Cannon Flexible Fund - Cannon Asset Managers

Shifting Seas

Tip Of The Iceberg: Demographics, Debt & Dubious Policy700Explicit and Implicit Public Debt (% GDP) (2010)600500Explicit Public DebtImplicit (Extended) Public Debt400%3002001000Spain Austria Germany France UK USAdapted from Wegelin Asset Management, based on calculations by Professor Raffelhschen et al (2009) “Ehrbare Staaten?”; Joshua Aizenman and Nancy Marion

Perception Versus Reality

Journey To The Centre Of The Earth199020002010198020202030US307m people12.7m cars23 barrels per personChindia2.5bn people13.1m cars2.3 barrels per personMJ Economides (2010)

BMW: New Drivers Are In Charge

Expectations Versus Reality504030Analyst expected returns (via target prices) and actual returns (US,%)Analyst ForecastActual Return20100-10-20-30-40-502000 2001 2002 2003 2004 2005 2006 2007 2008 2009James Montier, Behavioural Investing (2009)

The Folly Of Forecasting (In Easy Times)Misguided Models Behavioural Error Obsession With Forecasting

Sensible Market Valuation Is KeyPE Ratio (x)Data from Bloomberg (2012), analysis Cannon Asset Managers(2012)

Sensible Market Valuation Is KeyExtremevaluationoverlookedPE Ratio (x)Data from Bloomberg (2012), analysis Cannon Asset Managers(2012)

Sensible Market Valuation Is KeyPE Ratio & CAPE Ratio (x)Data from Bloomberg (2012), analysis Cannon Asset Managers(2012)

Sensible Market Valuation Is Key3025Effective inidentifyingextremevaluationPE Ratio & CAPE Ratio (x)2015105PE RatioCAPE Ratio01979 1983 1987 1991 1995 1999 2003 2007 2011Data from Bloomberg (2012), analysis Cannon Asset Managers(2012)

Sentiment Creates OpportunityEarnings & ALSI 1980 = 100Bloomberg, Cannon Asset Managers (2012)

Sensible Market Valuation Is KeyEuphoriaCAPE Ratio (x)OptimismAcceptanceSuspicionPessimismData from Bloomberg (2012), analysis Cannon Asset Managers(2012)

Sensible Market Valuation Is KeySubsequent Three-YearReal Return p.a. (%)Euphoria -1.5CAPE Ratio (x)Optimism 4.6Acceptance 11.8Suspicion 12.0Pessimism 14.6Data from Bloomberg (2012), analysis Cannon Asset Managers(2012)

To Asset Allocate Successfully You Have To Be ContrarianSubsequent 3-Year Annualised Return (%)50403020100-10CAPE Ratio versus Subsequent Three-Year Return5 10 15 20 25 30PessimismSuspicionAcceptance Optimism EuphoriaCannon Asset Managers; estimate based on data at start of 2012Q1

Discipline Harvests Opportunity

Cannon Flexible Fund: 50%-100% Equity AllocationSentimentCAPE Ratio(x)Quintile3 Year RealReturn (%)p.a.% NegativePeriodsEquityAllocation(%)CashAllocation(%)Pessimism 18.8 5 -1.5 71.4 50 50

Our Flexible Approach16.6%15.5%1-Year Rolling 3-Years Rolling 5-Years RollingTime Ahead of ALSI (%) 62.2 74.0 69.3Cannon Asset Managers and McGregor BFA

Widely Skilled & Stable Investment TeamChief Investment Officer Dr Adrian Saville BA (Hons) MCom PhDSenior Portfolio Manager Tshepo Modiba BSc (Hons)Senior Portfolio Manager Andrew Dittberner BEconSci (Hons) MComPortfolio Construction Analyst Takura Mahwehwe BCom (Marketing)Portfolio Construction Analyst Deshan Naidoo Bcom (Economics)Performance Analyst Henriette Herbst BCom (Hons)Research Analyst Ronnie Dlamini BCom (Hons)

Tactical, Price-Responsive & AgileFund Exposure

Pinnacle: Established & RobustLeading provider of communication and IT products and services to African continentCompellingly priced, high quality investment• 12 years Net profit CAGR 34%• 5 years Average ROE of 24%• 15 percent share buy back• PE 9.3x• Trading updateCannon Asset Managers (2012), Pinnacle Technology (2010) Annual Report

Metair: Sum Of The PartsManufacturing and distribution portfolio• Founded 1948 and listed 1949• OE, aftermarket, non-automotive and propertyTen-year growth history: revenue 13.4%; operating profit 15.0%; heps 13.0%• Disruptors in 2008 and 2009 (OE ↓ 527k to 354k)• ROE 0.3% and 5.5%• MIDP uncertaintyProfile Media; Bloomberg, Cannon Asset Managers

Metair: Sum Of The PartsInvestment case• OE recovery (530k); 2007/08 car park and APDP• increasing balance in portfolio• ROE recovery (~25%)• R50m debt, strong cash flow & cash R320m• industrial property portfolio ~227k m 2• Fundamental Score = 9 and H Score = 92• directors’ dealings• earnings yield 11.2% and dividend yield 3.2%Profile Media; Bloomberg, Cannon Asset Managers

Cannon Flexible FundFund objectives• volatility < equities• outperform equities over long-term using asset allocationWhere to use the fund• long-term equity portfolio• real-return fund with low volatility• tactical asset allocation toolModerate Risk-Profile Example: Strategic Equity Allocation 50%-60%Equity Building Block60%PropertyBuilding Block20%Fixed IncomeBuilding Block20%

Cannon Flexible FundFund objectives• volatility < equities• outperform equities over long-term using asset allocationWhere to use the fund• long-term equity portfolio• real-return fund with low volatility• tactical asset allocation toolModerate Risk-Profile Example: Strategic Equity Allocation 50%-60%Equity Building Block40% 60%CannonFlexible Fund20%PropertyBuilding Block20%Fixed IncomeBuilding Block20%

Houseview Track RecordsAnnualised Return (%)Cannon Asset Managers and McGregor BFA; note inception dates vary

Shifting Seas“Angola’s Banco BIC acquired Portugal’s BPN for $58m, a fifth of theoriginal asking price.”The Economist, September 2011

New World, Same Rulescannonassets.co.za@AdrianSaville@CannonAssets

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