Hidden Value in Real Assets

M A S S I F

C A P I T A L , L L C

HIDDEN VALUE IN REAL ASSETS

W H A T

A R E

R E A L

A S S E T S ?

REAL ASSETS A t M a s s i f C a p i t a l w e d e f i n e r e a l a s s e t s a s : i n d u s t r i a l s , e n e r g y, a n d b a s i c materials. The common thread between these sub-industries are tangible, long live d assets and predictable cash flows. At Massif Capital, we monitor 2,491 co m p a n i e s w i t h a com bi n e d m a r ke t ca p i ta l i z at i o n o f $15 tr i l l i o n US D trad e d across 24 countries . From that universe, we constru ct a concentrated portfolio of economicall y productive assets.

Basic Materials 22% Netherlands 4%

$ 15 T

Market Cap

24

Germany 4% Industrials 45%

Exchanges

Canada 6% France 6%

Energy 33%

UK 6%

Japan 11%

United States 46%

Are Real Asset s Cheap ?

18 Month % Change, 2017-2018

We believe that real assets provide investors with a desirable blend of capital appreciation, inflation 11%

protection and diversification away from major global indices. Real assets are thus an essential but

Interest Expense to EBIT

overlooked asset class that should comprise a portion of every portfolio. Real asset cash flows are the backbone of the global economy and can provide benefits in periods of economic contraction and expansion.

-64%

End-use demand drivers for essential industrial goods and commodities are often inelastic, predictable and sustainable, providing opportunities for constructive investment in periods of economic contraction. During periods of economic expansion and inflation, real assets produce a ‘real’ return that preserves the purchasing 11%

power of investors capital.

Debt to Market Cap 3%

While careful asset selection remains paramount, we find evidence today that the relative valuation of real assets against broad market indices are widening. Furthermore, the recent return profile of basic materials, energy and industrials suggests that the market has yet to recognize the emerging valuation differential providing a unique opportunity for investors to enter the space.

-19%

CROIC

Beginning in early 2017, energy, basic materials and industrials have far outperformed their S&P counterparts 58%

as it relates to capital allocation and balance sheet management. Despite this, energy, basic materials and industrials, have underperformed on a return basis.

Cash return on invested capital (CROIC) has improved significantly in real assets with the S&P experiencing a decline for the 8th straight year. Since 2010, energy, basic materials and industrials have improved their CROIC by 310% with the constituents of the S&P logging a 34% decrease. While debt levels relative to market capitalization has increased in the last 18 months, they have done so at a far less frantic pace.

28%

Energy, Basic Materials & Industrials

Return 18%

S&P 500 -80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

Source: Massif Capital, LLC, Thomson Reuters

1.6

VALUATION

1.4

Ratio of EV | EBIT

[Industry / S&P]

Ratio of EV|EBIT

Energy, Basic Materials & Industries over S&P 500 (Market Weighted)

EV|EBIT

1.2

Examining monthly EV/EBIT ratios from 2001 to 2018, we find that energy, basic materials, and industrials are trading at a

Premium to S&P

30% discount to U.S. equity markets. Right now the relationship is approaching a 20 year low, levels previously seen in

Discount to S&P

The breakdown in individual sectors tells a remarkably consistent story. The energy sector currently trades at a 26%

2005 and 2014. Both periods saw 15% annualized returns for the subsequent five years.

1.0 10-Year Average

discount, basic materials trade at a 39% discount and industrials trade neatly at the real asset average of 30%, all relative to the S&P 500. With all sub-sectors trading at below their ten year average, investors have a unique and immediate

0.8

0.6

0.4 2001 2003 2005 2007 2009 2011 2013 2015 2017

Source: Massif Capital, LLC, Thomson Reuters

opportunity.

Energy

Basic Materials

Industrials

S&P

7

P re m i u m t o N e t A s s et Va l u e Turning to the balance sheet, we observe a similar story. Energy, basic materials and industrials are trading at 3x their net asset value compared to the S&P 500 which is trading at 6x their net asset value. Furthermore, the relative valuation of real assets versus the S&P 500 has widened by 20% in the last five years. We believe that real assets are currently on sale in the market.

Market Price (Premium) to Net Asset Value

6.4

6

5.7

5

4 3.5

3.3

3.1

3

2.8 2.4

2.2

2

1

0

2015

2018

2015

2018

2015

2018

2015

2018

20% 17.7

18%

18.1

Notable Outperformance in Periods of Unexpected Inflation1 During the last three decades, an often overlooked benefit of real assets is that they do not materially erode in the presence of inflation. Of particular note is that real assets have historically outperformed both U.S. and global equities by 4%-7% annualized in periods of unexpected inflation between 1998 and 2018.

Average Annualized Return

16% 14% 12%

12.0 9.7

10%

8.7

8% 6% 4% 2% 0%

1

Industrials

Energy

Basic Materials

S&P

Global Equities

Defined as a period when annual CPI is at least 1% or greater than the previous years CPI forecast made by the Federal Reserve Bank of Chicago. During the period 1998 – 2018, there were six years in which this condition was met.

Source: Massif Capital, LLC, Thomson Reuters

B E Y O N D

V A L U T A T I O N S

GROWTH DRIVERS Real assets often benefit from secular tailwinds. For example, recent estimates suggest t h a t t h e w o r l d n e e d s t o i n v e s t s o m e $ 3 . 3 t r i l l i o n a y e a r o n t r a n s p o r t a t i o n , p o w e r, w a t e r and telecommuni catio n systems to support expected population growth rates. Emerging economies will account for 60% of that demand. Below we evaluate several similar demand drivers across various real asset sub-sectors.

Sector

Drivers for Growth

Sub-Sector •

Industrials

•

Infrastructure

•

Industrial Goods

A much needed infrastructure replacement drive in the developed world and continued demand for new infrastructure in the developing world will power investment in infrastructure for many years to come.

•

Ongoing industrialization of the developing world continues to drive increased demand for ever more complex industrial goods in previously underserved markets; while digitization and new sources of operational insight in developed markets is creating demand for new types of industrial goods and services.

Energy

•

Renewable Energy

•

Energy Infrastructure

•

Oil & Gas

•

Globally, the ongoing energy transition from a carbon based economy to a low carbon economy is creating new demand and creative opportunities for renewable deployment.

•

Surging US O&G production and widespread growth of natural gas as principal domestic energy source is driving demand for new energy infrastructure.

Basic Materials

•

Mining

•

Global electrification drive is juicing demand for metals ranging from copper to cobalt.

•

Limited exploration budgets and a lack of investment in new mines over the last decade threatens a multi year supply crunch for various industrial and precious metals.

M A S S I F Y O U

C A P I T A L ,

C A N

W R I T E

L L C

H E R E

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A company is an association or collection of individuals, whether natural persons, legal persons, or Massif Capital runs a long /short equity strategy focused on global a mixture of both. Company members share a common opportunities in liquid real assets and industrials. Our strategy is purpose and unite in order to focus. informed by value investing principles of Austrian e conomics with a focus on the preser vation of our investor capital via a combinati on o f s e c u r i t y s e l e c t i o n a n d t a i l r i s k s t r a t e g y.