Putting our money where our mouth is – 36ONE’s Cy Jacobs

At the fourth BizNews Conference, Cy Jacobs offered insight into his asset management firm 36ONE, with an investment team he has personally built over 18 years. Jacobs also offers his take on the performance fees debate and how they play a part in the group’s hedge funds.

Below are some excerpts from Cy Jacob’s presentation at BNC#4.

Cy Jacobs on benchmarks and performance fees 

I’m standing up here bravely saying I’m happy with the performance fee model. If we haven’t beaten the benchmarks agreed on, we shouldn’t charge a performance fee. But if we have beaten the benchmarks and the clients, by the way, set the benchmarks, we allow any type of benchmarks. Any institution who comes to us and says, we’d like a fund for you to manage, but you have to beat cap swix or you have to beat inflation plus five. Exactly. That’s the benchmark. And we have specialist teams with that throughout our business who in fact specialise in beating those benchmarks. As you can see from the middle of the slide, 100% of all our benchmarks in South Africa have beaten their benchmarks. 1% of our mandates have beaten their benchmarks over all investment periods. We are unconstrained by stars and I think both Sean and Piet were very, very right on this point, in that in South Africa, the market is very illiquid. So as a result, smaller asset managers are a lot more nimble, a lot more flexible. You can change your mind tomorrow about something you’ve bought today. And if some new news comes out tomorrow, you’re able to get out of that investment, where I think the larger asset managers are unable to do that. I think that’s a given. 

On what 36ONE really does 

We focus on the investments and on our portfolios. Sean mentioned not today, but actually in another speech,  a lot of balance funds and we do run a balanced fund as well. In fact, we run PPS’s managed fund. It’s a fund of quite a few billion rand, but it’s not as big as the 140 billion odd rand you heard about from Alan Grey. But very few balanced fund managers change the mix of the equity or the bonds or the offshore equity or the cash – let the markets take care of it. And I hope that over time their returns are smooth. At 36ONE, we do something very different. You look back to March of 2020, we saw COVID coming. It’s not that we predicted COVID. We didn’t. But once we saw the infection rates rising, we predicted what governments would do, what would happen, what would happen to markets and which businesses would do well, and what would happen to interest rates. When you put that thesis together, you realign your funds and you can see by the far left growth we were down to 20% in local equity, very little in offshore equity, 12% by the time COVID rolled in and you saw governments were helping and markets were going to be stable, then we realised what was happening again. You could up your equity where there were cheap opportunities. So for us it’s very much like a three-pronged approach. If you can read the world for where it is at a point in time, you know what asset allocation to have. If you can work that out, you can probably work out which industries are going to perform better than other industries; which are priced for perfection; which are underpriced. And the third part of that is in those industries, obviously, which companies from a bottom up perspective are going to do well. So I think obviously Piet’s focus is very much on that third part, and ignores potentially what he said: the macro. For us, we are very focused on all parts. We like to know what’s happening in the world. We want to work out what that effect’s going to be and then we want to pick the sectors and the stocks that are going to perform. 

On how you find a fund that’s not a value fund and not a growth fund 

Well, we don’t call ourselves either. We call ourselves a flexible fund. And we’d like to be in growth when growth is in favour. And we like to be in value when value is in favour. But on both sides of the spectrum, we want to be in quality on all sides. I just thought I’d give you two examples here of things we’ve done and things we’re currently doing. We know health care going into COVID, we thought – wow, these hospitals are going to be absolutely quiet except for COVID cases. Probably not going to get paid for the COVID cases because the government had various legislation around it. So we had nothing in fact in the hedge funds. We were short on health care, but coming out of COVID, we had one good health care company, Mediclinic. The margins had been impinged that were done wrong, the wrong type of deals offshore in the Middle East. And we looked at this business properly and we decided, right, one big overweight position in Mediclinic, the best of the class in our minds. We bought it. We held Aspen. In the meantime, Aspen was falling and you can see Aspen on the far left falling down. We finally eventually got an offer from Mediclinic. Luckily, I suppose, everyone recognised the value and at that time it was at the exact same time as extreme pessimism. That’s when we are effectively selling our Mediclinic shares and buying Aspen. 

Another stock, which has been an all time SA favourite, which we never held from 2016, 2017 all the way down to 2020, was Sasol. We were short in our hedge funds. We had nothing. I think it destroyed most of the balance funds, equity funds in this country because there was a big weighting in the index and it fell from what you can remember, from 500 rand all the way down to a low of 50. When it got to thirties and sixties and eighties, it was a free option. All prices started to turn. Management started to do the right thing. The hedges that were in place were costing them but were going to be unwound. And we realised from this point on there’s only upside. So being able not to hold that stock the whole way down and then to hold it and accumulate and be overweight the whole way up. That difference in performance you’re getting from a manager who’s flexible and not prepared to hold a stock right through the cycles is going to give you that outperformance. And that’s the difference at 36ONE. 

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