SENATE Group
Terence Craig – Chief Investment Officer
Jeléze Hattingh – Portfolio Manager
6 November 2014
What to do when everything looks expensive?
2
Portfolio Managers
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
Terence Craig48, Chief Investment Officer
B Bus Sc (Hons), CA (SA), CFA
13 : 20Element : Industry Experience
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
Agenda
Asset classes look expensive
Warning signs of over-the-top consumption
How did we get here?
How expensive?
What to do
4
Asset Classes look expensive
5
S&P 500 looks expensive on a number of measures…
6
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
All Share Index making new highs consistently
8
ALSI
ALSI Earnings
Source: Element Investment Managers, Inet, 31 October 2014
SA Bonds – 20 year bull market
9Source: Element Investment Managers, Inet, 4 November 2014
Warning signs of over-the-top consumption
10
What would you pay for this painting?
11
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
Three Studies of Lucian Freud
12
Rank: 7th
Artist: Francis Bacon
Sold for: $142.4m
Date sold: November 2013
Le Rêve
13
Rank: 4th
Artist: Pablo Picasso
Sold for: $155.0m
Date sold: March 2013
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)
15Source: Bloomberg
“I don’t know what money means anymore,” said Asher Edelman, an art dealer and founder of ArtAssure, an art financing company
Art Investment Funds abound
16Source: CNN Money
Sotheby’s – flashing warning signs for S&P 500…
17
18Source: Bloomberg
Wine funds not uncommon
19
SA Consumer under pressure or has Makro gone mad?
20
Source: Makro Christmas Liquor, 2014
The Enigma Mansion – Yours for R350m!
21Source: www.enigmamansion.com
22Source: Bloomberg
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”
~ Marc Faber, The Gloom, Boom & Doom Report, May 2014
How did we get here?
24
US: Quantitative Easing explained…
25
Developed market interest rates at 0%
26
Bank of England
US Fed
ECB
Source: Bloomberg, 11 July 2014
Increasing monetary base ≠ material change in economy…
27
As Velocity of money trends lower
Source: John Hussman, 3 November 2014
Debt levels are looking scary again…
28
How expensive?
29
Alsi TR/ Trend: FV = 41 919, 12% overvalued
Source: Element Investment Managers, 30 September 2014
30
Equity returns to disappoint vs history
Source: Element Investment Managers, I-Net Bridge, 30 September 2014
Expected 5 year total returnfrom current 16.1 PE = 10.2% p.a.
Two recent extreme points: Outcome very close to expectation
31
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
How expensive is the ALSI relative to history?
32
S&P 500: Cyclically-Adjusted PE ratio is expensive…
33
Is the US recovery really happening?
34Source: Element Investment Managers, Bloomberg, 31 October 2014
Loss-making stock IPOs are back to heydays
35Source: sentimentrader.com, June 2014
What happens when the punch bowl is taken away?
36Source: Business Insider, 30 October 2014
What to do?
37
Look for Relative Value
38
Global Equities vs Bonds – warning signs for Equities…
39Source: Nedbank Capital Research, 4 November 2014
We highlighted a rotation likely in 2013…Buy ResourcesSell Industrials
Sell ResourcesBuy Industrials
Series always reverts, only timing is uncertain
As stretched as ever
40Source: Element Investment Managers, 31 December 2013
Buy ResourcesSell Industrials
Sell ResourcesBuy Industrials
Series always reverts, only timing is uncertain
As stretched as ever
The gap between INDI and RESI closing
41Source: Element Investment Managers, 31 October 2014
Buy ResourcesSell Industrials
Sell ResourcesBuy Industrials
Series always reverts, only timing is uncertain
?
Industrials vs Resources: 3 year to turn…
42Source: Element Investment Managers, 31 October 2014
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
43Source: Element Investment Managers, 30 September 2014
Market currently trading on 32.5x trend-earnings
And 19.4x actual past 12m earnings
Both average around 12.4x
Indi’s CAPE remains at abnormal levels
44Source: Element Investment Managers, 30 September 2014
INDI earnings at unprecedented levels
45Source: Element Investment Managers, 30 September 2014
Earth Equity Sector Allocation
46Holdings as per Element Earth Equity Fund, 31 October 2014
Shoprite: Element Long Term Sheets
Source: Element Investment Managers, 31 December 2012
Buy Shoprite
Sell Shoprite
LT TrendEarnings
Actual EPS
Shoprite share price
47
Shoprite: EPS Long Term Sheet
48Source: Element Investment Managers, 30 September 2014
Sun International: EPS Long Term Sheet
49Source: Element Investment Managers, 30 September 2014
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)
Sun Intnl & Shoprite: Relative value example
Material relative valuation differentials = opportunity
Buy
Sell
Source: I-NET BFA, Element Investment Managers, 31 January 201350
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
Sun International & Shoprite: Valuation disparity
Source: I-NET BFA, Element Investment Managers, September 201451
Find unique opportunities
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Property Dual Listed Shares
6.5% pickupTarget
CPI + 3-7%
Source: Element Investment Managers, BESA, 31 October 2014
Real return from A-listed Properties
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%
Adding Value - Aquarius Plat Convertible Bond
55Source: Element Investment Managers, Bloomberg, 31 October 2014
Diversify
56
Element Flexible Fund - Asset Allocation
Holdings as at 31 October 201457
Holdings as per Element Flexible Fund
Diversify by:• Asset class• Geography• Currency• Commodity
&• Asset Manager
58
SWIX ALSI
Value style out of favourSource: Riscura, September 2014
3 Year Performance to Sept 2014: All 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
3 Year Performance to Feb 2009: Active Managers
59
Be patient…and wait for the sales
60
Naspers looking stretched
61Source: Element Investment Managers, 30 September 2014
Tencent – trajectory similar to 1999/2000
62Source: Bloomberg, 31 October 2014
SABMiller: Expensive relative to history…
63Source: Element Investment Managers, 30 September 2014
Anglos: EPS Long Term Sheet
64Source: Element Investment Managers, 30 September 2014
BHPBilliton: EPS Long Term Sheet
65Source: Element Investment Managers, 30 September 2014
Aquarius Platinum – Priced for death?
66
BEE Partners forced sellers Rightsissue
-98%
Source: Element Investment Managers, INET-BFA, 4 November 2014
1. Look for relative value
2. Try to uncover unique opportunities
3.Diversify
4.Be patient and wait for the sales
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What to do?
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 [email protected]
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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.
Disclaimer
69
Thank you
www.elementim.co.za
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