Element Investment

Element Investment presentation; Senate Group Conference; November 2014.

1. SENATE Group T erence Craig – Chief Investment Officer Jeléze H attingh – Portfolio Manager 6 November 2014

2. What to do when everything looks expensive? 2

3. 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 Craig 48, Chief Investment Officer B Bus Sc ( Hons ), CA (SA), CFA 13 : 20 Element : 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

4. Agenda Asset classes look expensive Warning signs of over-the-top consumption How did we get here? How expensive? What to do 4

5. Asset Classes look expensive 5

6. S&P 500 looks expensive on a number of measures… 6

7. 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

8. All Share Index making new highs consistently 8 ALSI ALSI Earnings Source : Element Investment Managers, Inet , 31 October 2014

9. SA Bonds – 20 year bull market 9 Source : Element Investment Managers, Inet , 4 November 2014

10. Warning signs of over-the-top consumption 10

11. What would you pay for this painting? 11 Artwork: Anna’s Light Artist: Barnett Newman Sold for: $105.7m Date sold: October 2013 Ranks 17 th 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

12. Three Studies of Lucian Freud 12 Rank: 7 th Artist: Francis Bacon Sold for: $142.4m Date sold: November 2013

13. Le Rêve 13 Rank: 4 th Artist: Pablo Picasso Sold for: $155.0m Date sold: March 2013

14. 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)

15. 15 Source: Bloomberg “I don’t know what money means anymore,” said Asher Edelman, an art dealer and founder of ArtAssure , an art financing company

16. Art Investment Funds abound 16 Source: CNN Money

17. Sotheby’s – flashing warning signs for S&P 500… 17

18. 18 Source: Bloomberg

19. Wine funds not uncommon 19

20. SA Consumer under pressure o r has Makro gone mad? 20 Source: Makro Christmas Liquor, 2014

21. The Enigma Mansion – Yours for R350m! 21 Source: www.enigmamansion.com

22. 22 Source: Bloomberg

23. 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

24. How did we get here? 24

25. US: Quantitative Easing explained… 25

26. Developed market interest rates at 0% 26 Bank of England US Fed ECB Source: Bloomberg, 11 July 2014

27. Increasing monetary base ≠ material change in economy… 27 As Velocity of money trends lower Source: John Hussman , 3 November 2014

28. Debt levels are looking scary again… 28

29. How expensive? 29

30. Alsi TR/ Trend: FV = 41 919, 12% overvalued Source: Element Investment Managers, 30 September 2014 30

31. Equity returns to disappoint vs history Source: Element Investment Managers, I-Net Bridge, 30 September 2014 Expected 5 year total return f rom current 16.1 PE = 10.2% p.a. Two recent extreme points: Outcome very close to expectation 31

32. 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

33. S&P 500: Cyclically-Adjusted PE ratio is expensive… 33

34. Is the US recovery really happening? 34 Source : Element Investment Managers, Bloomberg, 31 October 2014

35. Loss-making stock IPOs are back to heydays 35 Source : sentimentrader.com, June 2014

36. What happens when the punch bowl is taken away? 36 Source : Business Insider, 30 October 2014

37. What to do? 37

38. Look for Relative Value 38

39. Global Equities vs Bonds – warning signs for Equities… 39 Source : Nedbank Capital Research, 4 November 2014

40. We highlighted a rotation likely in 2013… Buy Resources Sell Industrials Sell Resources Buy Industrials Series always reverts, only timing is uncertain As stretched as ever 40 Source : Element Investment Managers, 31 December 2013

41. Buy Resources Sell Industrials Sell Resources Buy Industrials Series always reverts, only timing is uncertain As stretched as ever The gap between INDI and RESI closing 41 Source : Element Investment Managers, 31 October 2014

42. Buy Resources Sell Industrials Sell Resources Buy Industrials Series always reverts, only timing is uncertain ? Industrials vs Resources: 3 year to turn… 42 Source : Element Investment Managers, 31 October 2014

43. 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 43 Source: Element Investment Managers , 30 September 2014

44. 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 44 Source : Element Investment Managers, 30 September 2014

45. INDI earnings at unprecedented levels 45 Source : Element Investment Managers, 30 September 2014

46. Earth Equity Sector Allocation 46 Holdings as per Element Earth Equity Fund, 31 October 2014

47. Shoprite: Element Long Term Sheets Source : Element Investment Managers, 31 December 2012 Buy Shoprite Sell Shoprite LT Trend Earnings Actual EPS Shoprite s hare price 47

48. Shoprite: EPS Long Term Sheet 48 Source: Element Investment Managers, 30 September 2014

49. Sun International: EPS Long Term Sheet 49 Source: Element Investment Managers, 30 September 2014

50. 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 2013 50

51. 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 2014 51

52. Find unique opportunities 52

53. Property Dual Listed Shares 6.5% pickup Target CPI + 3-7% Source : Element Investment Managers, BESA, 31 October 2014 Real return from A-listed Properties

54. 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

55. Adding Value - Aquarius Plat Convertible Bond 55 Source : Element Investment Managers, Bloomberg, 31 October 2014

56. Diversify 56

57. Element Flexible Fund - Asset Allocation Holdings as at 31 October 2014 57 Holdings as per Element Flexible Fund Diversify by: Asset class Geography Currency Commodity & Asset Manager

58. 58 SWIX ALSI Value style out of favour Source: Riscura , September 2014 3 Year Performance to Sept 2014: All Managers

59. 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

60. Be patient…and wait for the sales 60

61. Naspers looking stretched 61 Source : Element Investment Managers, 30 September 2014

62. Tencent – trajectory similar to 1999/2000 62 Source : Bloomberg, 31 October 2014

63. SABMiller: Expensive relative to history… 63 Source : Element Investment Managers, 30 September 2014

64. Anglos: EPS Long Term Sheet 64 Source : Element Investment Managers, 30 September 2014

65. BHPBilliton : EPS Long Term Sheet 65 Source : Element Investment Managers, 30 September 2014

66. Aquarius Platinum – Priced for death? 66 BEE Partners forced sellers Rights issue -98% Source : Element Investment Managers, INET-BFA, 4 November 2014

67. Look for relative value Try to uncover unique opportunities Diversify Be patient and wait for the sales 67 What to do?

68. 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: [phone] or at [email protected] 68

69. 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

70. www.elementim.co.za CONTACT DETAILS: Portfolio Managers: [email protected] [email protected]