1) Terence Craig, CIO of Element Investment Managers, presented on long-term investing, risk, and asset allocation to the Senate Group.
2) Element provides unit trust funds across various sectors with a focus on long-term, value investing and downside risk management.
3) Element takes a top-down research approach to asset allocation using in-house quantitative models and fundamental analysis across macroeconomic and individual security factors.
2. Terence Craig
Chief 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
3. Agenda
Overview of Element Investment Managers
Unit Trust Fund Overview
Asset Allocation Process
Economic and Market Review
Key differentiators
4. 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
6. Changing to ALSI
Element‟s Unit Trust Fund Profile from 1 May 2012
Inception
Fund Sector Benchmark Max equity
Date
Element Earth
Domestic General Equity ALSI_D 100% Oct 2001
Equity
Element Flexible Domestic Asset
CPI + 5% 100% Oct 2001
Fund Allocation - Flexible
Domestic Asset
Element Real Allocation - Targeted
CPI + 3% 40% Oct 2002
Income Fund Absolute and Real
Return
Domestic Asset Average total return of
Element Balanced
Allocation - Prudential the prudential variable 75% Nov 2009
Fund
Variable Equity equity category
Element Global
Foreign Equity MSCI World Index 100% Feb 2011
Equity Fund
Element Islamic
Domestic General Equity FTSE/JSE Shari'ah ALSI 100% Feb 2006
Equity Fund
Domestic Asset Average total return of
Element Islamic
Allocation - Prudential the prudential variable 75% Apr 2010
Balanced Fund
Variable Equity equity category
6 Moving to Prudential Low Changing to average of
Equity category Islamic Equity funds (>1yr)
7. Element: Unit Trust Fund Profile
2% - 4% long term
out-performance
with lower than
market risk
Reduce risk with
combination of
asset classes
Reg 28 Balanced Fund
– expected position
Real return
with material
reduction in Size of
risk bubble =
maximum
drawdown
Offer investors a choice along
a risk/return frontier
Inception to 31 December 2011
9. 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
10. Top-Down Research/Asset Allocation
Via Investment committee:
SA Economy meets 2-4 times per year
members present
Global
Quants Markets &
Economies
reviews macro variables
timing issues
potential themes
asset allocation
ESG
Top Down
View
Commodities 2 full days
½ day follow up
Portfolio Risk Currencies
Detailed top-down research
Inflation &
Interest is a material differentiator
Rates
from competitors
11. 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
12. Balanced Funds Investment Process
Balanced Funds
Asset
Allocation
Equity Income Foreign
Income Implementation
Allocation
FRNs/ Cash Bonds ILBs Property Prefs
Security
Selection
Duration Credit Curve Shape Liquidity
13. Investment Process
Idea Generation
• Quantitative Measures
• Ranking tables
• Macro factors
• Industry factors
• Professional judgment
Maintenance Calendar 2011 Research
• Voting at AGMs • Management • Industry Analysis
• Group - 154
• Engagement • EIM only - 48 • Company Analysis
• Company visits • Broker meetings - 875 • Financial Analysis
• Result presentations - 209
• Updating models • Site visits - 25 • Management Meeting
• Meet different management • Conferences - 39 • Valuation & Reports
• Seminars - 26
Implementation
• Investment Committee
• Meets weekly
• Portfolio Construction
• Order Optimisation
• Execution
14. Detailed bottom-up in-house Research
Usually 7 reports prepared per company
Facilitates better discussion and risk analysis
Fundamental
ESG &
Research
Quantitative Sustainability
(Historical &
(Long term)
Future)
Fundamental
Long Term Sheets Corporate
Report
Value Rankings Governance
Absolute valuation
Timing Analysis Remuneration
(e.g. DCF)
Directors‟ Dealings BEE
Relative valuation
Shareholder Analysis Sustainability issues
(e.g. TRR)
16. 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
17. 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
18. “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)
22. 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 The Economist, June 13th – 19th 2009
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?
Forbes Magazine, 8 February 2010
24. Eurozone sovereign debt is material
3rd largest
economy
in Eurozone;
€1.9trn of
debt
Greece target
For 2020!
Data as at 31 December 2011
Reinhart & Rogoff
28. Chinese property developers – possible warning?
EverGrande up 17%,
other developers down
18%-41%
since Jan 2011
Source: Reuters, Element Investment Managers, 8 March 2012
29. SA‟s infrastructure focus – déjà vu
State of the Nation promises by President Zuma:
2009: Source: Times Live, 12 February 2012
“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
35. Asset Allocation – Element Balanced Unit Trust
Foreign Income, 4%
Foreign Equity, 17%
Net Equity, 39%
Money Market incl.
cash, 25%
Inflation
Linked
Bonds,
5% Listed Property, 3%
Nominal Bonds, 1% Hedged Equity, 6%
At 31 January 2012
36. Asset Allocation – Element Real Income
Foreign
Income, 15%
Net Equity, 20%
Foreign
Equity, 13% Listed
Property, 4%
Hedged Equity, 4%
Nominal
Bonds, 2%
Inflation Linked
Money Market incl. Bonds, 11%
cash, 30%
At 31 December 2011
37. 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
38. 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
39. Size and Shrinking Portfolio Universe
Maintain 3-5 x
portfolio universe
advantage
Insufficient resources
Increased portfolio risk
Constraints: 1. 5% Equity position
Source: FTSE/JSE All Share 2. < 15% Free Float
(167 companies as at 30 Nov 2011) 3. Trade 30% of market volume
40. 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
41. What period should investors focus on?
100 000.000 Aggregate return
10 000.000
Aggregate Return and Standard
1 000.000
100.000
Deviation (log)
10.000
Standard
1.000 Deviation
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)
Source: MJ Mauboussin (Chief Investment Strategist, Legg Mason)
42. What period should investors focus on?
110%
Time and the probability of gain
100%
90%
Probability
80%
70%
60%
50%
1 Hour 1 Day 1 Week 1 Month 1 Year 10 Years 100 Years
Years (log)
Source: MJ Mauboussin (Chief Investment Strategist, Legg Mason)
43. Element Equity: Performance & Risk
Element Earth
As at 31 December 2011 ALSI RELATIVE
Equity Fund
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
Inception (October 2001) to 31 December 2011
Current Fund Size R 477 m
Benchmark (To be) ALSI
44. Element Flexible: Performance & Risk
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
Inception (October 2001) to 31 December 2011
Current Fund Size R 459 m
Flexible Benchmark CPI + 5%
45. Performance – Balanced Composite (Instit)
Balanced
As at 31 December 2011 Balanced Composite RELATIVE
Benchmark
Annualised since Inception 18.4% 15.9% 2.5%
Annualised 7 Year 15.4% 14.1% 1.3%
Inception (October 2003) to 31 December 2011
Fund Size R856m
Benchmark 60% FTSE/JSE All Share Index, 25% All Bond
Index & 15% Short Term Fixed Interest Index
46. Element Global Equity Fund
Performance of Epoch Global Choice 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
Element Global Equity Fund
Return
(ASISA) Foreign EQ General Peer Group Rank
(Annualized)
Element Global Equity 10.23% 3/26
Source: Morningstar, 29 Feb 2012
47. 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
48. 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% SASOL 9.4%
SASOL 5.8% versus the ANGLOS 8.9%
Growth
TONGAAT 4.9% Funds 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%
BRITISH AMERICA
NAMPAK 3.7% 4.0%
TOBACCO
BIDVEST 3.1% BIDVEST 3.8%
TOTAL 51.4% TOTAL 67.8%
Source: Coronation Fund Fact Sheet, 31 Dec 2011
49. Contrarian stock selection = Good blend
Element Earth Equity % Investec Equity %
OLD MUTUAL 7.1% SASOL -
MTN 6.8% MTN -
BRITISH AMERICAN
ANGLOGOLD 6.4% -
TOBACCO
SASOL 5.8% versus the SABMILLER -
Growth
TONGAAT 4.9% Funds 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 -
not
TOTAL 51.4% Total
provided
Source: Investec Equity Fund Fact Sheet, 31 Dec 2011
50. Contrarian stock selection = Good blend
Element Earth Equity % Investec Value %
OLD MUTUAL 7.1% GOLD FIELDS -
MTN 6.8% SASOL -
ANGLOGOLD 6.4% STEINHOFF -
SASOL 5.8% ANGLOS -
versus the
TONGAAT 4.9% Value ANGLOPLAT -
Funds
REINET 4.7% ANGLOGOLD
GOLD FIELDS 4.5% SAPPI -
ANGLOS 4.4% JD GROUP -
NAMPAK 3.7% MEDICLINIC -
BIDVEST 3.1% MTN -
not
TOTAL 51.4% Total
provided
Source: Investec Value Fund Fact Sheet, 31 Dec 2011
51. Contrarian stock selection = Good blend
Element Earth Equity % Allan Gray Equity %
BRITISH AMERICAN
OLD MUTUAL 7.1% 11.4%
TOBACCO
MTN 6.8% SASOL 11.2%
ANGLOGOLD 6.4% SABMILLER 9.4%
versus the
SASOL 5.8% REMGRO 7.1%
Value
TONGAAT 4.9% Funds 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%
Source: Allan Gray Equity Fund Fact Sheet, 31 Dec 2011
52. Contrarian stock selection = Good blend
RE:CM Flexible Equity
Element Earth Equity % %
Fund
OLD MUTUAL 7.1% SUN INTERNATIONAL 7.6%
MTN 6.8% DISCOVERY 5.6%
ANGLOGOLD 6.4% OLD MUTUAL 4.9%
SASOL 5.8% versus the AMPLATS 4.9%
Value
TONGAAT 4.9% HARMONY 3.6%
Funds
HOSKEN
REINET 4.7% 3.2%
CONSOLIDATED
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%
Source: RE:CM Flexible Equity Fund Fact Sheet, 31 Dec 2011
53. Why use Element?
Active Investment Enhanced Long
process Term performance
Contrarian view Blend well
Boutique size Broader universe
Voting & Fiduciary
Engagement responsibility
ESG research Better risk analysis
No performance Equitable
fees treatment of
clients
55. 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
ian@elementim.co.za
56. CONTACT DETAILS:
• Natalie Smith
natalie@elementim.co.za (083 306 6460)
• Ian Jones
ian@elementim.co.za (071 675 4282)
Thank you
www.elementim.co.za