fairtree multi-strategy hedge fund update · soft commodities strategies 1 pm team . 9 portfolio...

Fairtree Multi-Strategy Hedge Fund Update

19 August 2020

2

Disclaimer

A Collective Investment Scheme may be closed to new investors in order for it to be managedmore efficiently in accordance with its mandate. The Manager does not provide any guaranteewith respect to the capital or the return of the portfolio. Excessive withdrawals from theportfolio may place the portfolio under liquidity pressure and in such circumstances, a processof ring-fencing of withdrawal instructions and managed pay-outs over time may be followed.Commission and incentives may be paid, and if so, are included in the overall costs. Investorsshould note that the value of an investment is dependent on numerous factors which mayinclude, but not limited to, share price fluctuations, interest and exchange rates and othereconomic factors. Performance is further affected by uncertainties such as changes ingovernment policy, taxation and other legal or regulatory developments.

The performance of the portfolio is dependent on the making of correct assessments of theprice movements of individual securities and other investments. Financial markets havehistorically exhibited high levels of volatility and negative movements that have affected theprice of all assets within a specific class. The portfolio’s investments will thus be subject tomarket risk. Through financial gearing via the long/short process, the portfolio may beleveraged. This will mean enhanced positive gains but conversely can mean magnified losses.No taxation has been deducted in the computation of returns. The taxation treatment ofreturns is the investor’s responsibility.

All returns are disclosed net of performance fees.

The Fairtree Global Flexible Income Plus fund is a sub-fund of PRESCIENT GLOBAL FUNDS PLCand is managed by Prescient Fund Services (Ireland) Limited. Prescient Fund Services (Ireland)Limited is authorised in Ireland and regulated by the Central Bank of Ireland. The FairtreeGlobal Flexible Income Plus fund is approved as a foreign collective investment scheme underSection 65 of the Collective Investment Schemes Control Act 45 of 2002 by the FinancialSector Conduct Authority of South Africa. Fairtree Asset Management (Pty) Ltd (FSP: 25917)is the investment manager of the Fairtree Global Flexible Income Plus fund.

Fairtree Asset Management (Pty) Ltd is registered as a financial services provider with theFinancial Services Board of South Africa, with registration number 2004/033269/07 and FSPnumber 25917.

A schedule of fees, charges and maximum commissions, as well as a detailed description onhow performance fees are calculated and applied, is available on request from the manager ofeach fund (“the Manager”), being either Sanne Management Company (RF) (Pty) Ltd, RealfinCollective Investment Schemes (RF) (Pty) Ltd, Prescient Management Company (RF) (Pty) Ltdor Boutique Collective Investments (RF) (Pty) Ltd, all being registered and approved managersof Collective Investment Schemes. The name of the fund shall reflect the name of theapproved manager of the fund. Additional information, including key investor informationdocuments, minimum disclosure documents as well as other information relating to theportfolio is available, free of charge, on request from the Manager.

The Manager retains full legal responsibility for any co-named portfolio and is responsible forthe appointment of a trustee in accordance with the provisions of the Collective InvestmentSchemes Control Act, 45 of 2002.

We believe the information displayed is accurate and reliable, but no warranty of accuracy orreliability is given and no responsibility arising in any way for errors and omissions (includingby way of negligence) is accepted by Fairtree Asset Management (Pty) Ltd.

This information is not intended to provide advice to, or take into account individual investors’objectives or circumstances. This material should not be construed to represent a solicitationto invest in the portfolio and is disclosed for reporting purposes only.

Collective Investment Schemes are generally medium to long-term investments. Please notethat past performance is no guarantee of future performance and that the value ofparticipatory interests may go down as well as up. Collective investments are traded at rulingprices and can engage in scrip lending and borrowing.

Agenda

Introduction - Herman Sandrock

Multi- Strat overview (15 mins)

• Bradley Anthony & Kurt van der Walt

Relative Value Equity (15 mins)

• Andre Malan, Deon Botha & Cornelius Zeeman

Fixed Income (15 mins)

• Jacobus Lacock & Ian Millard

Conclusion and Q&A (10-15 mins)

Fairtree Multi-Strategy Overview

Bradley Anthony, Kurt van der Walt

Agenda

Overview and portfolio construction

Performance and track record

6

On-balance sheet approach optimises multi-strategy product

KEY INVESTOR BENEFITS

Diversification: Uncorrelated strategies

Disciplined: Rebalancing of risk allocations

Fee saving: Performance fee off-set

Risk Management: Holistic risk monitoring

Leverage: Prudent application of leverage

7

Optimal solutions across risk return spectrum

MULTI STRATEGY INVESTMENT SOLUTIONS

For illustrative purposes only. Targets are subject to change and are not indicative of future returns. Assets as at July ‘20

Fund Information Wild Fig Multi Asset Class Fund Woodland Multi Strategy Fund

Objective Maximize nominal return Minimize downside risk

Return target Cash + 5%

Volatility 10 – 15% 4 – 7%

Strategic allocation Weighted asset class Weighted asset class

Tactical allocation Yes Yes

Leverage Target (3x) Target (1.8x)

Macro risk management Yes Yes

On balance sheet investing Yes Yes

Product Multi Asset Class Multi Asset Class

Inception Aug 2010 Apr 2012

Asset under management ~R750m ~R150m

Redemption terms Once monthly Once monthly

8

Independent team responsible for capital allocation and risk monitoring

DEDICATED MULTI STRATEGY TEAM

BRADLEY ANTHONY

22 Yrs experience

Managing Director

• Risk management• Aggregate risk exposures• Portfolio hedge / insurance

• Tactical tilts• Monitor opportunity set • Opportunistic allocations

• Portfolio construction• Design & implémentation• Optimal diversification

• Macro strategy • Capital & asset allocation• Strategy selection

Equity Strategies3 PM teams

PORTFOLIO MANAGERS

KURT VAN DER WALT

8 Yrs experience

Quant and Risk Manager

Fixed Income Strategies2 PM teams

Soft Commodities Strategies1 PM team

9

PORTFOLIO EXPOSURES

Asset Class: Equities

- Relative Value: Intra-sector pairs trading. Alpha primarily driven by stock picking.

- Directional: Directional view augmented by pairs book. Alpha driven by sector and stock selection, together with market exposure.

- Volatility: Primarily used as a portfolio protection strategy.

Asset Class: Agri & Soft Commodities

- Relative Value: Pairs trading between fungible commodities, relying on mean reversion driven by substitution, based on fundamental research.

- Directional: Directional bias based on fundamental research, expressed in linear and non-linear instruments.

- Volatility: Alpha driven by mispricing of volatility due to seasonality in agri & soft commodity options market.

Asset Class: Fixed Income

- Relative Value: Primarily curvature and basis trades, based on independent quantitative & fundamental research processes.

- Directional: Directional exposure in most liquid instruments to reflect fundamental Macro views.

- Volatility: Alpha driven by mispricing of volatility based on proprietary analysis of probability of outcome relative to market pricing.

Available strategies across asset classes (SA & Global)

10

Low strategy correlations improves portfolio diversification

STRATEGY TEAMS GENERATE UNCORRELATED RETURN STREAMS

Allocation (%)

Daily returns used to calculate 60-day rolling correlations. Source Fairtree

-1,00

-0,80

-0,60

-0,40

-0,20

-

0,20

0,40

0,60

0,80

1,00

Jun

-15

Au

g-1

5

Oct

-15

De

c-1

5

Feb

-16

Ap

r-1

6

Jun

-16

Au

g-1

6

Oct

-16

De

c-1

6

Feb

-17

Ap

r-1

7

Jun

-17

Au

g-1

7

Oct

-17

De

c-1

7

Feb

-18

Ap

r-1

8

Jun

-18

Au

g-1

8

Oct

-18

De

c-1

8

Feb

-19

Ap

r-1

9

Jun

-19

Au

g-1

9

Oct

-19

De

c-1

9

Feb

-20

Ap

r-2

0

Jun

-20

Fixed Income - Commodities Equity - Commodities Equity - Fixed Income

60-day Rolling correlation between underlying strategies remain close to zero

11As at Aug ‘19. Daily data used since inception for the vector diagram. The market is represented by the JSE All Share Total Return Index.

Our hedge funds provide differentiated returns vs. traditional assets

STRATEGY TEAMS GENERATE UNCORRELATED RETURN STREAMS

Correlation & Beta to the Market

Correlations to the Market

= Vector degrees

(90o → 0 Correlation)

Beta of returns

to the market

= Length of the vector

-0.2 0 0.2 0.4 0.6 0.8 1

SA Market

SA Rates

Correlation and beta exposures of alternative strategies to SA Equity Market

Agenda

Overview and Multi-Strat portfolio construction

Performance and track record

13

WILD FIG: PERFORMANCE TRACK RECORD

Return characteristics

Returns (ann.)Wild Fig

(%)JSE All

Share (%)SA Cash

(%)

Since Inception 21.1 10.3 6.5

2 Year 25.3 1.9 7.0

1 Year 36.3 1.6 6.7

Year to Date* 19.6 -0.7 3.6

Risk characteristics

Volatility (ann.)Wild Fig

(%)JSE All

Share (%)SA Cash

(%)

Since Inception 14.3 13.1

Sharpe Ratio 1.0 0.3

Correlation to JSE All Share 0.3

Inception date is Aug ’10. As at 31 July ’20. *Estimated Net Returns used for Jul ‘20. Past returns are not indicative of future returns. Source: Fairtree, Bloomberg

-

100

200

300

400

500

600

700

800

Jul-

10

No

v-1

0

Mar

-11

Jul-

11

No

v-1

1

Mar

-12

Jul-

12

No

v-1

2

Mar

-13

Jul-

13

No

v-1

3

Mar

-14

Jul-

14

No

v-1

4

Mar

-15

Jul-

15

No

v-1

5

Mar

-16

Jul-

16

No

v-1

6

Mar

-17

Jul-

17

No

v-1

7

Mar

-18

Jul-

18

No

v-1

8

Mar

-19

Jul-

19

No

v-1

9

Mar

-20

Jul-

20

Fairtree Wild Fig

JSE ALL Share

Stefi

14

Diversified contribution to performance

ASSET CLASS PERFORMANCE ATTRIBUTION

Wild Fig: Contribution to performance since inception

Return contribution (%)

Wild Fig: Contribution to performance last 24-months

3,4%

8,5%

9,2%

21,1%

0% 5% 10% 15% 20% 25%

Commodities

Fixed Income

Equity

Fairtree Wild Fig

1,6%

15,5%

8,3%

25,3%

0% 5% 10% 15% 20% 25% 30%

Commodities

Fixed Income

Equity

Fairtree Wild Fig

Inception date is Aug ’10. *As at 31 July ’20. Estimated Net Returns used for Jul ‘20. Past returns are not indicative of future returns.

15

WOODLAND: PERFORMANCE TRACK RECORD

Return characteristics

Returns (ann.)Woodland

(%)JSE All

Share (%)SA Cash

(%)

Since Inception 12.4 9.5 6.5

2 Year 20.5 1.9 7.0

1 Year 30.7 1.6 6.7

Year to Date* 19.6 -0.7 3.6

Risk characteristics

Volatility (ann.)Woodland

(%)JSE All

Share (%)SA Cash

(%)

Since Inception 7.4 13.1

Sharpe Ratio 0.8 0.2

Correlation to JSE All Share 0.5

Inception date is Apr ’12. As at 31 July ’20. *Estimated net return used for Jul’20 Past returns are not indicative of future returns. Source: Fairtree, Bloomberg

90

110

130

150

170

190

210

230

250

270

290

Mar

-12

Jul-

12

No

v-1

2

Mar

-13

Jul-

13

No

v-1

3

Mar

-14

Jul-

14

No

v-1

4

Mar

-15

Jul-

15

No

v-1

5

Mar

-16

Jul-

16

No

v-1

6

Mar

-17

Jul-

17

No

v-1

7

Mar

-18

Jul-

18

No

v-1

8

Mar

-19

Jul-

19

No

v-1

9

Mar

-20

Jul-

20

Fairtree Woodland

JSE ALL Share

Stefi

16

Diversified contribution to performance

ASSET CLASS PERFORMANCE ATTRIBUTION

Woodland: Contribution to performance since inception

Return contribution (%)

Woodland: Contribution to performance last 24-months

0,7%

5,5%

6,1%

12,4%

0% 2% 4% 6% 8% 10% 12% 14%

Commodities

Fixed Income

Equity

Fairtree Woodland

1,4%

13,2%

2,2%

20,5%

0% 5% 10% 15% 20% 25%

Commodities

Fixed Income

Equity

Fairtree Woodland

Inception date is Apr ’12. As at 31 July ’20. *Estimated net return used for Jul’20 Past returns are not indicative of future returns.

Relative Value Update

Andre Malan, Deon Botha, Cornelius Zeeman

Agenda

Relative Value Strategy & Performance review

Opportunities

19

Active trading to capture alpha & manage drawdowns

RELATIVE VALUE STRATEGY

Top down

Bottom up

Cross-sector

Pairs

Fun

dam

enta

l wo

rk

Active trading style

Gross exposure 120 - 200%

Net exposure (10) - 30%

20

Big dispersion, but not within sector

2020 STOCK RETURNS

21

0,60

0,65

0,70

0,75

0,80

0,85

0,90

0,95

Banks' relative share prices

ABG/SBK (rhs)

Prefers volatility in correlated earnings streams


-

2 000

4 000

6 000

8 000

10 000

12 000

14 000

16 000

18 000

20 000

Banks' relative share prices

Absa Standard Bank

22

Trending pair


-

5

10

15

20

25

30

35

40

45

50

-

50

100

150

200

250

300

DC

P S

har

e p

rice

CLS

Sh

are

Pri

ce

Pharma retailers' share prices

Clicks Dischem

-

2,0

4,0

6,0

8,0

10,0

12,0

14,0

CLS/DCP – Relative Outperformance

119% Over Two Years

Agenda

Relative Value Strategy & Performance review

Opportunities

24

Stocks catching up to commodity prices

PLATINUM OPPORTUNITY

0

0,5

1

1,5

2

2,5

3

3,5

4

4,5

5

-

5 000

10 000

15 000

20 000

25 000

30 000

35 000

40 000

45 000

50 000

Platinum disconnect

Ratio PGM basket (R') Impala share price

(67%)

(33%)

25

Favourable supply demand balance


57,2%

25,2%

35,2%

34,8%

7,5%

40,0%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Volume Value

3E basket composition

Pt Pd Rh

• SA mining supply has been declining for > years due to lack ofinvestment

• Global loadings per vehicle increasing

• Mining supply cuts largely matching drop in vehicle demand

• Strong vehicle demand recovery in China

• Investment demand for Platinum

26

Offering very attractive FCF yield


5,2%

14,9%12,9%

23,3%

32,7%

35,6%

8,9%

17,3%

20,9%

0%

5%

10%

15%

20%

25%

30%

35%

40%

2020 2021 2022

Free cash flow yields per CY

Amplats Impala Northam

27

3,0

3,5

4,0

4,5

5,0

5,5

6,0

6,5

250

300

350

400

450

500

550

600

Tencent outperforming Naspers

Ratio (NPN,PRX/Tencent) Tencent

Significant widening of discount

NASPERS RUMP OPPORTUNITY

(28%)

28

Unjustified discount


-

500

1 000

1 500

2 000

2 500

3 000

Tencentmarket value

Other listed Unlisted + Netcash

Prosus' sotp Prosus' shareprice

Prosus valuation breakdown (R'share)

33%

-

1 000

2 000

3 000

4 000

5 000

6 000

7 000

Prosus sotp Prosus' share price Naspers' share price

Naspers valuation breakdown (R'share)

55%

33%

33%

29

Steps taken to address the discount


1) Disposals

• They’ve crystallised >$5bn value on unlisted investments (Flipkart, Allegro). It shows their IRR’s aren’t just pure theory (although I still think it is overstated)

• They’ve unbundled ‘old world’ Multichoice to clean up the investment case

• They’ve proven that they are allowed to sell Tencent (albeit 8% discount)

• This proved that they can do it without incurring CGT for institutional investors

2) Prosus

• They’ve listed Prosus in a Developed Market jurisdiction to remove the EM-overhang

• This included an unbundling to reduce the weight of Naspers in the All Share, to remove the constant selling pressure

• They’ve sold some Prosus and did a buyback at Naspers level, at a value accretive price

30

Steps taken to address the discount


3) Segments

• They’ve moved away from the ‘spaghetti against fridge’-approach and focussed on 3 verticals by swapping their travel business• Classifieds

• Food Delivery

• Payments

• Maybe education

• They are also doing mergers instead of just writing cheques. And they’ve proven that they can step away from a deal like JustEat

• They’ve made the Classified business profitable, so it can stand on its own feet

4) ESG

• They’ve improved disclosure and investor interaction (I think they have like 3 IR’s now and held a big investor day)

• They are constantly improving their remuneration policy

31

To remain range bound

SA Inc

Fundamentals

Valuations

• Job losses due to lockdown

• Fiscal position • Education levels• Electricity shortage

• Policies (Land reform, BEE)

• Corruption• Lack of confidence

Fixed Income Update

Jacobus Lacock & Ian Millard

33

Fixed Income Attribution by Instrument

ASSET CLASS FOCUS: FIXED INCOME

Wild Fig: Fixed Income Attribution YTD

As at 30 Jul ’20. Past returns are not indicative of future returns.

17,6%

52,8%

-17,7%

-0,3%

7,7%

-1,0%

59,1%

-30% -20% -10% 0% 10% 20% 30% 40% 50% 60% 70%

FRA

SWAP

BOND

CASH

FX

GLOBAL

Total (Gross)

Key contributors:

• FRAs: We had a short dated flattener position on in FRA’s as well as overall receiver position.

We believed the SARB could surprise with more rate cuts as the economy weakened, inflation

surprised on the downside and global policy became more accommodative. Inflation fell to

low 2% and SARB cut 300bps

• Swaps: We were received front-end swaps, < 10yrs, and paid the back-end, >10yrs. Policy

loosening and aggressive re-positioning led to heavy swap steepening during the crisis.

Foreign selling exacerbated the move.

• Bonds: We held a bond flattener (spread between R186’s and R2048’s) as an attractive hedge

against our swap steepener position. The bond curve steepened as credit concerns mounted,

liquidity deteriorated, foreigners sold our bonds and policy loosened. We held a small R2023

position that benefitted.

• FX: Our long EUR trade benefitted from US dollar weakening while our tactical ZAR

positioning also added to performance.

34

FRA Rates collapsed during Q2-2020


Received FRA (3x6) – Calling a deeper cycle than the market

As at 18 Aug ’20. Past returns are not indicative of future returns. Source: Bloomberg

FRA: 21x24

FRA: 3x6

• SARB is getting to the end of its easing cycle

• Risk of deeper growth slowdown may force the SARB’s hand to cut once more

• Market is currently pricing in 3 hikes over the next year

35

The swap curve steepened


Swap steepener 5yr vs 10yr

As at 18 Aug ’20. Source: Bloomberg

10yr swap

5yr swap

Difference: 10yr – 5yr swap

36

The swap curve has steepened, provides an opportunity


Swap curve to flatten: SA 5y5y vs SA 1y1y


• SARB signalling end to cutting cycle

• Inflationary pressures rising over 12-18month horizon

• Long term rates to trade lower on global outlook

37

The bond curve steepened due to credit concerns and easy policy


Bond curve steepened but rallied post down grade


4,0

5,0

6,0

7,0

8,0

9,0

10,0

11,0

12,0

13,0

14,0

R208 2023 R186 2030 R213 R2032 R2035 R209 2037 R2040 R214 R2044 2048

3 4 8 11 12 14 16 18 18 21 22 25 29

Start of Year 23-Mar-2020 Current

38

The bond curve steepened due to credit concerns and easy policy


SA Bonds 30yr (R2048) – 6yr (R186)

As at July ’20. Source: Bloomberg

39

SA bonds attractive on a relative basis


SA 10yr real yields vs other EMs


-2

-1

0

1

2

3

4

5

6

7

8

SOU

TH A

FRIC

A

IND

ON

ESIA

BR

AZI

L

MA

LAYS

IA

CO

LOM

BIA

THA

ILA

ND

RU

SSIA

MEX

ICO

PER

U

RO

MA

NIA

SOU

TH K

OR

EA

TAIW

AN

CR

OA

TIA

CH

INA

PH

ILIP

PIN

ES

PA

KIS

TAN

TUR

KEY

IND

IA

CH

ILE

HU

NG

AR

Y

40

ZAR undervalued


ZAR Real Effective Exchange Rate


41

Outlook & Opportunities


• The global macro environment will turn more favourable towards emerging market assets including local EM debt as the US dollar

weaken, real rates remain low and monetary and fiscal policy remain accommodative.

• South Africa bonds are valued attractively on a relative and absolute basis and we expect foreign investors to re-enter our fixed

income markets proving scope for bond yields to fall.

• The yield curve has steepened due to credit concerns and heavy issuance. Current levels more than compensate for these risks.

We expect the curve to flatten over coming quarters.

• SA monetary policy will remain accommodative, but the recent easing cycle is close to its end. The risk to inflation sits on the

upside.

Conclusion

Bradley Anthony

43

Gearing & Exposures CAPITAL ALLOCATION

Strategic Allocation Ranges & Current Exposure (dot)

As at July ‘20

Woodland160%

Low (%) High (%)

40 80

20 40

20 50

Fixed Income

Commodity

Equity Net Exposure %

50 150Equity Gross Exposure %

30 90Equity

Current Level

ALLOCATIONS

EQUITY EXPOSURES

60 140

25 50

25 75

100 250

50 150

Wild Fig230%

Low (%) High (%)

44

Benefits of investing in single manager multi strategy funds

WHY MULTI STRATEGY FUNDS

Portfolio Construction

- Combine & optimize breadth of skill sets into diversified solution

- Securities sit on on-balance sheet, as opposed to multiple fund investments

- Dedicated team responsible for asset allocation & risk management

- Creates potential of “real-time” opportunistic & tactical allocations

Risk Management

- Close coordination with single strategy teams

- Real time monitoring of diversification and risk

- Aggregate portfolio risk management at an instrument and macro factor level

Leverage & fee off-set

- Prudent application of leverage to achieve targeted risk profile, as a result of securities held on one balance sheet

- Leverage increases the exposure per unit of base fee paid

- Performance fee off-set, as fees paid on aggregate performance

45

Risks of investing in single manager multi strategy funds

WHY MULTI STRATEGY FUNDS

Depth & Breadth of team

- One team managing all asset classes, can lead to concentrated bets across multiple asset classes

- Difficult to find one individual or team who specialises in everything

- Best of breed - Unproven diversified alpha generating capabilities

- Small teams battle to segregate duties

- Complexity of products can mask excessive risk taking

fairtree multi-strategy hedge fund update · soft commodities strategies 1 pm team . 9 portfolio...

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