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Element Global Opportunities Equity Portfolio

November 2012

The Element Global Opportunities Equity 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) : 98.59 Strategy Assets: Launch date: Portfolio Manager: 146700 14-January-2011 Filipe Alves da Silva, CAIA
105 100 95 90

Weekly Performance Chart

MSCI World Local Portfolio

80 Jan/11






Monthly Performance
Jan 2011 2012 -1,11% 7,06% 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% 12,75%

-0,86% -6,98%

Investment Highlights

Churchill once said that "you can count on America to do the right thing after they have exhausted every other possibility". This is ever so true, as republicans and democrats have been trying to reach a deal to avoid the 'fiscal cliff' at year end. If a deal is not reached, a set of automatic tax increases and spending cuts is set-off, which would most likely drive the country into a recession. This feels like a dj vu of the debt ceiling situation earlier this year. I don't put much weight on the macro events, but in my humble opinion, Mr. Churchill is once again spot on.
Moving on to a more interesting subject, this month I added a position in Calfrac Well Services, a Canadian company that specializes in hydraulic fracturing (fracking). Often oil & gas are so tightly trapped in the subsoil that they are not profitable to extract. However, more recently, technology was been developed that allows for the underground rock to be cracked enough so that its valuable content is released. This technology, called horizontal drilling and hydraulic fracturing, is Calfracs specialty: wells are drilled vertically to intersect the shale formations, then the well is deviated to achieve a horizontal wellbore within the shale formation. Afterwards, at least a dozen trucks with pumping equipment generate enough horsepower to blast a mixture of fine sand, water and lubricant chemicals into the bore, opening crevices so that the trapped oil & gas can be extracted (picture 1). The use of horizontal drilling and fracking is revolutionizing the oil & gas industry in North America, allowing for the exploration of reserves that were unreachable before. When you combine the rapid increase in horizontal drilling and fracking activity, with Calfracs experienced management team and solid execution you get some interesting economics. In the last 5 years Calfracs workforce has doubled, while revenues tripled and net income increased fivefold. To support its growth the company doubled its fleet (here measured by hydraulic horse-power), and it did so while maintaining a healthy balance sheet. Meanwhile Calfrac expanded its operations abroad, now having a solid foothold in the promising markets of Russia and Latin America.

Element Global Opportunities Equity Portfolio

Investment Highlights (cont.)

Picture 1 The fracking process. Source: U.S. Energy Information Agency,

When the position was initiated, the shares were trading at around 6 times earnings, with a dividend yield of 4.3%, and had dropped by more than 35% during the last twelve months. The share price evolution and cheapness are not hard to explain, as Calfrac will face headwinds in the coming year or two, driven mostly by something they have no control over: the price of guar gum. Guar gum is a powerful and versatile thickener that is widely used across several industries (textile, pharma, cosmetic, mining, explosives ...) to produce a large variety of products, some of which we use in our everyday life (toothpaste, yogurt ...). Guar gum is a vital part of the mixture that is pumped into the wells, preventing the sand particles from settling, with each well using-up as much as 80 football fields of guar plantation. The rapid increase of fracking activity in North America caused the demand for guar to increase significantly, leading the price of guar to skyrocket by more than 10 times since early 20101. The price spike of guar combined with lower expenditures from oil & gas companies in recent quarters took a toll on Calfracs earnings. The companys EBITDA margin dropped from 26% in 2011 to 19% in the last 12 months, and the number should go even lower in the short-term. The good news is that both situations are temporary. Eventually the capital expenditure budget of the big oil & gas firms will increase and more guar will be planted, bringing back balance to the supply/demand equation, ultimately leading to lower guar prices. I conservatively expect margins to expand again to the 20% to 22% range in the medium-term (and I think the company can do even better than this). Taking into consideration the increase in Calfracs fleet, I see the company earning upwards of $4 per share. Applying an undemanding multiple of 8 gets you to a price target close to $33, a +44% upside from the purchase price.

But the story doesnt stop here. Using the CEOs words although the timing and pace remain uncertain, the opportunity is immense. The use of horizontal drilling and fracking creates ample opportunities for oil & gas companies to extract resources from places they could not explore before, the so called unconventional reserves. Picture 2 & 3 illustrate the massive opportunities that lie ahead and show that Calfrac has a very large runway for growth. I expect Calfrac to take full advantage of this trend.
During November the portfolio underperformed its benchmark, the MSCI World Local, by -0.3%.

1 - As an aside for the geekier readers, in the food industry this substance is most commonly known as EU food additive code E421.

Element Global Opportunities Equity Portfolio

Investment Highlights (cont.)

Picture 2 U.S. dry natural gas production by source 1990-2040 (trillion cubic feet). Source: U.S. Energy Information Administration

Picture 2 Estimated shale gas in relation to conventional gas reserves. Source: U.S. Energy Information Administration

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

16,1% 9,0% 8,4% 5,9% 5,8% 5,4% 4,2% 4,2% 4,0% 3,8%

Ability to Short:

Currency Hedging:



Allocation by Sector
Real Estate Utilities Telecommunication Services Materials Health Care Consumer Staples Consumer Discretionary Energy 2,3% 2,0% 2,2% 0,6% 4,3% 4,4%

Allocation by Country
Cash Others Brazil China Netherlands Italy Sweden Spain Switzerland Germany Australia France Canada United Kingdom Japan United States 0% 2,0% 6,6% 1,5% 7,6%

0,2% 0,2% 0,2%

7,4% 0,6%

12,9% 17,9%

Information Technology Financials 0%

32,9% 12,4% 5% 10% 15% 20% 25% 30% 35%

4,8% 0,6% 3,3% 5,4% 1,9% 1,4%

56,5% 10% 20% 30% 40% 50% 60%

Currency Exposure
120% 100% 80%

For more information please contact Filipe Alves da Silva directly or send an email to

60% 40% 20%

0% -20%

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

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.



Element Global Opportunities Equity Portfolio

Complete List of Holdings

iShares MSCI World ETF Hedged IBM Apple Inc Microsoft Corporation Fidelity China Special Situations PepsiCo BMW Berkshire Hathaway Amadeus IT Holdings Teva Pharmaceuticals Lowe's Archer Daniels Midlands BlackRock Telefnica Chatham Lodging Trust Avangard Corning Inc Renault MRV Engenharia Monument Mining Jakks Pacific Energold Drilling IMAX Corporation Societe d'Edition de Canal+ PAX Global Technology Cninsure OPAP Telefonica 11 PUT 06/2013 Veris Gold Corp Calfrac Well Services GAP Inc Ted Baker Addvantage Technologies La Seda de Barcelona Cash

16,1% 9,0% 8,4% 5,9% 5,8% 5,4% 4,2% 4,2% 4,0% 3,8% 3,2% 3,2% 2,8% 2,2% 2,2% 2,0% 1,9% 1,7% 1,5% 1,3% 1,3% 1,1% 1,1% 1,0% 0,9% 0,9% 0,9% 0,9% 0,5% 0,5% 0,4% 0,3% 0,2% 0,1% 1,1% 100,0%


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.