Senate Group

A Return to Normality

Jeléze Hattingh – Portfolio Manager René Prinsloo – Portfolio Manager

14 November 2013

René PrinslooPortfolio Manager

B Sc Hons (Act Sci)

FFA – Qualified Actuary

CFA

8 years’ industry experience

Joined Element in November 2007

Appointed Portfolio Manager in June 2012

Stellenbosch University - Lecturer

Glacier - Investment Analyst

2

Overview of Element Investment ManagersIndependent investment manager established in 1998

Track record > 15 Years

Rebranded from Frater Asset Management in 2009

Long-term contrarian value investors

Material focus on downside risk

We define risk as the possibility of permanent capital loss

Leaders in Responsible Investment and ESG analysis

Enhances our analysis of risk

>115 years’ experience in Investment Team - qualifications include:

8 CFAs (80% of Investment team), 4 CA (SA)s, 3 Masters, 1 Actuary

No performance fees charged on Element Unit Trusts3

Agenda

Backdrop to the Return to Normality

Extremely stretched markets globally

Warning signs

Element Unit Trusts

How are we positioned for the Return to Normality?

Element Real Income Fund

Conclusion

4

Market movements since we last met…

Asset Class 2013/03/14 2013/11/12 Move % Move

ALSI 40 908 45 220 4 312 11%

ALSI - EY 5.9% 5.4% -50bp -8%

Property - DY 6.0% 6.5% 50bp 9%

10y Gov Bond 6.9% 8.0% 110bp 16%

10y ILB 0.9% 1.7% 80bp 92%

3y NCD 6.2% 7.2% 100bp 17%

Repo 5.0% 5.0% - 0%

CPI 5.9% 6.0% 10bp 1%

USDZAR 9.16 10.34 1.18 13%

S&P500 1 563 1 768 205 13%

10y UST 2.0% 2.8% 70bp 36%

5Source: Element Investment Managers, I-Net, 12 November 2013

Green: increased, more expensive. Red: sold off, cheaper.

Correlation Coefficient: 56%

QE is clearly driving all markets

Source: Element Investment Managers, I-Net Bridge, 30 September 20136

7

What do the following 3 scholars have in common?

James Tobin

Professor at Yale

Nobel Prize Winner

Economic Advisor to

Pres. J.F. Kennedy

Credited with “Tobin

Tax” and “Operation

Twist”

Koichi Hamada

Did Ph.D. under Tobin

at Yale (1967)

Professor at Yale

Economic Advisor to

P.M. Shinzo Abe

“Brains behind”

“Abenomics”

Janet Yellen

Did Ph.D. under Tobin at Yale

(1971)

Economic Advisor to Pres. Bill

Clinton

Next Fed Chair

“Force behind” … QE infinity

starting Sep’12

The portfolio-balance theory found that policy makers had the ability to affect the

prices of individual assets by altering their supply and demand in the

financial markets.

“Do policy makers have the knowledge and ability to improve macroeconomic

outcomes rather than make matters worse?

Yes…” ~ Janet Yellen, 1999

More loose monetary policies to follow?

Source: James Bullard, St. Louis Fed, 1 November 2013 http://research.stlouisfed.org/econ/bullard/pdf/BullardStLRegChamberFinancialForum1November2013Final.pdf

In June and September, changes in perceived tapering scenarios led to large movements in key financial

market variables.

Moves were significant and in the conventional direction.

Changes in the perceived pace of asset purchases have a very similar financial market effect as

changes in the policy rate during more “normal times.”

Real 5y interest rates: Equity markets:

Is the FED losing control of the markets?

8

This phenomenon’s latest exampleUS Non-farm payrolls for October were released on Fri 8 Nov

The number came in at 204 000 compared to market expectations

of 120 000

i.e. 204k jobs were created over October, more than expected

This is good news!

The markets sold off on this news

SA bonds weakened by 10 points, US bonds by 14 points

Gold sold off by 1.7%

The ALSI closed down 1.2%

Why?

Good news => economic recovery => Fed more likely to taper

Insanity or markets becoming too addicted to stimulus?

9

US Bonds still have a long way to go…

End of multi-decade bull market?

Current yield

Average yield

10

US Equity market looks expensive…

11Source: dshort.com, October 2013

12

US Equities’ expected returns are very poor!

Source: Butler, Philbrick, Gordillo & Associates, 31 July 2013

US’s margin debt above dot-com levels…

Source: Motley Fool, 26 October 2013 13

And high margin debt is negative for US equities…

Source: GaveKal, August 2013

?

14

SA Asset classes - 15 year bull markets!

Source: I-Net, 31 October 2013 15

Bond yields still down 47%!

ALSI up 13 times!

Source: Element Investment Managers, I-Net Bridge, 31 October 2013

The end of a 15y bull run?

SA bonds move in lock-step with US bonds

16

The ALSI PE is currently very high

Market currently trading on 21.4x trend-earningsAnd 18.8x actual past 12m earningsBoth average around 11.9x

Source: Element Investment Managers, 31 October 2013 17

Returns from this starting point should be poor

Source: Element Investment Managers, I-Net Bridge, 31 October 2013 18

Expected 5 year returnfrom current PE

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, 31 October 2013 19

ALSI in US$ vs World Index

A decade of materialOutperformance (5 x)

A great time tobuy SA market

ALSI in $ has rolled over – time for caution

Source: Element Investment Managers, I-Net, 31 October2013 20

All Share Breadth – June 2008

ALSI returned 10% over the previous year

Without these five you would have lagged the index by 24%

It was difficult to beat the index by omitting a few key shares (i.e. one-sided breadth)

The situation was exceptional relative to history

BHP Billiton, Anglo, Sasol, Implats and MTN skewing the ALSI’s performance

Source: Element Investment Managers, 30 September 2013 21

All Share Breadth – September 2013

Richemont, Naspers and SAB Miller skewing the ALSI’s performance

Breadth not as stretched or one-sided as in 2008

However, in the past year half of ALSI’s return came from 3 shares

Source: Element Investment Managers, 30 September 2013 22

6.50

6.70

6.90

7.10

7.30

7.50

7.70

7.90

8.10

8.30

8.50

8.70

8.90

-10 000

-

10 000

20 000

30 000

40 000

50 000

60 000

70 000

80 000

90 000

100 000

110 000

120 000

130 000

01

Jan1

2

16

Jan1

2

31

Jan1

2

15

Feb1

2

01

Mar1

2

16

Mar1

2

31

Mar1

2

15

Apr1

2

30

Apr1

2

15

May1

2

30

May1

2

14

Jun1

2

29

Jun1

2

14

Jul1

2

29

Jul1

2

13

Au

g12

28

Au

g12

12

Sep12

27

Sep12

12

Oct1

2

27

Oct1

2

11

Nov12

26

Nov12

11

Dec12

26

Dec12

10

Jan1

3

25

Jan1

3

09

Feb1

3

24

Feb1

3

11

Mar1

3

26

Mar1

3

10

Apr1

3

25

Apr1

3

10

May1

3

25

May1

3

09

Jun1

3

24

Jun1

3

09

Jul1

3

24

Jul1

3

08

Au

g13

23

Au

g13

07

Sep13

22

Sep13

07

Oct1

3

22

Oct1

3

06

Nov13

Cumulative Foreign Flows since J an 2012 (R'm) vs ALBI YTM

Cumulative Foreign Bond Flows Cumulative Foreign Equity Flows ALBI YTM

Foreigners: Buying BRICS to selling BIITS*?“What you will see is a lot more differentiation - what’s important is to distinguish

between one emerging market and another.”

Marco Annunziata, chief economist General Electric Co, Oct 2013

Foreigners hold > 38% of SA Government Bonds

7 Bonds > 45% foreign owned, SA’s 10y bond (R2023) is 60% foreign owned

Source: Element Investment Managers, I-Net Bridge, 11 November 2013*BITTS = Brazil, India, Indonesia, Turkey, South Africa 23

Warning signs of the

end of the “New Normal”

aka bubble territory

Anatomy of a bubble…

25

Party like it’s 1999…

Source: Element Investment Managers, Bloomberg, November 201326

Comparing Nasdaq (rebased to 1990) to the SA Retailers (based to 2002)

Exponential bubbles: Bonds and Farmlands

Source: Mauldin Economics, 3 November 201327

Caution warranted: Bearish sentiment at 20 year low…

30 October 201328

Jeléze HattinghPortfolio Manager

M Sc (Cum Laude), CFA, CMT

Business Mathematics and Information

Quantitative Risk Management

8 years’ industry experience

Joined Element in May 2010

Appointed Portfolio Manager in June 2012

Allan Gray Ltd – Fixed Interest

Credit Suisse and Deloitte Consulting (UK) – Risk Management

Standard Bank (SA) – Risk Management

29

Element Unit Trust Overview

and focus on

Element Real Income Fund

30

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

Reg 28 Balanced Fund – expected

position

Size of bubble = maximum drawdown

Offer investors a choice alonga risk/return frontier

Data: Fund inception to Oct 201331

Lower risk than the market

Element Global Equity Fund

Element Earth Equity Fund

Element Flexible Fund

Element Balanced Fund*

Element Real Income Fund*

Inception Date Feb 2011 Oct 2001 Oct 2001 Nov 2009 Oct 2002

ASISA CategoryGlobal - Equity

GeneralSouth African - Equity General

Multi Asset - Flexible

Multi Asset - High Equity

Multi Asset - Low Equity

Maximum Equity 100% 100% 100% 75% 40%

Benchmark MSCI World Index ALSI CPI + 5%Average of the Multi Asset – High Equity

GroupCPI + 3%

Performance at 31 October 2013 Fund

Bench-mark Fund

Bench-mark Fund

Bench-mark Fund

Bench-mark Fund

Bench-mark

Annualised since Inception

24.8% 25.2% 17.4% 18.5% 15.5% 11.0% 9.0% 13.3% 11.8% 8.4%

Annualised 10 Year     16.6% 20.0% 14.1% 10.8%     11.2% 8.8%

Annualised 5 Year     12.1% 20.2% 10.8% 10.4%     10.2% 8.4%

Annualised 3 Year     7.1% 17.9% 10.4% 10.8% 10.6% 14.2% 11.3% 8.8%

1 Year 45.9% 46.6% 7.6% 26.2% 13.6% 10.9% 14.4% 19.2% 13.7% 8.9%

* Regulation 28 Compliant

Element Unit Trust Performance Overview

Absolute AA Funds outperforming

First Quartile over 1y and since inception

Poor Equity Performance

32

Equity performance impacts all our Funds

EQUITY FUNDS

ASSET ALLOCATION

FUNDS

SCREENED FUNDS

EARTH EQUITY FUND

FLEXIBLE FUND

REAL INCOME FUND

BALANCED FUND

ISLAMIC BALANCED FUND

ISLAMIC EQUITY FUND

EQ

UIT

Y

EN

GA

GEM

EN

T

We manage and engage across “one” equity portfolio

When equity performance turns – will boost all our Funds

Asset Allocation calls have been good33

Source: Element Investment Managers, MoneyMate, October 2013

Our Asset Allocation calls have been good…

* For internal presentations only 34

Above average despitepoor Equity performance

Asset Allocation and Positioning

for a

Return to Normality

Asset Allocation Investment Process

Balanced Funds

Equity Income Foreign

Bonds ILBsFRNs/ Cash Property

CreditDuration Curve Shape Liquidity

Asset Allocatio

n

Income Allocatio

n

Security Selection

Prefs

36

Implementation

Cautioned against capital loss on “risk-free” assets

Source: Element Investment Managers, I-Net Bridge, 31 October 201337

There is no substitute for due diligence…

R925m corporate bond default – Element had zero exposure

Some of SA’s largest asset managers were caught – searching for higher yields

“We don’t know what happened here…Due diligence is only as good as the

financials that are presented to you.”

Leon Campher, CEO of ASISA, 26 July 2013

We disagree as there were numerous red flags raised!

Our credit process involves rigorous analysis of issuers

Detailed research on alternative investments

Including ESG research – particularly corporate governance

38

Mail & Guardian, August 2 to 7 2013

Investment in Renewable Energy Bond

Detailed research

Use alternative asset

classes to enhance our

risk-return profile

Actively manage our

income positions

Invest in CPV bond

…and kick the tyres!

39

-45%

-40%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

0% 1% 2% 3% 4% 5% 6% 7%

Cap

ital

Retu

rn

Exit Real Yield

I mpact of Real Yield Change for 10 SA Government I LB

ILBs: What did we say in April 2013?

Source: Element Investment Managers, I-Net Bridge, April 2013

Real GDP expectations:2013: 2.7%2014: 3.5%2015: 3.8%

Historical ILB Real Yield = 3.4%

Apr’13 10y Real Yield of 0.62%

Oct’13 10y Real Yield of 1.65%

8% Capital Loss in 6 months!

40

New Basel rules mean that preference share capital loses its recognition over time

African Bank Preference Shares effectively paying cash plus 7.2% after tax

African Bank Prefs are an attractive alternative

Reversion to historical norms implies price of R81: 21% upside

Prospect of company buy-back at price of R100: 49% upside

Even if this event only happens 5y from now, return earned is still 19% p.a.

Rights issue of R5.5bn is positive for pref shareholders and bond investors

Source: Element Investment Managers, I-Net Bridge, 31 October 201341

Active management of Foreign Cash

Leverage knowledge of domestic companies that issue offshore.

Hedge out currency risk.

Issuer YTM Exposure Currency TRR* TRR* of

ALBIRelative

TRR*TRR of

USDZAR

Old Mutual 5.2% USD 57% 15% 42% 33%

Aquarius Platinum 14.9% USD 71% 4% 66% 19%

Edcon Holdings 6.2% USD 40% 4% 35% 15%

Redefine International DY: 7% USD 108% 4% 104% 19%

* TRR in ZAR, since date of first purchase (not annualised)

At 31 October 2013 42

Peer Group Performance: Epoch Global Choice FundThe Epoch Global Choice fund’s reached its eight year track record in September 2013

For comparison, it outperformed all other funds in the ASISA Global - General - Equity fund

category since its inception.

Source: Epoch Investment Partners, Moneymate, 31 October 201343

Asset Allocation Investment Process

Balanced Funds

Equity Income Foreign

Bonds ILBsFRNs/ Cash Property

CreditDuration Curve Shape Liquidity

Asset Allocatio

n

Income Allocatio

n

Security Selection

Prefs

44

Implementation

The cyclicality of investor emotions…

45

RichemontNaspers

Platinum/Gold sharesResources

Retailers

Why have our equity funds underperformed?There is a material divergence between:

Low PE (Value) shares and High PE (Momentum) Shares

Resources (unloved) and Industrials (favourites)

Cyclicals (unloved) and Defensives (favourites)

Expensive shares have re-rated further

Cheap shares have de-rated further

Value managers are underperforming momentum managers

This is unsustainable and will change as it always has

46

Bottom 20 CTAR & Share Positions

6 shares account for76% of underperformance

Positions taken Earth Equity: Average relative weights of the latest 12 monthsending 31 Oct 2013

Benchmark ALSI47

Source: I-NET Bridge, Element Investment Managers, 31 October 2013

Oct 95: INDI 52% of ALSI

Sep 13: INDI 55% of ALSI

Mar 98: RESI 21% of ALSI

Jun 13: RESI 25% of ALSI

All Share Index: Industrials at all-time high

48

Resources look cheap, Industrials expensive…

Buy ResourcesSell Industrials

Sell ResourcesBuy Industrials

Series always reverts, only timing is uncertain

As stretched as ever

Source: I-Net Bridge, 31 October 201349

Sector Allocation

Holdings as per Element Earth Equity Fund, 31 October 201350

Top 10 Overweights

* Alternate to Platinum shares

Holdings as per Element Earth Equity Fund, 31 October 2013

SHARE% of Earth

Equity Fund% of ALSI RELATIVE

ANGLOGOLD 6.7% 1.0% 5.7%

SASOL 10.2% 4.7% 5.5%

NG PLATINUM ETF* 4.7% 0.0% 4.7%

MURRAY & ROBERTS 4.1% 0.2% 3.9%

TONGAAT 4.1% 0.2% 3.9%

TSOGO-SUN HOLDINGS 3.5% 0.0% 3.5%

GOLD FIELDS 3.8% 0.6% 3.2%

SUN INTERNATIONAL 3.3% 0.2% 3.1%

REINET 3.6% 0.5% 3.1%

HCI 2.9% 0.1% 2.8%

51

Murray & Roberts: Long Term Sheets

MUR trading at R102, a 564% premium to model fair value

Source: Element Investment Managers, 31 October 201352

History tends to repeat itself…

Divisional structures removed

Corporate office consolidated

Remuneration restructured

MUR market capitalisation Rm MUR shareholder’s equity

-

5 000

10 000

15 000

20 000

25 000

30 000

FY95FY96FY97FY98FY99FY00FY01FY02FY03FY04FY05FY06FY07FY08FY09FY10FY11FY12

FY95-FY99 Market cap -84%

FY08-FY12 Market cap -69%

-

1 000

2 000

3 000

4 000

5 000

6 000

7 000

FY95FY96FY97FY98FY99FY00FY01FY02FY03FY04FY05FY06FY07FY08FY09FY10FY11FY12

FY96-FY00 Ordinary shareholder's equity -48%

FY10-FY12 Ordinary shareholder's equity -36%

Leadership team strengthened

Non-core businesses disposed

Gearing reduced

Source: Company data, Element Investment Managers, I-Net Bridge to 30 June 2013 * Equity in FY12 adj for R2bn rights offer

Similarities between changes incorporated in 2001 & 2011:

53

Impact on gold as fiat currency => Gresham's law: “Bad money drives out good…

if they exchange for the same price.“

When a government overvalues one type of money and undervalues

another, the undervalued money will leave the country or disappear, while

the overvalued money will flood into circulation.

Source: Sharelynx.com, September 2013, BCA Research, 3 November 2013

?

Central bank balance sheet expansion and gold…

54

Anglos vs SAB: Cheapest in over 70 years…

At 30 September 2013

0.48

55

Bottom 10 Underweights

Holdings as per Element Earth Equity Fund, 31 October 2013

SHARE% of Earth

Equity Fund% of ALSI RELATIVE

SABMILLER 0.0% 8.6% -8.6%

CF RICHEMONT 0.0% 8.6% -8.6%

BHP BILLITON 2.6% 11.1% -8.5%

NASPERS 0.0% 6.2% -6.2%

MTN 1.8% 6.0% -4.2%

BA TOBACCO 0.0% 2.6% -2.6%

FIRSTRAND 0.0% 1.8% -1.8%

SANLAM 0.0% 1.7% -1.7%

REMGRO 0.0% 1.7% -1.7%

SHOPRITE 0.0% 1.3% -1.3%

56

Naspers: Long Term Sheet - EPS

Naspers Expensive

Naspers Cheap

Source: Element Investment Managers, 31 October 201357

Naspers now a bigger company than Sasol…

Source: I-NET Bridge, 31 October 2013

Sasol Market Cap

Naspers Market Cap

58

…despite Sasol earnings almost 5 times higher!

* HEPS per IFRS

Source: I-NET Bridge, 31 October 2013

Sasol Earnings

Naspers Earnings

59

Tech icons often fall to future competitors…

60

-94% downfrom peak

Conclusion on Element Fund positioning

Asset allocation - critical investment decision

Global and local markets do not look cheap

Diversify by asset class, geography and currency

SA Equities look expensive on a relative basis

We remain cautiously positioned

Material relative valuation differentials = opportunity

Capital preservation, dividend yield (rather than growth) key focus areas in equity markets over the medium term

“… but if you tell me that QE is going to be removed over 9 or 12 months, that’s a

big deal, because it’s my belief that QE has subsidised all asset prices and

when you remove that subsidisation the market will go down.”~ Stanley Druckenmiller, Sept 2013

Who should invest in the Real Income Fund?

Investors looking for a real return on their money

Target to outperform CPI + 3% over all periods

Have beaten its benchmark since inception 11 years ago.

A turnaround in equity performance will filter through in the Asset Allocation

Funds first

Investors who are more risk* averse – either older demographic or cautious of

the current environment

Low (<40%) exposure to equity

Well diversified portfolio across Asset Classes and Geographies

* We define risk as the possibility of permanent capital loss62

Asset Allocation – Element Real Income Fund

At 31 October 2013Holdings for Element Real Income Fund 63

Performance – Element Real Income Fund

As at 31 October 2013Element Real Income

FundCPI + 3% RELATIVE

Annualised Since Inception 11.8% 8.4% 3.4%

Annualised 10 Year 11.2% 8.8% 2.4%

Annualised 5 Year 10.2% 8.4% 1.8%

Annualised 3 Year 11.3% 8.8% 2.5%

1 Year 13.7% 8.9% 4.8%

64

Conclusion on Element Investment Managers

We have a proven philosophy, process and track record

Restructuring of staff completed, lessons learnt

Should lead to improved equity performance going forward

We have a well qualified, experienced and hard-working team

focused on ensuring our portfolios outperform our

benchmarks, cash and inflation on a long-term view

Strong Responsible Investment credentials

Our defensively positioned portfolios should hold up well in

the current environment of heightened uncertainty and

overvalued markets

65

Yellen and screamin’ into 2014…

28 October 2013

Justin Wolfers Univ of Michigan Public Policy & Economics Professor9 October 2013

“She’s an imaginative and technically adept economist possessed of a brilliant and precise mind.”

For:

Against:

66

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 2012 

Copies of our verification reports are available on request.

A complete list and description of our composites is available by contacting Brenda Lambrick at:

+27 21 426 1313 or at brenda@elementim.co.za

67

Thank you

CONTACT DETAILS:

• René Prinsloo

rene@elementim.co.za

• Jeléze Hattingh

jeleze@elementim.co.za

www.elementim.co.za

Element - LISP Platforms

LISP Earth Equity Flexible Balanced Real

IncomeIslamic Equity

Islamic Balanced

Global Equity Fund

Momentum FundShop

FundShop

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FundShop

FundShop

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Glacier Open Fusion/Open Open Fusion/

Open Open Open Open

AIMS Yes Yes Yes Yes Yes - -

Investec FundChoice

FundChoice - Fund

ChoiceFund

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Stratus/Topaz - - Stratus/

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Stanlib Classic Classic - - - - -

BoE - - - - Yes Yes -

69