Murray Winckler - Going Long/Short in South Africa

00:00:08 [Murray Winckler]
I guess the quotes, if we quote that, say as we over time, the market, which is sort of was used by Buffett as well. Over the time, the market is a weighing machine. It weighs the earnings and you weigh the earnings over time. Those will be your returns. But in the short term, it's a voting machine, which is sentiment. So, I mean, you can have your intrinsic value, but shares can fluctuate 50 percent, about 50 percent below. And that sentiment flows. You look at China at the moment, which is so bombed out. Fundamentally, it looks so bombed out. Now, there are risks in that, but probably over the next five, 10 years, you potentially could have huge returns from it. You could have.
00:00:51 [Vincent Weber]
Hello, everyone. I'm Vincent Weber, and this is Resonanz Spotlight, the podcast where we explore investment strategies, learn the story behind them, and meet the experts who create them. Allocators seeking diversification and appealing risk-adjusted returns. are often faced with offerings that are increasingly complex, costly and restrictive. Imagine, however, a country that boasts a large, mature financial market ripe for alpha generation. As an investor, you have the opportunity to tap into this market through established hedge fund managers who have consistently delivered strong risk-adjusted returns. These managers offer robust liquidity and achieve their results through traditional, proven stock picking strategies. Which country am I referring to? It's South Africa. Yet, it's been nearly a decade of wanting foreign interest in South Africa stocks with outflow exceeding 50 billion in that time.
And with unemployment still high, an electricity crisis still unsolved, and an election looming this year, Investors remain on the hook. Today, I'm privileged to be joined by Murray Winckler, co-founder and portfolio manager at Laurium Capital. Laurium Capital is a leading South African boutique asset management firm established in 2008 with over 2.5 billion US dollars in asset under management. Before co-founding Laurium Capital, Murray served as a CEO of Deutsche Bank South Africa for three years. His tenure at Deutsche Bank South Africa also included roles such as head of global market and head of research. Murray, welcome to the podcast. How are you today?
00:02:35 [Murray Winckler]
I'm very well, thanks Vincent. Nice to be on your podcast.
00:02:41 [Vincent Weber]
That's great, Murray. So let's dive right in. So first question, Murray, could you just give us a brief overview of Laurium Capital and your current role and how you came to found the company?
00:02:55 [Murray Winckler]
Okay, so if we go back, I mean, Laurium Capital has been going now for just over 15 years. It started in 2008, September 2008. My partner, Gavin Vorwerg, and myself, who both worked at Deutsche Bank. So I was at Deutsche Bank for many years before. I then left and took a sabbatical of a year and a half, which was quite nice, and then decided what to do. And the hedge fund was quite appealing to me. I saw what was happening globally. At that time, there were about $3 trillion in hedge globally. And SA was very small. And there were a couple of hedge fund managers. And I really believe that if I looked out the next 10 years, it was an industry that was going to grow quite rapidly. So that was one thing.
And then on the other side, having been on the sell side for many years from sort of as an analyst running research then into banking, et cetera, various roles, I was quite keen to change and go on to the buy side. I did think that hedge funds, because you're able to do a lot more than a long-only fund manager, a lot more tools in your box. You can short, you can put a bit of leverage in, use a bit more derivatives. Porto would really be an area that would do well over time. But SA hasn't grown that much. I mean, we literally sit now at sort of $5 billion in South Africa of hedge. Whereas our long-earning assets for the unit trust industry, which we bought, sits at $190 billion.
So it didn't quite work out in terms of a hedge. And it was about five. So Gavin and I started with assistance. We had probably, a year later, eight people in the business. We did start six weeks before Lehman's. So not very clever that we started running our first fund. So we went through the Lehman's crisis, which was really very hair-raising. But we managed to get through it. And we didn't have a lot of capital when we started. We literally started at the time, I think, with about just over $10 million. There was another institution who was coming in for $10 million. And they pulled out literally a month later when Lehman struck. So they were coming in and then they just pulled out.
00:05:19 [Vincent Weber]
Were you affected? Or how did the Lehman crisis affect your trading operation during the time?
00:05:27 [Murray Winckler]
We started, so we'd been going for six weeks when Lehman's hit, literally. So we got hurt quite badly. I guess if you look over the markets, I guess, from when we started, the SA market had a drawdown of 37%. That was the drawdown from when we started. And the market bottomed in, I think it was about the 9th of March. So it was literally a period of about six months later was the max drawdown. We managed to do okay. We had a drawdown in our funds of, it was 10.8% versus a market of 37%. So that was quite positive. There were a couple of interesting trades that we were able to do in that time, but some special situations.
that helped us and our nets were probably running at the time that varied between 20 and 60 percent but so yeah we actually came out quite well but from allocators it was there was a lot of nervousness for the next year plus and we had we always built our record and obviously over time we've done pretty well. you can always do better but it's been a decent decent record over time but yeah so that was and then then we decided it was about four years later that we're doing all hedge and not really growing that much and we had a i think a billion and a bit on in hedge saying four years on saying well and hiring a few people and said well if we're doing hedge it's not really growing We may as
well start a flexible, long-only flexible fund, which is closest to hedge. So we started that out. That's now been going for 11 years. And that was our foray into the long-only space as well. I think that if hedge had grown strongly, for me, we would just be a hedge fund business today, a big hedge fund business. That's what I envisaged, but we adjusted. We went into flex and we went to a pure long-only equity fund. And then we eventually moved into multi-strat as well. And we also started doing Africa in the beginning. So we had Africa funds as well, which is also more like sort of special situation, a lot of inefficiencies in Africa. So we started that from day one. And we included that in our hedge funds as well, a little bit.
In our offshore, one offshore hedge fund, we included a bit of Africa. So, yeah, we've evolved. And the business today, I mean, we do, I guess, multi-strat. We do Africa. equity, Africa, equities, Africa, sovereign bonds. And I guess we do have one, we put someone in three years ago that runs a global fund for us. The governor and I are not involved in that, but I mean, we get input into it, but he runs that. So the business has steadily grown and our hedge assets are just under 10% of our total assets would be run today, which. It's not how you envisage it, but we're pretty comfortable how the business has evolved over time. We have, I think, 17 people on the investment side now.
And we have a total staff complement of around 35 people.
00:08:48 [Vincent Weber]
Yeah, I mean, when you run a business, you have to adapt. I think this is the reality of most business. You adapt to doing something. or take a slightly different path than the trajectory you saw on day one. That's great. Before we dive into your investment philosophy and strategy, I would like to understand how did you become a stock picker?
00:09:15 [Murray Winckler]
Okay, so I guess it goes back to the qualifications. I mean, in South Africa, if you do finance, a lot of people do chartered accountancy. So you do a three-year commerce degree, then you do an honours, and then you can do chartered accountancy. So you do four years of accounting. And accounting is very complex these days, I must say. It was less complex when I did it. But so you do finance background. and very strong on the financial side. So from that, I then ended up getting into stockbroking. After doing my articles, I ended up with a firm, Arbor Jones Royals, a stockbroking firm. I was a research analyst.
and basically that's where the foundations i guess of my research and the philosophy of the firm then and it evolves over time but a very strong very strong and financial analysis so if i look at any company i mean you can look at the textbooks what have you have your business assessment the various factors that you look at from a business assessment your customers suppliers competitive advantage moat a whole lot of issues did you look at And then that's the first component. Is it a good business or is it a bad business? Step one. Then the second thing is the compartment we look at is the financial analysis. So where you're looking, what are the margins over time? What are the returns on capital employed? The financial structure, does it generate cash?
What is the working capital requirements, fixed capital requirements over time? And that bucket is where we focus a lot on. And then if you go back 35 years ago, there wasn't Bloomberg that you could pull stuff up like you can today. So we developed a system. In fact, the firm I worked for, which was called iNet, which a lot of brokers used, all the South African brokers used that system. We used to get paid additional for that system. Then we sold it off to one of the media companies. INAG Bridge and then they sold out Bridge. So it was very much financial analysis, loading companies, annual reports, and then being able to interrogate data. We set up a big database. So that was very much fundamental analysis.
00:11:38 [Vincent Weber]
We call that fintech today. You could call that fintech.
00:11:44 [Murray Winckler]
Fintech is a nice I-multiple. If we'd known that, we would have sold the business because we did the partnership sold it to Times Media. And I think it's a long time ago now. I think the multiple we sold it on was about a 10 times multiple. It was FinTech. We could have got 30. Yeah, so I think that's the second bucket. And then the third bucket is really valuation. How do you value the company? But I think really the fundamentals and our processes are built on those three components. And we've evolved over time. And the analysts, yeah, so I was an analyst. Then I ran research for Deutsche Bank. I was a stockbroking firm. We sold out to Deutsche Bank on deregulation in 1995, 1996.
In fact, at the time, I was the youngster of the partners there. And then I took over running research. So that was the foundations for Deutsche's research in South Africa. And I guess. All along the way, it's just refining the process, what you do in those buckets, three buckets. It's how well you do it. How well you analyze the companies. And then obviously at the end of that, the valuations and understanding. And I guess if we just look back in time, a famous or interesting comment, I was forced to, when I joined Arbor Jones Royal, I mean, not many people knew about Warren Buffett at that stage. He wasn't a cult father like we have today.
He'd obviously had some quotes, and actually in the CFA, I must have done the CFA in the early 90s, there were a couple of quotes from him. But I was forced to read a book that he quotes, Graham and Dodds. The senior partner came and said, okay, here's your book, here's your Bible, you go and read this. That was just one of the things, and then obviously that influenced Warren Buffett as well. So it was all fundamental, bottom-up. So that's the core of what we do. There are a lot of ways to make money. I mean, and I guess the quotes, if we quote that as say, as we over time, the market, which is sort of was used by Buffett as well. Over the time, the market is a weighing machine.
It weighs the earnings and you weigh the earnings over time. Those will be your returns. But in the short term, it's a voting machine, which is sentiment. So, I mean, you can have your intrinsic value, but. Shares can fluctuate 50% above, 50% below. And that sentiment flows. You look at China at the moment, which is so bombed out. Fundamentally, it looks so bombed out. Now, there are risks in that. But probably over the next five, 10 years, you potentially could have huge returns from it. You could have. Not without risk. But I think that's. Yeah.
00:14:41 [Vincent Weber]
So do you think that the approach to what's needed to analyze stocks has really dramatically changed over the last three years, 30 years?
00:14:50 [Murray Winckler]
I think if I look back, they were far more. I think volatility has gone up hugely in markets. So that's one thing. I think that the gaps in markets because there were less inefficiencies seemed a little bit more from. Your analysis point of view today, I think passive has changed the market massively. I think if I look at the U.S. market, it's quite scary. More than 50 percent of that market is now passive. And I mean, the concentration of a couple of stocks, whether it's a magnificent seven, a fabulous five, then they're changing the increments. But NVIDIA, NVIDIA this year now has got another. I don't know what it is, 4% or 5% of the market of the S&P. It's gone up 80% this year.
I mean, wow, what happened in the last two and a half months? So I think that, sure, it seems a lot more bold that you get around. And fundamentals, look, I think there's still long-term fundamentals to do well, analyzing good companies, bad companies, paying a reasonable price for a good company. You'll do well over time. I think we've been quite surprised. I mean, some of the movements that we've seen in the U.S. markets, it's like quite scary. I mean, something like a meta that I think went all the way down to 100. The next thing is back at 400 a year and a bit later, having collapsed almost half. Then the next thing is that it's up three, four times. There's a lot of sentiment that is driving those things.
Now, clearly it changes in fundamentals, but the perceptions in very short-term periods of time, people change their minds and have very different views. Now, in the old days, you didn't really get that. I mean, well, old days, I'm thinking 15, 20 years ago, it wasn't like that. So there's definitely a change and flows just drive, the bigger stocks get bigger. more money in, and indexes are just buying more of the money that goes to those stocks. So allocation of capital, I think, is an issue. The bigger stocks just permanently get more capital given to them.
00:17:03 [Vincent Weber]
What do you think makes South Africa today a fertile ground for running a hedge fund strategy? Are these the same global factors you're just mentioning?
00:17:16 [Murray Winckler]
So I'd say, firstly, it's a very small industry. So the hedge industry, say, is $5 billion. The long-running industry, there's $190 billion. This is just unit trusts. So with pension funds and that sort of lot more, $190 billion. Then probably, realistically, we can think of 100 shares on that SA exchange. A lot of dual-listed stocks like I guess we've got Prosus here. We've got Richemont. We've got British American Tobacco, AB InBev, and Anheuser-Busch. We've got Quarters. So you have some Anglo-American BHP Group. So in your top 20 market caps, they're dual listed. So you're playing stocks offshore and locally. Then if you move from outside the top 20, so from 20 to 100. Now, when you get to 100, you're starting to get quite small. But hedge funds are not being huge.
You can play in that space. So from stocks 20 to 100 for hedge funds, it's quite a fertile ground because you're able to, you're not too big. You can get into stocks, you can get out of the stocks, and you can play in that space. And a lot of the big players aren't really playing from 40 and below. So you can find decent inefficiencies. That's just looking for shares. On the shorting side, liquidity is good. So we look at the top 80 market cap stocks, and there's no problem on getting short sales as well. Cost to borrow is very cheap. You generally pay between 50 bps per annum and 80 bps per annum. So that's very cheap to borrow stock. And it's quite liquid.
We limit ourselves on stock borrow here where if we've got a 3% position, we can't be more than one day straight. If we've got a 1% position and a short, we can be three days straight. And we can play in any of the top 80 market cap stocks. So that's fairly good. And yeah, the long-run, there's some big long-run funds here that you can say are one or two that they can't move that easy and they're quite lazy, I'd say, in changing, doing stuff. So we can be quite nimble in some of the stuff we do. And if you compare to the US, the US are very hard to have a competitive edge. We play capital raises, special situations here. We play those quite well coming from an investment banking background.
So I just think you've got a few more inefficiencies that sit in our markets, capital raises. all the players in South Africa, all the investment banks, very well from having dealt on the other side, having done capital raises with the mayorals of cities, J.P. Morgan's, Morgan Stanley's. you've got to get some quite good insights and the corporates very well. South Africa's quite small.
00:20:24 [Vincent Weber]
We already touched a bit on your investment philosophy, which I understand to be really fundamentally driven. How do you translate this into a hedge fund portfolio?
00:20:37 [Murray Winckler]
Yeah, so we were generally, I mean, on the hedge fund side, I mean, it depends which fund. We run a more aggressive hedge fund, net sort of more like 70% net long. That's been going for 11 years. We run the main one that we started since inception that runs a net equity exposure of mid 50s. And then we run a market neutral one that's been going for 15 years. It runs at about 5% on average net long. So there are three different ones. The grosses we tend to do, we don't run big gross exposures. Our average grosses have been around 150, 160.
I mean, maybe we take the main long, short, broadly, we basically portfolio on our long book, we probably have, let's say if we had 100 million, 100 million long, and then on our short book, we would look to short things of probably 50 million or so. So our gross is 150 and our net exposure is 50. So that's it.
00:21:40 [Vincent Weber]
to basically keep it quite simple how our main long short works i would expect the south african stock market to be like significantly driven by global macro factors variables such as maybe like ethics your ethics commodity prices or how how does that affect your your your strategy how do you how do you deal with this this risk i mean if they are material.
00:22:11 [Murray Winckler]
Yes, I mean, exactly what you're totally right. They are very material. South Africa is part of the EM. So if we look at the composition of our index, we've probably got dual listed offshore stocks that are probably 40% of the market cap, if you just look by value. Then we have our exporters, the Platinums, Iron Ore, that sit in South Africa. Pure South Africa non-dollar-based companies, which are the banks, insurers, the industrial companies, property companies, is less than 40% of our index. So that is pure SA Inc. That's really on the ground domestic. The rest of our market, because we're EM, so we have a big slug in Naspers, which owns into Tencent. So we are very, obviously global drives markets, but EM, we are very linked to EM.
So China and EM is a big driver of how we perform. And we can see that resources in particular haven't done particularly well.
00:23:16 [Vincent Weber]
Do you try to neutralize this risk or do you rather play them actively all?
00:23:23 [Murray Winckler]
Yes, the resource exposure that we play, we dial down in our hedge funds. So if you look at pure resources, if you look at the South African index composition, resources would be about 35%, 30, 35% of the SA index, which is oil, platinum, global diversifieds. And if we just look at how much we play on that, generally 15% exposure to resources is 00:23:59 [Vincent Weber] probably that's a lot that sort of probably we don't don't often go much more than 15 so yeah because of the volatility on that so i believe we just briefly touch on that but can you describe a bit your your team your the people be behind lorian that help achieve this vision
00:24:23 [Murray Winckler]
Yes, so I guess, so Gavin and myself, one thing as a business, we're done with 37 people now. We have, I think, 18 people or shareholders in our business. We set up a trust as well. We don't have outside shareholders, which is. So we're able to run our own thing. But internally, people have got shares over time. Some have been given, some have paid in a discounted price. So that's a very important philosophy. I think Gavin and I own more than 50% of the shares, but I mean, there's a good 40% that's owned by the rest of the stock, which is very important for them to be aligned. So Gavin and I clearly are drivers. Then we have, I guess, on the investment team, We have some very experienced people who've been around.
We've done one deal in the 15 years that we've been running, and that was to buy a small boutique business, Tantalum, which the CIO was Rob Ollerman, who runs our global business now. He used to work for Coronation Asset Management. Three of them used to work for Coronation. He headed research for Coronation Asset Management in 2000, and so did Mel. Melanie Stockett was head of fixed income for Corit. Maybe they should have stayed with Corit, but they actually left, started their own boutique, did very well. And then they lost some assets and two of the guys with them left. And anyway, we eventually did a deal where they joined us and we acquired them. They had about $4 billion of assets. So they've come in. So very key, Mel does our fixed income now.
Rob is doing global, and he's some of the multi-strat. So they're pretty important to the team. But Gavin and I have both known Rob for 25 years as well. Very much fundamental bottom-up. So it works very well. So then we've got a nice layer of guys that are coming, sort of succession in that. If we look at our pure – our hedge funds are – Our hedge funds are run by Gavin, myself, and Matthew Pounce. Matthew's been with us for 10 years. So he came on, CACO played, and the three of us run our hedge funds. Then we have our long-handy bucket, which there are four of us that run that fund on a multi-council basis.
So Gavin, myself, and then our head of research, Junaid, has been with us, has been in the markets 20-plus years. He runs that. And then Dwayne Dipper now is also, he's 40 years old, been in markets 15 years. He runs a slice of it as well. So they're poor on the equity side. Then in the multi-strat side, we have an asset allocation committee, which is chaired by a guy, Brian Thomas, who used to work with us at Deutsche. So he's involved in multi-strat. He chairs it. Then Gavin, myself, Mel and Rob will sit on that. And then our asset allocation is done on that. And then we have Africa, which we have separate, which Paul Robinson runs our Africa business. Gavin and I used to in the beginning. Gavin still does a bit of Africa.
I moved out of that five years ago. And Paul now is the primary fund manager on the equity fund. And then on our bond fund, we have Mel fixed income with Paul doing Africa. So we built a business. I guess from quite robust with people coming up behind all well qualified.
00:28:10 [Vincent Weber]
That's pretty impressive. As I mentioned at the beginning, the news flow, the international news flow on South Africa has been pretty tough lately. do you see any any green shots on on the horizon or what's what's your view here in terms yeah so i think i think if we i mean if we look from democracy in 94 we had a wonderful period for 10
00:28:44 [Murray Winckler]
-15 years we could be very strong and then i think it started when zuma came in as president so if you've got it for the last 10 years i think that south africa is probably growing gdp's growing I'd say 1% a year. That's it. So in real, per capita, we've gone backwards half a percent per year, basically. So as you say, it's been pretty bad. You mentioned the number of $50 billion net outflows. Our bond market, foreigners used to own 35% of our bond market. They own probably 25, 20, 20% today. So yes, it's been quite negative. I think fixed investment in recent years has been, Not a lot. Government has done a very poor job. So we do have elections coming up now.
I think that from a fixed investment spend, electricity has been a huge issue that we just effectively are allowing it to be privatised now, which is a big change. So our electricity situation where we've had load shedding, load shedding. Really improved this year. Last year, the government was forced into allowing the private sector to do their own bills. That's what happened because they got so bad. So that's a positive. And there's still a lot of stuff. So I think if you look 18 months from now, even in the next 6 to 12 months, it's getting better and better, less load shedding, and that can become less of an issue for a lot of corporates. So that is improving.
00:30:19 [Vincent Weber]
Yeah, it's a big global debate. Talking about the long case, you recently launched an Africa fund. Could you talk about the opportunities set there?
00:30:33 [Murray Winckler]
Okay, so we've run an Africa fund for over 10 years. A dollar in dollars in Africa, and we do the whole of Africa. initially started our focus was very much kenya nigeria zimbabwe in the beginning and then we don't trade and so for the last five six years we shut that down and we haven't done that for a long time and so kenya nigeria and then obviously Egypt, Morocco, as well. The problem in Africa has been a lot of debt issue, foreign borrowings, dollar borrowings, and that's caught up with a lot of African countries. So the pure beta side from Africa has been very disappointing the last five years. Not good. On an alpha basis, we generated quite significant alpha in dollars. But the beach has not been great.
But what's happening, so we run, I think we've got in our Africa listed equities, we run just under $200 million is the size of the fund. So it's decent. The markets aren't that liquid, particularly now. nigeria and you'll be struggling to get money out of nigeria be struggling to get money out of egypt but what has happened now there's been some currency reforms that are happening at the moment which is also providing quite great opportunities in egypt at the moment the currency was pegged at 30 to one and it's just now generally in the last two weeks it is allowed to pre-float and it's 50. so now money is going to start coming back into egypt And Nigeria was the same. The currency, you couldn't get money out of Nigeria.
So they've also had a big deval, and the currency's gone. So we now think there's a lot of inefficiencies. I mean, South Africa's got a bit of inefficiencies. Africa's got a lot of inefficiencies. The dual list is you can funge between markets. You can go to London in the local market, discuss. So it's quite a good space to play. yeah but the beta story has not been good at all and we did start recently maybe we did start a dollar i mean it's probably going three years now is a africa bond fund which is does really sovereign bonds and that's done pretty decently it's done i think the last three years it's done five six percent better in dollars per year than the just buying u.s long bonds so and also you're getting a running
yield on that thing about 11% in dollars. The risk premium for Africa relative to its rating by Moody's and S&P generally trades about 150 to 200 basis points higher than the same ratings elsewhere in the world, just because it's Africa. So that also over time, there was hope. Yeah, so Africa's got Yeah, it's got some pretty decent opportunities. Equities have been not good at all, have really been tough. But I mean, year to date, a few changes. I think our dollars went probably up by 8% in dollars this year. This year, last year, it was smaller in dollars. So it hasn't been great, but there's some changes happening.
00:34:03 [Vincent Weber]
Well, Murray, thank you for being with us today. I really enjoyed the insight you shared. And to our listener, thank you for tuning in to Resonanz Spotlight.
00:34:12 [Murray Winckler]
Thanks, Vincent. Enjoyed it.
00:34:13 [Vincent Weber]
Thank you, Murray.