In quest of alpha

Independently owned asset manager, Laurium Capital, recently celebrated its 10th birthday.

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Independently owned asset manager, Laurium Capital, recently celebrated its 10th birthday. We talked to co-founder Murray Winckler to find out what differentiates this boutique firm from the rest.

In February 2006, Murray Winckler left Deutsche Bank and took an 18-month sabbatical to consider his future. Then he and Deutsche colleague, Gavin Vorwerg, decided to join forces and Laurium was born.

“We started running our first fund on 1 August 2008,” says Winckler, who with Vorwerg remains a majority shareholder and portfolio manager across all funds. “It was myself, Gavin and our assistant office manager, Victoria, doing everything.”

The initial idea was that the business would focus on hedge funds “with a bit into Africa”. With start-up investments of R100-million from their own resources, friends and associates, Laurium set sail – just six weeks before Lehman Brothers filed for bankruptcy.

“It was pretty scary going through that right up to March 2009 when markets actually bottomed,” Winckler recalls. “It was an extremely volatile time to start a business.”

Despite all the turmoil, Laurium pulled through, scoring a number of highs over the next 12 months and recruiting key individuals who are still with the firm today, such as Africa (ex SA) Portfolio Manager Paul Robinson, head of South Africa research Craig Sorour and trader Kevin Shein.

As time went on and assets accumulated, the focus shifted away from hedge funds. “When we started out, we thought hedge was going to be a very big category in South Africa,” says Winckler. “At the time South Africa hedge industry assets were about R25-billion, which is such a tiny proportion of the US$2.5-trillion in hedge globally, and we expected it to grow rapidly. Today, though, hedge assets in South Africa are just over R50-billion – it’s only doubled over 10 years.”

Disappointing as this development was, it didn’t stop Laurium. Assets under management were increasing steadily and the team grew at the same time. Today, the team has 10 associates dedicated to business development and operations and 11 on research and trading.

“We’re running assets of over R22-billion in total now,” says Winckler. “We diversified five-and-a-half years ago into the long-long space with the launch of the Laurium Flexible Prescient Fund and today our assets are split with about 55% from offshore investors and 45% from local investors. We run R3-billion in the rest of Africa, just under R4-billion in hedge fund assets, and the rest in our long-only segregated mandates and CIS Funds (Flexible, Balanced and Equity).”

The Laurium investment philosophy is grounded in pragmatism based on fundamental analysis, with a value bias. Of course, this doesn’t rule out owning growth stocks. “We look at expected returns and opportunities to make money where we can for our clients,” Winckler summarises.

Asked to define the main source of alpha across their funds, Winckler responds that it depends on which funds you look at. “The Laurium Long Short Prescient RI Hedge Fund has a 10-year track record, and has beaten the market by 1% compound per annum since inception, net of fees – hedge fund fees are quite high, we charge 1% annual management fee and 20% performance fee – and our average net exposure to the market has been around 50-55%, so our volatility has been very low. The main source of alpha is from stock picking, and the ability to trade around special situations or events. Coming from an investment banking background, we have the skill to take advantage of special situations and trading opportunities which have done well for use over time and added to our returns.”

As a boutique company, Laurium benefits from a degree of agility and versatility that the larger players lack.

“Being small and nimble allows us to be active in participating in IPOs, rights issues, accelerated book builds, etc which is quite different from what we see other people do. In South Africa, I think that’s the big differentiator.”

Although fairly small compared with giants like Allan Gray and Coronation, which manage assets in the hundreds of billions, the Laurium team are more nimble and much faster on their feet.

“Asset size is important because liquidity in our market becomes an issue the larger you get, especially the ability to trade mid and small caps, , which makes a very big difference,” Winckler explains. “If you want to build a 3% position in something like a Discovery, we could do that in three days, whereas much larger asset managers could take up to a month.”

Coming from the sell side, it took quite a mental adjustment for the Laurium team to move across to the buy side. For Winckler, the biggest adjustment has to do with accountability.

“On the sell side, you make calls and you change your mind with no accountability because you’re not being measured all the time. If I look over the years, being on the research side and dealing with people in investment banks, probably 20% of those people would do well on the buy side, but for the large majority of individuals it’s probably too big a change. The level of accountability on the buy side is so much more and your investment decisions carry tremendous consequences, which is very different to the sell side.”

Given the size and complexity of the market, boutiques often struggle to cover the range of investment options available. Laurium’s solution is to work smart. “Having been on the sell side for a long time, we know the companies well,” says Winckler, “so we also identify the top three analysts in a sector from the sell side and work with them. For example, there’s an analyst who’s been covering Sasol for more than 15 years and also worked at Sasol for more than five years. He has extremely detailed models that we can plug our own inputs into. It doesn’t make sense for us to build models on the well-covered larger stocks, so you rely on a couple of the guys on the sell side that really know the companies very well and you work with that.”

Although the company’s core competencies give it a competitive edge in South Africa and the rest of Africa, offshore is a core part of Laurium’s multi-asset funds. Winckler describes the process of allocating equity offshore:

“On the international side, we use low- cost ETFs to gain exposure, for example our US exposure is to the S&P500, which covers the top 500 stocks. We are happy with a passive international strategy as over three years, five years, 10 years, 15 years, 75% of the managers underperform the major indices... Our international equity exposure generally is run at about 15% in our multi-asset funds.”

Despite their relatively modest industry assets, Winckler believes that hedge funds still have a material part to play in client portfolios, with the 10 core SA hedge fund managers delivering average returns “as good as the market over time” but with significantly lower risk.

“The biggest thing for hedge funds is protection on the downside,” says Winckler. “Our main long-short hedge fund has been going for 10 years. During the financial crisis, the market maximum drawdown was 37%. If you had come in at the top and sold out at the bottom, you would have lost 37%. If you did the same on our fund, the most you could have lost would have been 10.8% – literally two thirds better than the All Share Index. That’s where hedge funds come into their own.”

With an equity-centric team and process, Laurium’s approach to asset allocation and other asset classes like bonds and cash varies from fund to fund. “For our flexible fund, launched 1 February 2013, our approach was very high equity with some yield enhancement: 85% in equities and 15% to play with yield-enhancement strategies in bonds, fixed income, credit and so on,” Winckler says.

“Our balanced fund has been going now for nearly three years. Being a Reg. 28 high-equity fund, maximum equity exposure is 75%, with an average of around 70% over time; to decide the asset allocation between cash, bonds, equity and property, we have an asset allocation committee where we look at expected returns for the different asset classes and the risk around each return for that asset class, and from there we decide on the weighting of the different asset classes.”

Winckler speaks with enthusiasm and authority about his current favourite equity ideas: “We like Reinet. About 65% of their asset value (NAV) consists of British American Tobacco, and 25% consists of Pension Corp, which is a very attractive business on a long-term basis – and you can buy it at approximately 38% discount. Sasol is another company where we have a large position. With their ethane cracker in US coming on-stream, we believe there is significant upside for Sasol. Also looking attractive on the long side at the moment is Old Mutual following the unbundling. There’s further unbundling to come and we think that it’s the most attractive insurer out there.”

A great deal of uncertainty has been introduced recently by the unwelcome phenomenon of trade wars; like most companies, Laurium is keeping a nervous eye on the market. For Winckler, the concern is not so much individual stock positions as the risk that the trade wars will simply get out of hand. Emerging markets have been haemorrhaging already – any further significant downward pressure would have a significant impact on South Africa.

“That is one of the big concerns for our portfolio,” says Winckler. “The other macro concern is SA Inc itself. Although confidence has picked up a lot with President Ramaphosa, there are still a number of issues. Handling of the land redistribution issue and new mining charter to encourage investment to support growth are important issues, and the elections might be a distraction. The worry is that the process of getting SA Inc back on track will be derailed. Those are the sorts of macro issues that impact our portfolio. A concern is that we are nine-and-a-half years into a bull market; the S&P500 has grown by about 16% compound return per annum in USD since the bull market started in March 2009. The worry is that returns from equity will be more modest over the next five years than they have been in the past.”

Another potential headache is the concentrated nature of the South African equity market, with 38% of the All Share Index being accounted for by just three companies, namely Naspers, Billiton and Richemont at 20%, 9% and 9% respectively. If these stocks sneeze, the market catches a cold. To minimise exposure, Laurium uses the Capped SWIX to benchmark its long-only equity assets: “This down-weights Naspers to 10%, which makes a very big difference, and then it adjusts for foreign ownership as well. That index down-weights Richemont and Billiton to about 2% and 2.5% as well. Now, when like last year you see the All Share going up 20%, 10% alone came from Naspers; if you didn’t have Naspers in your portfolio, you probably would have been up only 10% for the year. Very few people run at 20% in Naspers, so there is a distortion there. With the Capped SWIX, however, you can go into an overweight position with Naspers if you like Naspers.”

Within the Africa (ex SA) context, Laurium has consistently punched above its weight. “In the rest of Africa, we’ve done pretty well over time. Our banks and insurance analyst Matthew Pouncett doesn’t just do SA banks and insurance in SA, he covers the rest of Africa as well. Take Standard Bank and Absa: 30% of Standard’s earnings come from the rest of Africa and about 20% of Absa’s; Matthew, Gavin, Paul and I at various times meet with the CEO or CFO at Standard Bank’s subsidiaries in Nigeria or Kenya and compare notes with the CEO in South Africa. This allows us to cross-check and get the complete picture of what’s happening on the ground. There have been some very interesting opportunities in the rest of Africa that we’ve put into our funds that has added quite significant alpha. We’ve been running a pure long-only fund in Africa (ex SA) for four-and-a-half years. It’s beaten our Africa (non SA) MSCI and S&P indices by more than 10% compound per annum over this period.” 

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