Element Global Value

4th Quarter 2014 Year End Letter

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

Performance Chart

Portfolio Details
160

Net Asset Value (NAV) : 146.10

Launch date:

14-January-2011

140

Portfolio Manager:

Filipe Alves da Silva, CFA, CAIA

120
100

MSCI World Local

80
Jan/11

Portfolio

Jan/12

Dec/12

Dec/13

Dec/14

Monthly Performance
Jan

Feb

Mar

Apr

May

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%

2014

-2.14%

3.77%

2.49%

0.18%

Jun

Jul

Aug

Sep

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

2.62%

Nov

Dec

YTD

8.70% -2.83% -1.18% -12.57%

2.67%

1.35%

-1.50%

0.97%

0.87% 13.73%

1.68% -3.88%

4.46% -0.90%

3.84%

4.64%

2.19%

1.41% 21.15%

3.01%

0.11%

-0.72%

0.88%

5.22% -0.38% 21.27%

1.97%

0.62%

Oct

5.36%

Investment Highlights

With few exceptions, 2014 was another relatively calm year for markets. After a small hiccup in
January, US equity markets marched-on to new highs, only briefly interrupted by a sell-off during
October. The S&P500 ended the year at 2058 points, a gain of almost 14%, whilst in Europe
markets zigzagged for most of the year, ending with a 5% gain. Finally, emerging markets had
another lacklustre year, dropping by 4%.

Geopolitical events were plentiful: instability in Ukraine, the ISIS movement in Iraq and Syria, and
the resurgence of the Greek crisis. Albeit important, the impact on major equity markets was
subdued.
During the year, I was surprised by 3 things: the abrupt slide in the price of oil from $98 to $53, the
continued strength of the Dollar (the /$ cross started 2014 at 1.38, ended at 1.21 and is currently
close to parity!), and bonds reaching very low or even negative yields in Europe. The magnitude of
these movements is just breath taking.
All these factors will go a long way in helping Europe to get back on its feet: the low oil price acts
as a subsidy to consumers and industry; the depreciation of the Euro makes European producers
more competitive (Europes goods are now cheaper for outside buyers); and finally, the minuscule
.

Element Global Value

yield on government bonds means European countries are spending less money on interest
payments. It will be interesting to watch how this situation pans out.
I wrote in last years letter that I saw bonds in general () as very unattractive and with a very
high probability of generating negative real returns over the next business cycle. I was stunned
with the performance of this asset class in 2014, especially in Europe. European government
bonds had returns in excess of 13%, while investment grade corporates gained more than 8%.
European bonds are in a bubble: investors are now paying for the privilege of lending (negative
yields) money to Sweden, Germany, Netherlands and France for maturities up to 4 years. Hell, the
Swiss 10-year bond has a yield of -0.08%! To add fuel to the fire, a new force has entered the
market: the European Central Bank is now scooping 60bn/month of bonds in an effort to get
inflation and growth back on track.
On the corporate side, a basket of investment grade bonds with average maturity of 5 years yields
a disapointing 0.8%. As shown below, more than 70% of European companies now have a higher
dividend yield than their respective bond yield.

If you have a long enough time horizon, do yourself a favour, shy away from bonds!

During 2014, I added only one new position to the portfolio (JG Wentworth), sold 3 (Addvantage
Technologies, Cninsure and Telefnica) and 1 was acquired (Patient Safety Technologies). I like to
buy on pullbacks, and there were very few opportunities this year. If there are no corrections, even
if I really like a company, I will usually postpone the purchase until a correction occurs. Ideally, I
.

Element Global Value

like to make a purchase after a stock has underperformed strongly, suffered a correction and/or
when my view differs from the consensus, mostly due to different investing horizons. I strive to
focus on the long run, while most market participants focus on the latest quarterly numbers or
other short-term indicators, thus creating a time-arbitrage opportunity.
I hope that 2015 will be more volatile and create more opportunities for me to add new names to
the roaster.
The rest of the letter covers a performance review, followed by a summary of the top performance
contributors and detractors and review the investment philosophy.

Performance review
Element

MSCI World Difference

2014 Fourth Quarter Performance

5.7%

0.3%

5.4%

2014 Full Year Performance

21.3%

7.7%

13.6%

Accumulated Return Since Inception*

46.1%

38.5%

7.6%

Annualized Return Since Inception*

10.0%

8.6%

1.5%

* Since 14/Jan/2011

I am very pleased with how the portfolio performed during 2014, having its best year yet, both on
an absolute and relative basis: Element recorded a gain of +21.3%, outpacing the World equity
composite (MSCI World) by 13.6%.
The results from 2013 (+21.2%) and 2014 (21.3%) should not be extrapolated. Although I would
like very much enjoy 20%+ returns every year, the last two years were abnormally good, and one
should expect future results to be more moderated.

The positions that contributed most were (ranked) Apple, PAX Global Technologies, Microsoft,
TEVA and the Fidelity China Special Situations fund.
Also notable was the contribution of the appreciation of the dollar vs the Euro: although it is my
objective to hedge foreign currency, during the year there was an average weight of 25% on nonEuro currencies (which appreciated against the Euro). The contribution to overall performance was
roughly 3%.
Main performance detractors were AvangardCo, IBM, MRV Engenharia, OPAP and (again) the
mining related stocks.

Element Global Value

Top 5 contributors
Apple (performance since first added to the portfolio Jun/2011: +159%; 2014 performance: +41%)
What a difference in sentiment from a year ago! In late 2012, and during 2013, the investing
community was giving Apple a very hard time. It seemed like nothing the company would do was
right: the phones were not big enough, the company had become too big and could not keep
growing, there was no innovation in the post-Jobs era, etc.
With this background, I decided meaningfully increasing the position in Apple (between the end of
2012 and beginning of 2014).
Fast-forward to 2014 and investors are in love with the company once again. The new iPhone 6 is a
hit, there is huge hype behind the launch of the iWatch and the company seems like it can do no
wrong. The shares more than doubled since the 2013 lows, having appreciated by more than 40%
during 2014 alone, and now represent the largest position in the portfolio with a weight slightly
above 10%.
I remain confident there is still much more to come from Apple and that its shares will continue to
move higher.
PAX Global Technologies (Aug/2012: +525%; 2014: +156%)
PAX is the Worlds third largest maker of electronic payment terminals (the machines that read
your debit/credit cards). When I first picked-up shares (Aug-2012), the company was incredibly
cheap, trading for only 3 times earnings (once adjusted for surplus cash on the balance sheet).
Since then, sales and profits have doubled and the companys market cap has surpassed $1bn.
The investment in PAX has worked-out wonderfully, and yielded a return in excess of 500%.
Despite this amazing run, PAX still has a very long road ahead. To gauge just how big the
opportunity is: in China there are only 3 POS / 1000 inhabitants. This compares to 20/30 for
western countries. Half of PAXs sales are in China. Room for growth is immense.
Microsoft (Jan/2011: +87%; 2014: +31%)
After surging 44% in 2013, shares were up 31% in 2014.

Satya Nadela replaced outgoing CEO Steve Balmer at the helm of Microsoft in early 2014. Satya is a
breath of fresh air: he is changing Microsoft into a company with a broader and more holistic view.
During his first months he forged partnerships with companies such as Salesforce, Oracle and
Apple, something that was unimaginable under Balmer.
In December I trimmed the position, but the shares remain attractive.

Element Global Value

TEVA (Aug/2011: +73%; 2014: +46%)

TEVA has become the drug industrys comeback story! The companys shares laid dormant for
years but in 2014 they finally surged meaningfully, recording a 46% return, on the back of a new
CEO, substantially improving margins by reducing costs and reducing debt by almost $2bn.
Despite being a strong performer in 2014, TEVA remains undervalued trading at only 11x 2015
expected earnings, a meaningful discount to both its peers and the market as a whole.

Fidelity China Special Situations (Jun/2011: +47%; 2014: +26%)

Chinas economy grew by 7.4% in 2014. Despite this impressive rate, the pace of growth is
slowing, a natural progression as the economy rebalances away from investment & net exports
and towards consumption. At the end of the day, there are encouraging economic reforms, with
pro-growth measures to boost the consumption share of GDP. Even if China grows at a 5 to 6%
rate, this is a very healthy environment for individual companies.
Despite this backdrop, and the fact that the mid/long-term story in terms of the growth potential
is unchanged, valuations are nearing historic lows the MSCI China trades at only 9.5x earnings.
The long-term potential is colossal, reason why this fund is one of the top positions in the
portfolio, as it focuses on the sectors I expect to benefit from an increase in the consumption
component of GDP: consumption, IT and pharmaceutical.
Anthony Bolton handed the reins to Dale Nicholls in April, and the fund has performed very well:
since Dale took over the fund is up by 25.5% (excluding currency effects), which compares to
+14.4% for the MSCI China index.
For the full year, the fund posted a 19.8% performance vs 8% for the MSCI China.

Top 5 detractors
AvangardCo (Mar/2012: -81%; 2014: -81%)
AvangardCo is the Worlds second largest and Europes No 1 producer of eggs, and is based in
Ukraine. Up to 2013, the company had been steadily increasing production volume as well as its
share of the domestic market (from 23% in 2007, to 56% in 2013): revenues increased from
$128mn in 2007 to $661mn in 2013, while EBITDA grew at a 40% CAGR. Besides this, a major
CAPEX program was completed in 2013 increasing the production capacity from 5.2bn to 8.6bn
eggs/yr and a dividend was initiated (at the time representing a 10% yield).
As you might expect, the share price plunged due to the annexation of the Crimean Peninsula by
Russia, subsequent political instability and significant devaluation of the domestic currency.

Element Global Value

Even taking into consideration this situation, the production facilities located in the Crimean
peninsula only represented 5% of revenue and shares were incredibly cheap, so I doubled the
position in March. Until the end of the year the situation worsened and the shares receded by
75%. Not the best timing!
IBM (Jan/2011: +15%; 2014: -12%)
IBM inhabits in the intersection of business and technology, processing an astonishing 75% of the
Worlds business data. It has been one of the largest positions in the portfolio since the beginning.
Since 2011, IBM has returned an impressive $70bn to its shareholders via dividends and buybacks,
representing roughly 35% of its average market capitalization during the period. The share
repurchases alone have reduced share-count by 25%, effectively increasing the ownership of
shareholders by 1/3.
Warren Buffett explains the value of share repurchases best in his 1980 Letter to Berkshire
Hathaways Shareholders:
One usage of retained earnings we often greet with special enthusiasm when practiced
by companies in which we have an investment interest is repurchase of their own shares.
The reasoning is simple: if a fine business is selling in the market place for far less than
intrinsic value, what more certain or more profitable utilization of capital can there be
than significant enlargement of the interests of all owners at that bargain price? The
competitive nature of corporate acquisition activity almost guarantees the payment of a
full -frequently more than full price when a company buys the entire ownership of
another enterprise. But the auction nature of security markets often allows finely-run
companies the opportunity to purchase portions of their own businesses at a price under
50% of that needed to acquire the same earning power through the negotiated
acquisition of another enterprise.
During this period, IBM increased operating EPS by 43% and improved its margins substantially by
cutting costs and selling low-margin businesses. Despite this, investors have lost their patience, as
revenue growth stalled, results disappointed and the company abandoned the 2015 road map,
which called for adjusted profit of $20 per share by 2015.
The industry is facing unprecedented changes, with technology costumers moving from owning
hardware to storing data in the cloud. I remain confident that IBM will adapt and that, the current
price is actually a benefit on the long run, since the company will be able to buy more shares.
Again, Mr. Buffett explains it best:
If you are going to be a net buyer of stocks in the future, either directly with your own
money or indirectly (through your ownership of a company that is repurchasing shares),
you are hurt when stocks rise. You benefit when stocks swoon. Emotions, however, too
often complicate the matter: Most people, including those who will be net buyers in the
future, take comfort in seeing stock prices advance. These shareholders resemble a
commuter who rejoices after the price of gas increases, simply because his tank contains
a days supply.

Element Global Value

At year-end, IBMs shares traded for only 10 times its 2015 expected earnings.
MRV Engenharia(Jan/2011: -68%; 2014: -12%)
MRV is the third largest homebuilder and real estate company in Brazil building around 40k units
per year and is probably the best way to gain exposure to the low-income segment in the
country. It operates mostly under Minha Casa Minha Vida, the largest housing program ever
created in Brazil, that gives lower income families special conditions when buying a house. This
provides MRV with a less competitive environment to operate in.
The Petrobras corruption scandal placed the Brazilian market under pressure, and MRVs put
management on a cautious stance regarding 2015, having already taken steps to reduce
operational risk, such as reducing leverage, reducing the working capital cycle and improving
inventory management.
The shares traded in the Brazilian market lost -5.5% in 2014, but the ADR (traded in the US)
dropped by more than 17% due to the devaluation of the Brazilian Real.
The shares are incredibly cheap, trading at only 6 times 2015 earnings and at a free cash flow yield
of almost 15%. Management is aware and set in place a share repurchase program, having
reduced the share-count by 7.5% so far.
OPAP (Jul/2011: +10%; 2014: -6%)
OPAP has the monopoly to operate and manage numerical lottery and sports betting games in
Greece, and is Europes biggest betting firm.
Greek markets dropped by more than 30% last year as it became clear that the left wing party
Syriza would win the elections. After almost doubling in 2013, shares dropped by 6% in 2014.
Despite this, OPAP actually had a good year, with revenues increasing by 13%, EBITDA by 30%,
won the bid to buy Hellenic Lotteries (scratch cards) and cemented its position as the exclusive
organizer of gambling in Greece.
With time, these improvements in operational performance will translate into a higher share price.
Mining & Mining Related Companies: Monument Mining (May/2011: -76%; 2014: -48%),
Veris Gold (Sep/2012: -100%; 2014: -100%) & Energold Drilling (Aug/2011: -81%; 2014: -51%)
The mining industry continues to be a place where dreams go to die. After losing half their value in
2013, mining stocks overall lost more than 10% last year, with juniors losing double that. The
mining stocks in the portfolio perfumed worse: they lost half their value in 2013, and another half
in 2014. Veris Gold officially filed for bankruptcy in June.
At the beginning of the year, the allocation in these companies was: 0.5% in Monument, 0.4%
Energold and 0.15% Veris, which limited the damage.

Element Global Value

Looking back, buying Monument and Veris was a mistake on my part. I say this not because of the
horrible performance of the two investments, which had an overall negative impact on the
portfolio of almost 2%, but because of my attitude towards gold: most investors regard gold as a
store of value, a safe-haven and see it as an integral part of a diversified portfolio. To me gold is
simply a shiny metal, and one that is in tremendous oversupply relative to its industrial use.
Worse, it does not produce anything: if you own an ounce of gold, 100 years from now you will
still own one ounce.
Making a similar comparison to one done by Buffett in his 2011 letter: all the gold in the World
would be enough to fill 3 Olympic swimming pools, which at the current price $1170 / ounce,
would be valued at around $6.4 trillion. With this money, you could buy the equivalent of 10
Wal-Marts plus 15 Coca-Colas, and still be left with $1 trillion of walking around money you
know, just in case. Over the next 10 or 20 years, which of the two do you think will produce more
value?
With this in mind, buying the gold miners makes even less sense! This being said, I will not sell
them, as their size relative to the rest of the portfolio is negligible and so as to serve as a reminder
not to do similar mistakes.
You can surely count on me to do more mistakes. Just hopefully not as basic as this one!

Investment Philosophy
In managing Element, I endeavour to achieve above average capital appreciation over the long
term while attempting to avoid large permanent impairments of capital.
I invest in a purely bottom-up way. This means that I do not try to invest in themes, sectors or
countries, focusing only on companies and performing fundamental analysis (to try) to ascertain
what is their intrinsic value. In doing so, I study annual and quarterly reports, listen to conference
calls and read analysis from other (independent) investors. In some situations I will also read
research reports written by the sell-side. Besides estimating the intrinsic value of a business, I also
spend considerable time thinking about the moats around the business and how durable these
moats are, what could go wrong and what impact this might have on the valuation of the business.
After all this, the decision to invest depends solely on the opportunity presented and the price at
which it is possible to acquire shares. Even the most wonderful business can make for a lousy
investment if you pay too dear a price.
There is no investment idea that is so good that it cant be spoiled by too high an entry price.
-Howard Marks, Chairman of Oaktree Capital Management
Generally, position sizing increases with the quality of the business, the discount to estimated
intrinsic value, the moats around the business and quality of those moats.

Element Global Value

Investors have a tendency to believe there is a prize for hyperactivity, that just because you see
something you must act on it, and that you should be rewarded for taking such action. But the
only one who benefits from excess activity are brokers as they reap the commissions investors
so willingly pay them. Patience is a virtue and sitting on your hands, most often, is the right thing
to do!
Although it's easy to forget sometimes, a share is not a lottery ticket ... it's part-ownership of a
business: time-frame should be measured not in quarters or years, but in decades. Accordingly,
Elements holding-period is high and turnover is low: so far, the average holding period of
investments is 3 years (and counting!), which compares to 4 years of life for Element. You can say I
am a very patient investor.

It is also important to define risk. Most investors define risk as volatility: the daily, weekly or
monthly variation of the portfolios value. I take a very different view, defining risk as permanent
loss of capital. This means that I do not look to risk as how much a price of a security oscillates,
but rather what is the probability I will permanently lose my capital by investing in a
particular security.
I welcome volatility as it creates opportunities to acquire securities at attractive prices!

Review of Portfolio Investment Rules (copy from 2012 & 2013 letter)
In order to force myself to be disciplined, I imposed a set of rules on the management of the
portfolio. These rules are intended to define what I can and cannot do, set limits towards what
type of instruments are available and define where I can invest:
Long stocks, with a maximum gross exposure of 130% of assets
Maximum individual position is set at 10%
Short stocks, with a maximum gross exposure of 30%
Maximum individual position is set at 2.5%
Net long exposure must be within the 70%-130% range

Warrants & Options, with a maximum exposure (notional) of 20%

Currency exposure is hedged to Euros on a best effort basis
No geographic/sector restrictions
No restrictions on investable asset classes (as long as it is traded in a stock-exchange)
I am very conservative in managing Element, as it represents most of my networth. I avoid using
leverage and do not engage in short-term trading. Also, I do not actively seek to use warrants &
.

Element Global Value

options or short stocks, only wanting to have the possibility of using these instruments if
presented with the right opportunity.

Final Remarks
Last year I concluded the year-end letter saying that equities were the best place to park your (if
the time-horizon is long enough) and that bonds were very unattractive. One year after the first
part stands and the second one gains emphasis! Overall, the bond market is in a bubble, and will
likely produce negative real returns over the next business cycle.

2014, just like 2013 was a very calm year for the markets, which was one of the main reasons why
there was only one new name in the portfolio. Hopefully, 2015 will have more ups and downs so I
can keep filling the portfolio with quality businesses at attractive prices.

Never regret. If its good, its wonderful. If its bad, its experience.
-Victoria Holt

Element Global Value

Investment Guidelines

Largest Positions
Name

Max. Net Long Exposure: 130%

Min. Net 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

Weight

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

10.4%
8.9%
6.2%
6.1%
5.2%
4.9%
4.8%
4.1%
3.9%
3.9%

Total TOP 10 Positions

Allocation by Sector

58.5%

Allocation by Country
Cash

Cash

Others

Other

8.2%

Utilities

0.0%

Telecommunication Services

2.6%

Materials

3.8%

Health Care

4.9%

Consumer Staples

8.9%

Consumer Discretionary

0.3%

Information Technology

32.3%

Financials

12.0%
0%

Australia

0.0%

Japan

0.0%

Kazakhstan

0.6%

United Kingdom

0.8%

Brazil

0.6%

Ukraine

0.5%
4.1%

Spain

0.8%

Industrials

0.0%

Israel

27.5%

Energy

13.7%

Switzerland

5%

10%

15%

2.3%

Germany

3.9%

France

3.7%

Canada

1.8%

United States

20%

25%

30%

35%

69.6%
0%

Currency Exposure

10%

20%

30%

40%

50%

60%

70%

80%

Contacts

100%

For more information please contact Filipe Alves da Silva directly

or send anemail to element.cap@gmail.com

80%
68.0%

60%

Disclaimer
40%
20%

13.9%

8.9%
0.6%

2.8%

0.8%

0.5%

BRL

CAD

GBP

UAH

3.9%

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.

0%
EUR

USD

CNY

HKD

E L E M E N T

Element Global Value

Complete List of Holdings

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

Total

Weight
10.4%
8.9%
6.2%
6.1%
5.2%
4.9%
4.8%
4.1%
3.9%
3.9%
3.9%
3.8%
3.8%
3.8%
3.4%
3.1%
3.0%
2.7%
2.3%
1.9%
1.8%
1.5%
1.3%
1.2%
1.1%
0.9%
0.8%
0.8%
0.6%
0.6%
0.5%
0.3%
0.2%
0.2%
0.0%
-1.6%
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.