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

52

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

67

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 greg@elementim.co.za

68

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

CONTACT DETAILS:

• Portfolio Managers:

terence@elementim.co.za

jeleze@elementim.co.za