ELEMENT turns 20!

Terence Craig
Chief Investment Officer

B Bus Sc (Hons), CA (SA), CFA

Dear Fellow Investors 

A material milestone for Element was passed on 7 April 2018 with our company turning 20 years old! It has been an eventful, interesting, challenging, inspiring, emotional and (at times) fun journey for all of us that have been part of the Element fabric for all or part of the last two decades since 7 April 1998. We would like to thank all our stakeholders: Clients, Staff, Shareholders, Advisors, Consultants and Friends who have supported us through the years. We look forward to the next 20 years of our Element journey together. 

In the first quarter of 2018, global investors were reminded that markets are cyclical with volatility returning to asset classes in a dramatic way after a benign 2017. At Element, we have been concerned for some time that downside risks were not being priced appropriately in asset prices and that lack of volatility in prices had allowed investors to become increasingly complacent about potential outcomes for asset prices. 1Q2018 has reminded investors that prices can go down as well as up, with many US Tech shares coming under pressure towards the end of the quarter and SA’s largest share in our Equity indices, Naspers, dropping -16.2% over the quarter ending March 2018. 

“I’ll be Back” 

In our Investment Commentary, portfolio manager (and director) Jeleze Hattingh analyses the return of volatility to global equity markets in the first quarter in more detail. From a 2017 year when markets hardly moved up or down on a daily basis, 1Q2018 has shown a number of volatile trading days of material moves as investors start factoring risks more into company valuations. The leader group of companies of the current global equity bull market has been the US tech heavyweights – particularly the FAANG group of companies (Facebook, Apple, Amazon, Netflix & Google). These shares came under pressure at the end of the first quarter as issues around abuse of data privacy were disclosed. Jeleze highlights these issues in her commentary with increased regulatory scrutiny a likelihood going forward which may impact on future profitability and business models of the global tech giants. 

Offshore Misadventures 

In his investment article, portfolio manager Andrew Bishop highlights the destruction of shareholder value brought about by the rush for some SA companies to diversify their earnings bases away from SA by investing and acquiring companies offshore. “Diworseifying” is a much more appropriate description as highlighted by investing legend, Peter Lynch. Former SA equity market “darlings” Woolworths, Brait and Famous Brands all made material acquisitions offshore, hyped by the management teams at the time, that have destroyed material value for shareholders as a result. The worst culprit was Brait that bought UK “fast fashion leader” New Look for R14.5bn in June 2015 only to write the investment down to zero a mere two years later! Yes – you read that correctly – R14.5bn written down to zero only two years later. About that due diligence! As always we publish our quarterly voting track record in this newsletter for the companies held in our portfolio. Our long-term voting track record (shown since 2001) may be viewed on our website (www.elementim.co.za). Lastly, we welcome any feedback you may have on our newsletter or any other aspect of our business – including over the last 20 years! Please e-mail me at terence@elementim.co.za or call 021-426 1313 if you have any comments, suggestions or questions.

View our quarterly newsletter - First quarter 2018