Element Global Opportunities Equity Portfolio - November 2012

7/29/2019 Element Global Opportunities Equity Portfolio - November 2012

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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% 12,75%

Element Global Opportunities Equity Portfolio

The Element Global Opportunities Equity Portfolio has the mandate to goanywhere 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. Theportfolio uses as benchmarkthe MSCI World(Local) but it does not seek to mimic or track this index in any way.

November 2012

Net Asset Value (NAV) : 98.59

Strategy Assets: 146700

Launch date: 14-January-2011

Portfolio Manager: Filipe Alves da Silva, CAIA

Portfolio Details

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.

Monthly Performance

Weekly Performance Chart

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

MSCI World Local

Portfolio
http://upload.wikimedia.org/wikipedia/en/2/2e/Fiscal_Tightening_Infographic.pnghttp://upload.wikimedia.org/wikipedia/en/2/2e/Fiscal_Tightening_Infographic.pnghttp://upload.wikimedia.org/wikipedia/en/2/2e/Fiscal_Tightening_Infographic.pnghttp://upload.wikimedia.org/wikipedia/en/2/2e/Fiscal_Tightening_Infographic.png


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Investment Highlights (cont.)

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

unconventionalreserves. 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.

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


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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


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Allocation by CountryAllocation by Sector

Currency Exposure


For more information please contact Filipe Alves da Silva directly

or send an email to [email protected]

Contacts

Weight

i Shares MSCI World ETF Hedged 16,1%

IBM 9,0%

Apple Inc 8,4%

Microsoft Corporation 5,9%

Fidel i ty China Specia l Si tuations 5,8%

PepsiCo 5,4%

BMW 4,2%

Berkshire Hathaway 4,2%

Amadeus IT Holdings 4,0%

Teva Pharmaceuticals 3,8%

66,8%

Name

Total

12,4%

32,9%

1,9%

2,3%

17,9%

12,9%

6,0%

4,4%

4,3%

0,6%

2,2%

2,0%

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

Financials

Information Technology

Industrials

Energy

Consumer Discretionary

Consumer Staples

Health Care

Materials

communication Services

Utilities

Real Estate

Cash

56,5%

1,4%

1,9%

5,4%

3,3%

0,6%

4,8%

0,6%

7,4%

0,2%

0,2%

0,2%

7,6%

1,5%

6,6%

2,0%

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

United States

Japan

United KingdomCanada

France

Australia

Germany

Switzerland

Spain

Sweden

Italy

Netherlands

China

Brazil

Others

Cash

103,1%

-17,7%

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

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

EUR USD CNY BRL CAD GBP UAH

Max. Long Exposure: 130%

Min. Long Exposure: 70%

Use of Derivatives: May use options or warrants

(Max notional exposure of 20%)

Ability to Short: Max individual position 2.5%

Max gross short exposure 30%

Currency Hedging: Hedged on a best effort basis

Investment Guidelines

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.

Disclaimer

E L E M E N T

Largest Positions
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]


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Complete List of Holdings


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

Weight

iShares MSCI World ETF Hedged 16,1%

IBM 9,0%

Apple Inc 8,4%

Microsoft Corporation 5,9%

Fideli ty China Special Situations 5,8%

PepsiCo 5,4%

BMW 4,2%

Berkshire Hathaway 4,2%

Amadeus IT Holdings 4,0%

Teva Pharmaceuticals 3,8%

Lowe's 3,2%

Archer Daniels Midlands 3,2%

BlackRock 2,8%

Telefnica 2,2%

Chatham Lodging Trust 2,2%

Avangard 2,0%

Corning Inc 1,9%

Renault 1,7%

MRV Engenharia 1,5%

Monument Mining 1,3%

Jakks Pacific 1,3%

Energold Drilling 1,1%

IMAX Corporation 1,1%

Societe d'Edition de Canal+ 1,0%

PAX Global Technology 0,9%

Cninsure 0,9%

OPAP 0,9%

Telefonica 11 PUT 06/2013 0,9%

Veris Gold Corp 0,5%

Calfrac Well Services 0,5%

GAP Inc 0,4%

Ted Baker 0,3%

Addvantage Technologies 0,2%

La Seda de Barcelona 0,1%

Cash 1,1%Total 100,0%

Name

Documents

Element Global Opportunities Equity Portfolio - November 2012