Element Investment presentation; Senate Group Conference; November 2014.

1. SENATE Group
Terence Craig – Chief Investment Officer
Jeléze Hattingh – Portfolio Manager
6 November 2014

2. What to do when
everything looks expensive?
2

3. Portfolio Managers
Terence Craig
48, Chief Investment Officer
B Bus Sc (Hons), CA (SA),
CFA
13 : 20
Element : Industry Experience
20 years’ industry experience
Joined Element as Director & CIO in March
2001
Since April 2001 responsible for:
Investment philosophy and process
Portfolio management
Investment team development
Prior:
Allan Gray – Portfolio Manager
Taita (Private Equity) - Director
3
9 years’ industry experience
Allan Gray Ltd – Fixed Interest
Credit Suisse and Deloitte
Consulting (UK)
Standard Bank (SA)
Joined Element in May 2010
Appointed PM in June 2012

4. Agenda
Asset classes look expensive
Warning signs of over-the-top consumption
How did we get here?
How expensive?
What to do
4

5. Asset Classes look expensive
5

6. S&P 500 looks expensive on a number of measures…
6

7. US Bonds - >30 year bull market
US10y Bond Yield to Maturity:
• Average YTM over last 50y = 6.1%
• Average YTM over last 224y = 6.0%
• Lowest YTM on 2012/7/25 = 1.4%
• Current YTM (2014/11/04) = 2.3%
Source: Barry Ritholtz, 31 December 2013
A multi-decade bull
market?
7

8. All Share Index making new highs consistently
8
ALSI
ALSI Earnings
Source: Element Investment Managers, Inet, 31 October 2014

9. SA Bonds – 20 year bull market
Source: Element Investment Managers, Inet, 4 November 2014 9

10. Warning signs of over-the-top
consumption
10

11. What would you pay for this painting?
Artwork: Anna’s Light
Artist: Barnett Newman
Sold for: $105.7m
Date sold: October 2013
Ranks 17th on the list of
most ever paid for a
painting (inflation
adjusted)
4 out of top 20 on this
list sold last year, of
which this was one
11

12. Three Studies of Lucian Freud
12
Rank: 7th
Artist: Francis Bacon
Sold for: $142.4m
Date sold: November 2013

13. Le Rêve
13
Rank: 4th
Artist: Pablo Picasso
Sold for: $155.0m
Date sold: March 2013

14. By comparison
14
Company: Holdsport
Value: $176m
Assets:
35 Sportsmans Warehouse stores
20 Outdoor Warehouse stores
Strategic investment in Performance Brands, supplier
of First Ascent and Capestorm
Revenue: R1.4bn ($133m)
Profit: R174m ($16.3m)

15. “I don’t know what money means anymore,” said Asher
Edelman, an art dealer and founder of ArtAssure, an art
financing company
Source: Bloomberg 15

16. Art Investment Funds abound
Source: CNN Money 16

17. Sotheby’s – flashing warning signs for S&P 500…
17

18. Source: Bloomberg 18

19. Wine funds not uncommon
19

20. SA Consumer under pressure or has Makro gone mad?
Source: Makro Christmas Liquor, 2014
20

21. The Enigma Mansion – Yours for R350m!
Source: www.enigmamansion.com 21

22. Source: Bloomberg 22

23. On why the current financial bubble may be even larger than the 2000 bubble:
“In the 2000 bubble, a very narrow group of stocks (mostly NASDAQ 100 stocks)
were grossly overpriced, while most other assets – including real estate, art,
wines, emerging markets and commodities – were not just relatively but absolutely
depressed. Now … we cannot argue that [these asset classes] are depressed
in absolute terms, having risen considerably since the turn of the millennium”
23
~ Marc Faber, The Gloom, Boom & Doom Report, May 2014

24. How did we get here?
24

25. US: Quantitative Easing explained…
25

26. Developed market interest rates at 0%
26
Bank of England
US Fed
ECB
Source: Bloomberg, 11 July 2014

27. Increasing monetary base ≠ material change in economy…
As Velocity of money trends lower
27
Source: John Hussman, 3 November 2014

28. Debt levels are looking scary again…
28

29. How expensive?
29

30. Alsi TR/ Trend: FV = 41 919, 12% overvalued
Source: Element Investment Managers, 30 September 2014
30

31. Equity returns to disappoint vs history
Expected 5 year total return
from current 16.1 PE = 10.2% p.a.
Source: Element Investment Managers, I-Net Bridge, 30 September 2014
Two recent extreme points:
Outcome very close to
expectation
31

32. How expensive is the ALSI relative to history?
ALSI PE = 16.5
Median constituent on
a PE of 15.6
Distortion from the PE
“inflators” and the PE
“deflators” is roughly
symmetrical.
Long-term average is
12.1
Shares that
push the ALSI
PE up
Shares that
drag the ALSI
PE down
Distortion is roughly
symmetrical
Source: Element Investment Managers, 17 October 2014
32

33. S&P 500: Cyclically-Adjusted PE ratio is expensive…
33

34. Is the US recovery really happening?
Source: Element Investment Managers, Bloomberg, 31 October 2014 34

35. Loss-making stock IPOs are back to heydays
Source: sentimentrader.com, June 2014 35

36. What happens when the punch bowl is taken away?
Source: Business Insider, 30 October 2014 36

37. What to do?
37

38. Look for Relative Value
38

39. Global Equities vs Bonds – warning signs for Equities…
Source: Nedbank Capital Research, 4 November 2014 39

40. We highlighted a rotation likely in 2013…
Buy Resources
Sell Industrials
Sell Resources
Buy Industrials
As stretched as ever
Series always reverts,
only timing is uncertain
Source: Element Investment Managers, 31 December 2013 40

41. The gap between INDI and RESI closing
Buy Resources
Sell Industrials
Sell Resources
Buy Industrials
As stretched as ever
Series always reverts,
only timing is uncertain
Source: Element Investment Managers, 31 October 2014 41

42. Industrials vs Resources: 3 year to turn…
Buy Resources
Sell Industrials
Sell Resources
Buy Industrials
Series always reverts,
only timing is uncertain
?
Source: Element Investment Managers, 31 October 2014 42

43. INDI only this stretched twice before
The INDI is currently on a similar
valuation as the ALSI was in May
2008, just before the correction
Source: Element Investment Managers, 30 September 2014 43

44. Indi’s CAPE remains at abnormal levels
Market currently trading on 32.5x trend-earnings
And 19.4x actual past 12m earnings
Both average around 12.4x
Source: Element Investment Managers, 30 September 2014 44

45. INDI earnings at unprecedented levels
Source: Element Investment Managers, 30 September 2014 45

46. Earth Equity Sector Allocation
Holdings as per Element Earth Equity Fund, 31 October 2014 46

47. Shoprite: Element Long Term Sheets
Sell Shoprite
Buy Shoprite
LT Trend
Earnings
Source: Element Investment Managers, 31 December 2012
Actual EPS
Shoprite share price
47

48. Shoprite: EPS Long Term Sheet
48
Source: Element Investment Managers, 30 September 2014

49. Sun International: EPS Long Term Sheet
49
Source: Element Investment Managers, 30 September 2014

50. Sun Intnl & Shoprite: Relative value example
January 2013:
• SUI & SHP have the same year end (June) and similar HEPS
• Shoprite trades at R204 and Sun International at R96 (47% of SHP)
Material relative valuation differentials = opportunity
Sell
Buy
Source: I-NET BFA, Element Investment Managers, 31 January 2013
50

51. Sun International & Shoprite: Valuation disparity
September 2014:
• Shoprite trades at R138 (down 32%)
• Sun International trades at R118 (up 23%) and at 85% of SHP
Valuation gap has closed materially
Source: I-NET BFA, Element Investment Managers, September 2014
51

52. Find unique opportunities
52

53. Real return from A-listed Properties
Property Dual
Listed Shares
6.5% pickup
Target
CPI + 3-7%
Source: Element Investment Managers, BESA, 31 October 2014

54. CPV01 – Soitec Renewable Energy Bond
Use alternative asset classes
to enhance our risk-return profile
Amortising bond (reduced interest rate
risk) to mature in 2029
Trading at yield of 11.2% (coupon 11%)
Detailed research – incl. 4 site visits
Only listed renewable energy bond in SA
Expect more to follow
Guarantees by DoE, Group 5 and SOITEC.
Management updates monthly
54
TRR to 2014/11/04 2013/04/29 2013/12/20
ALBI 4.6% 8.9%
CPV01 13.2% 18.6%
Relative TRR 8.6% 9.7%

55. Adding Value - Aquarius Plat Convertible Bond
Source: Element Investment Managers, Bloomberg, 31 October 2014 55

56. Diversify
56

57. Element Flexible Fund - Asset Allocation
Holdings as at 31 October 2014
57
Holdings as per Element Flexible Fund
Diversify by:
• Asset class
• Geography
• Currency
• Commodity
&
• Asset Manager

58. 3 Year Performance to Sept 2014: All Managers
58
SWIX ALSI
Value style out of favour
Source: Riscura, September 2014

59. 3 Year Performance to Feb 2009: Active Managers
Value/Contrarian
style in favour
*Note: In August 2009 the company name was changed from Fraters Asset Management to Element Investment Managers.
Source: Alexander Forbes Asset Consultants, February 2009
59

60. Be patient…and wait for the sales
60

61. Naspers looking stretched
Source: Element Investment Managers, 30 September 2014 61

62. Tencent – trajectory similar to 1999/2000
Source: Bloomberg, 31 October 2014 62

63. SABMiller: Expensive relative to history…
Source: Element Investment Managers, 30 September 2014 63

64. Anglos: EPS Long Term Sheet
Source: Element Investment Managers, 30 September 2014 64

65. BHPBilliton: EPS Long Term Sheet
Source: Element Investment Managers, 30 September 2014 65

66. Aquarius Platinum – Priced for death?
66
-98%
BEE Partners forced sellers Rights
issue
Source: Element Investment Managers, INET-BFA, 4 November 2014

67. 1. Look for relative value
2. Try to uncover unique opportunities
3.Diversify
4.Be patient and wait for the sales
67
What to do?

68. Disclaimer
Figures quoted are from Element Investment Managers (Pty) Limited, for the period
ended October 2014, for a lump sum investment, using NAV-NAV with income
distributions reinvested.
Element Investment Managers claims compliance with the Global Investment
Performance Standards (GIPS®). The firm includes all portfolios managed by Element
Investment Managers. Element Investment Managers is an independent, owner-managed
company. It provides discretionary investment management services to
retail and institutional clients.
Element Investment Managers has been verified for the period:
1 January 2003 to 31 December 2013
Copies of our verification reports are available on request.
A complete list and description of our composites is available by contacting
Greg Hahn at:
+27 21 426 1313 or at greg@elementim.co.za
68

69. Disclaimer
Collective Investment Schemes in Securities (CIS) are generally medium to long term
investments. The value of participatory interests may go down as well as up and past
performance is not necessarily a guide to the future. CIS prices are calculated on a net
asset value (NAV) basis which is the total value of all assets in the fund, including any
income accrual and less all permissible deductions from the portfolio. CIS are traded at
ruling prices and can engage in borrowing and scrip lending. Different classes of
participatory interests apply to the funds and are subject to different fees and charges.
A schedule of fees and charges and maximum commissions is available on request from
the company/scheme. Commission and incentives may be paid and if so, would be
included in the overall costs. Fluctuations or movements in exchange rates may cause
the value of underlying international investments to go up or down. The funds are
valued daily at 15h00 and forward pricing is used. The funds may be closed to new
investments at any time in order to be managed in accordance with its mandate. Past
performance is not indicative of future performance.
69

70. Thank you
www.elementim.co.za
CONTACT DETAILS:
• Portfolio Managers:
terence@elementim.co.za
jeleze@elementim.co.za