Peregrine’s Conradie: Home run with AI in ’23 – SA, China and stock picking for ’24

After delivering double the stock market’s returns for investors last year, for 2024, South Africa’s oldest and largest hedge fund is excited about opportunities in its backyard. In this review of Peregrine Capital’s annual Investor Letter, CEO Jacques Conradie looks back to another stellar year (helped by Meta…) and looks forward to how the team intends to repeat those returns in the current 12 months. He spoke to BizNews editor Alec Hogg.


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Edited transcript of the interview

Alec Hogg:
Jacques Conradie is the chief executive and also a portfolio manager at Peregrine Capital, known as a leading figure in the investment field. Peregrine Capital operates the oldest and largest hedge fund in South Africa, celebrating a quarter of a century last year with a remarkable record of never experiencing a year of negative performance. Jacques and his colleague, David Fraser, will be presenting at the upcoming BizNews conference to share insights on their successful strategies.

Certainly, we’re eager to have you both at the conference, especially given the challenges asset managers face in outperforming indices. Your latest investor letter highlights impressive results, with the high growth fund up by 14.7% and the pure hedge fund by about 12.5%, far exceeding the 5% increase in the JSE all share index. This consistent outperformance underscores the value of well-managed hedge funds in preserving capital.

Jacques Conradie:
Thanks for the introduction, Alec. We’re excited about the conference. Every year presents new challenges, but the thrill of hunting for investment ideas is what drives us. Over the past 25 years, we’ve consistently found opportunities in the market, often from unexpected sources.

Alec Hogg:
Looking forward to hearing more about your strategies. You’ve been ahead of the curve, particularly with your focus on artificial intelligence. How do you stay ahead of the game?

Jacques Conradie:
Learning and staying informed about global developments is a passion for me and many on our team. Exploring platforms like Twitter and X helps uncover emerging trends. The launch of chat GPT caught our attention, signaling exciting potential. However, translating these insights into profitable investments is the real challenge. It’s about piecing together the puzzle and identifying opportunities with strong earning potential.

Alec Hogg:
Let’s delve into Meta. Despite being your worst performer, you maintained your position. Can you shed light on this decision?

Jacques Conradie:
Our initial investment in Meta was opportune, but challenges arose, leading to significant drawdowns. We have a rigorous review process for such situations, evaluating if our thesis still holds. While Meta faced threats from competitors like TikTok and changes in ad targeting, their aggressive investment in AI seemed promising. Despite the setbacks, we believed the stock was undervalued. In hindsight, we should have increased our position. Nevertheless, Meta’s turnaround has been remarkable, driven by strategic decisions like aggressive staff cuts and continued innovation.

Alec Hogg:
Jacques, considering Warren Buffett’s longevity in the field, you’ve got plenty of time ahead for learning and growth. Speaking of which, your track record speaks volumes. Investments like Capitec and NEPI have seen remarkable gains. However, the challenge lies in knowing when to trim positions. How do you approach this dilemma, especially with Meta’s rollercoaster journey?

Jacques Conradie:
Maintaining discipline is crucial. We’ve learned from past mistakes and understand the importance of scaling back positions when necessary. With Thungela, for example, as it surged in value, we progressively reduced our exposure to manage risk. Similarly, with Meta, we’ve recently trimmed our holdings, though we still see potential. The correlation between companies heavily invested in H100 graphics cards and AI capabilities, like Meta and Microsoft, suggests further upside. Additionally, Meta’s ventures into VR technology offer intriguing opportunities.

Alec Hogg:
Your investor letter also touches on South Africa’s prospects, which you view optimistically despite challenges. Could you elaborate on your outlook for local companies listed on the Johannesburg Stock Exchange?

Jacques Conradie:
We’re cautiously optimistic, closely monitoring factors like load shedding and potential interest rate cuts. Collaboration between Eskom and the private sector indicates progress, although challenges remain. The upcoming elections also hold significance, with hopes for constructive coalition outcomes. Despite uncertainties, we find value in SA mid caps and sectors like banking, which are attractively priced. With banks trading well below book value and offering substantial dividends, we see potential for solid returns, even in a modest growth scenario.

Alec Hogg:
So, Jacques, you’ve reduced your holding in Meta. Did you reallocate those funds into South African companies, including banks?

Jacques Conradie:
Actually, Alec, we’ve invested much of that capital into China. Despite concerns over China’s regulatory landscape in 2021, resulting in significant derating of Chinese tech companies, we’ve identified compelling opportunities. Comparing Chinese tech firms’ valuations to their US counterparts reveals historically unprecedented discounts. While China’s regulatory environment presents risks, we believe these are priced in, making Chinese stocks attractive. We’ve particularly favored Tencent and Pinduoduo, betting on their undervalued potential.

Alec Hogg:
Many South Africans are familiar with Tencent due to its association with Naspers, but what about Pinduoduo?

Jacques Conradie:
Pinduoduo is a Chinese e-commerce platform akin to Amazon or Takealot. Despite entering a market dominated by Alibaba and JD.com, Pinduoduo’s innovative approach, offering low-cost products directly from manufacturers, has propelled its growth. Expanding globally, including South Africa, Pinduoduo’s competitive pricing and rapid delivery times present a formidable challenge to established players. It’s an intriguing story of disruptive competition in the e-commerce space.

Alec Hogg:
Indeed, it’s a fascinating narrative. While Amazon prepares to enter South Africa, Pinduoduo’s global expansion poses a new challenge. What’s your outlook for 2024, Jacques?

Jacques Conradie:
Predicting the future is uncertain, especially given the impact of aggressive rate hikes and economic conditions. While the economy has shown resilience, there’s uncertainty regarding the potential lag effects of rate hikes. We’re maintaining specific company bets, focusing on sectors like S&M mid-caps and offshore opportunities. As stock pickers, we’re less reliant on macro trends and more focused on identifying resilient companies that can thrive regardless of economic conditions. So, while I can’t offer a definitive forecast, our strategy remains agile, responding to emerging data and market dynamics.

Alec Hogg:
Straight from the source, Jacques Conradie, CEO of Peregrine Capital. I’m Alec Hogg from BizNews.com.

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