Fairtree Senate Group presentation

PRESENTED BY:

INSTITUTIONAL BUSINESS:

DATE:

CREATINGWEALTHTHE GENUINE,TIME-TESTEDWAY

Jean Pierre Verster

Portfolio Manager: Equities

[email protected]

November 2016

mailto:[email protected]

2

Introduction to Fairtree Capital

Current market conditions

Fairtree Protea & our Qualified Investor Hedge Fund (unit trust)

Q & A

A Hedge Fund Manager’s View of the Current Market

3




Q & A


4

We are a leading multi strategy alternative and long only investment manager

5

AN EXEMPLARY TRACK RECORD

2 0 0 3

Andre Malan launches

First Fairtree Fund

Fairtree Market Neutral

Equity Fund

>

2 0 0 5

Symmetry Hedge Fund Awards

SA Hedge Fund of the year

Fairtree Market Neutral

Equity Fund>

2 0 0 6

Management buy-out

Fairtree Capital established through management buy-out of the business

managing Fairtree Market Neutral Equity Fund

South Africa Hedge AwardsHedge Fund of the Year

Fairtree Market Neutral Equity Fund

>

2 0 0 7

Launch

Fairtree Long Short Equity Fund

>

6


2 0 0 8

South Africa Hedge Awards

SA Long Short Equity Fund of the Year

Fairtree Long Short Equity Fund

>

2 0 1 0

Launch

Fairtree Wild Fig Multi Asset Class Fund

Fairtree Fixed Income Fund

Hedge News Africa AwardsSA Fixed Income Fund of the Year

Fairtree Fixed Income Fund>

2 0 1 1

Launch

Fairtree Equity Prescient Fund, Fairtree Assegai Long Short

Equity Fund Fairtree African Blackwood

Commodity Fund

Hedge News Africa AwardsSA Fund of the Year

Fairtree Fixed Income FundSA Multi Strategy Fund of the Year


New Fund of the Year


>

2 0 1 2

Launch

Fairtree Woodland Multi Strategy Fund

Largest institutional investorNorges Bank Investment

Management, responsible for managing the Norwegian

Government Pension Fund

Hedge News Africa AwardsSA Fixed Income Fund of the year

Fairtree Proton Fund

>

7


2 0 1 3

LaunchFairtree Flexible Balanced

Prescient Fund

Appointed Fund ManagerMetropolitan Income Plus Fund and co-manager of Momentum Income

Plus Fund

Funds renamedBadger Quant Fund renamed to

Fairtree Acacia Volatility Arbitrage Fund

Hedge News Africa AwardsSA Fixed Income Fund of the Year

Fairtree Proton Fund

>2 0 1 4

LaunchHospitality Real Estate

Private Equity Fund

Cayman Structures?

Fairtree Global Consumer Long Short Fund

>

2 0 1 5

Launch

Prescient Africa Sustainable Equity Fund

Fairtree Impact Capital FundFairtree Empowerment Fund

Fairtree Mezzanine Debt Finance Fund

>

2 0 1 6

Launch

Fairtree Protea Long Short Equity Fund

Fairtree Protea Cayman SPC

Fund changesAll South African funds transitioned

to regulated product structure

>

8

Leading multi strategy investment manager

FAIRTREE CAPITAL OVERVIEW

HIGHLIGHTS2007/2008 - Strong performance 2010 - Launched Multi Strategy funds

- Fixed Income & Commodity joins2011 - Long only equity and

directional bias fund launched2013 - Awarded NBIM mandate

- Volatility Arbitrage, Credit &International Equity join

2015 - Launch of Private equity funds2016 - Launch of Protea long short equity funds

2003STARTED

TYPELong Only R21bn (76%) Alternatives R7bn (24%)

INDUSTRY9% of SA Hedge Fund industry *

CLIENTS (BY VALUE)Non-South African 58%South African 42%

~R28BNFIRM AUM

Specialist teams across major asset classes

Small independent teams across 3 offices

World class institutional infrastructure

Large talent pool with diverse skill set

15STRATEGY TEAMS

Portfolio managersAnalystsTrading Investment support

40+INVESTMENTPROFESSIONALS

* Assets under management as at Sep’16. Industry assets from Novare Hedge Fund survey Jun’16

9

INSTITUTIONAL INFRASTRUCTURE

BOARD OF DIRECTORS

INVESTMENTS OPERATIONS DISTRIBUTION

40+ INVESTMENT PROFESSIONALS PRIMARILY OUTSOURCED

CIO

PORTFOLIO MANAGEMENT

RESEARCH

RISK MANAGEMENT

EQUITY TRADING & EXECUTION

COO

OPERATIONS

BUSINESS OPERATIONS

RISK MANAGEMENT

HEAD OF DISTRIBUTION

INSTITUTIONAL DISTRIBUTION

RETAIL DISTRIBUTION

INTERNAL

OUTSOURCED

>

10

PRODUCT OVERVIEW

HEDGE FUNDS

EQUITY FIXED INCOME COMMODITY

Market NeutralLong ShortGlobal ConsumerAssegai L/S

Protea L/S

Fixed IncomeProton

BlackwoodAcacia

MULTI STRATEGYWild Fig & Woodland

LONG ONLY

EQUITY FIXED INCOME

SA General EquitySmart BetaAfrica

Global and Fixed Income

PRIVATE EQUITY

REAL ESTATE EMPOWERMENT

Hospitality Real Estate Private Equity

Empowerment Fund 1

BBBEEHOSPITALITY

Flexible Balanced Fund

11




Q & A


12

Forecasting the future is too difficult a task, preference is to analyse the recent past

Extensive use of quantitative tools to guard against behavioural biases (more on this later)

Top-down macro analysis is useful for risk management, less so for investment calls

Remember: Hedge Funds can take advantage of both cheap and expensive shares


13


FTSE/JSE All Share Index

Current market level

All seems calm for the past 2.5 years, but below the surface…

14


FTSE/JSE Resources Index


…commodities have had a wild ride

15


China macro economic conditions


…commodities have had a wild ride (China)

Source: MRB Partners

16


FTSE/JSE Financials Index vs Price-to-Book ratio


…financials have been under pressure (politics, ratings & real growth rates), and now seem very cheap or are correctly pricing in a very gloomy future

17


FTSE/JSE Industrials Index vs Naspers


…and Industrials Index has been driven by Naspers, which is now about a quarter of the Industrials Index (will be even more after December index review)

Not a conducive environment in which to make money, especially not if one prefers to be long companies with ‘moats’ and be short price-takers

18


Top & Bottom returns over 1 year Top & Bottom returns over 2 years

Where have recent returns come from?

The source of above-average returns is specific stocks/situations, not market averages

19

Current investment opportunities:

- Long select financial stocks

- Long & short individual shares in various sectors for specific reasons

- Special situations / arbitrage

- No big bets, but rather a portfolio of smaller bets given current binary environment

- Be aware of implicit currency exposure


20




Q & A


21

FAIRTREE PROTEA

Philosophy

Warren Buffett – Buy great business rather than cigar butts, limit your downside

Charlie Munger – Have a multi-disciplinary approach, look for lollapaloozas

George Soros – Identify reflexivity (price-value loops), manage risk relative to probabilities

Jim Simons – Automate and look for predictive patterns in data

Seth Klarman – Seek non-linear situations and a margin of safety (loss a little, win a lot)

Jim Rogers – Always be curious, work hard and have a global mindset

David Dreman – Be aware of market psychology and biases, think differently/contrarian

Michael Steinhardt – You need a variant perception, always question yourself

Sir John Templeton – Reject dogma, be intellectually humble and diversify

Peter Lynch – Kick the tyres, be alert to opportunity at all times and graph the price vs value

Philip Fisher – Use scuttlebutt, seek long-term compounders and quality management

Joel Greenblatt – Combine cheapness & quality (ROIC) formulas, exploit special situations

Learning from the Great Minds of investing

22

Combining the qualitative with the quantitative = “QUANTAMENTAL”

FAIRTREE PROTEA

• Read, read & read – Newspapers, business magazines, trade publications, sell-side analyst reports, buyside analysis, annual reports, investigative websites, regulatory releases

• Meet the Management team – Assess the people involved: their aptitude, attitude, shareholder-orientation, logic, reason, drive, strategic thinking, capital allocation skills, risk appetite, incentives, ambition and authenticity

• Know the product/service and where it fits in the economic ecology – Analyse competitors, suppliers, customers, threats, opportunities….classic Porter 5-forces

• Scuttlebutt & mosaic theory – Seek opinions far and wide and connect the dots / fill the gaps through abductive reasoning

• Be aware of psychological biases – Use common sense and don’t fool yourself, know you don’t know

• Think – Have time and space that is conducive for thinking deeply and clearly, get in the ‘flow’

• Financial Data – Use Bloomberg to pull in full historical financial statements automatically into excel master model. Adjust data if necessary

• Use algorithms – Forecast each line item of the financials for the next 4 years, using proprietary statistical techniques (reversion, momentum & linked formulas). Automatic base case.

• Du Pont / Gordon Growth model – ’Translate’ future full financials into fair value using robust valuation principles

• Assess outcome/fit – Graph Price vs Value, evaluate past ‘fit’ and projections for reasonability

• Toggle variables – Adjust inputs using common sense, model allows for multiple input toggles

• Rank – Rank the various valuation metrics of companies in the universe to compare expected returns in real-time

Qualitative fundamentals Quantitative

23

Manager track-record

FAIRTREE PROTEA

5-Year Relative Performance: Almost double the market (Mar ’11 – Aug‘16)

Source: Standard Bank Securities, Nedbank Wealth Stockbrokers, Sanlam iTrade, Anglorand Securities & Fairtree Capital

CAGR from 1 March ‘11 to Feb ‘16 (5 yrs)- 32.5% CAGR = Actual before any fees- 30.4% CAGR = Gross after base & other fees, but before performance fee- 23.6% CAGR = Net after performance and other fees

Assumed fees:- base fee van 1% + VAT.- performance fee van 20% + VAT (from zero)- other fees van 0.4% incl VAT (admin, middle office, audit)

Protea: 23.6% p.a.vsALSI TR: 14.5% p.a.

24

Current investment opportunity

FAIRTREE PROTEA

Segregated portfolios since June, QIHF launched 1 Sep 2016

Pro forma: Capital weighted returns used; June return for a partial month

Protea 0.43% 0.22% 0.30% -1.62% -0.32% Fairtree Capital

ALSI -3.02% 1.16% 0.27% -0.94% -2.49% Tel: +27 21 943 3760

diff 3.45% -0.94% 0.03% -0.68% 2.17% [email protected]

Oct Contact DetailsJun Jul Aug Sep

Current name: “Fairtree Sequoia Macro IDS QI Hedge Fund” – change of name pending

Minimum investment: R1m

Gearing: Net long of 50-70% at most times; gross gearing limit of 200%

Fees: 1% p.a. management fee and 20% performance fee conditional on cash (JIBAR) return

Also available on the RMB Equity-linked note platform with a R250,000 minimum & additional 0.65% p.a. cost

Founders Fee class available for minimum R50m investment before end 2016:Zero management fee & 25% performance fee above cash-plus-2% hard hurdle and a total fee cap of 4%

25

Different Perspectives create unique results

As an owner-managed asset manager we encourage independent thinking

WHY FAIRTREE CAPITAL?

26

Thank you

Q & A

27

Fairtree Capital (Pty) Ltd is a registered fund manager with the FinancialServices Board. The partnerships managed by Fairtree Capital (Pty) Ltd arenot regulated or approved financial services products in South Africa.Fairtree Capital (Pty) Ltd’s registration with the Financial Services Boarddoes not cover its management of such products.

Past performance is no guarantee of future results. Current returns shownrepresent past returns and may not be indicative of future returns. Theperformance of the fund is dependent on the making of correctassessments of the price movements of individual securities and otherinvestments. Financial markets have historically exhibited high levels ofvolatility and negative movements that have affected the price of all assetswithin a specific class. The fund’s investments will thus be subject to marketrisk. Through financial gearing via the Long/ Short process, the fund may beleveraged. This will mean enhanced positive gains but conversely can meanmagnified losses. No taxation has been deducted in the computation ofreturns. The taxation treatment of returns is the investor’s responsibility. Allreturns are disclosed net of performance fees.

We believe the information displayed is accurate and reliable, but nowarranty of accuracy or reliability is given and no responsibility arising in anyway for errors and omissions (including by way of negligence) is accepted byFairtree Capital (Pty) Ltd.

This information is not intended to provide advice to, or take into accountindividual investors objectives, or circumstances. This material should notbe construed to represent a solicitation to invest in the partnership and isdisclosed for reporting purposes only.

DISCLAIMER

Investor Relations

Fairtree Senate Group presentation