Benedicte Gravrand, Opalesque Geneva:
A South African hedge fund manager describes his take on stock picking.
Peregrine Capital runs a South African-focused equity long/short hedge fund, the Peregrine High Growth Fund, which has compounded 30% annually since its mid-2000 inception outperforming the Johannesburg All Share Index which annualised 15% during that period.
Founded in 1998, it is the oldest hedge fund firm in the country. It started with seed capital of R30m from Peregrine Holdings (a listed company which owns 50% of Peregrine Capital), and it now manages R6.3bn (around US$470m). The fund is run by three managers; David Fraser, the co-founder, Tobie Lochner, and Jacques Conradie, who recently spoke to Matthias Knab on Opalesque TV. Conradie joined Peregrine in 2007 from the insurance industry.
“We are very much bottom-up stock pickers that do spend a lot of time researching the companies we cover,” he says during the video interview. While there are many stock-picking funds around, where Peregrine differentiates is in their ability to outthink the consensus in the market.
“We think that investment is a zero-sum game, that all asset managers compete for the same returns, and in the end, the sum of all our returns must equal the market. When your fee comes off the industry overall, it probably underperforms the market.” As Charlie Munger said, he adds, investing isn’t easy, and anyone who thinks it is easy is stupid.
The investment team is the most important factor for generating excess return over time, he says. They are passionate about market, they spend a lot of time reading and researching. “Even in our holidays and free time, we never really fully switch off; you are always involved; you are always following up in the news of your companies.”
Peregrine runs very concentrated portfolios, he explains. “We believe at any point in time, there are about 150 companies on the JSE that we can cover, and that’s liquid enough to take sizeable positions in, but at any one moment, probably only 10 of them are really good ideas.” So rather than adding new ideas to the fund, the managers buy more of the top five best ideas. The High Growth Fund’s top 10 positions in the last three years made up around three quarters of its net asset value. This might add some stock volatility in the fund in the short term, but excess risk-adjusted returns over the long term make up for that.
The approach of running concentrated portfolios comes from the high conviction in the companies they invest in. And when markets get volatile, convictions get tested. “And if you don’t have the conviction, you might not make the right decisions at any point in time,” he says, citing the example of the spin-off of a JSE company that listed in 2011. Before the unbundling, he explains, the team researched the company and got a fair idea of the value of the investment. They bought a substantial position as it was trading at a discount. During the unbundling, a lot of investors sold their share, which fell around 30%. The managers at Peregrine did not panic; they had done their work and had their conviction. Instead, they increased their position. In the last four and half years, the stock went up by more than 600% from the low point caused by the sell-off. Which reminds of another quote from Charlie Munger, an American investor and the vice-chairmain of Berkshire Hathaway; “It’s waiting that helps you as an investor, and a lot of people just can’t stand to wait. If you didn’t get the deferred-gratification gene, you’ve got to work very hard to overcome that.”
Another thing that Conradie and his team believe in is not being scared by complicated situations. That’s when a lot of research work is needed. They tend not to rely too much on sell-side research. Late last year, he says, there was a lot of volatility in the South African market, especially in the banking sector after one of the banks went into curatorship. One bank, Capitec, was facing a lot of pressure and uncertainty. The Peregrine team did a lot of research, concluded Capitec was quite different from the other bank that had just failed, and established a substantial position in Capitec. “Quite a lot of other players in the market were just happy to say, let’s wait for the dust to settle here and see where things play out,” he says. Capitec’s share is up by more than 200%. This shows you can’t always wait for the dust to settle, he says. Best to do the work when the situation is most at risk, “because often that’s the time when you can lock in the best prospective returns, if you are willing to at those times take a position.”