BNC#6: Fraser Q&A – Hedge fund evolution, investment strategies and SA outlook

During a Q&A session at BNC#6 in Hermanus, Peregrine Capital Executive Chairman David Fraser discussed various topics including the hedge fund environment, small-cap investments, and South Africa’s state-owned entities. Fraser noted increased hedge fund marketing and traction, particularly with lower volatility and higher returns. He delved into specific investments and challenges facing South Africa, such as load shedding and the future of the JSE. Fraser emphasised a pragmatic approach to investments, seeing potential short-term opportunities in South Africa and long-term potential in tech.

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Summary of the Q&A session with Peregrine Capital Executive Chairman David Fraser at BNC#6 in Hermanus

In their conversation, Bronwyn Nielson and David Fraser cover a range of topics pertinent to investment strategies and market dynamics. Fraser reflects on the evolution of hedge funds, noting recent marketing efforts that have led to increased traction and improved returns. He highlights the importance of finding value in small-cap companies, citing examples like Dako, a South African industrial engineering firm, as resilient performers even in stagnant markets.

Transitioning to the state of South Africa’s economy, Fraser acknowledges challenges such as load shedding but expresses optimism, particularly regarding recent developments in state-owned entities like Eskom and Transnet. He credits successful collaborations with the private sector for positive outcomes in infrastructure projects, signaling a shift towards more pragmatic governance.

Fraser offers insights into his investment approach, emphasizing the significance of valuation and management quality. He discusses the diminishing role of sell-side analysts and the need for companies to align their interests with those of shareholders. Additionally, he touches upon international investments, including exposure to companies like Tencent and Pinduoduo in China, as well as Evolution Gaming in Europe.

Regarding cryptocurrency and emerging technologies, Fraser maintains a cautious stance, acknowledging the potential of Bitcoin and the metaverse but preferring to observe developments before committing to significant investments. When prompted about his preferred geographical focus, Fraser underscores short-term opportunities in South Africa while also recognizing the long-term potential in the tech sector.

Ultimately, Fraser’s pragmatic outlook and emphasis on value, management quality, and adaptability shine through, offering a comprehensive perspective on navigating today’s complex investment landscape.

Edited transcript of the Q&A session with David Fraser at BNC#6 in Hermanus ___STEADY_PAYWALL___

Bronwyn Nielson [00:00:07]:

I want to pick up on what Cy was discussing yesterday: the hedge fund environment, regulation, and risk mitigation.

David Fraser [00:00:27]:

About 5 or 6 years ago, hedge funds faced heavy regulation without much upside. But over the past 2 or 3 years, we’ve seen significant marketing efforts. Now, hedge funds are gaining traction and becoming mainstream, offering lower volatility and higher returns.

Bronwyn Nielson [00:01:52]:

Let’s delve into small and mid-cap investments. Any specifics you can share?

David Fraser [00:02:09]:

We’re still active in small caps, particularly companies like Dako, an industrial engineering firm showing growth despite market stagnation.

Bronwyn Nielson [00:03:11]:

You’ve researched state-owned entities. What’s your outlook?

David Fraser [00:03:39]:

There’s cause for optimism. Private sector involvement, as seen with Eskom and Transnet, can drive efficiency. Michelle Phillips’ leadership at Transnet is encouraging.

Bronwyn Nielson [00:05:33]:

It’s refreshing to hear optimism around state-owned entities. Let’s turn to audience questions.

BizNews Community Member [00:07:56]:

Could you share your investment filtering factors?

David Fraser [00:08:06]:

Valuation and management quality are key. We focus on companies with strong leadership aligned with shareholder interests.

Bronwyn Nielson [00:11:53]:

Do you see enough shareholder activism in South Africa?

David Fraser [00:11:53]:

Picking fights isn’t ideal, but constructive engagement is necessary. We’ve had success, as seen with the Fortress story, where win-win solutions were achieved.

Bronwyn Nielson [00:13:37]:

Let’s talk about your China exposure.

David Fraser [00:13:37]:

We invest directly in companies like Tencent and Pinduoduo, bypassing Naspers and Prosus due to past value-destructive deals.

Bronwyn Nielson [00:15:50]:

Could you elaborate on Pinduoduo?

David Fraser [00:15:50]:

Pinduoduo’s rapid growth in online retail, particularly in South Africa, is noteworthy.

Bronwyn Nielson [00:18:59]:

How do you view the proliferation of stock exchanges in South Africa?

David Fraser [00:18:59]:

The JSE’s capital-raising role is dwindling. Listing costs need to be addressed. Additionally, sell-side analyst coverage has declined significantly.

Bronwyn Nielson [00:22:46]:

Your take on Bitcoin and gold?

David Fraser [00:22:46]:

Bitcoin is debated internally, with some analysts invested personally. Gold isn’t a focus for us.

Bronwyn Nielson [00:24:58]:

Thoughts on shorting Tesla?

David Fraser [00:24:58]:

We’re cautious about shorting Tesla or the US market due to current conditions.

Bronwyn Nielson [00:27:33]:

How does political risk factor into your investment process?

David Fraser [00:27:33]:

Political uncertainty is present, but we’re encouraged by recent government actions favoring private sector involvement, which could drive economic growth.

Bronwyn Nielson [00:29:06]:

Closing thoughts on investment horizons and geography preferences?

David Fraser [00:29:06]:

Short-term, South Africa holds promise. For a three-year horizon, we’re still bullish on tech in South Africa.

Bronwyn Nielson [00:29:30]:

Let’s end on that optimistic note. Thank you for the insightful discussion.