Johannesburg-based hedge fund boutique Laurium Capital opened shop in2008, just as the global economic crisis was getting under way. In what has turned out to be a particularly difficult period both to launch a business and to manage money, the company has made significant strides and is positioned for growth.
Founded by Murray Winckler, former CEO and head of research at Deutsche Bank South Africa, and long-time colleague Gavin Vorwerg, who was Deutsche’s deputy head of research and covered equity structuring, the company now manages/advises on four funds, with a total of R1.2 billion under management (US$150million).
Named after the Greek town of Laurium, which was famous in classical antiquity for silver mining and was a constant and steady source of wealth for the Athenian state, the Laurium team aims to mine profits and generate wealth for its investors over time.
“Our plan has always been to build a scaleable institutional-grade business, with a strong team,” says Winckler. “Our assets have grown strongly in the past year and while the markets have not been easy, we are building good track records with the funds. We have survived turbulent times and steadily grown assets under management, with returns across all our funds above their benchmarks.”
The team manages South African long short and market-neutral equity strategies for randbased investors, and advises on a dollar-based long short fund that invests in South Africa and the broader African markets, as well as a specialist Zimbabwe portfolio.
As part of building its business, in January Laurium entered into a strategic relationship with Connecticut-based emerging markets hedge fund Artha Capital, which has around $2 billion under management. Headed by ex- Morgan Stanley Asset Management duo Jaideep Khanna and Mike Schwabe, Artha has been in existence for 10 years, and has had a long-term association with Winckler and Vorwerg, dating back to their days on the sell side at Deutsche Bank.
The Artha Capital Emerging Markets Fund has gained 14% compounded per year since inception in 2002, with just one drawdown year in 2008. The fund currently has 5%-7% net exposure in Africa, holding a handful of positions in South African large caps.
The Artha principals have invested $10 million of personal capital into Laurium’s offshore fund, committed for three years, and have purchased 10% of the management company. In return, the alliance will help raise Laurium’s profile internationally.
Laurium employs nine people with seven focused on the investment side.
Craig Sorour and Sven Thordsen are analysts and portfolio managers, taking responsibility for the market-neutral Bell Rock fund, which they launched in January 2009. Also both Chartered Accountants and CFA charterholders, they were previously top-rated analysts at Deutsche with Sorour moving on to manage Deutsche’s proprietary trading desk while Thordsen ran his own property development business.
Also part of the team is Kevin Shein, analyst and trader, and Paul Robinson as analyst. Shein, a CFA, was previously at Bridge Capital in the corporate finance division and before that at Deutsche Bank London and Anglo American; while Robinson, a BSc MBA, was with Merrill Lynch and Citibank in London and Dubai prior to joining Johnnesburg-based hedge fund Ralk Capital, where he spent two and a half years.
In addition to the investment side, Laurium has focused on building strong operational infrastructure, hiring Mark Preston earlier this year as chief operating officer. A Chartered Accountant studying towards a CFA, Preston worked previously at the Aveng Group and before that in Bermuda, gaining experience in the alternative investments industry. He is assisted in the back- and middle-office by Victoria Gorman, who joined as office manager in 2008 after four years in marketing at Peresys.
The Laurium team takes a fundamental bottom-up research approach across its range of funds.
“Our approach is one-third top down and two-thirds bottom up,” says Winckler. “We have been bullish this year and in retrospect on the resource side we were too optimistic, which has hurt us a bit. We still believe global growth will continue and China will hold up. But obviously there is a lot of risk around – once we started seeing knock-on effects in recent months we reduced risk materially. Overall valuations are attractive but volatility is very high, therefore we have reduced our net exposures.”
The Laurium Capital Long Short Fund has a three-year track record, returning a net 44.7% since inception in August 2008, or 12.4% annualised versus a 6.9% total return from the JSE All Share Index and 8% from cash. The fund added 20% in its first full year followed by a 17.2% gain in 2010 and is 3% higher this year to the end of September. Its biggest drawdown was 10.3% in the global financial crisis, compared with a market drawdown of 37%.
There are about 35 long positions on the book and 20 shorts, with basic materials and financials the fund’s greatest allocations by sector. Top long positions are in basic materials and financials, while financials and consumer goods feature most strongly on the short side.
The Laurium Capital Sub Saharan Fund, a US$28 million long short fund focused mainly on sub-Saharan equities and also encompassing related strategies in preference shares, bonds, convertibles and other derivatives, launched in December 2008.
The dollar-based fund, which is domiciled in the Caymans and is part of the SA Alpha platform, is predominantly invested in South African stocks but can allocate up to 25% to pan- Africa. The fund has gained 41.8% since launch and is 3% lower year to date to the end of September, faring far better than most emerging and frontier markets.
“We assess the merit of every company from its business fundamentals, financial strength and valuation”
“Our base case remains that the US economy will be weak but not slip back into recession,” Laurium told investors in its most recent newsletter. “Aggressive monetary accommodation is here to stay. Negative real rates should underpin equity markets and help them to deliver superior returns relative to both cash and bonds over the next 6-12 months. However, as a result of huge uncertainty in the short term we have pulled in risk and are not putting on any aggressive positions.
“We have done relatively well in Africa this year considering what has been happening in the markets,” adds Winckler. “We were worried about Kenya and therefore didn’t allocate. Zimbabwe has been flat and we were hurt a bit on Nigerian banks. We have kept our Africa exposure in the fund at about 10% given what we have been seeing.”
The Laurium Capital Zambezi Fund invests in Zimbabwe; it is primarily a long equities fund and has a flexible mandate to explore other opportunities. The fund has gained 36.1% since inception in December 2009, and is 3.7% higher year to date.
Winckler says news flow around indigenisation has been negative for the Zimbabwean market this year, with some positive outcomes seen recently. The team is still finding good opportunities, however, and will look to add to positions on further market weakness. The fund is at US$17 million under management and will remain small, with capacity for up to $25 million.
The Bell Rock market-neutral strategy has gained a net 38.2% since inception in January 2008, focusing on intra-sector pair trades with liquidity a key concern. It is 2% higher this year to the end of September after adding a net 10.9% last year to win the HedgeNews Africa Market-Neutral and Quantitative Award for top risk-adjusted return in 2010. The fund has R200 million under management and has capacity up to R750 million.
“The crisis starting in July has made life difficult in the market-neutral space,” says Thordsen. “We have a fairly positive view on valuations but sentiment can knock the markets. In this environment you can make money and then give it all up in the last two days of the month. Fundamentally, things look fairly attractive but we have a hedge mandate and we are fairly cautious.
”Laurium typically builds concentrated but conservative portfolios, utilising derivatives where appropriate to enhance yield, protect asset values and minimise volatility. Its portfolio construction process starts with macro views, based on global and local economics and market valuations. Stocks are screened, using financial ratios, relative value, technical analysis and event opportunities, combined with detailed fundamental analysis, regular management contact and company visits, taking into account business assessment, financial analysis and valuations. Risk is an important factor in portfolio construction, and includes factors such as mandate compliance, gross and net sector exposure as well as liquidity, beta and value at risk.
“We assess the merit of every company from its business fundamentals, financial strength and valuation,” says Winckler. “We screen stocks based on various ratios, from liquidity to financial ratios, such as return ratios, financial structure and cash flows. We have a fundamental value bias and we spend a lot of time visiting companies.
“Markets tend to over- and undershoot fair value in times of exuberance or crisis and we believe these times present the best trading and investment opportunities,” he adds. “Our approach is pretty standard, it really just depends on how well you do it.”