element
TRANSCRIPT
Senate Group
Long-term investing, Risk & Asset Allocation
Terence Craig - CIO
8 March 2012
Terence CraigChief Investment Officer
B Bus Sc (Hons), CA (SA), CFA
18 years’ industry experience
Allan Gray - Equity Analyst and Portfolio Manager
Taita, Private Equity Firm – Director
Joined Element as Director & Chief Investment Officer in April 2001
Since April 2001 responsible for:
Investment philosophy and process
Portfolio management of all Element funds
Investment team growth and development
Agenda
Overview of Element Investment Managers
Unit Trust Fund Overview
Asset Allocation Process
Economic and Market Review
Key differentiators
Overview of Element Investment Managers
Independent investment manager established in 1998
Rebranded from Frater Asset Management in 2009
>R20bn Assets Under Management
Well diversified client base
Long-term contrarian value investors
Material focus on downside risk
Leaders in Responsible Investment and ESG analysis
Enhances our analysis of risk
36 staff: > 150 years’ experience in Investment Team
9 CFAs (60% of Investment team), 6 CA (SA)s, 3 Actuaries
Unit Trust Fund Overview
Element’s Unit Trust Fund Profile
Fund Sector Benchmark Max equity Inception Date
Element Earth Equity Domestic General Equity ALSI_D 100% Oct 2001
Element Flexible Fund
Domestic Asset Allocation - Flexible CPI + 5% 100% Oct 2001
Element Real Income Fund
Domestic Asset Allocation - Targeted
Absolute and Real ReturnCPI + 3% 40% Oct 2002
Element Balanced Fund
Domestic Asset Allocation - Prudential
Variable Equity
Average total return of the prudential variable
equity category75% Nov 2009
Element Global Equity Fund Foreign Equity MSCI World Index 100% Feb 2011
Element Islamic Equity Fund Domestic General Equity FTSE/JSE Shari'ah ALSI 100% Feb 2006
Element Islamic Balanced Fund
Domestic Asset Allocation - Prudential
Variable Equity
Average total return of the prudential variable
equity category75% Apr 2010
Changing to ALSI from 1 May 2012
6 Moving to Prudential Low Equity category
Changing to average of Islamic Equity funds (>1yr)
Element: Unit Trust Fund Profile
2% - 4% long term out-performance with lower than
market risk
Reduce risk with combination ofasset classes
Real returnwith material reduction in
risk
Inception to 31 December 2011
Reg 28 Balanced Fund – expected position
Size of bubble = maximum drawdown
Offer investors a choice alonga risk/return frontier
Asset Allocation Process
Decision making and meetings
Quarterly Asset Allocation (QAA) meeting
Weekly Investment Committee meeting
Weekly Asset Allocation and Income meeting
Weekly Portfolio Managers meeting
Stock specific Investment Committee meetings
Top-Down Research/Asset Allocation
Top Down View
SA Economy
GlobalMarkets &Economies
Commodities
CurrenciesInflation &
Interest Rates
Portfolio Risk
ESG
Quants
Via Investment committee: meets 2-4 times per year members present reviews macro variables timing issues potential themes asset allocation 2 full days ½ day follow up
Detailed top-down researchis a material differentiator
from competitors
Top-Down Research/Asset Allocation
Day 1 : Analyst Responsible
Introduction Matthew Kreeve
Portfolio Risk: Performance and Attribution Glenda Speckmann
Portfolio Risk: Risk and Liquidity Warrick Erlank
ESG: Politics Danny Stimela
Portfolio Risk: Implementation Log Altaaf Noormahomed
Quants Rene Prinsloo
Day 2:
Commodities Andrew Bishop & Guy Antoine
Currencies Steven Barber
International Markets Johny Lambridis
International Interest Rates and Inflation Jeleze Hattingh
SA Economic Review Graeme Ronne
SA Interest Rates and Inflation Jeleze Hattingh
Day 3:
SA Economic Review: GFCF Steven Barber
ESG: Responsible Investment David Couldridge
Property Report Jeleze Hattingh
Income Review Rene Prinsloo
SA Equity Timing & Element Positioning Terence Craig
Day 4:
Summary Matthew Kreeve
Balanced Funds Investment Process
Balanced Funds
Equity Income Foreign
Bonds ILBsFRNs/ Cash Property
CreditDuration Curve Shape Liquidity
Asset Allocatio
n
Income Allocatio
n
Security Selection
Prefs
Implementation
Idea Generation
• Quantitative Measures
• Ranking tables
• Macro factors
• Industry factors
• Professional judgment
Research
• Industry Analysis
• Company Analysis
• Financial Analysis
• Management Meeting
• Valuation & Reports
Implementation
• Investment Committee
• Meets weekly
• Portfolio Construction
• Order Optimisation
• Execution
Maintenance
• Voting at AGMs
• Engagement
• Company visits
• Updating models
• Meet different management
Investment Process
Calendar 2011• Management
• Group - 154• EIM only - 48
• Broker meetings - 875• Result presentations - 209• Site visits - 25• Conferences - 39• Seminars - 26
Quantitative
Fundamental Research
(Historical & Future)
ESG & Sustainability (Long term)
Long Term SheetsValue RankingsTiming Analysis
Directors’ DealingsShareholder Analysis
Fundamental ReportAbsolute valuation
(e.g. DCF)Relative valuation
(e.g. TRR)
Corporate Governance
RemunerationBEE
Sustainability issues
Detailed bottom-up in-house Research
Usually 7 reports prepared per company
Facilitates better discussion and risk analysis
Economic & Market Review
Secular Global Themes
Deficits: budget/trade/savings/housing/taxes
China: Hard/soft landing
Oil price; Commodity prices
US Rates & Dollar as a global reserve
US statistics – “lies, damned lies and…”
Cheap liquidity now - expensive later
Global Security
From Crisis to … Crisis
Govt/CB intervention is distortionary
Factors affecting Portfolio Positioning
Global Macro:
Debt, more debt and downgrades– we expect more will follow
Inflation/deflation – fat tail outcomes
BRICs unlikely to support global growth on their own
SA Macro:
Inflation: Upside risks in 2012
Consumer debt levels – still remain high
SA Equity Valuation levels:
Absolute and relative – we do not look cheap
Foreign flows increase volatility
Risk not being priced correctly so risks to the downside have increased
“New normal” moves to Paranormal!
New normal: Below average growth with high unemployment and the “heavy-hand of government” evident in markets (PIMCO: May 2009)
“…somewhat slower pace of recovery over coming quarters; downside risks to the economic outlook have increased.” (Fed: 9 August 2011)
“For 2012 investors must lower return expectations.
The new normal is ‘Sub’, ‘Ab’, ‘Para’ and then some.
The financial markets and global economies are at great risk.” (Bill Gross, PIMCO: Jan 2012)
US Unemployment – stubbornly high
US Inflation – Alternate (Base of 1980)
Effect of changing inflation baskets over time
SA Inflation – Effect of CPI reweighting
Debt, more debt & downgrades
Downgrade of France results in a rating wedge with Germany (“Core” becoming brittle)
French elections in April 2012 – further risk
Five AAA rated European countries outside EMU:
Denmark, Norway, Sweden, Switz & UK
Only four within EMU:
Germany, Finland, Luxembourg & Netherlands
US Debt remains material long-term concern
US elections – do we believe stats this year?
Remedies: Defaults or currency deflation?
The Economist, June 13th – 19th 2009
Forbes Magazine, 8 February 2010
PMIs indicate Eurozone recession in 2012
ExpansionContraction
Eurozone sovereign debt is material
Data as at 31 December 2011
3rd largest economy
in Eurozone;€1.9trn of debt
Reinhart & Rogoff
Greece targetFor 2020!
Euro debt refinancing in 2012
Macro themes playing outHigher taxes and lowerbenefits (austerity) do
not make for happyvoters!
7
All PIIGS had change ofGovernment in 2011
EU austerity will not help create jobs
Chinese property developers – possible warning?
EverGrande up 17%, other developers down
18%-41%since Jan 2011
Source: Reuters, Element Investment Managers, 8 March 2012
SA’s infrastructure focus – déjà vu
State of the Nation promises by President Zuma:
2009:
“Massive” programme to build economic and social infrastructure
Cost of telecoms to be reduced
2010:
Government to spend R846bn in next 3 years on public infrastructure
Rail network - reliable, competitive and better integrated with ports
2011:
Year of job creation via economic transformation and inclusive growth
Jobs fund of R9bn over 3 years to finance job creation
2012:
Five major infrastructure projects (Rail, Road, Port/Eskom charges)
President to convene infrastructure summit to discuss plan
Delivery remains critical
Source: Times Live, 12 February 2012
SA Inflation: Upside surprises likely
Source:ThomsonReuters
FoodRandOil
3.0
3.5
4.0
4.5
5.0
5.5
Jan-
60
Jan-
64
Jan-
68
Jan-
72
Jan-
76
Jan-
80
Jan-
84
Jan-
88
Jan-
92
Jan-
96
Jan-
00
Jan-
04
Jan-
08
Jan-
12
Alsi Price, Deflator: CPI
Real Price Trend Price +2SD -2SD
R²: 75%
Slope: 3.2%
ALSI Index in Real Terms
2nd highest deviation above the mean
Source: Inet Bridge, 1960 to 29 February 2012
Start of 2003Bull market
0.9
1.4
1.9
2.4
2.9
Jan-
60
Jan-
64
Jan-
68
Jan-
72
Jan-
76
Jan-
80
Jan-
84
Jan-
88
Jan-
92
Jan-
96
Jan-
00
Jan-
04
Jan-
08
Jan-
12
Alsi Earnings, Deflator: CPI
Real Earnings Trend Earnings +2SD -2SD
R²: 67%
Slope: 2.3%
ALSI Earnings in Real Terms
Gold at $800/oz
Gold Index 30% of ALSI
2nd highest level of real earnings ever
Source: Inet Bridge, 1960 to 29 February 2012
Start of 2003Bull market
3
8
13
18
23
Jan-
60
Jan-
64
Jan-
68
Jan-
72
Jan-
76
Jan-
80
Jan-
84
Jan-
88
Jan-
92
Jan-
96
Jan-
00
Jan-
04
Jan-
08
Jan-
12
Alsi PE, Deflator: CPI
Price/ Trend Earnings PE Avg P/ Trend E Avg PE
ALSI PE: Trend and Trailing
Historical PE: 13.4
Price/Trend E: 19.1
Source: Inet Bridge, 1960 to 29 February 2012
Asset Allocation – Quant Models
Asset Allocation – Element Balanced Unit Trust
At 31 January 2012
Net Equity; 39%
Listed Property; 3%
Hedged Equity; 6%Nominal Bonds; 1%
Inflation Linked Bonds,
5%
Money Market incl. cash; 25%
Foreign Equity; 17%
Foreign Income; 4%
Asset Allocation – Element Real Income
At 31 December 2011
Net Equity; 20%
Listed Property; 4%
Hedged Equity; 4%
Nominal Bonds; 2%
Inflation Linked Bonds; 11%
Money Market incl. cash; 30%
Foreign Equity; 13%
Foreign Income; 15%
Conclusion on current portfolio positioning
Global and local equity markets do not look cheap
Propped up by low interest rates, fiscal deficits and high asset prices – a combination unlikely to be sustainable
SA Equities look expensive on a relative basis
We remain cautiously positioned
Both within asset allocation and within equities
Historical underperformers are trading at levels from where they usually outperform materially
Capital preservation and yield are likely to be key focus areas in markets over the medium term
Element: Key Differentiators
1. Our size and our investable universe
2. Excellent long-term performance track record
3. Top long-term risk-adjusted statistics
4. Contrarian style blends well with competitors
Size and Shrinking Portfolio Universe
Source: FTSE/JSE All Share (167 companies as at 30 Nov 2011)
Constraints: 1. 5% Equity position 2. < 15% Free Float 3. Trade 30% of market volume
Insufficient resources
Increased portfolio risk
Maintain 3-5 x portfolio universe
advantage
Element: Key Differentiators
1. Our size and our investable universe
2. Excellent long-term performance track record
3. Top long-term risk-adjusted statistics
4. Contrarian style blends well with competitors
What period should investors focus on?
100 000.000
10 000.000
1 000.000
100.000
10.000
1.000
0.100
0.010
0.001
0.000
0.000 1 Hour 1 Day 1 Week 1 Month 1 Year 10 Years 100 Years
Time (log)
Ag
gre
gate
Retu
rn a
nd
Sta
nd
ard
D
evia
tion
(lo
g)
Source: MJ Mauboussin (Chief Investment Strategist, Legg Mason)
Standard Deviation
Aggregate return
What period should investors focus on?
110%
100%
90%
80%
70%
60%
50%
1 Hour 1 Day 1 Week 1 Month 1 Year 10 Years 100 Years
Source: MJ Mauboussin (Chief Investment Strategist, Legg Mason)
Pro
bab
ilit
y
Years (log)
Time and the probability of gain
Element Equity: Performance & Risk
Inception (October 2001) to 31 December 2011Current Fund Size R 477 mBenchmark (To be) ALSI
As at 31 December 2011Element EarthEquity Fund
ALSI RELATIVE
Annualised since Inception 19.1% 17.3% 1.8%
Annualised 10 Year 18.8% 15.1% 3.7%
Ranking over 10 years Quartile
Performance 7/32 1st
Sortino 2/32 1st
Sharpe 1/32* 1st * Joint 1st
Maximum drawdown 2/32 1st
Beta (min = 1) 2/32 1st
Element Flexible: Performance & Risk
Inception (October 2001) to 31 December 2011Current Fund Size R 459 mFlexible Benchmark CPI + 5%
As at 31 December 2011 Element Flexible Fund CPI + 5% RELATIVE
Annualised since Inception 16.0% 11.3% 4.7%
Annualised 10 Year 15.4% 11.3% 4.1%
Ranking over 10 years Quartile
Performance 4/11 2nd
Sortino 2/11 1st
Sharpe 2/11 1st
Maximum drawdown 1/11 1st
Performance – Balanced Composite (Instit)
Inception (October 2003) to 31 December 2011Fund Size R856mBenchmark 60% FTSE/JSE All Share Index, 25% All Bond
Index & 15% Short Term Fixed Interest Index
As at 31 December 2011 Balanced CompositeBalanced
BenchmarkRELATIVE
Annualised since Inception 18.4% 15.9% 2.5%
Annualised 7 Year 15.4% 14.1% 1.3%
Element Global Equity Fund
31 December 2011 Epoch Net Return MSCI World Relative
1 Year -0.60% -5.50% 4.90%
3 year (ann) 12.90% 11.10% 1.80%
5 year (ann) 1.30% -2.40% 3.70%
Since Inception (ann) 6.20% 1.50% 4.70%
Inception (September 2005) to 31 December 2011
Performance of Epoch Global Choice Fund
(ASISA) Foreign EQ GeneralReturn
(Annualized)Peer Group Rank
Element Global Equity 10.23% 3/26
Source: Morningstar, 29 Feb 2012
Element Global Equity Fund
Element: Key Differentiators
1. Our size and our investable universe
2. Excellent long-term performance track record
3. Top long-term risk-adjusted statistics
4. Contrarian style blends well with competitors
Contrarian stock selection = Good blend
Element Earth Equity % Coronation Top 20 Fund %
OLD MUTUAL 7.1% STANDARD BANK 9.9%
MTN 6.8% MTN 9.9%
ANGLOGOLD 6.4%
versus the Growth Funds
SASOL 9.4%
SASOL 5.8% ANGLOS 8.9%
TONGAAT 4.9% BHP BILLITON 6.5%
REINET 4.7% NASPERS 6.1%
GOLD FIELDS 4.5% NEDBANK GROUP 5.3%
ANGLOS 4.4% MONDI PLC 4.0%
NAMPAK 3.7%BRITISH AMERICATOBACCO
4.0%
BIDVEST 3.1% BIDVEST 3.8%
TOTAL 51.4% TOTAL 67.8%
Source: Coronation Fund Fact Sheet, 31 Dec 2011
Contrarian stock selection = Good blend
Element Earth Equity % Investec Equity %
OLD MUTUAL 7.1% SASOL -
MTN 6.8% MTN -
ANGLOGOLD 6.4%
versus the Growth Funds
BRITISH AMERICAN TOBACCO
-
SASOL 5.8% SABMILLER -
TONGAAT 4.9% ANGLOS -
REINET 4.7% BHP BILLITON -
GOLD FIELDS 4.5% VODACOM -
ANGLOS 4.4% CF RICHEMONT -
NAMPAK 3.7% FIRSTRAND -
BIDVEST 3.1% TIGER BRANDS -
TOTAL 51.4% Totalnot
provided
Source: Investec Equity Fund Fact Sheet, 31 Dec 2011
Contrarian stock selection = Good blend
Element Earth Equity % Investec Value %
OLD MUTUAL 7.1% GOLD FIELDS -
MTN 6.8%
versus the Value Funds
SASOL -
ANGLOGOLD 6.4% STEINHOFF -
SASOL 5.8% ANGLOS -
TONGAAT 4.9% ANGLOPLAT -
REINET 4.7% ANGLOGOLD
GOLD FIELDS 4.5% SAPPI -
ANGLOS 4.4% JD GROUP -
NAMPAK 3.7% MEDICLINIC -
BIDVEST 3.1% MTN -
TOTAL 51.4% Totalnot
provided
Source: Investec Value Fund Fact Sheet, 31 Dec 2011
Contrarian stock selection = Good blend
Source: Allan Gray Equity Fund Fact Sheet, 31 Dec 2011
Element Earth Equity % Allan Gray Equity %
OLD MUTUAL 7.1%BRITISH AMERICAN TOBACCO
11.4%
MTN 6.8%
versus the Value Funds
SASOL 11.2%
ANGLOGOLD 6.4% SABMILLER 9.4%
SASOL 5.8% REMGRO 7.1%
TONGAAT 4.9% STANDARD BANK 4.7%
REINET 4.7% SANLAM 4.4%
GOLD FIELDS 4.5% ANGLOGOLD 4.3%
ANGLOS 4.4% ANGLOS 3.8%
NAMPAK 3.7% IMPALA PLATINUM 3.3%
BIDVEST 3.1% MONDI 2.5%
TOTAL 51.4% Total 62.1%
Contrarian stock selection = Good blend
Source: RE:CM Flexible Equity Fund Fact Sheet, 31 Dec 2011
Element Earth Equity %RE:CM Flexible Equity Fund
%
OLD MUTUAL 7.1% SUN INTERNATIONAL 7.6%
MTN 6.8%
versus the Value Funds
DISCOVERY 5.6%
ANGLOGOLD 6.4% OLD MUTUAL 4.9%
SASOL 5.8% AMPLATS 4.9%
TONGAAT 4.9% HARMONY 3.6%
REINET 4.7% HOSKEN CONSOLIDATED 3.2%
GOLD FIELDS 4.5% METROPOLITAN 3.2%
ANGLOS 4.4% OMNIA 3.1%
NAMPAK 3.7% TELKOM 3.1%
BIDVEST 3.1% LONMIN 2.9%
TOTAL 51.4% Total 42.1%
Why use Element?
Active Investment process
Voting & Engagement
ESG research
No performance fees
Enhanced Long Term performance
Fiduciary responsibility
Better risk analysis
Equitable treatment of
clients
Contrarian view Blend well
Boutique size Broader universe
Thank You
Any questions?
Disclaimer
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 2009. Currently being verified to end December 2011. Copies of our verification reports are available on request.
A complete list and description of our composites is available by contacting Ian Jones at +27 21 426 1313, or at [email protected]
Thank you
CONTACT DETAILS:• Natalie Smith
[email protected] (083 306 6460)• Ian Jones
[email protected] (071 675 4282)
www.elementim.co.za