By Alan Yates, Head of Distribution at Peregrine Capital
My father is a committed Toyota Land Cruiser man. He’s owned a Toyota 4×4 for as long as I care to remember. There was the Land Cruiser bakkie with the mattress in the back for us kids to sit on when we went on holiday. Then there was the Land Cruiser GX; while a significant upgrade in comfort for us kids, it was also a very unfortunate shade of brown that resulted in much toilet humor from my friends. And currently it’s a Prado with well over 300,000km under its belt and still going strong. The takeaway here is that he definitely feels like he gets value out of that brand of car.
This might not be true for a driver with no kids and no interest in off-road adventures. To them a 4×4 would be horrible value for money. They would be paying for all sorts of features they didn’t need and forgoing some of the features they do (like the ability to parallel park in something other than a truck stop). Conversely, if my dad had bought an entry-level sedan and tried to take his family through the dunes of Mozambique, he would have found it to be a very expensive mistake. Simply put, different vehicles have different uses, and you can’t expect to get the performance you need out of something that isn’t built to give it.
The same can be said for investment vehicles. The suggestion that the cheapest option is the best option, speaks to only one side of the equation: price. But what about value? For most investors, there is significant value in getting higher than index returns, and even more value if you can get them at lower levels of volatility. And it is here that I think the passive vs. active debate has consistently missed the point. If you are looking to generate the same return as the market, at the same risk levels, then I agree that the cheapest possible tracker fund is probably the best option for you. You already know what you will get, so the only variable to consider is the price you will pay for it. But you might well be leaving a lot of money on the table. And over time that could well be a lot of money. Just as importantly, you would have experienced the full ride along the way and might have decided not to stay the course when things got tough through things like the Global Financial Crisis in 2008, or the COVID crash in 2020. So inherently there must be value in a fund that can beat the market, and even more so in one that can beat the market and do it with less of the downside risk.
And it is here that the active manager side of the market enters the chat. There is the oft quoted market statistic that more than 75% of active managers underperform the market. And I’m certainly not going to suggest otherwise. The ASISA South Africa General Equity average 10-year figures bear this out, with the average return coming in 82bps per annum lower than the FTSE/JSE Capped Swix TR Index*. Fees certainly play a role in this, as active managers tend to charge a higher management fee than that of the passive crowd, but so too do things like fund size and career risk for the manager in question. Most funds charge a management fee on the total assets they manage and are therefore incentivised to maximise their total assets under management, rather than outperform their stated benchmark. So, does that mean then that we should all be investing in passive funds alone and accept the market return as the best we can achieve? I’d argue not.
Hedge funds are a very small part of the overall market in South Africa, and yet they offer some of the best risk-adjusted returns available. We fall into the active manager camp, but there are some distinct advantages available to hedge fund managers versus our long-only peers.
While hedge funds are known to be “expensive” relative to other options, they also might offer the best value of the lot. Price is what you pay, value is what you get. The average long-short equity hedge fund has outperformed the FTSE/JSE Capped Swix TR Index by 1.69% per annum** over the same 10-year period, net of all fees. And just as importantly, they have managed to do that at just less than half the volatility. That means better returns, and a much more comfortable ride for the investor as well.
The Peregrine Capital High Growth H4 QI Hedge Fund has managed to do much better than the average. The 10-year return (net of all fees) is more than double the market return at 14.49% per annum, and again that’s with around half the volatility and less than a third of the maximum drawdown. Source: Morningstar
Let’s put that in perspective. If you had invested R1,000,000 in the index ten years ago, you would have R1,792,300 now. If you’d invested the same R1,000,000 in the Peregrine Capital High Growth H4 QI Hedge Fund, you would have R3,868,400 now! As I said at the start, if passive was your only perspective, you might have left a lot of money on the table.
All information correct as at 29 February 2024
*Annualised 10-year net return figure to 29 February 2024. Source: Morningstar
**Annualised 10-year net return figure to 29 February 2024. Source: HedgeNews Africa, Morningstar
For more information and full disclosures please visit www.peregrine.co.za
