RYK VAN NIEKERK: Welcome to my weekly Market Commentator podcast, where I speak to the leading investment professionals in the country. We try to get an understanding of their perceptions of the markets, of equities, as well as the different asset classes.
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My guest today is Jacobus Brink, the head of investment at Novare’s multi-management division. He has been in the industry for nearly 15 years and held several portfolio management positions at Absa, Commerzbank and FirstRand. His LinkedIn profile also states he was a musician linked to the Universal Music Group. We must certainly ask him about that a bit later.
Jacobus, thank you so much for joining me. Novare is an interesting asset manager. It was founded in 2000, so it is around 21 years old. It also has offices in many countries on the continent. It is a Level 1 BEE company. Tell us about Novare and what your core strategy is.
JACOBUS BRINK: Thanks, Ryk and thanks very much for having me. Novare has been around for a while. We just recently celebrated our 21-year birthday. We were initially founded in 2000 by two gentlemen, Derrick Roper and Johan Henn, as an actuarial consulting business.
From there on out, in 2001 to 2003-ish, we also developed our own in-house investment management capability, and we started with the launch of our flagship fund of a hedge fund, which I’m sure we’ll chat about later. That also followed fairly quickly with some global capabilities and a local long-only fund of funds.
Then around 2008, we branched out into Africa. Well, we launched the Novare Africa Property Fund in 2010, where we basically started some of the first constructions of malls in Nigeria. That fund was quickly followed by another fund in 2012. We now own malls in the Novare Apo Mall in Abuja in Nigeria. We’ve got properties in Mozambique and Botswana. So it’s become quite a diverse offering. But our core business is still in our investment-management business.
On the other side, we also have an investment-consulting arm, which consults with some of the larger pension funds in South Africa. There’s obviously a closed sort of Chinese wall between all of those various entities.
RYK VAN NIEKERK: The exposure to Africa is very interesting, especially the focus on property. We’ve seen several other property companies actually withdraw from Africa, especially Nigeria. How successful is that fund?
JACOBUS BRINK: If you look at it since inception, these funds are very much private-equity funds and have had initial lockups of about 10 years. Initially they were quite successful. We were one of the more successful stories out in Africa, but because of the macro scenario in most of the African countries that we’ve seen over the last few years especially, we have taken some drawdowns.
So Fund 1 currently has been extended by investors. We hopefully expect to see some recovery in the macroeconomic picture, and Fund 2 is still ongoing.
We’ve positioned the funds to be currently sitting on very, very low loan-to-values. We’ve negotiated a new financing deals with most of our banks. We own premium properties in all of those countries. We did obviously take a bit of a knock over the past few years or so, but we expect to make all of that back as the macro picture hopefully starts to improve.
RYK VAN NIEKERK: You head up the multi-management division of Novare. Who is it aimed at? Who do you target to invest in your funds?
JACOBUS BRINK: Most of our investors, probably about 95%, are actually institutional investors – so mostly large pension funds. We do also have a small contingent of retail investors, but we offer retail offerings as well. So it’s not like we only manage these institutions. They do have minimum subscription amounts. Up till now it was mostly focused on the institutional market.
RYK VAN NIEKERK: What is your funds under management?
JACOBUS BRINK: Our total funds under management currently is in the region of R8 billion, so a fairly smallish niche operation still. Of that about 80% is made up of our Global Fund of Funds that we manage. That’s basically a multi-asset global fund of funds. It’s also domiciled out in Jersey. About the other 15% is in our hedge-fund strategies and the remaining 5% in long-only strategies.
RYK VAN NIEKERK: Let’s talk about markets. We are talking now around lunchtime on Thursday, November 4, just as a reference. The JSE Alsi [All-Share Index] nearly hit a new high this morning. This is despite Naspers and Prosus being down around 1.8% each. Is the local market a bit stronger than what the Alsi suggests?
JACOBUS BRINK: Yes. I think today’s an interesting day because obviously we had the Fed [US Federal Reserve] meeting, and the statement out last night, and that just boosted markets across the globe.
So we’ve seen a bigger risk-on scenario this morning. I think we are finally seeing some of the names that were a little bit in the dark over the past few months; with some of the local macro environment there’s obviously a lot of uncertainty around it, so we’ve seen some of them come back quite strongly. MTN is up, Massmart, Amplats, some of those,
…and we’re starting to get slightly bullish on local equities.
We recently released a piece where we indicated that at this stage we still prefer bonds over equities, purely for the fact that the yield curve is steep and we think there’s a lot of value in bonds currently. There’s more and more certainty that we start seeing in the local market as far as the macro picture is concerned, and we are starting to pick up our equity exposure as we go along. We ran quite a large underweight position for the past 18-odd months, but we’ve started to increase that position.
RYK VAN NIEKERK: ‘Slightly bullish’ – a very interesting term. So you’ve become bullish about the local market, but are you actually changing your asset allocation?
JACOBUS BRINK: We think there’s still a bit of liquidity that needs to be flushed out of the system, looking at the US market in particular. Obviously we are nearing the Christmas period, where we seasonally always see the Christmas rally. We do think we can see a little bit of a pull-back first, so we’re keeping a close eye on markets because we manage those funds of ours fairly dynamically and do make tactical calls there. We are keeping an eye on the market and [with] any sort of weakness we see from here we will start upping our equity allocation.
RYK VAN NIEKERK: Your flagship fund is the Mayibentsha Moderate Qualified Fund of Hedge Funds. A very interesting name. The portfolio size is around R440 million. Tell us about this fund – especially the interesting name, Mayibencha.
JACOBUS BRINK: [Chuckling] ‘Novare’ actually means ‘Let it be new’ in Latin. So the Mayibentsha name is actually the Xhosa word for ‘Just let it be new’. Obviously we are a BEE Level 1 contributor, very much focused on that area, and hence it’s where the name comes from.
The fund, like I said, is the longest flagship strategy we run. The inception date of the fund was April 1, 2003. It is also our largest fund by assets under management in the local space. We’ve been shortlisted for a number of awards over the years.
The latest award that we won was actually earlier this year, for the 2020 year; it was a HedgeNews Africa award. So we’re very proud of that in the year 2020, where we saw Covid lockdowns – something we’d never seen, at least in our lifetimes. We were quite proud of that, specifically the category that we won, which is judged on best return over an entire 12-month period. So that would’ve been [for] the entire 2020 period, provided that the Sharpe Ratio is within 25% of the ratio of the other nominees.
Despite the fact that we saw great performance, the fund has also given us that performance at very low volatility.
RYK VAN NIEKERK: I’m looking at the fact sheet. In 2020 the fund rose by 13.1%, which is pretty decent. In 2021 year to date it has increased by close to 9%. How many hedge funds of funds are there in South Africa?
JACOBUS BRINK: Not a lot. We took the view that, post 2016, when hedge funds started being regulated by CSCO [Cisco Systems Inc], we would start to see some more inflows into this space, but we’ve actually seen the opposite. We’ve seen funds closing down. So no – at the moment there are not a lot of offerings around, and we’re especially proud of the fact that we’ve been around since 2003 and are still going strong and still reaping the awards.
RYK VAN NIEKERK: Obviously a multi-manager invests in other fund managers’ funds, so you don’t manage your own fund. Your fact sheet also reveals that you are invested through several other asset managers or hedge-fund managers – 36One, Abax, Acumen, Catalyst Fund Managers is there, Coronation, Matrix, several of the big South African hedge-fund managers. Is this a strategy to be broadly diversified, because it seems like you are invested in the majority of the hedge fund managers in the country?
JACOBUS BRINK: The name you see there is purely the names of the investment house; obviously underneath those they do run more than one strategy. But yes, in each of our funds we have three risk-profile funders. One is obviously our balanced-risk profile. So we’re trying to beat inflation by 3.5%, but we want to do it with substantially less volatility than the JSE, and typically something more in the region of bonds. That we’ve obviously achieved since inception as well.
The view we take here is that, because it’s a multi-strategy fund, we bucket certain of the underlying strategies – call it equity, long-short, fixed-income, arbitrage – into various buckets based on the return distribution that they have historically exhibited. Because of this, we don’t have a fund that’s invested only in equity long-shorts, or only in equity-market neutral.
All of our funds are multi-strategy and invest across those strategies.
It’s the reason why there are quite a number of underlying managers in the fund, because each of these managers brings something specific to the fund, something we specifically look at.
Obviously equity-market neutral is a fairly broad category, and within those there are guys who manage money in a number of different ways. Despite the fact that we might have four equity-market neutral managers in the fund, each of them has a very different management style that targets different return profiles, and that’s what we are looking to gain access to in these funds, in order to generate alpha at a substantially lower return.
RYK VAN NIEKERK: What is the risk profile of this fund in comparison to, say, a normal equity fund?
JACOBUS BRINK: As I mentioned, we manage the fund with the idea of giving investors substantially less risk – if you measure it by volatility or maximum drawdown – than the equity funds. Despite the fact that we do have equity exposure, it’s obviously not purely long-only exposure, so the fund is much more conservative when it comes to its return and risk profile was equities.
RYK VAN NIEKERK: Another thing that is really interesting is the total investment charge. Now, everybody in South Africa – one of the first things they do when they look at a fund fact sheet is go to look what the total investment charge is. Yours is 4.5%. That seems to be very, very high. How do you justify such a charge?
JACOBUS BRINK: That charge obviously does include a performance fee. As you know, most hedge fund managers, if not all of them, do charge performance fees. We don’t mind paying performance fees but we do think it aligns our interests and the investor’s interest with the fund manager’s interest.
The reason for this very large charge currently is the fact that we’ve had to pay so much [in] performance fees over the past 18 months specifically. Most of our managers that we are invested with did very, very well, and because of that we were able to generate these great returns. So yes, there is a bit of a performance fee that we also take for outperforming our benchmark, but the majority of that is performance fees from the underlying managers.
Typically managers charge a 1.5% management fee, and around a 15% performance fee. That has come down in some cases – about 1% in a 10% performance above their benchmark. But because we’ve been around so long and we do have very good relationships with these managers, we are typically able to negotiate better fees. So yes, it might look high, but the reason it’s so high is because the managers’ underlying [strategies have] been doing what we’ve been selecting them to do.
RYK VAN NIEKERK: I know most hedge funds are expensive; there are significant performance fees payable. But do you think it is sustainable, because there is such a big move away from high fees in the broader collective-investment industry? Do you think in 10 years’ time we’ll still see these type of fees?
JACOBUS BRINK: There’s obviously been a large move away from such high fees. That might continue going forward. But at the end of the day we don’t mind paying performance fees. As I mentioned, if the managers we are invested with have a mandate to give us double what the Alsi does, and they give us four times what the Alsi does, then I suppose it’s not bad to pay that extra fee because you’ve really earned an extra return on it.
I understand that it’s a difficult one, just looking at fact sheets and thinking, oh my goodness, this fund’s investment charges four-and-a-bit percent, but we’ve still achieved in a year where we saw massive drawdowns. Last year we still achieved 13.1% and, if you looked at it, in March 2020, when the market took a real bath, this fund was down minus 3.5%. It is almost difficult to justify these types of fees when we are only seeing a raging-bull market like we have over the past 10 years. There’s obviously been a lot of excess liquidity going around, and investors forget that we could see another 2008 and have a massive drawdown of 30% or 50% here. That’s, I think, where these strategies typically shine through very, very well.
At the end of the day, you get what you pay for. Like I mentioned, those fees are so high because the performance has been so good. As I mentioned, in 2008 this fund lost 6%. We’ve never been an advocate of ‘just invest all of your retirement money in our hedge fund’, but these funds definitely have a place in any investor’s portfolio, especially now that retail investors can also invest in them. Despite the fact that, yes, the fees are high, the net returns however are very good.
If you look at these funds from a diversification point of view, as I mentioned, if you sat with a hundred-percent equity allocation, you would have taken a 50% bath in 2008, whereas, if you had included a fund like this, it would obviously have cushioned that blow – and that’s what we’re advocating.
RYK VAN NIEKERK: I just want to return to the strategy allocation. You’ve got equity long-short exposure around 30%, equity-market neutral 24%, and then fixed-income arbitrage – which is the biggest allocation – nearly 56%. What is ‘fixed-income arbitrage’?
JACOBUS BRINK: [Chuckles] That’s a very good question because I think if you ask three different managers, ‘Okay, so you are fixed-income arbitrage managers, what do you actually do?’ all three of them will probably give you a different answer.
Just going back to, as you mentioned, equity long-shorts 30%, equity-market neutral 23%, we obviously see those as both sort of drawing their alpha from the equity market. So, if you are on a look-through basis and you include some of the multi-strategy funds, our equity allocation is a little bit higher – if you just want to look at it from that basis. So no, the fixed-income arbitrage is not necessarily the biggest allocation in this fund.
But fixed-income arbitrage is basically, in layman’s terms, [where] they can pretty much use any strategy [where] the underlying [investment] is any fixed-income instrument, whether it be a bond, a pref share, or corporate credit that they invest in. The arbitrage is a bit of misnomer because there are so many underlying types of strategies that the guys follow that it’s more of a catch-all phrase.
Some of our fixed-income arbitrage managers are very much macro-focused, so they’ll take very much a large global macro view. Based on that, they would take specific sort of positions in, we think, this country or South Africa is one [where] we’re seeing the yield curve is very steep. So they are at the long end, the shorter end of the curve. There’s a multitude of strategies, but it basically comes down to trying to generate alpha using fixed-income instruments in whatever form whatsoever.
RYK VAN NIEKERK: Interesting. Then just lastly, tell us about Jacobus the musician.
JACOBUS BRINK: [Laughing] I’ve been making music my entire life. In 2015 two friends and I decided to start a band. We had some extra money on our hands and we decided to call that an album. We went through the proper channels – a proper recording studio.
But it was all just for ourselves and for fun, and we released our first single with a video on YouTube. About three hours later Universal Music phoned me and said they would like to meet us. So we subsequently signed a deal with them and from there I actually took some time off to make music professionally.
But the life of a musician is fairly boring. You’ve got a lot of time on your hands during the week, and then obviously do a lot of gigs over the weekend. I just figured I couldn’t still be involved in the investment world and make music, so it’s very much still in the music scene, releasing a few songs every now and again, [but] it’s also being the head of investments at Novare. I think the balance keeps me sane.
RYK VAN NIEKERK: I think many people will say a musician’s life could probably be a lot more interesting than a multi-manager’s life. What instrument do you play, or are you on vocals?
JACOBUS BRINK: I’m actually a singer, but I also play the guitar and piano – and some bass guitar every now and again, with percussion. I started playing the piano when I was seven years old, so it’s been very much part of my life up until now.
RYK VAN NIEKERK: Well, hopefully the music keeps on playing for your investors. Jacobus, thank you so much for your time today. That was Jacobus Brink, the head of investments at Novare’s multi-management division.
source: Markets and music – Moneyweb