Element Global Value

2nd Quarter 2014

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.

Weekly Performance Chart

Portfolio Details
Net Asset Value (NAV) : 131.94

130

Launch date:

14-January-2011

120

Portfolio Manager:

Filipe Alves da Silva, CFA, CAIA

110
100
MSCI World Local

90
80
Jan/11

Portfolio

Jan/12

Dec/12

Dec/13

Monthly Performance
Jan

Feb

Mar

Apr

May

Jun

2011

-1.11%

1.61% -2.05%

2012

7.06%

5.19%

1.62% -0.86% -6.98%

2013

2.90%

0.47%

1.33%

1.51%

1.68% -3.88%

2014

-2.14%

3.77%

2.49%

0.18%

3.01%

Jul

Aug

Sep

Oct

3.30% -1.25% -1.72% -1.37% -7.23% -7.20%

2.62%

0.62%

Nov

Dec

YTD

8.70% -2.83% -1.18% -12.57%

2.67%

1.35%

-1.50%

0.97%

0.87% 13.73%

4.46% -0.90%

3.84%

4.64%

2.19%

1.41% 21.15%

1.97%

9.52%

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 negative
levels, in an attempt to restart the EUs 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
..

Element Global Value

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 doesnt 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 companys 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, Cninsures 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 Fidelitys
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 funds initial good performance vanished in 2011, leading
the fund to trade at a considerable discount to NAV. I took this opportunity to add the fund to the
portfolios 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. Boltons 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%.

Element Global Value

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 and
Athleta. 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, Gaps 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. JGWs 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 to
approve 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.

Element Global Value

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 7
times current year EPS, a price that clearly doesnt 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 bluechip 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 buying
overvalued assets; stable or not, gravity applies.
- Jesper Madsen of Matthews Asia Dividend Fund

Element Global Value

Investment Guidelines

Largest Positions
Name

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

Other

Cash
Others
Switzerland
Australia
Japan
Kazakhstan
United Kingdom
Brazil
Ukraine
Israel
Spain
Germany
France
Canada
China
United States

7.0%
0.0%

Telecommunication Services

5.0%

Materials

3.9%

Health Care

4.4%

Consumer Staples

11.9%

Consumer Discretionary

25.2%

Energy

1.2%

Industrials

0.2%

Information Technology

29.9%

Financials

9.9%
0%

5%

10%

15%

20%

25%

30%

35%

0.2%
1.7%
0.0%
0.0%
0.0%
0.6%
0.7%
0.7%
2.2%
3.7%
4.6%
4.6%
4.4%
2.6%
9.9%
64.1%
0%

Currency Exposure

10%

20%

30%

40%

50%

60%

70%

Contacts

100%
80%

56.2%

Allocation by Country

0.2%

Utilities

8.0%
7.5%
6.9%
6.9%
5.2%
4.6%
4.6%
4.5%
4.2%
3.9%

Total TOP 10 Positions

Allocation by Sector
Cash

Weight

Appl e Inc
Fi del i ty Chi na Speci a l Si tua ti ons
IBM
Mi cros oft Corpora ti on
Peps i Co
BMW
Berks hi re Ha tha wa y
Al terna ti ve As s et Opportuni ti es
AMERCO
Archer Da ni el s Mi dl a nds

For more information please contact Filipe Alves da Silva directly

or send anemail to element.cap@gmail.com

77.3%

60%

Disclaimer
40%
20%
4.7%

7.5%

0.7%

4.1%

0%
EUR

USD

CNY

BRL

CAD

0.4%

2.2%

2.5%

GBP

UAH

HKD

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.

E L E M E N T

Element Global Value

Complete List of Holdings

Name
Apple Inc
Fidelity China Special Situations
IBM
Microsoft Corporation
PepsiCo
BMW
Berkshire Hathaway
Alternative Asset Opportunities
AMERCO
Archer Daniels Midlands
Teva Pharmaceuticals
BlackRock
Lowe's
General Motors
CF Industries
Corning Inc
Chatham Lodging Trust
Amadeus IT Holdings
PAX Global Technology
Renault
Avangard
Telefnica
Societe d'Edition de Canal+
OPAP
The Gap $42 CALL Jan/2015
IMAX Corporation
J.G. Wentworth
MRV Engenharia
Ted Baker
KazMunaiGas E&P
The Gap
The Gap $45 CALL Jan/2015
Calfrac Well Services
Energold Drilling
Cash

Total

Weight
8.0%
7.5%
6.9%
6.9%
5.2%
4.6%
4.6%
4.5%
4.2%
3.9%
3.7%
3.5%
3.2%
2.6%
2.6%
2.6%
2.6%
2.4%
2.4%
2.3%
2.2%
2.2%
2.1%
1.7%
1.2%
1.1%
1.0%
0.7%
0.7%
0.6%
0.6%
0.6%
0.5%
0.5%
0.2%
100.0%

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.