors HFS Decisions
Fund Manager XYZ
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Switching

• Asset Sector Changes may be small changes
  needed when the 10 year return differential is
  significant
• eg one sector may have run too fast it is time to
  move to another sector
• Switching of Fund Managers may be needed at any
  time. NB we will be retaining the same asset
  sector exposure eg retaining small-cap shares,
  but a different Manager
• It may be driven by portfolio analysis eg
  portfolio held by A is not as robust as B.
• Or it may be driven by better skills or processes
  to monitor and re-weight the portfolio going
  forward

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The Boxes to Tick
Realistic Goals Structure/Strategy (Tax
etc) Super Fund Admin Asset Mix (1) -Cash/TD
needs Asset Mix (2) ASvsISvsP Stock-Picker
Selection