Steady cap­i­tal and in­come growth The fund aims to achieve steady growth of cap­i­tal and in­come for in­vestors, ac­cord­ing to its fact sheet. The fund man­ager is a sig­na­tory to the UN’s Prin­ci­ples for Re­spon­si­ble In­vest­ment.

Finweek English Edition - - MARKETPLACE - * fin­week is a pub­li­ca­tion of Me­dia24, a sub­sidiary of Naspers.

The re­source sec­tor has lived through a tough cou­ple of years as China’s de­mand for raw ma­te­ri­als dropped. South African min­ers, to­gether with their coun­ter­parts in the rest of the world, had to adapt quickly to sur­vive.

Some of those com­pa­nies now of­fer en­tic­ing value propo­si­tions. El­e­ment In­vest­ment Man­agers is pick­ing the win­ners.

The El­e­ment Earth Equity Fund has re­turned over 17% since the start of the year to pa­tient in­vestors, with es­pe­cially gold min­ers ben­e­fit­ting from the up­swing, ex­plains Jeleze Hat­tingh, port­fo­lio man­ager at El­e­ment. The El­e­ment Flex­i­ble Fund didn’t hold any of the so-called “dar­lings” (such as Naspers*, SABMiller and BAT) that drove per­for­mance across a broad spec­trum of lo­cal funds dur­ing 2014 and 2015, she says.

“We look at re­source stocks from a bot­tom-up fun­da­men­tal view­point,” she says. “If we work through the num­bers we still see sig­nif­i­cant value in cer­tain re­source stocks. Not all of them.”

One such stock is AngloGold Ashanti, which is also the flex­i­ble fund’s largest equity hold­ing. The com­pany has cut its cost base by 30% over the past three years and now mines gold at about $960 per ounce, Hat­tingh ex­plains. With the cur­rent gold price, that re­lates to free cash flow of about $300 per ounce, she says.

“We look at com­pa­nies that have a strong bal­ance sheet and do not have to come to the mar­ket in the fore­see­able fu­ture to raise equity or try to re­fi­nance ex­ist­ing debt,” Hat­tingh says.

The fund’s ex­po­sure to lo­cal bonds is largely lim­ited to cor­po­rate debt. The cur­rent gov­ern­ment debt mar­ket is very volatile, with yields re­act­ing near-im­me­di­ate to po­lit­i­cal state­ments, she says. In this en­vi­ron­ment, her fund is tak­ing a wait-and-see ap­proach to when SA’s sov­er­eign debt rat­ing is down­graded. The mar­ket re­ac­tion to this will surely be neg­a­tive, which would cre­ate a “bet­ter” en­try point into gov­ern­ment debt, Hat­tingh ex­plains.

Why fin­week would con­sider adding it:

The fund rode out the down­turn in the com­mod­ity sec­tor. Fo­cus­ing on min­ers that have cut costs dras­ti­cally stands to ben­e­fit any in­vestor.

Gold funds have had a stel­lar kick-off to this year, ac­cord­ing to Morn­ingstar Re­search data. Bul­lion’s price is not de­ter­min­ing the ex­tent of prof­its, but rather the dou­ble-pos­i­tive of cut­ting costs and pro­duc­ing in rands.

The fund’s cau­tious ap­proach to the gov­ern­ment debt mar­ket may stand it in good stead when, and if, the coun­try gets down­graded to junk. The move in bond prices should not be as dra­matic as post-Nene in De­cem­ber, but may still prof­fer re­turns to the pa­tient.

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