‘Hedge funds can be a risk-reducer or diversifier, or a return-enhancer’

You can also listen to this podcast on iono.fm here.

RYK VAN NIEKERK: Welcome to this week’s edition of the Be a Better Investor podcast. My name is Ryk van Niekerk and in this series I speak to leading professional investors about their investment journeys. We look at their first investments and how their investment strategies have changed over the years.

We also take a peek into their personal portfolios to see whether they practise what they preach. The idea is to identify a few nuggets of wisdom to help young amateur retail investors become better investors.

My guest today is Kamini Naidoo. She is the chief investment officer [CIO] at Equilibrium. Equilibrium of course is owned by Momentum. Before she was appointed CIO she held several other asset-management positions at RMB and Momentum. She has a BSc degree in computer science and an honour’s degree in financial management from the University of KwaZulu-Natal, and she holds a Master of Management degree in Finance and Investments from Wits.

She is also a chartered alternative investment analyst with the Chartered Alternative Investment Analyst Association. Kamini, that’s a mouthful.

First, tell us about your background. Where did you grow up – and did you ever dream of becoming a professional investor?

KAMINI NAIDOO: Thanks Ryk, I appreciate the time. I grew up in Durban. I was actually born and brought up in Durban and schooled there.

After finishing school, though, I was considering a career in either veterinary science or computer science. Investments didn’t feature that point, and computer science won.

So I continued my studies back home at the University of Natal. After I completed my honours in computer science, I joined Standard Bank in the Investment Banking Graduate Programme. That was here in Johannesburg, and that’s when I made the big move up here.

RYK VAN NIEKERK: ‘Investment Graduate Programme’ – I haven’t heard of that one. Tell us about it.

KAMINI NAIDOO: Well, at that stage – and I’m giving away my age – it was Standard Corporate Management Bank, so SCMB. They had a grad programme where they took graduates from across the country and circulated them through the Corporate and Investment Bank to give them exposure to investment banking and, well, the inner workings of an investment bank. That’s what that was about. It’s about a year-long programme where we just rotate through the different areas to get the exposure.

RYK VAN NIEKERK: You got in there because of your computer science background, and then you fell in love with investments – is that pretty much the story?

KAMINI NAIDOO: It’s pretty much the story. While working there – in a banking environment, you get exposure to all the instruments and their mechanics and risks, and my interest grew.

I knew I wanted to get closer to markets and I decided to study a bit further there, so I focused on finance and investments in the degrees you mentioned.

Shortly after I finished my studies, I had the opportunity to join a company called Fraim. That was First Rand Alternative Investment Management, a sister company to RMB Asset Management. They had a position for a hedge fund analyst based down in Cape Town. So 16 years ago I made the move down to Cape Town to take up the position, and many name changes and a corporate action later I find myself here at Equilibrium.

RYK VAN NIEKERK: It’s a fantastic story and it shows you how someone’s career is sometimes very dependent on breaks you get. It is not careful planning for years and years, and picking certain degrees. Sometimes you get into a door and then life takes over.

KAMINI NAIDOO: Yes, and it’s also about following your interest, I think. It’s important to find what interests you and just go with that.

RYK VAN NIEKERK: Let’s talk about the investments. What was the very, very first investment you made with money you’d earned yourself?

KAMINI NAIDOO: My first PA [personal account] investment as such wasn’t in stocks.

It was actually into a hedge fund, and that was back in 2010/2011, so before hedge funds actually moved into a regulated environment.

And I invested into a growth-type equity [with a] long-short strategy, which I still hold today. I would say it was my first and probably one of my better personal investments.

RYK VAN NIEKERK: Which fund was this?

KAMINI NAIDOO: That was the Fairtree Assegai Fund.

RYK VAN NIEKERK: Oh, Fairtree, yes. They are actually one of the leaders in the field. Why that one?

KAMINI NAIDOO: Well, at that stage, when I looked back at where I was in my lifecycle, I was looking for a growth-type investment. It was a new fund to the market.

I think we have very skilled managers, and there were many that I was looking at that stage, but that was one that I was analysing for institutional portfolios anyway.

I thought it aligned with what I wanted from a personal investment. I was looking for something that had a higher risk profile, but with the ability to protect some of that growth.

So I was looking for sort of a racier equity, long-short type of fund, and that’s exactly what I got.

RYK VAN NIEKERK: Subsequent to that did you maybe ever invest directly in equities or into other asset classes?

KAMINI NAIDOO: I did look at equities very briefly directly, but I did feel that the fund managers were very skilled at it and I decided to execute and rather let the professional do it.

So I pretty much diversified from an equity hedge fund into fixed-income hedge funds into global.

But I try to keep the bulk of the investments with fund managers, because that’s where the expertise lies.

RYK VAN NIEKERK: Yes, a very interesting investment. Currently – I’m not talking about your retirement savings, which I imagine would go into a pension fund or an RA [retirement annuity] – what is your current discretionary investment strategy?

KAMINI NAIDOO: The bulk of my discretionary portfolio is in funds. So equity, fixed-income funds. I also do have global funds that I’m exposed to. I use RAs. I also use tax-free savings. I use that quite aggressively. I do have some retail savings bonds because those yields were quite good at a stage. So it’s quite a diverse portfolio at the moment, just as a function of where some of the opportunities have been more recently.

Watch: Why should you diversify your investments?

RYK VAN NIEKERK: You are also a chartered alternative investment analyst. I didn’t even know such a designation existed, but what is this and do you still have an interest in it?

KAMINI NAIDOO: Absolutely. The bulk of my investment career since joining Momentum has been within the alternative space. I got the designation quite early in that cycle. In fact, I think on my certificate there are only three digits.

But it is a globally recognised qualification and it does focus on alternative investment.

What’s quite nice about it is it is quite relevant to what’s happening in the market at the time. At the time that I had written it, it was just following the global financial crisis, and the bulk of the content was focused on that.

Listen/read:
Alternative assets on the ascent: Investing outside the box
Unlocking hidden potential: The boom in private equity and alternative investments

It gives you quite a relevant perspective on what’s happening in the alternative space and it gives you access to content that is continuous. For example, this evening I’m joining a webinar on ‘factor investing’, and how that is considered more globally. That’s through the CIA [Certified Internal Auditor] programme.

RYK VAN NIEKERK: Now this podcast is aimed at assisting young professionals – people who have just entered the job market – to start their investment journey. Do you think they should consider alternative investments as in, maybe, a diversification type of investment?

KAMINI NAIDOO: Maybe I’ll take a step back and just say that when I think about investments, my investment philosophy centres around diversification, trying to ensure exposure across different risk-and-return sources.

By that I mean investing across asset classes, geographies and strategies.

I think alternative investments certainly do give investors access to a range of risk-and-return sources that you wouldn’t ordinarily get through traditional portfolios.

So alternatives can play a role within any portfolio from that perspective.

It’s just important to know what it is you would like to get out of the exposure.

RYK VAN NIEKERK: So what do you think young investors should aim to achieve? Maybe you can refer to a few specific options you think they should consider.

KAMINI NAIDOO: In the alternative space, hedge funds have been regulated since 2015. Under the regulation, these are classified as either retail-investor hedge funds or qualified-investor hedge funds.

Among the retail-investor hedge funds there are a number of funds available for different risk appetites or tolerances.

So I think when considering a hedge fund exposure, the investor first needs to decide on what they want that role to be within their portfolio.

Hedge funds can play a range of roles, either as a risk-reducer or a diversifier or they can be a return-enhancer. But that comes with the commensurate risk.

So when you know what role you want to play, you need to then go and look further into which funds would match your requirement and what you’re trying to achieve.

RYK VAN NIEKERK: It’s interesting what the perspectives of the numerous professional investors I’ve interviewed over the years are, and this is definitely an interesting one.

If you could go back in time and speak to yourself just when you started to earn a salary and your career was taking off, what investment advice would you give yourself?

KAMINI NAIDOO: I would probably say to start investing earlier. The earlier I could have started, the better.

I do think there’s a wealth of information out there and sometimes that can be overwhelming – which is why I didn’t start earlier.

So again, it’s about deciding what it is you want to achieve and then focusing on the execution. So I would say start earlier.

Listen/read: ‘Start investing early, don’t be scared to do the hard work’ 

RYK VAN NIEKERK: And what are your perceptions regarding risk, because I think it’s one of the key aspects of investments that not enough young investors take into account. They don’t understand risk. How do you think they should look at it? Let’s look at equity investments, just to use an example. Should you go for the potential Capitec and Naspers and other [such] companies when they are still small, trying to hit the 10-baggers or the 100-baggers, or stick with blue-chip stocks?

KAMINI NAIDOO: It’s interesting to think about how we define risk. In my mind you define risk as your risk of capital loss, how much you are willing to lose in any investment, and you must be comfortable with that risk.

Watch: What is risk?

So it’s not just about what you’re trying to achieve in terms of your return off your objective, but also about the journey, in how you’re planning to get there, so what you can get.

And this is why I believe diversification is key because it manages both your growth in your investment but also the journey in how you get there.

So by diversifying your exposures, you manage your risk, and you are limiting your capital loss through offsetting in correlation or your diversification benefit.

Therefore you should get to a better outcome over time at your lowest possible risk of capital loss.

RYK VAN NIEKERK: And lastly, the two questions most people listening to this podcast wait for every week. What was your best investment ever? You referred to the Fairtree Assegai Hedge Fund earlier, but what do you regard as the best one you’ve ever made?

KAMINI NAIDOO: I would say it’s my hedge fund portfolio, not necessarily a single fund.

I’ve selected three or four funds which together offer me quite a diversified exposure to the hedge fund risk-and-return sources, and that would be my best investment.

RYK VAN NIEKERK: And the worst one, the one you really don’t want to tell anyone about, because all professional investors also make mistakes?

KAMINI NAIDOO: I wouldn’t say I have a worst investment because, as I said, I didn’t do a lot in terms of single stocks.

But perhaps something I could have done better was to start earlier.

I think we all say the biggest asset is time, and I think the earlier one starts the more meaningful that outcome can be.

RYK VAN NIEKERK: Kamini, thank you so much for your time today and for sharing your insights. I think it’s a very interesting perspective you have and may it continue to be very successful for you.

KAMINI NAIDOO: Thank you, Ryk. Thanks for your time.

RYK VAN NIEKERK: That was Kamini Naidoo, the chief investment officer at Equilibrium.