Some Thoughts on Peregrine Capital’s 13,147% Return
I have listened to your interview with Jacques Conradie with interest, a very impressive young man! A few clients called me to enquire about the fund so I looked deeper into the returns and on the fact sheet I find the following:
The calculation of net returns and the risk measures comprises data from the Peregrine High Growth en Commandiite Partnership from 1 February 2000 until 30 November 2016, thereafter the data relates to the Peregrine Capital High Growth H4 QI Hedge Fund (“the High Growth Fund”). Source: Fact sheet attached.
It is not clear from the note whether it was a name change or a different hedge fund that was rolled up into the current hedge fund. It is also not clear if there were any mandate changes.
The natural question is whether one should join the fund with such a stellar record.
On a side note, a similar question can be asked about investing in South Africa. In the next table real returns are shown for equity returns in the period 1900 to 2022:
The best place to have been since 1900 is in the South African equity market! Does that mean that one should put all your money on the JSE? Of course not! I believe (as does Magnus Heystek) that there is very little reason to invest any funds in South Africa for a variety of reasons.
Although the performance measured since February 2001 is indeed exceptional (as is South Africa’s since 1900!) many things have changed in the investment landscape over the last few decades, I reckon a measure over the last 5 years would be more appropriate. One should also measure in hard currency.
Since the Peregrine Hedge fund has no benchmark, I have decided to measure against the MSCI World, S&P 500 and Nasdaq ETFs to see whether the performance is still above average.
I have picked these benchmarks as they are real and a reflection of worldwide markets. I have used accumulating ETFs as the Peregrine High Growth Fund reinvests income. The results are as follows:
Another point gleaned from the fine print on the fact sheet is the fund charges. The average TIC (Total Investment Charge) disclosed for the past 3 years is 6.90%. If this charge is added back to the performance, it seems that the fund may have outperformed (or performed on par) with both the MSCI World and S&P 500 ETFs.
My impression is that this is very good business for Peregrine on a fund holding assets of almost R6bn but that investors should rather look elsewhere for better returns as this fund’s cost base erodes the returns in favour of Peregrine and to the detriment of investors. The poor performance of the MSCI South Africa ETF also points to offshore investments as a better alternative.
Find attachments below
Response to Mr Marais’ Letter from Peregrine CEO, Jacques Conradie
Thanks for sending me the letter from Mr Marais.
Firstly, regarding the fund name change in 2016: The Collective Investment Scheme Control Act allowed hedge funds to operate as Collective Investment Schemes for the first time in 2015. We merely changed the fund structure from a partnership to a collective investment scheme, driven by the change in regulation. It has been the same fund, with the same investment philosophy and mandate, since its inception in 2000.
Then regarding the comparisons made: There are two very important things to consider when conducting comparisons between investment funds and investment indices.
1. Cherry picking
Has either the measurement period of the return, or the funds being compared been cherry-picked, i.e., have they been picked with the benefit of hindsight? If we could pick our investments with full knowledge of the future, we would all put all our money into Bitcoin in 2010 and be billionaires.
2. Have we compared both return and risk?
There are many different investments on the risk spectrum, all the way from cash to equities and venture capital. One should therefore try to compare both the risk and return of investments.
If we look at the comparison done with our fund, I would argue that using the NASDAQ and the S&P500 is somewhat cherry-picking. With hindsight, we are using the best major developed stock market in the world (the USA), and then over and above that, we are comparing to the NASDAQ, the technology index, in the best performing stock market in the world over that period.
If we want to make a global comparison, we should use the MSCI World Index which is the only appropriate index as it doesn’t cherry picks winners after the fact. It is the weighted average performance of the world. We cannot pick specific countries or sectors that have done the best over the past 5 years.
Secondly, the 5-year time period is too short. It corresponds to a very strong starting point for the ZAR, per the below graph, making the ZAR depreciation over time seem much worse. It also looks at one particularly weak period of SA market history. One should instead look at longer term data like 10- or 15-year data.
If we look at the 10-year data in ZAR, this has been one long bull market, so you would expect it to be harder for a hedge fund to keep up with equity markets fully, yet that is what we achieved. You will see that the High Growth Fund returned 15.4% per annum over the 10 years to investors. This is slightly below the 16.7% per annum for the MSCI world, but more than double the return of MSCI SA at 7% per annum. Very importantly, the volatility at 8.29% was almost half the volatility of the two indices which were both at 15%. The maximum drawdown of 9.5% for the High Growth Fund is also almost half that of the MSCI World, and much better than MSCI South Africa.
If we look at the 15-year data, which includes a bear market and a bull market, you’ll see a different picture emerge. The High Growth Fund still delivered more than 15% per annum, whereas the MSCI World managed only 10% and the MSCI SA index did 6%. You will also notice that the volatility and max drawdown for the High Growth Fund is again only about half of that of the MSCI World and MSCI SA indices, indicating that we took substantially lower risk to achieve our returns than the overall market.
During this entire period, our mandate was to deliver great Rand-denominated returns for investors, while managing risk. For this reason, we think the most appropriate comparison is the South African Multi-Asset High Equity category that we use on our fund fact sheets. However, I think the above analysis shows that over 15 years we have substantially outperformed global equities, and even over a 10-year bull market we kept up with global equities, while doing so at much lower risk for our investors.
I trust this helps to answer Mr Manie Marais’ questions on equity investing vs. hedge fund investing. Should he have any other questions, he is welcome to contact us.
Source: Peregrine Capital and Morningstar | As at 07/03/2022
- For the 15-year comparison, the iShares ETFs that Mr Marais refers to in his letter have been substituted for the relevant market indices due to the ETFs not being available for the full 15-year period.
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