Low profile, big reputation: 36ONE’s Cy Jacobs on Naspers, Absa and the investment approach that’s attracted R33bn

Cy Jacobs is among a handful of investment managers who consistently attract South Africa’s smart money. An all rounder, his company 36ONE runs hedge funds and unit trusts, takes long and short positions, invests locally and offshore. With a 15 year compound annual growth rate of 16%, an investment of R1m in 2006 in its flagship SNN Q1 Hedge Fund has grown to R11m today. In this interview ahead of Jacobs’ keynote presentation to BNC#4, the ace money manager shares his investment strategy – and gets into specifics on Naspers and Absa. An investing masterclass from a professional at the top of his game. – Alec Hogg

Cy Jacobs on how he differs from Piet Viljoen with regard to his investment approach

Piet is very much a value investor. I think at 36ONE, we always started off almost as a flexible investor. So when we feel the tide is right and value is in favour, we’re happy to be a value investor when we think growth is right. We have to be a growth investor and they all, in our mind, have very obvious cycles in this market that are predictable. And if you look over the last few decades, it’s been good for almost a decade to be a growth manager and a value manager, then again a growth manager. So I think it’s difficult to box yourself, particularly in South Africa where there aren’t that many opportunities. The market is small, liquidity is not there, and really your value bucket or your growth bracket is quite small: aggregate them together. In our case, obviously, we’re also hedge fund managers, so we can do both of those in the opposite direction as well. But I think that the whole style of what we do is quite different, where we may be more short, medium-term focused, looking at the changing trends and you know, we believe in value, but, you know, value at a price and depending on the right cycle.  

On whether size is an anchor for performance

Size is definitely an issue when it comes to performance. I think for us, size is not yet at that specific tipping point. So we manage perfectly well and we created something different a few years ago at 36ONE, which has helped us, which is that we have siloed the business into its various mandates, specific investment committees, a focus on specific mandates. The whole team has input in the research process, but each and every mandate is catered by itself individually. So it allows flexibility and different dealing times and different opportunities. And the mindset around every single mandate is different. For example, if you’re in a flexible mandate or a balanced mandate, your mind has to be about absolute return. It’s not about beating a benchmark of the market. Therefore, you’re only looking for opportunities of an absolute nature where there are bonds or, you know, cash or equities and only equities that can give you a positive return when you’re trying to manage money, to beat caps weeks or weeks or whatever that index is. Your focus is against the debt index. So it requires a different mindset and a different approach.  

On their interest in ABSA when it was at the bottom

Our thinking was, you know, that rates would be lower, that tech would accelerate faster as the likes of domestic banks and normal businesses would be in big trouble. So at that time, we had zero banks and in fact, in the hedge funds we were short. It turned out to be the perfect combination – we were effectively making money on the deterioration of the ABSA share price and other banks.  So we sold the shares while owning them. Therefore, the share prices declining actually helped our profitability and our hedge funds in our long only mandates, where you’re unable to short. We had no banks, those fell dramatically. And obviously the poorer quality banks which are perceived to be poorer quality and the abacus fell far more than the likes of the first trades. When we saw that, we eventually realised we were buying Absa and Nedbank actually at one stage, you know, at .4,5,6 times the value of their books.  

On when he started buying into Naspers

There are times to own shares and there are times not to own. Our view on that space must only be taken as our current view on that space which currently we’re about market neutral on. That means that in our long only mandates where for example, Naspers and Prosus combined for say 10% of the index, we’re round about 10%. That for us means we think it’s going to perform roundabout in line with the market in the hedge funds and the flexible funds and etcetera. We only have a little bit of an assessment and process because it has already reacted phenomenally from the bottom once all those plans have been announced. But if you take us back for a number of weeks, we were overweight  only three, 4% overweight and we had as much as 7% just sitting in the absolute funds, in the hedge funds. 

On the US markets in July

There was a very big bounce in July. I don’t know if that bounce is going to be sustained. There’s no doubt in our minds that the US economy is headed for recession. We’re seeing mass layoffs. What I think the market is starting to say is that we’ve peaked at inflation and because it peaked at inflation, the Fed’s pushed rates too high, too quickly. I think the data will probably start showing as well that inflation has come down because you can see the iron ore price is substantially lower year on year all. The price is now slightly below 100 USD. Most commodity prices, copper, etc. have come off substantially. So the market is trying to almost lead the Fed into saying, we’re backing out of this. 

Our view, and my view particularly, is it’s not over. Corporate earnings are going to suffer. We have seen some good earnings that are coming off on a low basis. And we’ve seen some good quality tech earnings, which are maybe a little bit different. But we’ve also seen some big businesses like the Walmarts and the Targets suffer. And the consumer, in my mind, will come under pressure. In the US, mortgage rates have skyrocketed, unemployment has started to increase, the cost of goods has skyrocketed. Margins have to be impaired, to some extent, so we thought that revaluation is not really there and we didn’t benefit much from the revaluation.

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