Trouble is brewing in banks across sub-Saharan Africa. The continent was once so lauded as the next big investment destination that it lured the likes of ex-Barclays Plc Chief Executive Officer Bob Diamond, who started a business focused on buying African financial-services companies. He was following other lenders tapping into the region’s young population, rising wealth and two decades of record growth. Now, Africa’s fading economies risk taking down more lenders with them. Two years ago the ‘Africa Rising’ story was probably overblown, said Ronak Gadhia, a research analyst at London-based Exotix Partners LLP. Those investors with hot money have been disappointed and are withdrawing. Evidence of the fallout is mounting. Kenya and Zambia are each grappling with a series of bank failures, while lenders in Nigeria and Ghana are struggling with declining profit and depleted capital levels. Deals are also drying up, with initial public offerings and debt sales plummeting, when only last year bankers from Standard Chartered Plc and Deutsche Bank AG to Citigroup Inc. and JPMorgan Chase & Co. were criss-crossing the continent wrapping up mandates.
Financial stability risks have risen across sub-Saharan Africa, Adesoji Solanke, Renaissance Capital’s head of research in Nigeria, said by phone on May 20. A slowdown in China, Africa’s largest trading partner, a commodity price rout and an energy shortfall are combining to change the playing field. Add depreciating currencies and widening government budget shortfalls and the outlook dims. The International Monetary Fund cut its 2016 growth forecast for sub-Saharan Africa by 1 percentage point to 3 percent. The markets most at risk are those with highly concentrated sector loans, for example the oil and gas sector in Nigeria,said Andy Bates, head of Africa financial services for Ernst & Young LLP in Johannesburg. Banks exposed to the copper industry in Zambia and the Democratic Republic of the Congo are also at threat following a 25 percent drop in the commodity over the past year. In Ghana and Mozambique, rising government debt levels and current-account deficits will invariably place strain on banks, he said. Expansion Opportunities Three Kenyan lenders have collapsed in the past year, mainly because the country’s biggest lenders hold most of the cash in the system, and even as the government forecast gross domestic product growth of 6.1 percent this year. Ghana, which last year expanded at the slowest pace in 20 years, has six banks struggling to make returns, while Zambian authorities have seized three financial services firms, with another four battling to boost income. Four Nigerian banks have been interrogated by the country’s Economic and Financial Crimes Commission as part of a probe into illegal transactions, and another four have seen profit slump as the continent’s biggest economy teeters on the edge of a recession. For those willing to navigate the risks, expansion opportunities have opened up for buyers looking beyond the current economic slump, with lower valuations for some of the continent’s lenders, said Robert Besseling, a Johannesburg-based executive director at business risk consultancy Exx Africa.
We expect to see further consolidation in the Nigerian banking sector, and a much needed consolidation effort in countries like Kenya, Tanzania, and Ivory Coast, he said. The exit of Barclays Plc from the continent, mainly to conserve cash by reducing its controlling stake in Johannesburg-based Barclays Africa, is also giving Diamond, 64, the chance to bolster his ambitions of building a pan-African banking group since leaving the London-based lender four years ago. Diamond’s Bid Diamond has joined U.S. private-equity giant Carlyle Group LLP to work on a potential bid for Barclays Africa. He wants to combine the lender’s operations in 12 countries on the continent with Atlas Mara Ltd., a venture he started in 2013, and which has since made purchases to gain access to seven markets in the region.
He has yet to convince investors of the strategy and analysts have criticized Atlas Mara for overpaying for deals, with the stock halving in the two years after its initial public offering. The company’s shares fell 1 percent in London on Thursday after saying it fell to first-quarter loss from a year-earlier profit, as weaker African currencies hurt earnings when converted into dollars, and because of credit provisions taken in Zimbabwe against corporate loans. Stronger Banks Atlas Mara will continue to target full-year profit in 2016 that will exceed last year, even though depreciating currencies and more challenging economic backdrop provide meaningful headwinds to this outcome, the company said. The continent’s larger banks also aren’t standing still. Morocco’s Attijariwafa Bank is eyeing Kenya, Ethiopia and Nigeria. Banks from South Africa, which hold more capital than regulators require, are also looking for potential targets. Johannesburg-based FirstRand Ltd., the continent’s largest bank by market value, and Old Mutual Plc’s Nedbank have both expressed interest in Kenya. Initially, African banks with stronger balance sheets will be able to benefit, however investors from China, the Gulf, and other Asian countries such as India and Japan will certainly seek to enter new markets too, Exx Africa’s Besseling said. The continent’s growth story isn’t over, according to Exotix’s Gadhia. It has a young and growing population of 1.1 billion and commodity cycles turn. The price of oil has jumped 85 percent from a 12-year low earlier this year. The dedicated money is still in Africa, Gadhia said. The opportunity remains. It’s still under-penetrated with fairly fast-growing economies. People forget what a frontier market really is. You’ve got to realize there are risks and structural challenges and cycles.
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36ONE Asset Management is an independent owner-managed specialist investment manager based in Johannesburg, South Africa. Our investment philosophy is to focus on fundamental analysis while using a macro overlay to understand which themes complement our fundamental approach and for risk management purposes with the aim of generating above-average real returns. We continually manage our investments in a flexible manner to reflect changing market conditions.
36ONE Hedge fund is a long/short equity hedge fund with a focus on the South African equity market. Please give us a brief introduction of your fund and the background of the funds key personnel.
The 36ONE Hedge Fund is a long-biased fund which aims to generate absolute returns throughout the cycle through superior stock selection. This is 36ONE’s flagship rand fund and has generated a net return of 19.6% p.a. since inception 10 years ago. Due to client demand we have created a more conservative version of the strategy, called the 36ONE Fund. Both the 36ONE Hedge Fund and the 36ONE Fund are available in US dollar denominated, currency hedged mirrors for international clients.
The fund has been managed since inception by Cy Jacobs, with the support of a small but experienced team of analysts. Cy co-founded 36ONE in 2004, prior to which he managed a various funds for Investec and HSBC in Johannesburg.
What are the key features of 36ONE Hedge Fund’s approach to investing? How do you distinguish your fund among your peers investing with a similar strategic mandate and geographic exposure?
We follow the same investment approach across all our funds and focus primarily on bottom-up, fundamental research, with macroeconomic views playing a supporting role in portfolio construction. We differ from peers with similar strategies in a number of ways. Firstly, our net equity exposure is maintained in a fairly narrow range; in other words we do not attempt to time the market. Secondly, we aim to avoid large bets and instead maintain a portfolio that is well diversified at all times; this has enabled all our hedge funds to achieve volatility figures in the mid-to-high single digit range since inception. Finally, we have a style agnostic approach to stock picking, whereas value is the dominant style among South African fund managers. We are flexible and trade around our fundamental long and short positions regularly.
The 36ONE Hedge Fund was incepted in 2006. Over the last 10 years, how has your portfolio allocation within the South African market evolved? What are some of the other key markets which you allocate to within the region?
Since inception the fund has consistently invested the majority of its assets in the South African equity market. Sector allocations vary over time and we have no sector bias. During the early years the fund had no size bias, but over time the focus shifted towards mid and large caps in order to maintain a high level of liquidity at all times. Another structural shift was a gradual increase in exposure to international stocks in order to enhance diversification. The exposure to markets outside South Africa is capped at 25%, with the current allocation around 15%.
Looking back at the fund’s history, 36ONE Hedge Fund had a good year in 2007 with returns of 35.57%, the highest on record till today. Please share with us some of the key factors which contributed to your success during this year
2007 was a strong year for the South African stock market, which gained 19.2% on the back of strong economic growth, driven largely by the mining industry. The fund capitalised on this theme by investing in a number of miners but more so in industrial companies that serviced the mining industry. The fund also profited from investments in the construction and materials industry, which performed well on account of an urbanisation driven construction boom. The fund managed to avoid large losses in the financial sector, which performed poorly during the tail end of a sharp rate hiking cycle.
In 2011, the fund returned 19.17% with all 12 months of positive returns, while hedge funds globally languished with losses of 1.77% over the same period. Tell us a little bit more about some of your most profitable trades which lead to this outperformance.
The South African stock market was marginally positive in 2011 as the recovery from the 2009 financial crisis was picking up speed while investors remained sceptical. The fund’s performance was driven by consistent stock picking which generated positive returns in both the long and the short book. This time around the basic materials sector played a smaller role than in 2007, with consumer goods, financials and industrials making the largest positive contributions.
The 36ONE hedge fund significantly outperformed global hedge funds for two consecutive years in 2014 and 2015. Could you shed some light on this against the backdrop of your propriety investment methodology?
The South African market gained 16.6% in rand but lost 20.8% in US dollar over the two year period while the 36ONE Hedge Fund delivered 37.1% in the rand class and 20.5% in the US dollar class.
Over the two years there were large divergences in market performance at sector level: the consumer services sector gained 9.0% in US dollar terms while the basic materials sector lost more than half its value. The fund’s bias towards globally diversified, high quality enterprises and away from commodity based businesses served our investors well. Furthermore, the currency hedging policy of the US dollar mirror funds ensured that our non-South African investors did not have their returns diluted by adverse currency moves.
What are some of the strategies you employ in order to enhance your returns and manage your risks? Given the inherent risks of investing in emerging and frontier economy markets, how do you manage your downside risk especially during periods of high market volatility?
The Johannesburg Stock Exchange was rated the second best regulated exchange in the world in 2015 by the World Economic Forum. South African reporting standards are also world leading, which means the quality of financial reporting is higher than in most developed markets. As a result, many of the typical emerging market risks related to corporate governance and transparency are largely absent in the South African market.
Meaningful risks that remain include reduced liquidity and elevated volatility when global sentiment turns against emerging markets. In order to mitigate these, we constantly monitor liquidity levels in our funds to ensure that we are able to meet large redemptions during times of stress without prejudicing the remaining investors. Volatility is managed by always having short exposure to the South African equity market, via put options or futures, and also hedged exposure to the South African rand, which acts as a proxy for global risk.
For a fund domiciled in South Africa, how have the newly implemented regulations governing hedge funds in South Africa affected the operating costs of the 36ONE Hedge Fund?
We support the recent introduction of regulations that allow for the creation of retail hedge funds in South Africa. The industry regulator has received a large number of applications for funds to register under the new regime and is currently working through the backlog so it may be some time before implementation is complete and hedge funds become a meaningful part of the retail investment landscape.
The regulatory burden of the new regime is negligible for 36ONE and likely to be minimal for the local hedge fund industry as a whole. Although hedge funds themselves were unregulated in the past, hedge fund managers have been regulated by the Financial Services Board since 2002. This means the additional regulatory burden rests not with the hedge fund managers themselves, but with the specialist fund administration companies that will administer the new retail hedge fund vehicles.
Given the depreciation in emerging currencies against the US dollar over the last few years, emerging market funds have struggled to provide a similar level of returns to both domestic and overseas investors. Do you feel this could be a challenge for your fund as well in attracting investments from non-domestic entities/individuals?
South Africa’s currency, the rand, has historically been volatile, even by emerging market standards. As such, currency is one of the key risks we monitor in our portfolios. The structure of the South African equity market allows us to express a positive or a negative view on the rand through stock selection; in recent years, our funds have been indirectly short the rand and thus benefited from its depreciation. Furthermore, our dollar based funds are mandated to hedge out all direct long rand exposure. This policy has contributed to stable hard currency returns for our international investors, who now make up more than half of 36ONE’s hedge fund assets.
Lastly, what is your outlook for the global economy in 2016, in particular for South Africa? How well prepared is your fund for future opportunities?
We expect the key macroeconomic themes that have dominated the news this year to continue driving markets for the remainder of 2016. Due to heightened levels of uncertainty, particularly around monetary policy, market reactions to even marginal changes in economic indicators are becoming increasingly severe. Against this backdrop, diversification is key and we therefore avoid large exposures to individual risk factors. We continue to monitor domestic and international markets and will increase our risk appetite when appropriate. We believe that the bifurcation of monetary policy between the major central banks could lead to further divergences at country, industry and company level which will continue to provide investment opportunities for flexible stock pickers such as ourselves.
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Local asset manager 36ONE Asset Management has earned international recognition by placing 11th in a recent global hedge fund ranking produced by Bloomberg. The ranking looked at the 2015 annual performance of all hedge funds with assets between $250 million and $1 billion.
The rankings are somewhat incongruous as the fund returns are all given in local currency and therefore not strictly comparable, but they nevertheless give a picture of which fund managers managed to extract noticeable value from the markets in which they operate.
Given that the JSE All Share Index showed returns of just 5.1% last year, the performance of the 36ONE Hedge Fund was outstanding. It also continued its long term track record of delivering consistent market-beating returns.
Since the fund started in April 2006, it has delivered annualised returns of 20.18%. That is against an Alsi return of 12.56% per annum.
An exceptional feature of the fund’s performance is that in the 128 months it has been operating, it has only shown negative returns 22 times, and six of those were in 2008. This is evidence of a good hedge fund’s ability to produce stable returns in all market conditions.
36ONE’s co-founder and portfolio manager Cy Jacobs says that last year’s performance was based on getting the major themes right, particularly in a weak rand environment. The fund runs an equity long-short mandate, so that meant being long in the sectors that performed well, and short on those that struggled.
“The equities we held were rand hedge on the long side,” he explains. “Naspers was probably our biggest contributor again, and we also had decent slugs in SABMiller.
“On the short side, we had quite a few commodity shorts, and we also had retailers at different stages, construction stocks, and some telcos like MTN,” Jacobs adds. “n the last part of the year we also took short positions on some of the food services companies like Pioneer and Tiger Brands.”
In hindsight that seems pretty simple, but of course it’s a lot harder to make the right calls at the right time. The sudden switch in the character of the market in the first few months of this year is evidence of that.
“We are slightly down year to date, having lost a bit in January and after a bad month in February, although we’ve bounced back a bit so far in March,” Jacobs says. “Luckily we covered most of our commodity shorts, but what’s cost us more than anything is that the rand has come back quite sharply and a lot of rand hedges haven’t performed. Naspers also hasn’t performed since December.”
He believes that the rebound in commodity stocks definitely shows a short term cyclical change in the market, but whether it will be a lasting one is difficult to say.
“One thing that may contribute is that almost 40% of Europe is on negative short term interest rates, which makes gold and possibly platinum quite attractive, Jacobs says. The rand/gold price is now at near all time highs.
But it’s difficult to know with commodities,” he adds. “I doubt there is a permanent bull case for these companies. I think that they have maybe just been sold down too heavily on the theme that they were going to collapse, and that became such a crowded trade that any rebound was going to be quite severe.”
Jacobs also believes that the weaker rand and the fact that a lot of mining companies are steering away from rights issues has been positive for share prices. Commodity producers are instead looking to sell assets to convince the market that debt levels will come down and banks are being supportive in this. However it is still difficult to come up with accurate valuations for these companies.
“When you have a very small equity number relative to a company’s debt number and any outlook improves, the gearing is so massive that it’s hard to say what that equity is worth,” Jacobs says.
Nevertheless, the market appears to have bought into the story that they are realigning their businesses. And together with the liquidity being provided by big international banks and the Chinese government affirming that it will spend more to sustain growth, sentiment towards commodity producers has unquestionably improved.
“If rates remain low and stimulus continues, they have a place in the world,” says Jacobs. “Especially if China is still growing at 6.5% to 7% a year.”
by Patrick Cairns
http://www.moneyweb.co.za/investing/36one-hedge-fund-makes-the-top-15-on-bloombergs-global-rankings/
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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.”
http://www.opalesque.com/658134/tips_from_a_South_African_hedge_fund813.html
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I got to share the Momentum Investment Summit podium yesterday with hot money management firm 36One’s co-founder Cy Jacobs. As 36One keeps outperforming, Cy’s own reputation continues to soar. He has become the closest I’ve seen to the late Simon Marais, erstwhile chairman of Allan Gray. Cy keeps a low profile, so being able to question him on a public platform is a rare privilege.
At the same event in June last year, Cy told us 36One had a big short position in the ill-fated Abil (ie sold shares it did not own). After Abil’s demise, his colleague Jean Pierre Verster revealed the firm’s hedge fund made a profit of R100m on this view.
This time Cy wouldn’t be drawn on a single stock to sell, but did say he is negative on SA Inc especially consumer-facing businesses exposed to the local market. And he’s still staying far away from shares in resources companies.
On the upside, Jacobs believes despite its stratospheric surge, media group Naspers remains heavily undervalued. Last year he picked Pinnacle Computer as the share most likely to rise, after its price had been smashed in a corruption scandal. Pinnacle then traded at R12. It is still available today at R12. A suggestion, perhaps, that it is worth taking a good hard look at this fallen angel?
Alec Hogg
A tip “and a warning“ from SA’s hottest stock market fund manager
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Four of the five best equity hedge funds, as measured by strength and stability of returns over the last five years, are from the same two firms.
Peregrine Capital and 360NE Asset Management have two funds in the top five of a league table compiled by information provider, Preqin.
Preqin has used its database of over 12,000 hedge funds to rank equity and other hedge fund strategies, such as macro and event-driven, using annualised return, volatility, Sharpe ratio and Sortino ratio as criteria for ratings.
The Peregrine High Growth Fund topped the ranking of equity hedge funds with a rating of 95.5.
The BNY Mellon ARX Extra FIM fund topped the macro strategy sector. ARX Investimentos and Verde Asset Management also performed well, having three and four funds in the top ten, respectively.
The Altum Credit Fund topped the event-driven class, while Capitania Multi Credito Privado FIC FIM topped the credit sector.
Peregrine Capital appears at the top of another strategy sub-set “relative value“ with its Capital Pure Hedge Fund, scoring 93.5.
The TRZ Funds Global Arbitrage Fund topped the multi-strategy table with a score of 95.7. Six of the top ten funds in this sector are based in Brazil.
Finally, the Global Sigma Plus fund received the top score in the CTA range and across all the strategies, with a consistency rating of 98.5.
Preqin has made it clear that these league tables are in no way an attempt to endorse the funds.
©2015 funds europe
http://www.funds-europe.com/home/news/16381-most-consistent-performing-hedge-funds-revealed
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