Element Global Value

January 2013

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.

Portfolio Details
Net Asset Value (NAV) : 102.32 Launch date: Portfolio Manager: 14-January-2011 Filipe Alves da Silva, CAIA
110 105 100 95 90 85 80 Jan/11

Weekly Performance Chart

MSCI World Local Portfolio

Jun/11 Oct/11 Feb/12 Jun/12 Oct/12

Monthly Performance
Jan 2011 2012 2013 -1,11% 7,06% 2,90% Feb 1,61% 5,19% Mar -2,05% 1,62% Apr 3,30% May Jun Jul Aug Sep Oct 8,70% -1,50% Nov Dec YTD -1,25% -1,72% -1,37% -7,23% -7,20% 2,62% 0,62% 2,67% 1,35% -2,83% -1,18% -12,57% 0,97% 0,87% 13,73% 2,90%

-0,86% -6,98%

Investment Highlights

When looking for companies to invest I always try to keep an open mind, because many times something that seems awful at first might very well be a sound investment. But this wasnt always so: if a few years ago you told me that I would be researching an oil & gas company in Kazakhstan where the major shareholder is the state, I would tell you got me confused with someone else. I sadly admit that, back then, the first thing that came to mind when I thought of Kazakhstan was Borat wearing a ridiculous green swimsuit. Kazakhstan is a huge country that shares its borders with Russia on the North, China on the East and the Caspian Sea on the West. Despite its huge size, the country is home to only 17 million people and has a GDP of $200bn (lower than Portugal) or $12k per capita. Even so, the middle income nation has a per capita income similar to Turkey or Mexico. Supreme Chancellor Nazarbayev has been ruling the country for more than two decades and maintains strong popular support. He has been pushing Kazakhstan towards greater integration with the rest of the World. The country was one of the last decades hot emerging markets, with the equity market rising 26 fold between 2001 and 2007. Following the onslaught of the 2008 crisis, the four major banks were rescued and the stock market plunged by more than 75%. Now, five years later, the financial sector still faces challenges.

Element Global Opportunities Equity Portfolio

Investment Highlights (cont.)

What caught my attention were the oil & gas reserves: Kazakhstan is the World's 18th largest oil producer and has plenty of opportunity to grow production, as recoverable (proven) oil reserves stand at 5.5bn tons (9th on the World ranking). To put this into perspective, it would take the largest oil tanker ever built, the Norwegian Knock Nevis, about 10000 trips to carry all the oil reserves. One of the companies banking on these huge reserves is KazMunaiGas Exploration & Production (KMG EP). After 1991, when Kazakhstan declared itself an independent country, all the state controlled oil&gas related assets were grouped into a state controled company called National Company KazMunaiGas (NC KMG), then in 2004 KMG EP, a subsidiary of NC KMG, was created from the merger of two companies. Finally in 2006 KMG EP carried out its IPO, with NC KMG remaining a majority shareholder (2/3 stake). KMG EP has grown through acquisitions of exploration rights from its parent company at very favorable prices, as the later has repeatedly ceded to KMG EP the right of first refusal on transactions in hydrocarbon properties. Since the IPO production has averaged 245Kbpd and the company holds enough reserves to maintain production at current levels for 20 years. Usually the objective of a companys management is to maximize value for its shareholder, and KMG EPs management has been doing just that, but not in the way you would expect. Since the state is the majority shareholder, KMG EP is plagued by bureaucracy, and is forced into projects that aim to please the people and consequently the government, not exactly the minority shareholders. Besides this, NC KMG has been borrowing money from KMG EP to finance its own projects, not exactly a good example of corporate governance. You can say that KMG EPs management aims to maximize the value for the majority shareholder, but not exactly for the minority one. But, as with most value investments, while the outside looks repealing, the value is on the inside, and for that some digging is needed. There are several relevant facts that make KMG EP a very attractive investment at current prices. The company has an immaculate balance sheet, with no debt and $4.1bn in cash & equivalents, which accounts for more than half of the value market assigns to the company (market capitalization of $7.5bn).

KMG EP generates about $1.5bn in profits every year. Profit margin is high, at 25%, despite tax increases in recent years and the company being forced to sell at least 20% of its production for domestic use, at a considerably lower price than what it gets for the rest of its oil from international markets.
The shares trade for 5 times earnings (2.25 if you back-out cash) and at an enterprise value to EBITDA ratio (EV/EBITDA) of just 1.6. Calling this KMG EP cheap would be putting it mildly.

Element Global Opportunities Equity Portfolio

Investment Highlights (cont.)

The companys operations are very inefficient, but there is a substantial modernization process underway, targeted at making the company more efficient and increasing production on existing wells. KMG EP also has an ambitious exploration program in progress which targets increasing the companys reserves. This exploration plan eclipses past exploration efforts: for the past 5 years the exploration CAPEX was $25mn/yr, but it is now projected to be $300mn over the next 5 years. In its effort to open itself to the world, the Kazakh government has plans to privatize via stock exchange listing many state owned enterprises, with NC KMG planning to be listed in 2015. This can act as a medium-term catalyst to improve corporate governance. Of course the government can always do what it wants, but with its objective of rebuilding its capital markets and improving its image before the rest of the World, I dont think they will do anything too stupid. Besides, Chinas sovereign fund has a 10% stake in KMG E&P, and you dont really want to upset your best Client Time arbitrage is defined as taking advantage of the opportunity for long-term profit offered when short-term investors sell due to disappointing short-term macro or business progress. In other words, you buy undervalued assets that are being neglected by the general investment community and sit on your hands until they come to their senses. The sitting on your hands part is more difficult that it appears, as a constant feed of news and reports make you want to do something. KMG EP rewards its investors with an 8% dividend, which should help with the sitting on your hands part! I just wrote about a political sensitive company in a former communist country that has been amassing assets acquired from its parent, and where government has recently increased taxes. But it is all about how much you pay for something, and here you are paying very little: just $2 per barrel, for a company with reserves of 2bn barrels of oil and 40000 km2 in exploration assets (about the size of Switzerland). This one is promising! In January I didnt manage to buy shares in KMG E&P as the price had a sudden spike and I didnt want to chase it. This being said, I will do my best to build a position in the company over the next few weeks. It is just too cheap to ignore.

2013 started-off strong, with the broad equity market posting a return of +5.28%. The portfolio lagged its benchmark, advancing by only +2.9% during the month.

Element Global Opportunities Equity Portfolio

Investment Guidelines
Max. Long Exposure: Min. Long Exposure: Use of Derivatives: 130% 70% May use options or warrants (Max notional exposure of 20%) Max individual position 2.5% Max gross short exposure 30% Hedged on a best effort basis

Largest Positions
Name
i Sha res MSCI Worl d ETF Hedged IBM Fi del i ty Chi na Speci a l Si tua ti ons Appl e Inc Mi cros oft Corpora ti on Peps i Co BMW Berks hi re Ha tha wa y Ama deus IT Hol di ngs Teva Pha rma ceuti ca l s

Weight
10,2% 9,2% 6,7% 6,2% 5,7% 5,3% 4,6% 4,4% 4,1% 3,4%

Ability to Short:

Currency Hedging:

Total

59,7%

Allocation by Sector
Cash
Other Utilities Telecommunication Services Materials Health Care Consumer Staples Consumer Discretionary Energy 1,6% 0,4% 5,6% 3,7% 4,8% 7,5%

Allocation by Country
Cash Others Brazil China Netherlands Italy Sweden Spain Switzerland Germany Australia France Canada United Kingdom Japan United States
35%

5,1%
12,3% 18,1%

Industrials
Information Technology Financials 0%

1,3%
30,1% 11,8% 5% 10% 15% 20% 25% 30%

7,5% 4,7% 1,6% 8,4% 0,1% 0,1% 0,1% 6,6% 0,4% 4,9% 0,4% 4,5% 4,7% 1,3% 0,9% 53,8% 0% 10% 20% 30% 40% 50% 60%

Currency Exposure
120% 100% 80%
103,8%

Contacts
For more information please contact Filipe Alves da Silva directly or send an email to element.cap@gmail.com

60% 40% 20%

0% -20%
-19,3%
7,3%

Disclaimer
1,6%
4,1%

1,4%

2,2%

1,3%

Past performance is not indicative of future performance. Reference in this document to specific securities should not be construed as a recommendation to buy or sell these securities. You should conduct the due diligence yourself.

-40%
EUR USD CNY BRL CAD GBP UAH HKD

E L E M E N T

Element Global Opportunities Equity Portfolio

Complete List of Holdings

Name
iShares MSCI World ETF Hedged IBM Fidelity China Special Situations Apple Inc Microsoft Corporation PepsiCo BMW Berkshire Hathaway Amadeus IT Holdings Teva Pharmaceuticals BlackRock Archer Daniels Midlands Lowe's Alternative Asset Opportunities Telefnica Chatham Lodging Trust Societe d'Edition de Canal+ Avangard Renault Corning Inc MRV Engenharia IMAX Corporation Jakks Pacific OPAP PAX Global Technology Monument Mining Energold Drilling Cninsure Veris Gold Corp Calfrac Well Services GAP Inc Ted Baker Addvantage Technologies La Seda de Barcelona Cash

Weight
10,2% 9,2% 6,7% 6,2% 5,7% 5,3% 4,6% 4,4% 4,1% 3,4% 3,2% 3,2% 3,2% 2,5% 2,3% 2,3% 2,2% 2,2% 1,9% 1,8% 1,6% 1,1% 1,1% 1,1% 1,1% 1,1% 0,9% 0,6% 0,5% 0,5% 0,3% 0,3% 0,2% 0,1% 5,1% 100,0%

Total

Disclaimer: Past performance is not indicative of future performance. Reference in this document to specific securities should not be construed as a
recommendation to buy or sell these securities. You should conduct the due diligence yourself.