The boutique that doesn’t want to be a boutique

All Weather Capital has ambitious growth plans. I spoke to CIO Shane Watkins about how the firm's approach in the long-only space has been set up to support these ambitions.

All Weather Capital currently manages around R30 billion. CIO Shane Watkins says that the business sees its way to AUM well beyond that.

“Our ambition is to manage R150 billion,” Watkins says. “We’ve structured the business very systematically to enable it to grow.”

All Weather started in 2013, initially with two hedge funds and a long-only South African equity offering. It has subsequently grown to a suite of eight funds, covering hedge, equity, multi-asset and fixed income.

“Each product is set up as a unit trust and each is managed by a three-person team – myself and two fund managers,” Watkins says. “We feel that we are now well positioned to grow, both in terms of how we have capacitated the business with staff and having the right product categories.”

The bulk of All Weather’s AUM still sits in its local equity mandates. Watkins says these account for R20 billion.

“We have four offerings – a long-short hedge fund; a market neutral hedge fund; a traditional, more institutional SA equity product that is benchmark cognisant and tracking error constrained, with around 60 positions; and the SA equity best ideas fund that is more concentrated, with 20 to 25 positions.”

Over 12 years, the general SA equity fund has delivered annualised returns of 1.8% ahead of its Capped SWIX benchmark. The All Weather BCI Best Ideas Equity Fund was launched in April last year, and returned 38% in its first 12 months.

Both of these strategies align with what All Weather is doing in its hedge funds.

“In general, what you would expect is that the long positions in our hedge fund would be the overweights in our general equity fund, and the shorts would be the underweights,” Watkins says. “The best ideas fund would just be concentrated version of long positions.”

Notably for a smaller manager, All Weather does not see any advantage in playing in the small cap space.

“We very seldom stray into small caps because on a risk-adjusted and liquidity-adjusted basis you seldom get good returns,” Watkins says.

“I also don’t think you have a scalable business if you focus on companies under R2.5 billion. We don’t want to be a boutique. We want to be a large, mainstream fund manager. We don’t want to look at small, illiquid companies that don’t really move the dial for us.

“Let’s say we wanted to take a 1% position in a tiny company. We manage R20 billion, so that would mean buying R200 million. If the market cap of the company was only R1 billion, we’d own 20% of the business, and we wouldn’t want to do that.”

Watkins (pictured above) adds that they select and weight stocks on a three-factor basis. The first is the analyst’s forecast return, which is then modified by a risk adjustment and the analyst's level of conviction.

“For example, let’s say our analyst thinks Sasol has a 100% upside from here. We would take that and put in a risk adjustment factor, given that the company has $5 billion of offshore debt. That might bring the forecast return down to 60%. Then we ask the analyst for their level of conviction, which is probably extremely low because anything can happen. So, despite a very high forecast annual return, we would have a smaller position in the stock.

“But we might then look at the Foschini Group and say the forecast return is 25%. It’s a lower forecast return, but the risk adjustment factor would be low and analyst conviction would be very high. That means we would have quite a large position.

“It’s a question of adjusting between the countervailing forces of the forecast return and the conviction we can have in that.”

Macro cognisance

This bottom-up process is also supported by macroeconomic work done by head of strategy Nick van Rensburg.

“When I started out in the industry 30 years ago, a dominant portion of a share’s return was determined by whatever was going on at the company itself,” Watkins says. “Now, a much larger portion of the R-squared that explains share price behaviour is determined by macro or geopolitical events.”

In recognising this, All Weather has seen the importance of being macro cognisant in its stock selection.

“We look for the canaries in the coal mine,” Watkins says. “For example, our global emerging markets equity team had a significant position in Russia leading up to the war in Ukraine. Nick was monitoring events on the Russian border, and the canary in the coal mine was when the Russian army started to export expiring blood units to the western front. That’s when we realised that they were going to invade, so we cut our Russian exposure from 8% to basically zero. Three days later Russia invaded.

“Another example would be the Chinese lockdown for Covid that extended way beyond the rest of world. But then Xi Jinping approved the running of Beijing marathon, which would be 40 to 50 thousand people in basically a super-spreader event. We said that if they are going to allow that, then the lockdown is fundamentally over.

“Those are the kinds of signposts that give us some idea of what might be coming.”