November 15, 2013

In the five years since it opened its doors in 2008, Johannesburg-based Laurium Capital has established a strong track record and a diverse client base across its funds, which are focused on the South African and broader African markets.Founded by ex-Deutsche Bank CEO Murray Winckler and long-time colleague Gavin Vorwerg, who previously headed Deutsche’s equity structuring business for Africa, Laurium now has assets of R2 billion across its suite of managed and advised funds, including both South African and African mandates in rand and dollar classes.Laurium, like many of its peers, recently moved into the long-only world with the start of the company’s first South African unit trust in February. The Laurium Flexible Prescient Fund, launched in conjunction with the Prescient Management Company, aims for long-term capital growth. It gained 8.4% from launch to the end of June, a promising start relative to the equity market and other funds in the category.Classified in the Domestic Multi Asset Flexible category, it has a high degree of flexibility but must invest a minimum of 70% of its assets in South Africa, a maximum of 25% in global assets and a potential additional 5% in African assets. Investable assets include equity, fixed interest, listed property and money-market instruments. It aims to achieve a return of at least 5% above CPI, measured over rolling three-year periods.“For us the aim with the unit trust is to leverage off the same research team and process but targeting a different investor base,” says Winckler. “In line with current regulations, we don’t target retail investors for our hedge funds. But if they move into the CISCA environment [regulation is pending under the Collective Investment Schemes Control Act] we will have made inroads into building a unit-trust brand and operating in the CISCA environment.”“On the investment side, the difference with the unit trust comes down to portfolio construction. We have a lot of common positions with the hedge funds, but sizing is different and, of course, this is a pure long-only fund.”On the other end of the product spectrum, Laurium went live with its aggressive equity long short fund in January – a higher-octane version of its flagship long short fund. The Laurium Aggressive Long Short Fund has gained an impressive net 21.9% in the six months since launch in January, including adding 10.8% in May before dipping 0.5% in June.The fund has a more aggressive approach than the group’s conservative flagship long/ short equity fund. Winckler says the team expects the new fund to have higher volatility than the flagship fund, with potentially bigger drawdowns. Over time, however, the returns are expected to be higher.The new fund aims to deliver at least 10% per annum more than South Africa’s Consumer Price Index (CPI) on a rolling three-year basis, and is more concentrated than the main fund. Leverage and derivatives are used where appropriate to enhance yield, protect asset values and minimise volatility.“In the retail space hopefully there will be movement into the CISCA environment and there should be descent growth when it happens”

Murray Winckler

Winckler says most positions in the main fund are included in the new portfolio, but generally position sizes will be bigger, tapping into event-driven opportunities in particular.The fund has assets under management of R70 million and will be capped to new investment at R250 million. No one investor can have more than R50 million of initial capital invested in the fund. Laurium staff have allocated just 25% of their firm-wide invested capital to the new product, despite the higher return profile, with the bulk remaining in the flagship fund, preserving the integrity of its product range.“Broadly speaking we can take more risk in event-driven positions. We have already gone as high as 15% of NAV in a single position, Laurium applies investment talent to a growing array of fund options The new unit-trust launch follows that of a more aggressive long short fund, sharing the same research team as the firm builds on its proven process and we can go higher according to the fund’s mandate,” says Winckler. “For us these are big positions given our historically conservative approach with the main fund.”Laurium’s new products are built on a foundation of steady and consistent returns in its existing funds, applying the same exhaustive investment process based on intensive company research. All the Laurium portfolios are constructed using the investment team’s bottom- up, valuation-driven research process.Its first hedge fund, the Laurium Capital Long Short Fund, went live in August 2008, at the height of the global market crash, and has delivered a net return since inception of 13.7% per year (to end-June 2013). This compares favourably to the 10.7% annualised total return delivered by the JSE All Share Index over the same period. The fund targets returns of at least 7% per annum more than South Africa’s CPI on a rolling three-year basis, and has delivered 8% more than CPI since launch with less than half the market volatility.With assets under management of R1.1 billion, it has capacity for R3 billion. The fund has added 9% so far this year to the end of June, after delivering 13.9% in 2012.Two new people have joined Laurium’s investment team this year, taking it to nine professionals, including equity partners Craig Sorour, Kevin Shein and Paul Robinson.Paul Neethling joined in January as an analyst, and was previously an associate at Investec in the corporate finance division. A chartered accountant with a CFA, he was a trainee accountant at PricewaterhouseCoopers in Johannesburg.Florance Matjeke came on board in May as a portfolio assistant and works alongside COO Mark Preston. She has a BCom (Finance) and prior to Laurium was an intern at Momentum Investments, rotating in various fields including equity and credit research and portfolio implementation.Laurium also retains its strategic relationship with Connecticut-based Artha Capital, the large global emerging markets hedge fund, which owns a stake in the business. The two investment teams collaborate in various areas, from Africa investment themes to investor networks.Laurium’s most conservative hedge fund offering is the Laurium Capital Bell Rock Fund, a market-neutral fund that was previously a joint venture before being fully incorporated under the Laurium umbrella a year ago. Sorour, who joined from BellRock and is now an equity partner of Laurium, was previously a rated retail analyst at Deutsche Bank from 1999 to 2005, before jointly managing the bank’s proprietary desk, for which he assumed sole responsibility in 2008.“Rallying equity markets and relatively low dispersion amongst stocks have made for a tough environment for market-neutral strategies. There has been very little money going into market-neutral strategies in South Africa, and some funds have not survived,” says Winckler. “Everyone has been chasing beta in the markets. But the fund is doing well this year and we’re confident the appetite for this strategy will return.” The fund focuses on capital preservation, looking to deliver absolute monthly returns, with a net annual target of 5% in excess of cash (SteFI) and minimising risk through disciplined hedging processes. It has delivered an 11.4% return per annum since inception in January 2009, with very few negative months during that time, and a maximum monthly drawdown of 1.3%. The fund has gained a solid 9.7% this year to the end of June and has capacity for R500 million.On the offshore front, the SA Alpha Sub Saharan USD Fund is an offshore portfolio advised by Laurium, and is focused on Sub Saharan African equities (with some positions in preference shares, bonds, convertibles and other derivatives). The fund aims for a real return in US dollars of more than 15% per annum on a rolling three-year basis with a low correlation to global and South African equity markets and a low risk of capital loss. It has gained 14.5% per annum since inception in December 2008, including 8.9% so far this year to the end of June.“We have taken in a couple of new offshore investors this year and a couple more are doing due diligence. There is interest. The fund is growing and we hope the growth will accelerate once the fund exceeds US$50 million,” says Winckler.The fund currently has around 80% invested in South Africa, with the remainder mostly in Nigeria, Zimbabwe and Tanzania. Looking at the world markets, Winckler says he sees value in developed-market equities, most notably in the US. South African stocks, particularly those with a domestic focus, still look expensive, despite a pullback in June on concerns over China’s growth and quantitative easing from the US Federal Reserve.“We feel domestic SA Inc is fully valued, particularly in the retail space. Our positioning this year has been short domestic stocks and long rand hedges.”“The resource sector has been bombed out. If we see positive progress on the industrial action, which has hit the industry hard, and if China does better by year-end, we could have resources performing well,” said Winckler.He says resources exposure held the team back last year. Their main fund still delivered a respectable net 13.9% in 2012, but they have scaled back on resources. They retain positions in rand hedge stocks, which stand to do well with a weakening South African currency, but are short retail and recently neutralised a net short position in banks.“We have been negative on the currency so we have exposure to rand hedge counters on the long side,” he said. “In South Africa, if the rand stays weak as it is, that will be negative news for the consumer. We can expect to see consumer stocks de-rate and earnings disappoint 18 months from now.”In the broader African continent, Laurium stills expects upside over the long term, despite a strong run from many markets in the past 12months, including Nigeria, Kenya and Zimbabwe. Rising interest rates could hold back performance in some countries while elections in Zimbabwe will be closely watched, after a market gain of more than 40% year to date.Winckler notes that Nigeria, for example, has still not reached its previous highs, meaning there are gains to be made. “In Nigeria, there is a big disparity between stocks like Unilever and Nestlé, which have forward price-earnings (PE) multiples of 25 to 30 times, while banks are at eight to 10 times. We still expect to see upside, though not in a straight line.“From a business point of view, Winckler expects growth in the hedge fund industry in the short term to be driven mostly by foreign investor flows, where the company is gaining good traction.“In the domestic pension fund industry, trustees are concerned about fees so we don’t see massive amounts of capital coming in,” he said. “In the retail space hopefully there will be movement into the CISCA environment and there should be decent growth when that happens.”“The industry in South Africa is still very small but the bigger managers have had decent returns with low volatility. There is no reason why the industry shouldn’t double in size from here.”

FUND FACTS - Laurium Capital Long Short FundStrategy: South African long short equityManagers: Gavin Vorwerg, Murray WincklerInception date: August 2008Prime brokers: Deutsche SecuritiesAdministrator: MaitlandCurrency: RandOpen to investment: Yes

FUND FACTS - Laurium Capital Bell Rock FundStrategy: South African market-neutral equityManagers: Craig Sorour, Gavin Vorwerg, Murray WincklerInception date: January 2009Prime broker: Peregrine EquitiesAdministrator: MaitlandCurrency: RandOpen to investment: Yes

FUND FACTS - Laurium Aggressive Long Short Fund

Strategy: South African long short equity, aggressive

Managers: Gavin Vorwerg, Murray WincklerInception date: January 2013

Prime brokers: Deutsche Securities

Administrator: MaitlandCurrency: Rand

Open to investment: Yes

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