Element Global Value - 2Q14

8/10/2019 Element Global Value - 2Q14

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Element Global Value

The Element Global Value Portfolio has the mandate to “go anywhere” in pursuit of attractive investment opportunities, using a

bottom-up investment approach. Being equity focused, the portfolio has at least 70% of its assets invested in international equity

markets. The portfolio uses as benchmark the MSCI World (Local) but it does not seek to mimic or track this index in any way.

2nd Quarter 2014

Net Asset Value (NAV) : 131.94

Launch date: 14-January-2011

Portfolio Manager: Filipe Alves da Silva, CFA, CAIA

Portfolio Details

Investment Highlights

Equity markets pushed through and gained 3.72% in the quarter and are now up 4.27% for the

year. The portfolio outperformed by roughly 1.5% in the quarter, gaining 5.23% and is now up

9.52% in 2014.

This quarter saw unprecedented measures by the ECB, such as cutting deposit rates to negativelevels, in an attempt to restart the EU’s economic engine and increase inflation.

Also noteworthy: Russia continued ignoring warnings from the rest of the World regarding the

conflicts in the Crimean region and a new rebel movement, ISIS, took everyone by surprise when it

captured several cities in Iraq and Syria.

I made several changes to the existing portfolio and one new purchase:

• Two long-time positions were liquidated during the quarter: Addvatage Technologies with and

Cninsure.

Addvantage Technologies is a small family-controlled company that distributes new and

refurbished cable-television equipment. The company's moto is that it can deliver the equipment

you need in a short period of time (on hand, on demand) thus being able to charge a premium

price for its service. What attracted me to Addvantage almost 3 years ago was its solid balance

..

Monthly Performance

80

90

100

110

120

130

Jan/11 Jan/12 Dec/12 Dec/13

MSCI World L ocal

Portfolio

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec YTD

2011 -1.11% 1.61% -2.05% 3.30% -1.25% -1.72% -1.37% -7.23% -7.20% 8.70% -2.83% -1.18% -12.57%

2012 7.06% 5.19% 1.62% -0.86% -6.98% 2.62% 0.62% 2.67% 1.35% -1.50% 0.97% 0.87% 13.73%

2013 2. 90% 0. 47% 1. 33% 1. 51% 1. 68% -3.88% 4.46% -0.90% 3.84% 4.64% 2.19% 1.41% 21.15%

2014 -2.14% 3.77% 2.49% 0.18% 3.01% 1.97% 9.52%

Weekly Performance Chart




sheet (its balance sheet was flush with cash, which represented about 50% of its market

capitalization while inventory made up for the other half) and its conservative management.Performance in the business has been lack-luster and doesn’t seem like it will improve in the

foreseeable future. I took the opportunity to seal-in a 50% return and exit the position when

during June while the shares briefly traded above the $3 mark.

Cninsure is a Chinese insurance intermediary where my investment was not so fortunate. I

invested mostly because of the company’s attractive valuation, strong balance sheet and good

growth prospects. This situation came crumbling down when in 2011 the company was accused of

providing false and misleading statements regarding its business and prospects, specifically

regarding the scorecard incentive scheme the company used to motivate its sales-force (later

settled the lawsuit for $6.6Mn, admitting no liability, fault or wrongdoing). To add fuel to the fire,the co-founder, and (ex) Chairman & CEO offered to take the company private, only to later

withdraw the proposal due to “market conditions and near term volatility”. While this was going

on, Cninsure’s results took a turn for the worse. Today the company is profitable, but I doubt that

it will ever achieve the profitability levels it had experienced, leading me to sell the shares and

realize a 58% loss.

Both positions were small and had a limited impact on the portfolio.

• Increased the Fidelity China Special Situations position

One of the largest positions in the portfolio is the exchange traded closed-fund Fidelity China

Special Situations, a fund that invests in Chinese companies with a special focus on the Chinese

consumer, a theme of which I am I am very fond. The fund launched in April 2010 with Fidelity’s

rock-star Anthony Bolton taking center stage. Mr. Bolton previously attained a stellar track-record

managing the Fidelity Special Situations fund from 1979 to 2007, achieving an annualized return of

19.5%.

The fairy-tale quickly ended when the fund’s initial good performance vanished in 2011, leadingthe fund to trade at a considerable discount to NAV. I took this opportunity to add the fund to the

portfolio’s holdings in June of 2011, and have since increased the exposure meaningfully. For the

following 3 years Mr. Bolton only managed to slightly outperform the overall Chinese equity

market.

In April Mr. Bolton, after having postponed it for 2 years, finally retired and Dale Nicholas, who had

previously managed other Fidelity Funds focused in Asia with very good results, took over.

Before Mr. Bolton’s exit the fund discount to NAV increased temporarily and I again took

advantage of this opportunity. The position now accounts for 7.5% of the portfolio, up from 6.4%

in the end of the 1st quarter, and has, so far, generated a gain of 16.5%.




• Increased exposure to a long-time favorite: The Gap

The Gap is a fashion retailer known to most that also operates Banana Republic, Old Navy andAthleta. I first bought shares back in May of 2011 because the shares were trading for an

undeserving 12 times earnings and the company was aggressively repurchasing its shares. Since

then, Gap’s management has successfully repurchased 30% of shares outstanding, thus increasing

my ownership by 41%. This massive buyback and good performance across the business led to a

re-pricing of the multiple, which now stands at 16.

Because of the rapid increase in share price I decreased the position in 2012, but have decided

again to increase it. I did this by increasing the investment to 0.6% of the portfolio and

implementing an option strategy:

- Sold an ATM (at the money) PUT for September/2014

- Used the proceeds to buy two OOM (Out of the Money) Calls for January 2015

At the end of the quarter, delta-adjusted exposure to The Gap was 3.1%.

• Added a new position in J.G. Wentworth

J.G. Wentworth is the leader of the structured settlements market (a structured settlement is a

settlement where the claimant agrees to resolve a claim by receiving periodic payments on an

agreed schedule rather than as a lump sum) in the US. JGW’s main business is acquiring several of

these structured settlements (picture them as a cash-flow stream) from individuals, packaging

them into asset backed securities and reselling them (at a higher price) to institutional investors,

thus providing an uncorrelated source of return.

JGW pays individuals at a discount rate of around 11% and resells the settlements at a discount

close to 4% via a securitization (grouping several of these structured settlements and selling them

as one). When you take into consideration that some of these settlements have very long lives, the

difference in yield at which JGW buys and sells makes a huge difference in price.

When an individual sells his/her structured settlement to JGW in exchange for cash, a judge has toapprove the transaction, thus shielding JGW from any possible wrongdoing or possible claim in the

future.

Also, it is important to note that when you settle for a structured settlement you will not be

receiving the money directly from the defendant. He (or his insurer) will buy an annuity from an

insurance company, thus mitigating the specific credit risk of the defendant by replacing it with a

highly rated major insurer.

The beauty comes in the details. Because these structured settlements are backed by a major

insurer it means the cash-flow stream has almost no correlation with other assets. JGW adds value

because it takes several small illiquid structured settlements and re-packs them into large,

institutional sized pools, which can then be sold and traded by institutional investors. JGW controls

60-70% of the market and usually issues 3 of these per year.




JGW had a sour IPO in late 2013, with the deal expected to come out at $20, but ending up priced

at only $14. Despite there being no clear peer group for this company, it is now trading for only 7times current year EPS, a price that clearly doesn’t factor in future growth of any kind. A

comparison, however, can be made with: i) Santander Consumer (SG) which trades at 12 times

2014 earnings, and unlike JGW takes on credit risk, JGW would be worth almost $30; ii) Peach

Holdings was bought out by a private equity firm for 16 times earnings in 2005, implying a price

north of $35 for JGW (JGW acquired Peach Holdings, its largest competitor, in 2011).

Because equity markets have been going up for the past 5 years, it is becoming increasingly

difficult to find good bargains. The low rates environment in which we live makes it so that blue-

chip names, especially those with solid dividend payment history, have appreciated meaningfully,

and are now priced for perfection. Despite this, in the segments more ignored by investors, such

as emerging stocks, there are still interesting opportunities. Expect future additions to the

portfolio to come from these remaining pockets of value

Unfortunately, successful investing may not be just about finding good companies, but also about

buying future dividend payments at attractive prices. We believe there is nothing safe about buyingovervalued assets; stable or not, gravity applies.

- Jesper Madsen of Matthews Asia Dividend Fund



9.9%

29.9%

0.2%

1.2%

25.2%

11.9%

4.4%

3.9%

5.0%

0.0%

7.0%

0.2%

0% 5% 10% 15% 20% 25% 30% 35%

Financials

Information Technology

IndustrialsEnergy

Consumer Discretionary

Consumer Staples

Health Care

Materials

ecommunication Services

Utilities

Other

Cash

64.1%

9.9%

2.6%

4.4%4.6%

4.6%

3.7%

2.2%

0.7%

0.7%

0.6%

0.0%

0.0%

0.0%

1.7%

0.2%

0% 10% 20% 30% 40% 50% 60% 70%

United States

China

Canada

FranceGermany

Spain

Israel

Ukraine

Brazil

United Kingdom

Kazakhstan

Japan

Australia

Switzerland

Others

Cash

Allocation by CountryAllocation by Sector

Currency Exposure


For more information please contact Filipe Alves da Silva directly

or send anemail to [email protected]

Contacts

77.3%

4.7% 7.5%

0.7% 4.1%

0.4% 2.2% 2.5%

0%

20%

40%

60%

80%

100%

EUR USD CNY BRL CAD GBP UAH HKD

Max. Long Exposure: 130%

Min. Long Exposure: 70%

Position Sizing (Long): Max Position 10% (at purchase)

Use of Derivatives: May use options or warrants

(Max notional exposure of 30%)

Ability to Short: Max individual position 2.5%

Max gross short exposure 30%

Currency Hedging: Hedged on a best effort basis

Investment Guidelines

This report is based on my portfolio. Reference to specific

securities should not be construed as a recommendation to buy or

sell these securities. You should always conduct the due diligence

yourself.

Disclaimer

E L E M E N T

Largest Positions

Weight

Apple Inc 8.0%Fidelity China Special Situations 7.5%

IBM 6.9%

Microsoft Corporation 6.9%

PepsiCo 5.2%

BMW 4.6%

Berkshire Hathaway 4.6%

Alternative Asset Opportunities 4.5%

AMERCO 4.2%

Archer Daniels Midlands 3.9%

56.2%

Name

Total TOP 10 Positions

mailto:[email protected]








Complete List of Holdings


Note: Reference to specific securities should not be construed as a recommendation to buy or sell these securities. You should always conduct the due

diligence yourself.

Weight

Apple Inc 8.0%

Fideli ty China Special Si tuations 7.5%

IBM 6.9%

Microsoft Corporation 6.9%

PepsiCo 5.2%

BMW 4.6%

Berkshire Hathaway 4.6%Alternative Asset Opportunities 4.5%

AMERCO 4.2%

Archer Daniels Midlands 3.9%

Teva Pharmaceuticals 3.7%

BlackRock 3.5%

Lowe's 3.2%

General Motors 2.6%

CF Industries 2.6%

Corning Inc 2.6%

Chatham Lodging Trust 2.6%

Amadeus IT Holdings 2.4%

PAX Global Technology 2.4%

Renault 2.3%

Avangard 2.2%

Telefónica 2.2%

Societe d'Edition de Canal+ 2.1%

OPAP 1.7%

The Gap $42 CALL Jan/2015 1.2%

IMAX Corporation 1.1%J.G. Wentworth 1.0%

MRV Engenharia 0.7%

Ted Baker 0.7%

KazMunaiGas E&P 0.6%

The Gap 0.6%

The Gap $45 CALL Jan/2015 0.6%

Calfrac Well Services 0.5%

Energold Drilling 0.5%

Cash 0.2%

Total 100.0%

Name

Element Global Value - 2Q14

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