Fairtree Protea launch sidesteps choppy markets post Brexit vote
Well-known fund manager Jean Pierre Verster officially launched his new South African directional long/short equity strategy at Fairtree Capital in mid-June.
The strategy, known as Fairtree Protea, started out with an internal allocation from Fairtree’s multi-strategy offering. It will be developed into a standalone South African retail hedge fund product and also a global long/short equity product as soon as applications to the Financial Services Board have been finalised.
Verster was most recently with South African boutique fund manager 36ONE Asset Management, which he joined in 2010. Prior to that he was at Melville Douglas Investment Management from 2007 and before that at Standard Bank. He is a chartered accountant, having completed the TOPP (training outside the public practice) programme, a chartered financial analyst and a chartered alternative investment analyst.
Verster started out cautiously, launching into a particularly volatile period around the Brexit vote in the UK, which has agitated global markets.
“There were opportunities to make a lot of money and also opportunities to lose a lot of money in June – I managed to sidestep both,” he said. “It was more important for me to not make any serious mistakes at the start.” Fairtree Protea had a positive return to 30 June versus the market’s drop over the same period.
The portfolio launched with 80 stocks, and Verster aims to whittle it down to less than 50. It can include up to 25% exposure to offshore names.
“I wanted to be more diversified at the beginning and then to cull the portfolio, while maintaining the diversification of risk. It is not in my nature to take concentrated bets. I know that I don’t know where markets are going to go.”
Verster has navigated through uncertainty before, working at Melville Douglas in the run-up to the 2008 market crash.
His aim is to build a portfolio with a balance of exposures. “I read a lot and analyse the macro environment, it informs my process. Top-down views are a useful tool for risk management but I am essentially a bottom-up stockpicker,” he says.
He is mindful that big macro risks – such as a shifting commodities cycle – could impact the portfolio, and therefore aims to hedge or take advantage of these bigger themes.
“I didn’t expect the Brexit vote,” he says. “But the portfolio was robustly structured, including zero exposure to Capital & Counties and a short position in Intu Properties. I also took advantage of the turmoil by investing in certain UK-listed companies at attractive prices.”
“Right now the big idea that markets are focusing on is Brexit. But there are still concerns around China. The silver lining there is the government stimulus, and some macro metrics are improving. But it is a debt-fuelled stimulus and that can only go so far.”
China’s high debt levels at about 200% debt to GDP, much of which is tied up in the shadow banking system, make the system more fragile.
There are also ongoing issues around the direction of global interest rates, with more and more sovereign debt showing negative yields. While the US Federal Reserve’s Janet Yellen wants to hike rates, this is not happening amid deflationary pressures in China, the UK, Europe and Japan.
“No one knows how this movie plays out,” says Verster. “It is a tricky situation for central bankers to normalise rates.”
South Africa has its own political and economic issues, with a volatile currency driving inflation and putting economic growth under pressure.
“Our local government elections will be very interesting,” says Verster. “If we see more service delivery protests and if the unions become more militant, it could impact our mines and other sectors such as manufacturing.”
The country also still faces a potential downgrade to junk status in December. “My head thinks it will happen but my heart hopes it won’t,” says Verster.
As sole portfolio manager, he covers a lot of stocks, with models on all major companies on the Johannesburg Stock Exchange, whilst supported by the rest of the Fairtree equity research team. This work feeds into a ranking table that allows him to see valuation gaps and dislocations on both the long and short sides. He also does his own detailed analysis and uses sell-side research too, giving depth and breadth to his process.
“At the moment I am overweight financials because they are quite cheap, notwithstanding a gloomy outlook. I am cautious on commodities. They have dropped sharply but then bounced earlier this year and I think that the bounce might have gone too far,” he says.
Given Fairtree’s liquidity preferences, Verster is focusing on more liquid larger caps, ensuring that his process and mandate are scaleable. He may take small exposure to some mid caps on the long side, but doesn’t want to be impacted by size constraints in the long term.
Shorting is an active part of Verster’s process and he sees it as a long-term opportunity to provide alpha by shorting companies with structural issues.
“I buy shares I like and short those I don’t – it is not pair trading,” he says. “The natural trend of markets is to move higher, so for me shorting is mostly employed as a risk management tool. But there are certainly times when I would like it to be a profit centre.”
The Fairtree Protea strategy will be limited to gross exposure of less than 200% at all times, fitting into a retail hedge fund mandate and making its application of leverage more conservative than Fairtree’s other highly successful directional long/short strategy, Fairtree Assegai, which is managed by Stephen Brown.
Fairtree Assegai is moving closer to capacity and the partnership with Verster will enable Fairtree to significantly increase its directional long/short equity hedge capacity.
“My net exposure will be 50-70% at most times,” says Verster. “I see this as a stable directional long/short strategy. I do take directional exposure but I don’t take extreme risks. I am very comfortable with the strategy – it is something I have been doing for a long time, the approach is not new to me.”
Verster sees scope to build the domestic strategy to as much as R10 billion over time.
With the JSE having “moved sideways” for almost two years, Verster believes it is a good time to be investing with capable hedge fund managers.
“It is a stockpicker’s market. At most times there are opportunities on the long and short sides for managers who have both these tools at their disposal. With regulated hedge funds now available in South Africa, it is natural that those investors who are cogniscant of downside risks will increasingly allocate to hedge funds. These strategies can be very valuable, offering a relatively stable return that beats cash.”
Fairtree Capital is a leading multi-strategy alternative and long-only investment manager, across multiple global asset classes. It currently manages around R25 billion.
Copyright. HedgeNews Africa – July 2016.IN THE PRESS