STRICTLY PRIVATE & CONFIDENTIAL 21 March 2019 / 1 Business 101: “Investing in Shares and Businesses”
Peter Corban Investment Adviser, Private Wealth Specialist
Please note that this is a copy of a slide presentation. Nothing within this document is to be taken as a solicitation to buy or sell securities. Please DO NOT pass this on to 3rd parties. If you would like further information, please contact Peter Corban at 924 0504 or [email protected]
Strictly Confidential 1 STRICTLY PRIVATE & CONFIDENTIAL 25 March 2019 / 1 Disclaimer
This presentation is a private communication to clients of Craigs Investment Partners Limited resident in New Zealand and is not intended for public circulation or publication or for the use of any third party, without the express prior approval of Craigs Investment Partners Limited. This presentation is not intended for distribution to any person outside New Zealand except in accordance with all the legal requirements of the relevant jurisdiction. While this presentation is based on information from sources which Craigs Investment Partners Limited considers reliable, its accuracy and completeness cannot be guaranteed. Craigs Investment Partners Limited, its partners and employees, do not accept liability for the results of any actions taken or not taken upon the basis of information in this presentation, or for any negligent mis-statements, errors or omissions. Those acting upon information and recommendations do so entirely at their own risk. Craigs Investment Partners Limited and/or its partners and employees may, from time to time, have a financial interest in respect of some or all of the matters discussed. The research analyst or analysts responsible for the content of this presentation certify that: (1) the views expressed and attributed to the research analyst or analysts in the presentation accurately reflect their personal opinion(s) about the subject, securities and issuers and/or other subject matter as appropriate; and (2) no part of his or her compensation was, is or will be, directly or indirectly related to the specific recommendations or views contained in this presentation.
Craigs Investment Partners Limited did not take into account the investment objectives, financial situation or particular needs of any particular person. Accordingly, before making any investment decision Craigs Investment Partners Limited recommends professional assistance from an investment adviser is sought.
Disclosure statements are available on request or from www.craigsip.com.
STRICTLY PRIVATE & CONFIDENTIAL 25 March 2019 / 2 Craigs Investment Partners: Core business and expertise is in in providing investment advice
30 year history in personalised investment management Craigs has a significant retail distribution network in New Zealand
Locally owned & operated (50% staff ownership)
Sole focus - investments for NZ private wealth & institutional clients
Over $16bn of funds under management and administration
60,000 clients – from individuals through to community organisations and charitable trusts
Self managed super
Strategic partnership with Deutsche Bank
Access to new equity and debt issuance through dedicated investment banking team
Comprehensive strategy and research team
STRICTLY PRIVATE & CONFIDENTIAL 25 March 2019 / 3 Introduction to investing: with a focus on shares
• What is investing?
• Why invest?
• Deciding what to invest in
• How to diversify your investment
• Why diversification is important
STRICTLY PRIVATE & CONFIDENTIAL 25 March 2019 / 4 What is investing?
“To lay out money in an enterprise with the expectation of profit”
- Definition from Oxford Dictionary
Profit can be achieved through:
• Income stream (interest and dividends)
• Capital growth (an improvement in the value of your original investment)
STRICTLY PRIVATE & CONFIDENTIAL 25 March 2019 / 5 Why do I need to invest?
Besides the fact that it is interesting and fun . . .
• The income from NZ Super is simply not enough – to have a good lifestyle you will need to derive additional income
STRICTLY PRIVATE & CONFIDENTIAL 25 March 2019 / 6 We can categorise investments as either:
1) Growth assets - example company shares, property
or
2) Income assets - example term deposits and fixed interest
Source: CIP, Bloomberg.
STRICTLY PRIVATE & CONFIDENTIAL 25 March 2019 / 7 Investment assets
Income assets Growth assets
$100 in = $100 on maturity, generally an unlimited whether that be in maturity and an 3 months or 5 years unknown amount out, but, ideally, some growth
Return = interest = a fixed & known a capital return on amount realization, BUT in most cases, also a regular income (rent, dividends)
Source: CIP, Bloomberg.
STRICTLY PRIVATE & CONFIDENTIAL 25 March 2019 / 8 What sort of returns might I get?* Company shares help protect your money from inflation -
Source: Reserve Bank of New Zealand, Bloomberg, Craigs Investment Partners. Share returns are calculated using the Barclays Capital Index prior to 1986 and the NZSE Gross Index from 1986. This index excluded dividends up to 1986, included gross dividends from 1987 to 2000 and net dividends since then – on balance it includes dividends reinvested net of tax. The six month term deposit rate was sourced from the RBNZ, tax has been deducted from interest at a rate of 30% and interest has been compounded. Inflation has been calculated using CPI data. * Note – past performance is not a guarantee of future results
STRICTLY PRIVATE & CONFIDENTIAL 25 March 2019 / 9 Graphically:
NZ shares since 1967 $10,000 $12,254
$1,000
NZ shares have returned a nominal 9.8% pa over the past 50 years…
$100
Source:Source: CIP, CIP, RBNZ, RBNZ, Bloomberg. Bloomberg. RBclays BarclaysCapital Capital Index Index from from 1967 1967 to to July July 1986, NZSE Gross Index from July 1986 to current. Data as at December 1986,2018. NZSE Tax considerations Gross Index from ignored July 1986 for shares to current. and house prices (given imputation regime etc), and term deposit income taxed at 30% per annum.
STRICTLY PRIVATE & CONFIDENTIAL 25 March 2019 / 10 So what is the sharemarket?: - The capitalist system
. Everything we use or require is produced by someone
. Many centuries ago we produced these things ourselves or in our family unit
. Over time we specialised – farmer, builder, clothing etc
. As we became more efficient, innovative and creative, the ‘better’ producers got larger and larger
. As they got larger, or planned to get larger, they needed extra capital to pay for labour, machinery, supplies, marketing etc
. If could not self-fund, then needed to either borrow the extra funds – BANKS – or, sell ‘shares’ in the business to raise capital
STRICTLY PRIVATE & CONFIDENTIAL 25 March 2019 / 11 Hence the sharemarket . . .
. Is simply a market, or exchange, set up to enable entrepreneurs to efficiently raise additional capital to help fund growth in their businesses
. It also has the additional benefits of: enabling anyone to own a stake in a business by buying shares in the listed company Providing a way for existing and future owners to sell should they want . A shareholder enjoys the benefit of growth in the companies profits – share price and dividends from growing profits
STRICTLY PRIVATE & CONFIDENTIAL 25 March 2019 / 12 The sharemarket
. Nothing ‘magical’ or different with a sharemarket-listed company than a one-person or three-person company – just scale
. Own a stake in growing companies and enjoy the increase in wealth that is created by the capitalist system and good managers World* New Zealand* 1) Apple 1) a2 Milk 2) Microsoft 2) Meridian Energy 3) Amazon 3) Auckland Airport 4) Google 4) Fisher & Paykel Healthcare 5) Facebook 5) Spark 6) Johnson & Johnson 6) Ryman Healthcare
. How many of these companies/products do you use everyday?
* ranked by market capitalisation/value
STRICTLY PRIVATE & CONFIDENTIAL 25 March 2019 / 13 With shares in companies, you can diversify by sector:
Contact Energy Z Energy
Spark Fletcher Building
Mainfreight Pushpay
Kathmandu Precint
ANZ Woolworths
F&P Healthcare
STRICTLY PRIVATE & CONFIDENTIAL 25 March 2019 / 14 And you can diversify by geography
*This chart is illustrative only.
STRICTLY PRIVATE & CONFIDENTIAL 25 March 2019 / 15 Why invest in company shares?
• Because it enables you to co-invest with the best companies in the world and with the best opportunities
• Because it enables you to access a high and growing income stream into the future
• Because it helps you to grow your money and give you more financial freedom in the future
• Because your investment is extremely liquid You can sell any part of your holdings at any time and with cash settlement in 2 days
STRICTLY PRIVATE & CONFIDENTIAL 25 March 2019 / 16 How can you access the different investment areas? Sharebroker Fund manager Bank Estate agent Income assets Cash Yes Indirectly Yes -
Fixed income Yes Indirectly Possibly -
Growth assets Property (direct) - - - Yes
Property (listed) Yes Indirectly Possibly -
Shares/Equities Yes Indirectly Possibly -
Core competency: Investment Investment Lending Real estate
STRICTLY PRIVATE & CONFIDENTIAL 25 March 2019 / 17 Interest rates: a structural decline
20%
18% For three decades, 16% interest rates have
14% been consistently declining . . . 12%
10%
8%
6%
4%
2%
0%
Source: RBNZ, 5 year government bond yield
STRICTLY PRIVATE & CONFIDENTIAL 25 March 2019 / 18 You need money to live off - but interest rates have plummeted to historical lows
Monthly income on a $500,000 3-month term deposit*
2008 $3,200 2019 $1,130 -65%!
Effectively, someone who has saved throughout their lifetime has taken a 65% pay cut over the last 11 years.
After inflation,Source: CIP, Bloomberg. its actually -70%!
* Source: interest.co.nz - rates as at 20 June 2008 and 18 March 2019, and pre-tax
STRICTLY PRIVATE & CONFIDENTIAL 25 March 2019 / 19 20
Lets look at two investors, back in 2000:
1. Investor A invests $100,000 in term deposits
2. Investor B invests $100,000 in 10 major companies*
We will ignore any capital growth or otherwise for this exercise
* Auckland International Airport, Contact Energy, Ebos Group, Fisher & Paykel Healthcare, Fletcher Building, Mainfreight, Port of Tauranga, Ryman Healthcare, TrustPower, The Warehouse
STRICTLY PRIVATE & CONFIDENTIAL 25 March 2019 / 20 21 The term deposit investor gets the following net real income returns*:
Interest 3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
-0.5%
-1.0%
* Net real return being after deduction of tax at 30% and inflation
Source for data: RBNZ
STRICTLY PRIVATE & CONFIDENTIAL 25 March 2019 / 21 22 The share portfolio investor gets the following real income returns from dividends:
Dividends 40% 35.8% 35% net
30%
25%
20%
15%
10%
5%
0%
Why the increases? – growth in profits over time, leading to a growth in dividends
Disclaimer: Please note that past performance is not intended to convey any guarantee as to future performance, and these figures are based on a hypothetical portfolio.
STRICTLY PRIVATE & CONFIDENTIAL 25 March 2019 / 22 23
Comparing the two:
Income $40,000 $35,800 $35,000 Interest $30,000 Dividends $25,000
$20,000
$15,000
$10,000
$5,000
$0 $284
-$5,000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Note that this ignores any capital growth or loss from either investment, purely focussing on cash income
Disclaimer: Please note that past performance is not intended to convey any guarantee as to future performance, and these figures are based on hypothetical portfolios.
STRICTLY PRIVATE & CONFIDENTIAL 25 March 2019 / 23 24 Dividends versus interest:
Income $40,000 $35,800 $35,000 Interest $30,000 Dividends
$25,000
$20,000
$15,000
$10,000
$5,000 $284 $0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Disclaimer: Please note that past performance is not intended to convey any guarantee as to future performance, and these figures are based on hypothetical portfolios.
STRICTLY PRIVATE & CONFIDENTIAL 25 March 2019 / 24 Examples of high dividend paying companies*
2019f 2020f
Air New Zealand 13.2% 13.2%
Trustpower 12.7% 9.5%
Turners Automotive 10.4% 10.4%
NZ Refining 9.9% 14.6%
Fletcher Building 9.8% 9.2%
Spark 8.9% 8.9%
Z Energy 8.8% 12.6%
Contact Energy 8.5% 8.9%
Heartland Group 8.4% 9.1%
Genesis Energy 7.8% 8.0% Average 9.8% 10.4%
3 month term deposit 3.0%
1 year term deposit 3.5%
* Note – this is not a recommendation to invest in any of these specific companies. Any potential investments should be discussed with your investment adviser
Source: CIP estimates at 18 March 2019, being the ten highest yielding companies on the NZX that are research covered and with a Neutral or Overweight rating
STRICTLY PRIVATE & CONFIDENTIAL 25 March 2019 / 25 Dividend and portfolio growth – dividends more stable
Dividends and capital growth for a portfolio of NZ shares $100,000 $2,000
$90,000 $1,800 Dividends are $80,000 $1,600 much less volatile $70,000 than share prices $1,400
$60,000 $1,200
$50,000 $1,000
$40,000 $800
$30,000 $600
$20,000 $400
$10,000 $200
$0 $0
Annual cash dividend (RHS) Portfolio value (LHS)
Source: CIP, Bloomberg, Capital IQ. Equally weighted portfolio of AIA, CEN, EBO, FPH, FBU, MFT, POT, RYM, TPW and WHS with no rebalancing. Dividends include imputation credits, and tax deducted at 30%.
STRICTLY PRIVATE & CONFIDENTIAL 25 March 2019 / 26 27 In addition, the share investor has also seen a significant growth in the real* value of their capital over time, whereas the deposit investor has seen the real value of their capital decline:
$700,000
$600,000 $547,000 Term deposit - 8x more $500,000 Share portfolio than TD $400,000
$300,000
$200,000
$100,000
$0 $66,700
More income (126x more) . . . and more capital (8.2x more)
* Real value meaning after adjusting for inflation
Disclaimer: Please note that past performance is not intended to convey any guarantee as to future performance, and these figures are based on hypothetical portfolios.
STRICTLY PRIVATE & CONFIDENTIAL 25 March 2019 / 27 If dividends reinvested – the power of compound returns
$200,000 +96%
$175,000 more Reinvesting the income unlocks the $150,000 power of compound returns
$125,000
$100,000
$75,000
$50,000
$25,000
$0
Portfolio value (LHS) Portfolio value incl. reinvested dividends
Source: CIP, Bloomberg, Capital IQ. Equally weighted portfolio equally weighted portfolio of AIA, CEN, EBO, FPH, FBU, MFT, POT, RYM, TPW and WHS with no rebalancing. Dividends include imputation credits, and using a tax rate of 30%
STRICTLY PRIVATE & CONFIDENTIAL 25 March 2019 / 28 Great returns . . . but what about volatility?
• The longer you’re invested, the less volatility will affect you.
1 month – looks extremely volatile 1 year – still looks a little rocky
5 years – looks more consistent
*Source: NZX Index as at 20 July 2018
STRICTLY PRIVATE & CONFIDENTIAL 25 March 2019 / 29 Volatility in an overall context
Conservative Balanced High Growth
Disclaimer: These are examples of indicative performance of portfolios using historical returns of benchmark indices, and weighted according to the selected asset allocation of the different portfolios. They are not intended to convey any guarantee as to future performance. The indices used include: Fixed Income - S&P/NZX NZ Government Bond Index, NZ - S&P/NZX All Gross Index, Property – S&P/NZX Real Estate Gross Index, Australia - All Ords Accumulation Index, Global - MSCI All Country World Gross Index. The Conservative portfolio used in this example has a weighting of 25% ‘income’ assets / 75% ‘growth’ assets; the Balanced portfolio a weighting of 40% ‘income’Source: assets CIP, /RBNZ, 60% ‘growth’ Bloomberg. assets; RBclays and the CapitalHigh Growth Index portfolio from 1967a weighting to July of 10% ‘income’ assets / 90% ‘growth’ assets. All returns are before fees. A tax rate of 30% has1986, been NZSE assumed Gross. Index from July 1986 to current.
STRICTLY PRIVATE & CONFIDENTIAL 25 March 2019 / 30 Over time, returns will even and average out* Range of rolling 1 year returns in the past 20 years: -17.9% to 23.9%
Range of rolling 5 year returns in the past 20 years: 1.0% to 11.2%
* For a hypothetical “Balanced” asset allocation (Income assets 40% (36% Fixed interest, 4% cash), Growth assets 60% (NZ equities 20%, Australian equities 15%, Global equities 22%, Property 3%). Performance figures shown are compound returns in NZ dollars, and are not intended to convey any guarantee as to future performance. The historical returns are based on actual historical data and geographical indices, being the S&P/NZX NZ Government Bond Index, S&P/NZX All Gross Index, Australia All Ords Accumulation Index and MSCI All Country World Gross Index. A tax rate of 30% has been assumed. Source: Bloomberg, CIP July 1986 to current.
STRICTLY PRIVATE & CONFIDENTIAL 25 March 2019 / 31 Dollar Cost Averaging can also smooth returns
An investment strategy whereby you buy a regular fixed dollar amount of shares. More is purchased when prices are low, and less when prices are high.
By investing a fixed amount at regular intervals, regardless of the price, this will have a smoothing effect on market changes and on the value of your investment.
Source: Craigs Investment Partners
STRICTLY PRIVATE & CONFIDENTIAL 25 March 2019 / 32 Do investment markets always go up?
No – they will fluctuate, but generally, over time, with an upwards bias
Why?
• Because they are a barometer, a measuring stick, of the onwards and upwards growth in human productivity, ingenuity and creativity
• There will always be bad news . . . Bad news ‘sells’ . . . But the onwards march of progress is inexorable
STRICTLY PRIVATE & CONFIDENTIAL 25 March25 March 2019 2019/ /33 33 Negative forecasts may “sell newspapers”, but are not always correct . . .
Source: https://stocktwits.com/JBoorman; https://pbs.twimg.com/media/DloRqfCW4AE6EZs.jpg:large
STRICTLY PRIVATE & CONFIDENTIAL 25 March25 March 2019 2019/ /34 34 And over time, the markets have always survived and prospered:
Source: JP Morgan Asset Management, using data from FactSet, NBER, Robert Shiller, and JP Morgan Asset Management. Data shown in log scale to best illustrate long-term index patterns. Past performance is not indicative of future returns. Chart is for illustrative purposes only
STRICTLY PRIVATE & CONFIDENTIAL 25 March25 March 2019 2019/ /35 35 And a similar story in Australia – long term growth over time:
Source: sapience.com.au, using the following data: MLC Investments Commercial and Industrial Monthly Averages (1875-1936), Sydney All Ordinaries Index Monthly Averages (1936-1979), All Ordinaries Share Price Index Monthly Averages (1980-1999), All Ordinaries Share Price Index Month End Price (2000-2009). Past performance is not indicative of future returns. Chart is for illustrative purposes only
STRICTLY PRIVATE & CONFIDENTIAL 25 March25 March 2019 2019/ /36 36 The most crucial decision is your asset allocation 10%
25% 40%
60% 75% 90%
Income Growth
Conservative Balanced High Growth 50%
Rolling 12mth returns (last 20 years) 40% 37.4%
30% 24.2%
20% 11.2% 7.7% 10% 5.3% 6.6%
0%
-10% -4.5%
-20% -18.0% -30% Source: CIP. -28.7%
STRICTLY PRIVATE & CONFIDENTIAL 25 March 2019 / 37 Sensible diversification is still the only “free lunch”
NZ listed Aust shares CIP balanced Auckland NZ Fixed US shares NZ bank Year NZ shares property (NZD) portfolio house price interest (NZD) deposits 1998 -3.3% 4.8% 15.2% 9.7% -2.1% 14.1% 41.1% 8.2% 1999 17.0% -6.4% 26.0% 13.7% 2.2% 0.1% 22.5% 4.3% 2000 -9.1% 7.3% 4.1% 10.3% 2.1% 11.1% 7.1% 6.1% 2001 16.7% 12.1% 6.5% 5.2% 6.3% 4.8% -6.2% 6.0% 2002 4.2% 10.4% -19.4% -4.7% 5.0% 8.7% -38.1% 5.2% 2003 26.5% 13.4% 24.3% 10.3% 21.4% 6.4% 3.0% 5.3% 2004 28.0% 20.0% 20.7% 17.8% 7.7% 5.5% 1.1% 5.5% 2005 9.0% 19.7% 19.7% 10.4% 12.9% 7.0% 10.3% 6.7% 2006 18.7% 24.9% 30.2% 19.2% 7.0% 4.2% 12.3% 7.0% 2007 -0.3% -4.3% 20.4% 4.2% 8.9% 3.8% -3.0% 7.7% 2008 -33.7% -20.8% -36.7% -12.3% -4.3% 15.8% -16.7% 8.6% 2009 19.4% 11.8% 42.8% 11.7% 6.8% 1.7% 1.3% 4.4% 2010 3.1% 3.4% 9.2% 4.3% -3.2% 7.0% 6.6% 4.6% 2011 1.4% 11.2% -11.2% 1.6% 6.5% 13.3% 2.4% 4.5% 2012 27.2% 20.5% 13.4% 11.6% 10.5% 4.8% 8.9% 4.1% 2013 18.3% 3.9% 3.4% 7.0% 12.1% -2.0% 33.4% 3.9% 2014 17.2% 24.2% 1.5% 9.4% 13.0% 7.8% 19.9% 4.0% 2015 13.6% 14.6% 5.7% 9.5% 13.6% 5.4% 15.8% 4.0% 2016 9.6% 2.7% 8.7% 5.4% 9.1% 3.4% 10.3% 3.3% 2017 22.6% 12.8% 19.1% 13.2% 2.5% 5.5% 19.0% 3.3% 2018 4.9% 9.8% -7.9% 4.8% 0.1% 4.6% 1.0% 3.3% Return pa 9.0% 8.8% 7.8% 7.5% 6.4% 6.2% 5.9% 5.2%
STRICTLY PRIVATE & CONFIDENTIAL 25 March 2019 / 38 We would emphasise that we do not suggest a “100% do this” or “100% do that” approach – but rather, a sensible, structured, individualised approach*
Global Cash shares
Australian shares Fixed interest
NZ shares Listed Source: CIP. property
* This should be done by consulting with your investment adviser
STRICTLY PRIVATE & CONFIDENTIAL 25 March 2019 / 39 Investment planning process
Objectives and risk profile
Asset allocation
Investment strategy and security selection
Implementation
Monitoring and reporting
STRICTLY PRIVATE & CONFIDENTIAL 25 March 2019 / 40 Summary:
• Invest and save for the short-term - because it is in the short term we have to buy our food and our clothes But also • Invest and save for the longer term - because in the longer term we will still need to eat and buy clothes, and with inflation, what $100 buys today, it won’t buy in 10 years or 20 years
Source: CIP, Bloomberg.
STRICTLY PRIVATE & CONFIDENTIAL 25 March25 March 2019 2019/ /41 41 Questions?
STRICTLY PRIVATE & CONFIDENTIAL 25 March 2019 / 42