Jean Pierre Verster on his ‘quantimental’ investment approach

RYK VAN NIEKERK: Welcome to this brand-new ‘Be a Higher Investor’ podcast. It replaces the outdated Market Commentator podcast, which I’ve been doing for a few years. The Be a Higher Investor podcast might be completely different, as I’ll choose the brains {of professional} buyers on why they select to speculate or disinvest from sure shares, the knowledge and the information they use to make these choices, and their successes and their errors. Hopefully these buyers will supply just a few nuggets of knowledge that may permit common beginner buyers to enhance their funding choices and expertise.

The very first visitor is Jean Pierre Verster of Protea Capital Administration. He’s a chartered monetary accountant, or a CFA, and he’s a chartered different funding analyst or a CAIA, and he has been making use of his commerce for a few years. He has labored for Fairtree and 36One, however he’s most likely finest often called the man who shorted Steinhoff and African Financial institution earlier than they imploded.

Jean Pierre, thanks a lot for becoming a member of me. In what number of conversations do the Steinhoff and African Financial institution brief positions you took emerge? Is it nonetheless high of thoughts for a lot of different buyers?

JEAN PIERRE VERSTER: Sure. Hello, Ryk. Thanks. It’s, which is kind of attention-grabbing as a result of because the years go by these occasions are additional up to now which makes them possibly much less related. However I might hope that they’re nonetheless related as a result of it signifies precisely what you may be discussing in these podcasts – and that’s the course of reasonably than the end result of what skilled buyers observe.

These have been two examples of outcomes which point out {that a} sure course of was adopted and subsequently I nonetheless consider that it’s nonetheless related. Sure, lots of people nonetheless discuss with these two occasions.

RYK VAN NIEKERK: We’ll get to the method in a minute. However you are also a charted different funding analyst. What precisely does that imply?

JEAN PIERRE VERSTER: It’s an instructional qualification that’s supplied by an internationally accredited affiliation. Mainly to get the accreditation one should have some sensible expertise in different investments, which refers to non-traditional investments. Your conventional investments are equities and bonds. So different issues like hedge funds, personal fairness and, some individuals would even say, property or actual property are seen as extra different investments.

They ship you a whole lot of info to undergo, a whole lot of books to learn by, to check. There are two completely different exams, multiple-hour exams. If you happen to cross the exams, plus have the requisite variety of sensible hours, you’ll be able to then attain the CAIA qualification. That’s one thing I did early on in my profession.

RYK VAN NIEKERK: What number of of those CAIAs are there in South Africa?

JEAN PIERRE VERSTER: I’ve seen the qualification round. If you happen to go onto LinkedIn, you see fairly just a few individuals as an illustration put them in the back of their surname to point the qualification. I don’t have an actual quantity for you, however there are I might guess at the very least 100 CAIAs within the nation, and there might be considerably extra.

As different investments have grow to be a extra standard subject, these skilled buyers who wish to achieve extra tutorial perception and a superb theoretical foundation to enter the choice asset administration trade have turned to the CAIA, which is extra specialised when in comparison with, as an illustration, the CFA qualification, which is broader and contains conventional asset courses as properly.

RYK VAN NIEKERK: Let’s speak about your funding course of. How do you go about analysing an organization and deciding whether or not you wish to go lengthy or brief?

JEAN PIERRE VERSTER: Sure – fairly a easy query and possibly a sophisticated reply, however I’ll attempt to clarify it as merely as I can.

We observe a course of that I first made my private course of, and it has now grow to be the Protea Capital Administration course of which we discuss with as a ‘quantimental’ course of. Now quantimental is a made-up phrase. It’s a mixture between basic and quantitative and it implies two alternative ways wherein buyers or analysts typically method the evaluation of shares, and is often seen as two distinct forms of approaching funding evaluation. We have now mixed, and we use each a basic and a quantitative method in our course of.

Concerning every certainly one of these individually, I’ll begin with a basic method of taking a look at companies and deciding on investments. That’s what one would perceive most enterprise individuals would. You assess the qualitative points of an organization, you undergo the audited monetary statements of an organization, you learn by the notes to see if there’s something unusual – or maybe the accounting insurance policies that this particular firm has utilized are uncommon. On the finish of the day you’d, particularly for that firm, construct an analysis mannequin – whether or not it’s easy or complicated – and get to a valuation within the conventional basic method of taking a look at an organization.

The opposite method is quantitative in nature. The time period quantitative implies a whole lot of information getting used. What we do there’s we use an information supplier to get information factors on a whole lot of firms. Our present universe is 10 000 firms globally. These information factors embody value information, market information, but additionally basic information, which [involves] the person line gadgets of the corporate. So, as an illustration, what the belongings, the liabilities and the fairness are for annually of the historical past of the corporate.

After which we use algorithms on that information to forecast the person line gadgets, That could be a quantitative method then to construct a valuation mannequin and resolve what an organization is price with no human perception, with out going by the notes and occupied with the standard of the administration crew, as an illustration, or the aggressive benefits that this firm may need. It’s purely based mostly on the numbers. What we do at Protea Capital Administration then is to mix the elemental method of taking a look at companies – which is, as we are saying, extra qualitative in nature – plus the quantitative method of taking a look at companies which is far more data-intensive. We mix these two, and that’s how we then resolve if an organization is perhaps engaging to both purchase or brief.

RYK VAN NIEKERK: How profitable is that this course of? What number of hits do you get and what number of misses are there?

JEAN PIERRE VERSTER: Ah, sure, that’s a superb query as a result of once we analyse if what we’re doing works in follow, and never simply in idea, now we have two main methods of taking a look at it.

The one is what we name the hit fee, or as you then say – what share of the time are we appropriate? If we expect a share ought to go up in response to the best way we select shares, are we proper greater than we’re flawed?

The opposite method we take a look at it’s batting the common. The batting common signifies that when you find yourself proper you need to make more cash than when you find yourself flawed. And for those who can mix a excessive hit fee, subsequently being proper extra typically than you’re flawed, plus a excessive batting common, which signifies that when you find yourself proper you earn more money than when you find yourself flawed, then you definitely get above-average outcomes.

After we analyse during the last decade or extra that I’ve utilized this quantimental course of, I’m happy to say that each our hitting fee is above common – we’re proper greater than we’re flawed – and our batting common is above common. So we earn more money once we are proper than we do once we are flawed. These are the 2 methods wherein one can assess in case your method is working.

RYK VAN NIEKERK: What have been your returns over the previous decade or so? I do know you handle completely different funds – lengthy funds, brief funds and hedge funds – however what’s the quantity you’ve in your head that you simply regard us a good reflection of your efficiency?

JEAN PIERRE VERSTER: I feel firstly one have to be very cautious of theoretical numbers and back-tested numbers and simply numbers in anybody’s head. The excellent news is that I truly began managing exterior cash in 2009, Might 2009. I invited my family and friends, an in depth circle, to put money into what I known as the Verster Funding Partnership. Regardless that it was a small sum of money in the beginning, it allowed me as an analyst on the time to have some capital that I may then afterward say, ‘It is a true reflection of actual cash being invested by me making the choices, and these are the returns I generated on that cash’.

From Might 2009 to this point, that cash in actual phrases, the companions within the Verster Funding Partnership who have been there from day one, their cash has compounded at simply over 19% each year. That compares to the JSE compounding at roughly 13% each year. The distinction between 19% each year and 13% each year over a interval of 12 to 13 years is kind of substantial. So the companions within the partnership now have gotten nearly 10 instances the cash that they invested in 2009, which is an above-average return and, I’m happy to say, is an actual return, a real return, not only a return in my head.

RYK VAN NIEKERK: Are you extra profitable in shorting shares than going lengthy?

JEAN PIERRE VERSTER: It is dependent upon the place we’re within the cycle, as we name it. At instances when now we have bull markets and shares typically rise we typically earn more money from lengthy positions than brief positions, and very often, as has been the case over the previous 18 months, we may very often lose cash over the a part of the cycle which we name the bull market cycle [when] markets rise fairly sharply.

However then when the opposite a part of the cycle occurs, the bear market cycle, and markets fall sharply, then the shorts come into their very own. Very often they generate significant earnings which assist to cushion the strain we would really feel on the lengthy positions that might additionally then drop in value throughout a bear-market cycle. Over a full cycle if we are able to make any constructive return on shorts, even a small constructive return, we’d say that it exhibits that the brief guide added to efficiency and made a constructive contribution.

In the mean time due to the final 18 months and the way sharply shares have risen, our brief guide has simply stepped right into a state of affairs the place it has not generated a constructive return. So we have to wait now for the subsequent cycle, the subsequent bear-market cycle for our brief positions to earn a living. Then I can say that now we have made cash on our shorts traditionally. At this time limit the shorts have been a really slight drag, however on the similar time allowed us to have greater than 100% publicity on the lengthy aspect. So it has in an oblique method added to our efficiency as a result of, despite the fact that it detracted from efficiency, it allowed us to have extra lengthy positions than we in any other case would have had if we didn’t have a brief guide within the portfolios.

RYK VAN NIEKERK: Let’s speak about retail or beginner buyers. How skilful do you assume a median South African retail investor is?

JEAN PIERRE VERSTER: It’s tough to say, as a result of to measure that we have to know what the returns of the common South African retail investor has been traditionally. So far as I do know there aren’t actually a whole lot of research which were achieved on that subject. There have been research achieved in worldwide markets, particularly within the US. What that has indicated is that retail buyers typically do fairly a bit worse than the funds managed by skilled buyers. The explanation why they do worse is that they usually make investments after a fund has had a superb run and has proven a superb historic return, they usually usually disinvest from a fund after a shorter poor interval of efficiency. That signifies that retail buyers typically purchase excessive and promote low, whereas to earn a living in markets you want to do the alternative. It’s good to purchase low and promote excessive.

So if this South African expertise is analogous – and I’ve no purpose to consider that it wouldn’t be – I might guess that South African retail buyers on common do worse then skilled buyers. That’s the reason we discuss with them as retail beginner buyers, as a result of it’s very tough even for skilled buyers to recover from the psychological bias of being scared when markets fall and, out of worry, promoting when costs are low – and on the opposite aspect getting over-eager and having a whole lot of hope when share costs are excessive, and subsequently shopping for extra shares when costs are excessive. These are typical behavioural bias issues that make that each retail and institutional buyers make much less optimum choices than they need to relating to investing.

RYK VAN NIEKERK: It’s additionally a matter of analysis and entry to correct information. I don’t assume – and it’s my expertise – that retail buyers do sufficient analysis earlier than they really decide on whether or not to put money into a sure firm or not.

JEAN PIERRE VERSTER: Most likely, sure. I might go a step additional to say you’ll be able to most likely take that subject you’ve recognized and break up it in two. The one is entry to info and the opposite one is what then to do with that info.

In relation to entry to info, I feel that the taking part in fields have been levelled in the previous couple of years. Within the US once more there was a regulation greater than 20 years in the past that got here out known as Regulation Honest Disclosure, RFD, and that meant that skilled buyers can’t, as an illustration, name up the monetary director of an organization and get any materials info in that telephone name that’s not disseminated to the entire market, and subsequently [information] which retail buyers would additionally concentrate on.

So the taking part in fields have been levelled relating to entry to information, in my view. The identical factor with massive information and instruments like Google Tendencies, as an illustration. Anybody can now use opensource instruments which might be out there and see, as an illustration, how standard sure search traits are on Google.

A couple of years in the past, name it a decade in the past, that sort of knowledge was accessible solely to institutional buyers and it was very tough for retail buyers to get their fingers on that information. At this time that’s not the case.

However the second factor I feel is an even bigger purpose for the distinction between institutional buyers. That’s that despite the fact that they may have entry to the identical information at this time, what they do with the information is completely different; one wants to essentially perceive information, monetary outcomes, accounting requirements, [how] to interpret information appropriately and do the fitting factor based mostly on that information. I feel there’s nonetheless an enormous distinction between what retail buyers do with information versus what institutional buyers do with information that’s broadly out there.

RYK VAN NIEKERK: However not all institutional buyers are equally profitable. We’ve seen in current instances that lots of the South African main asset managers have truly carried out fairly poorly and didn’t even come near beating their very own benchmarks. Why do sure funding approaches fail, particularly from skilled buyers?

JEAN PIERRE VERSTER: True. I’m truly going to make use of two Protea funds for example. Fairly an attention-grabbing instance right here, Ryk. If one seems at 2021, our Protea South Africa Fund carried out roughly in step with the benchmark, which is the native markets index, the JSE All Share Index, whereas our Protea World Fund considerably underperformed the worldwide index. Each these funds adopted the identical method.

So, even when one follows the identical method you’ll be able to have completely different outcomes. The explanation for that’s, once more, what I might name the everyday market cycle, and we’ve had completely different cycles play out beneath the JSE and in world markets. So the primary level, and an necessary level, is whether or not an establishment investor is considered as being profitable or not, fairly usually as you do with the place we’re within the cycle and over what interval one is measuring efficiency.

In relation to equities, as a result of share costs transfer in irrational and unpredictable methods within the brief time period, I might counsel that one ought to at all times take a look at intervals of at the very least three years when assessing whether or not any investor has achieved a superb job or not, as a result of random issues occur in shorter intervals.

Then by way of completely different approaches, one can use an method that appears like a strong method, but it surely additionally works at completely different instances out there cycle. Right here the most common approaches which might be referred to are progress and worth buyers. If you happen to look once more on the previous two years, we’ve had a really attention-grabbing cycle of progress buyers or a progress method doing very properly from early 2020 to early 2021. Then swiftly the expansion method [was] underperforming over the previous 12 months – from January 2021 to January 2022 – and the worth method considerably outperforming over the previous 12 months.

So buyers who use very completely different approaches, the worth method versus the expansion method, would have vastly completely different returns for the years 2020 and 2021, when one may say that each these approaches might be seen as fairly profitable approaches over the long run.

So watch out, I might counsel, in wanting on the final result of an method over any interval shorter than three years. One solely sees if an method is a profitable method if it really works over a interval longer than three years.

RYK VAN NIEKERK: What has been your finest funding ever, and what has been your worst one?

JEAN PIERRE VERSTER: Wow. For my finest funding I would want to return and I might say it was in South Africa property firms, the place I purchased vital lengthy publicity to South African property firms; most likely roughly 10 years in the past. Importantly, despite the fact that the shares of these property firms turned costly in my thoughts, I held on as a result of I considered them as being high-quality firms. On the finish of the day they went up nearly 10 instances in value. Thank goodness I additionally bought them close to the highest of the South African property market, roughly 5 years in the past.

So by way of pure efficiency, that was my finest commerce – shopping for South African property firms roughly 10 years in the past and promoting them roughly 5 years in the past.

When it comes to my worst investments, two come to thoughts. The one is being brief gold-mining firms in December 2015. You may keep in mind that we had Nenegate occur in December 2015; that induced the rand to depreciate sharply and our native gold shopping for shares to rise very sharply. As a result of I had shorted these shares, I incurred vital losses.

The opposite one is definitely up to now 12 months, Ryk, the place we had publicity to vital high-growth firms in our World Fund. Swiftly up to now two months, the months of December 2021 and January 2022, these shares have come beneath vital strain. It’s been disappointing to see that a few of our holdings have dropped 30% or much more, and it has had a adverse impact on our funds. I might subsequently additionally categorise it as one of many worst outcomes of my funding profession during the last 13 years or so.

RYK VAN NIEKERK: After which, simply lastly, are you able to inform us what firms you’re presently shopping for, and which sectors or firms are you staying away from?

JEAN PIERRE VERSTER: On the native aspect we’re nonetheless discovering a whole lot of high-quality mid-cap firms which might be nonetheless comparatively low-cost, despite the fact that their share costs have recovered over the previous 18 months; we’re shopping for these. And in world markets I discussed that quite a lot of high-quality progress shares have been bought off fairly sharply during the last two months, I can consider firms like Netflix, which fell 30% in a day, or an organization like Fb, which has simply come out with outcomes and fell by greater than 20% on the again of these outcomes. So these high-quality, high-growth firms are additionally what we’re shopping for most lately.

RYK VAN NIEKERK: And regionally? Are you able to give us just a few names?

JEAN PIERRE VERSTER: Positive, sure. We’ve been shopping for shares like Hudaco, Cashbuild, Afrimat. These are the everyday mid-cap firms that we view as being top quality – Italtile as properly – which have recovered from their lows; however we nonetheless see vital long-term worth in these firms as a result of they’ve obtained excellent administration groups. They’re not fairly as low-cost as they have been, however from prior expertise I’ve additionally realized that simply since you purchase a share and the share value doubles within the brief time period, it doesn’t imply you need to then promote the share. Generally one of many worst errors you can also make is to promote high-quality firm shares too early.

RYK VAN NIEKERK: After which simply lastly, what recommendation would you’ve for retail buyers, regular beginner retail buyers?

JEAN PIERRE VERSTER:

For these forms of buyers, Ryk, I might say diversify, as a result of an beginner investor, usually as I discussed, won’t have the technical expertise to interpret monetary statements to the identical diploma as an expert investor would. The very best defence towards that’s to diversify.

And the second phrase of recommendation I might give is to stay to high quality reasonably than attempting to purchase shares of firms whose share costs you see falling very sharply and also you assume that signifies that essentially the share costs should get well – despite the fact that it’s a mediocre firm that doesn’t have pricing energy and doesn’t have a powerful aggressive place. Relatively concentrate on robust firms with pricing energy, good aggressive positions. Maintain them for the long run. That’s how a retail investor has the most effective probability of outperforming even the institutional skilled buyers.

RYK VAN NIEKERK: How necessary is luck to achieve success?

JEAN PIERRE VERSTER: I consider it has a really massive influence on success. I discussed earlier that we measure our hit fee, how typically we’re proper versus flawed. Our hit fee is slightly below 60%, which signifies that we’re flawed 40% of the time. A big chunk of that 40% of the time the place we truly lose on an organization whose shares we purchase or brief is due to unhealthy luck. This stuff occur due to the random nature of short-term share-price actions. The one defence towards that’s diversification and, secondly, to have a repeatable course of the place, when unhealthy luck occurs, it’s not too detrimental to your funding returns.

However on the similar time you’ll be able to then additionally profit from good luck. I undoubtedly wouldn’t low cost luck, and I personally can consider many examples, each the place unhealthy luck had a adverse influence on my returns and good luck had a constructive influence on my returns. Once more, it’s solely over the long run you could see, with out the influence of luck, each good and unhealthy, if a course of would’ve generated above-average returns based mostly on ability reasonably than luck.

RYK VAN NIEKERK: What did Gary Participant say? “The extra you practise, the luckier you get.” It’s most likely very related within the funding trade as properly.

However Jean Pierre, thanks a lot for becoming a member of us and giving us your insights. Good luck into 2022.

JEAN PIERRE VERSTER: Thanks, Ryk, I respect the chat.

RYK VAN NIEKERK: That was Jean Pierre Verster. He’s CEO of Protea Capital Administration.