Over the past 21 years, the average fund in the Asisa South Africa multi-asset high equity category has given investors an annualised return of around 10.3%. The Peregrine Capital High Growth H4 QI hedge fund has delivered more than double that. (Picture source: Bloomberg, IRESS and Peregrine Capital)
The fund recently surpassed the remarkable milestone of a 10,000% return since it was launched in 2000. That means that R1m invested at the start, would be worth more than R100m today.
‘The goal of the fund has always been to look for higher returns,’ said Jacques Conradie (pictured), CEO at Peregrine Capital and co-manager of the portfolio. ‘The net equity exposure in the fund is typically between 60% and 80%. It is a fund where we can go big on our best ideas.’
However, risk management remains a priority. This is evidenced by the fact that, in its 21 year history, the fund has only twice produced a negative return over a calendar year. It was down -12.0% in 2008, and -4.1% in 2018. In every other year, apart from 2016, it has delivered at least a double-digit gain.
This has resulted in long-term annualised returns of 24.9%. (Picture source: Bloomberg, IRESS and Peregrine Capital)
Conradie said that the fund generally has a gross equity exposure of 150%. Its long book will be 110% of the fund’s value, with 40% in shorts.
Within the long book, Peregrine focuses on three kinds of ideas.
‘First would be shares that we call real compounders,’ Conradie said. ‘These are companies that will be able to grow their earnings over time at an attractive rate.’
An example would be Capitec, which compounded growth over many years. These kinds of opportunities have, however, become harder to find on the JSE.
‘Over the last five years we have shifted more and more of that part of the book into offshore shares,’ Conradie said. ‘In the current South African macro environment, it’s been tough to find high growth shares on the JSE. We have made up for that by finding similar companies globally.’
He said that a decade ago the fund wouldn’t have held more than 20% offshore. Now its exposure to stocks outside of South Africa could be as high as 50%.
‘As we’ve built up our skill set and found more opportunities offshore, we have steadily increased our exposure.’
The second part of the long book is in shares that Peregrine believes are mis-priced.
‘There is a bit more churn in that part of the book, and that is a key part of the hedge fund model,’ Conradie said. ‘The compounders are shares we own outright, and that carries a fair amount of market exposure. This other bucket allows us to achieve some level of lower correlation with the market.’
The third set of long positions is a smaller selection of small caps or less established businesses that have good growth prospects and could become very valuable over time.
‘An example would be Meituan Dianping in China. It’s not that profitable now, but it can become very profitable over time.
‘These kinds of shares are slightly more volatile and risky. That is why we size the positions a bit smaller.’
Like the fund’s long positions, the short book also takes more than one approach.
‘Primarily it’s there to reduce the risks of the long positions,’ Conradie said. ‘If we find a good long, like Capitec for example, but we are worried about the overall sector outlook, we can then buy more Capitec and also build a portfolio of shorts on other banks that we think will underperform. That reduces the risk in that sector, but also allows us to amplify our long ideas.’
The fund also identifies companies that are failing, or performing poorly.
‘We play in typically more liquid short positions and run smaller positions versus our longs. You have to be sufficiently diversified on the short side.
‘What we also do as part of our short book is use index shorts to match our longs. Especially in the last year or two we think index shorts have been a good way to manage a part of the short book.
‘Due to Covid, the share prices of many of the companies with weak or poor businesses models fell so much that being short at that price was more risk than it was worth. We are actually better off shorting the index because if anything changes in those companies we could be hurt on the upside.’
Over the fund’s life, its largest drawdown from any month-end closing value has been 17%.
‘That for us is a key measure to look at,’ said Conradie. ‘We didn’t get the returns we have by swinging for the fences. In more than 20 years we haven’t had a drawdown half the extent of the biggest drawdown on the JSE.’
Part of this is careful management of the short book. But it also comes from being highly flexible.
‘We don’t mind actively cutting positions the moment things change. We are fairly ruthless. When our thesis is not playing out on a share, we have the view that we never have to make back our losses on the same share. We cut that position, and we move on. We go to find the next idea.’