Thinking differently and creating different investment outcomes

Our next speaker is Chad Peddlewitz, co-CIO at Telaria Asset Management.

His presentation topic is Thinking Differently and Creating Different Investment Outcomes.

The Telaria Global Equity Fund takes a high-conviction, value-biased approach to construct a portfolio of high-quality large-scale companies from around the globe.

Their unique investment methodology harnesses the benefits of consistent income generation and capital appreciation to grow investors' real wealth.

Chad had more than 20 years experience in the financial services industry in the UK, South Africa and Australia.

Previously worked at HSBC London and First National Bank in South Africa.

Chad is a fellow of the Financial Services Institute of Australasia and is a CFA charter holder.

Welcome Chad to the presentation.

Great, thank you and thanks everyone for joining.

What I'd like to do is tell you a little bit about our differentiated global equity strategy at Telaria.

What it is we are with our primary objective is to compound real wealth over time.

And we do that viral portfolio of 25 to 40 large cap companies listed in developed markets.

and we're focusing on generating three key outcomes, which I will go into a bit more detail later, but at a high level, it's about generating a high level of consistent income from differentiated sources, keeping most of the market's gains while losing less when it declines, and just a lower volatility of returns because the journey matters.

If we'd consistently do that over time, we expect to deliver very competitive

returns better than the market.

And as you can see, we've consistently been able to do that since inception.

Let me tell you a little bit about our process.

So we do bottom up work to buy companies we want to own over the long term.

And then I'll tell you how we buy them.

But firstly, I'll tell you what we do in terms of our screening process.

We're looking for companies outside of Australia, 5 billion and above market cap, we exclude

tobacco, armaments, gambling.

And once you make these adjustments, we're looking at a universe of approximately 1800 companies.

We then apply seven factors that we think are important in terms of how they impact shares over time.

And we rank those to get to the top decile, which is neutral on sector and neutral on region.

So we're looking at the top 10% of companies across region and sector.

which gets you to approximately 180 companies.

And from there is where the more bottom up analyst work happens across seven analysts.

And we're looking at fundamental bottom up research in terms of normalising cash flows, making various adjustments, looking at the margin profile of companies, and a whole range of things to ultimately get to a decision that will end up into the portfolio,

This last process is the most time intensive, because it's the most fundamentally important one.

And that takes four to seven weeks.

We do apply ESG integration alongside this process.

However, once we've decided we do want to own a company, the manner in which we buy it is quite different.

And this allows us to generate some of those outcomes I've touched on.

And let me explain as an inspiring example.

Let's assume the work we've done on a share that's trading at $100 leads us to believe it's worth say 120.

Rather than buying that share directly, what we will do, and we do this every single time we want to enter in a position, we will sell an exchange traded put option.

In this example at $96.

So we'll agree to buy share in two months time at $96.

In return for that obligation, we will charge a premium.

So we're charging in this example, $3.

So we're getting paid $3 to agree to buy a share at 96, that's trading at 100, that we think is worth 120.

Now, two things are gonna happen if in two months time that shares below 96.

If it's below 96, we will take ownership of the share, but our net cost will be 93.

So you can see there's a significant amount of risk reduction if the share were to fall,

But we will take ownership of it and hold it for the long term because we think, as I said, it's worth 120.

If it's above 96, we won't get the share.

But either way, we keep the premium and we might look to redo that option.

That premium of $3, 3% is around 18% annualized.

So it's a very high return.

What you can also see.

is we 100% cash back the options.

So if we wanted a million dollars exposure, we would have a million dollars in the bank.

There is no leverage.

There's no counterparty risk because they are exchange traded options.

And that we have a minimum return hurdle of 15%.

Now I touched on some of the outcomes.

I'll just touch on those a bit more and give you the totality of how our returns come from.

So we think multiple sources of return are important to achieve our objectives.

Now, as you can see, whether it's one year, three or five years, there are multiple sources of return.

The option premium generated is a significant and sustainable and a consistent number.

And you can see that at dark blue and that in strong markets like the last year, we would have a higher proportion of capital gains as well.

And there's also interest and dividends alongside that.

Let me touch on income for a second.

It looks over the last 140

years per decade.

This is S&P 500 data going back to 1880.

One can see that dividends as a component of return, which is in dark blue, is a very substantial and consistent number.

And it's important to notice that every single decade it's a contributor, whereas capital gains actually has three decades at all.

The totality of these numbers show that approximately 50%

of total return come from income as a component of return in the S&P.

Now we generate a lot of income as a component of return and you can see that over the last 10 years in dark blue is the option premium generated by this differentiated process of how we buy shares.

When markets are more volatile, like 2020, the option premium is higher.

When it's not as volatile, like the prior few years, it's a little bit lower.

But as you can see, that dark blue line is consistent, a relatively high number.

When adding dividends and interest to that, you get some years a little bit above eight, some years just below, but around that number, and it's a very consistent number that stands between you and a loss.

It gives you a very higher probability of a good outcome.

That income we generate does form the basis of a high level of distributions that we pay out quarterly.

And as you can see, the distributions that we pay out are consistent over one to 10 years.

And they track very well when one compares that to dividend yields in both the US and more domestically.

Touching on another one of the outcomes which I talked about is lower downside capture and keeping most of the up.

And one can see this in a bit more detail.

We're looking when the markets up historically, we're about 75% of that up.

So we're not the shiniest thing out there because we do take a lot less risk, but it's consistently at a high number.

But when markets fall, we are only around 34% of that.

So we lose a lot less than we gain.

And allowing us to maintain our capital when markets are weak allows us to compound far better over time.

And the third outcome of a journey matters.

To be there for the destination, you have to enjoy the journey along the way.

And as you can see, when one looks at it via standard deviation,

We are significantly lower than the market on rolling three year numbers.

Lastly, about the S&P we've talked about.

our income component from that.

I also wanted to just give you a bit more of a context against the Australian market, which is driven a lot by dividends.

As you can see, the dark blue is growth and the rest is dividends and reinvestment of dividends, but a process that combines global equity, bottom-up value approach, capital gains and income, you can see does deliver very competitive dividends.

returns against different market environments and different indices as well.

So on that, I'm going to stop and see if there are any questions and thank you for your time.

Yeah, thanks, Chad.

I do have a few questions for you.

The first one being, how many of the equities that you go to buy via the put options that you explained, do you ended up getting it?

Yeah, that's a very good question.

When we sell an option, although we're happy to own the share and we do end up owning them, the reality is only around one third of the options we sell become shares for that specific option.

If that doesn't become a share, i.e.

the option expires and we keep the income no matter what, we do then look all else being equal if the share hasn't moved much or gone up much to actually rewrite that option again.

So we will continue to do that as part of the process, but each option is about one third the answer.

And my next question is you generate high levels of income, we got that, but isn't capital growth the main driver of equity returns?

Yeah well look, capital gains are important.

You're buying companies that are growing and if you don't buy companies that are growing, you tend not to be in a very good situation.

So companies that grow are important.

Share prices that go up, capital gains are important.

We think both are important.

As I showed over the last 140 years, around 50% in the US, which has been a very good capital, around 50% has come from income.

The vast majority over a shorter period of time, but in the last few decades in Australia has only been around income.

So income absolutely is important across different regions and different timeframes, but we think both are important.

And can you give me some examples of some of the best stocks you have bought in the last few years?

Yeah, so just giving a couple of recent examples.

One of them is Swiss based pharmaceutical company Novartis.

When we looked at it, it's up around 20%.

Most recently, we're starting to exit it.

When we looked at the value of the existing drugs that they were selling, as well as the R&D pipeline, we thought was significantly undervalued.

That has subsequently been more re-rated by the market.

And as a back of that, we've done very well out of that.

Secondly, another share, Mitsubishi Electric, Japanese industrial business, very diversified.

But when we looked at their asset base, it was assuming a very low return on that, which was historically abnormal to expect such a low return.

That has turned out to be a correct assessment.

And because of that, we were able to buy the shares at 1300, 1400 yen and selling them at around net 1900 yen.

Thank you, Chad, for your presentation and the answers to my question.

See you next time.

You're welcome.

And thank you.

Thank you for your time.

Thank you.