36ONE Asset Management director Steven Liptz is clear in his conviction that smaller firms are at a distinct advantage in South Africa.
‘The South African equity market is small and it’s illiquid,’ said Liptz. ‘That means that for the large asset managers it’s not difficult but impossible for them to be nimble and flexible. We are able to manoeuvre. When we see either short term opportunities, or opportunities that are not large enough in value for a large asset manager, we can take advantage where they can’t.’
The conundrum, of course, is that performance attracts assets. The natural inclination for any business is to grow.
For Liptz, however, 36ONE has always had a clear philosophy since he and his co-founder Cy Jacobs left Investec to form the firm in 2004.
Performance, not asset gathering
‘What we said to our first clients is that we’re never going to grow big,’ he said. ‘Of course, their response was that that’s what everyone says, but people are greedy and anyone will grow if they can.
‘But we’re now more than 15 years into the business and we still think the same way.
‘We left big, institutional businesses wanting to be in a different kind of business. We wanted to go to work in the clothes we wanted to wear, and behave the way we wanted to behave. We wanted to build a business that focused on performance, not asset gathering.’
36ONE’s record suggests that they’ve been getting this right.
Over the past five years, when the local market has gone sideways, the 36ONE BCI Equity fund is up 7.0% per annum, compared to the 2.6% gain from the FTSE/JSE All Share Shareholder Weighted Index. The average return of funds in the ASISA South Africa equity general category over this period is 0.9% per annum.
The portfolio that perhaps most defines 36ONE, however, is the 36ONE SNN QI hedge fund, which was launched in April 2006. Since inception it has delivered an annualised return of 15.9%.
‘We love hedge funds,’ said Liptz. ‘It’s a big part of our business. Hedge funds give us a much bigger toolkit, which allows us to reduce volatility, to protect capital, and to provide downside protection while still catching upside.’
Around half of 36ONE’s AUM is in its hedge fund strategies.
‘It’s been much more important for us to focus on the assets we’ve got and perform on those than gather assets,’ said Liptz. ‘That comes out of a loyalty and commitment to existing clients, but also a competitive streak. We want to be, if not the best, but as good as we can and we know that gets harder with size.
‘For the first 13 years of our business, we didn’t have any distribution. We didn’t have any business development people. We weren’t trying to grow because we didn’t want to. The only way we grew was through word of mouth.’
That has changed now with the appointment of two people responsible for business development, but Liptz said that this was more reactive than proactive, as ‘our competitors starting taking business away from us’.
As the local industry evolves, he believes that size will increasingly be a differentiator.
‘There will be increased recognition of smaller managers,’ said Liptz. ‘Not small start-ups with going concern issues, but small managers that are strong businesses, strong financially, with strong leadership, and a strong team.
‘Our investment team is disproportionately large for the size of the business, but we can afford it. Massive businesses have massive costs not only in absolute, but also relative terms. In a business like ours, we are so lean on costs that we can afford to put that money into people.’
Particularly in a low return environment, these advantages are going to come to the fore in his view.
‘There will be increased awareness about and scrutiny of returns,’ said Liptz. ‘In a rising market, people don’t really care. When times are tough returns become more important. And with increased transparency, people should be looking at returns and paying more attention.
‘I think there will be more recognition that the good, smaller asset managers have a sustainable, predictable edge, where they were previously perceived to be higher risk,’ he added. ‘For people that spend time doing their due diligence and understand what they are doing, the smaller, good mangers will become increasingly sought after.’
So too, he believes, will hedge funds.
‘The hedge fund industry, with time, will increase because of the recognition of the benefits of hedge funds and because of the regulatory changes that have taken place,’ said Liptz. ‘The impact so far has been small, but once hedge funds get onto platforms and once collective investment schemes are allowed to invest in them, then the awareness of hedge funds will grow. That will lead to more demand.’