Peregrine Continues to Differ from the Peer Group

By Stephen Cranston

The hedge fund firm had a strong start to the year, with positive returns in January when the market was down.

Returns on Peregrine Capital’s hedge funds continue to have a low correlation with peers and the overall market, according to CEO and co-portfolio manager Jacques Conradie.

In the firm’s annual newsletter, Conradie said this was due to its distinctive approach to portfolio construction and identifying opportunities that are not simply linked with the overall index.

Peregrine Capital funds had net returns in the 12 months ending December 2023 of 14.7% and 12.5% for the long/short High Growth fund and the market-neutral Pure Hedge fund, respectively.

Conradie said in the firm’s newsletter that in 2023, both of these hedge funds generated consistent absolute returns.

He said a key contributor to the overall fund performance was that the firm had few loss-making positions during the year, with only one position losing more than 0.5%.

‘On the positive side, we had many winners in a variety of sectors. Our team responded well to economic and company-level data throughout 2023.’

Conradie said a key driver of long-term success is the willingness to change its mind when new data emerges.

‘When it started to become clear that inflation was falling and that economies were proving more resilient, we took advantage of that opportunity by adding to our equity exposure at what proved to be opportune times, in hindsight.

‘We made solid returns from the South African market, taking advantage of the attractive valuations earlier in the year when the market was overly worried about loadshedding.’

Conradie said that Meta Platforms was the firm’s biggest winner in 2023, but it should have been even better as the holding should have been bigger.

‘We learnt from this mistake as the year progressed. Two of our other winners this year, [online retailer] Pindoudou and [payment firm] Adyen, were opportunities where we actively engaged and built positions more aggressively during pullbacks and times of uncertainty

‘Entering 2023, our main concern was whether global central banks would be able to act decisively enough to address soaring inflation, while maintaining the fine balance between aggressive interest rate hikes and protecting economic growth.

‘The fact that inflation has come down rapidly now gives central banks the ability to lower interest rates if economic activity slows materially in the coming months.’

A good backdrop for equities

Conradie said the monetary environment had been good for equity markets.

‘Thus far, central banks have managed to slow down demand sufficiently to get inflation under control, while not yet tipping the economy over into a recession.’

Striking a note of optimism, Conradie said things seem to be on the right track on the power front as private solar generation has gone into overdrive, and Eskom seems to be getting a little better.

He added that South African equity valuations remain attractive, and the firm continued hunting for new opportunities in its ‘backyard’.

Conradie said the technology/AI theme has certainly played out in 2023

Peregrine was extremely optimistic about AI a year ago, and things are moving even faster than expected.

He said the potential in fields such as healthcare and pharma is immense with the possibility to assist in the discovery of new drugs and dramatically improve patient diagnosis and outcomes, especially in developing countries with lower access to healthcare.

Fortress wins

Conradie said that Fortress Real Estate Investments proved to be a good investment opportunity on the JSE.

‘The loss of rental income experienced during Covid in 2020 created an untenable situation where the A class and B class shareholders entered a fierce conflict about when, and to whom, dividends should be paid.’

He said that when the company was forced to relinquish its real estate investment trust status and cease the payment of dividends in November 2022, many market participants labelled the company as uninvestable.

‘We believe our process leads to returns that are less correlated to the overall markets and long-only managers.

‘At first glance, it was crystal clear that the Fortress management team had continued to deliver excellent operational results through trying economic times. Despite this, the complex capital structure, the loss of Reit status and constant quarrels between shareholders caused a tremendous divergence between the price of the Fortress shares and the value of the underlying net assets that it owns.

‘If shareholders were able to work together productively, there had to be a solution that could unlock significant value for all shareholders. This period of doubt and uncertainty persisted through 2023, creating the opportunity for us to build a significant position in both the A and B shares.

‘Once we had accumulated enough of both shares to have a seat at the table, our team set to work. Our objective in early 2023 was to collaborate with major Fortress shareholders on both sides of the divide to design a transaction that could eliminate the dual-class share structure.

‘Resolving the capital structure was a sure way to unlock the trapped value that we had identified. It was of utmost importance that any solution had to provide win-win outcomes for both classes of shareholders.

‘We proposed that the company repurchase all the B shares, eliminating any potential future conflicts once and for all and leaving a single simplified share class.

‘From 25 February 2024, Fortress will have one class of shareholders, and the executive team can focus on running the business to create per-share value.

Conradie said that while significant value has been unlocked already, Peregrine remains a substantial shareholder of the company,

Strong start

Alan Yates, head of business development, said there was a volatile start to the year, with emerging markets struggling to contain losses.

The MSCI Emerging Market index ended January down 4.6%, while the MSCI World index was up 1.2% in USD.

Locally, the market showed weakness, with the Alsi down 2.9%, and the Capped Swix down 2.8% in ZAR.

But Yates said that the Peregrine Capital Pure Hedge fund and High Growth QI funds protected investor capital, with healthy returns for the month of 1.54% and 1.52%, respectively.

He added that underlying contributors to performance for the month included property, food producers and luxury. Local banks, e-commerce, and government bonds were among the detractors to performance.

He said portfolio positioning remains balanced, with moderate gross exposure and lower than typical net equity exposure.

‘We continue to actively seek out dislocations in asset prices that offer pair trading opportunities so that we can flex our gross exposure without increasing our exposure to market risk.’