Differential Capital

www.differential.co.za

Company details

FAIS FSP registration number: 49982

Switchboard:

+27 10 443 7470

General email: info@differential.co.za

Address:

151 on 5th, Cnr 5th Street & Park Lane, Block B, Third Floor Sandown, Sandton, 2196 Postnet Suite 446, Private Bag X9 Benmore, 2010

Compliance officer name:

Johan van Zyl

+27 11 568 0925

Investment philosophy

Our investment philosophy is based on the view that investors set market prices based on their expectations of cash flow and risk. We believe that mispricing occurs because changes in expectations (and how these changes are incorporated into prices) are imperfect. We focus on three sources of market imperfection:

Information Asymmetry: Although investors are ultimately privy to the same set of information, there are differences in the extent to which different investors make use of the available information. For instance, at a micro level, many retailers publish their catalogue of prices on their ecommerce websites, yet the market is still routinely surprised by the price inflation realised by these same retailers. The same asymmetry exists at a macro level: by aggregating the prices across multiple food retailers, investors would be able to better anticipate inflation for various components of the CPI basket. This asymmetry is partly a function of the fact that most investors do not continuously harvest the pricing information published by retailers. This is due to a number of reasons – some retailers do not have the technical and financial wherewithal to harvest this information, while others adopt an investment style that does not focus on short-term earnings surprises (e.g., long-term deep value investors).

This creates an opportunity for investors who can harvest and use more information than others. Therefore, Differential Capital has invested time and resources into ensuring that it has access to more information than the typical investor and incorporates this information at both a micro (company-specific) and macro (overall portfolio positioning) level.

Processing Asymmetry: There are material differences in the readiness with which different investors can incorporate and act on new information. For instance, it might take some time for an analyst to accurately decipher what a surge in money supply might mean for a retailer’s margins, or, even simpler, what a change in the price of oil should mean for the price differential between two oil producers. It might also take some time between when an analyst has formed a view based on a new piece of information and when that view is traded into the portfolio. These differences in processing speed exist for a number of reasons – including the fact that some parts of the work of an analyst can be automated (e.g., models can be used to continuously assess whether changes in the prices of two oil producers are congruent with the fundamental features of the two companies) and the bureaucracy and lack of nimbleness that often comes with large asset managers.

This creates an advantage for asset managers with superior processing power and organisational nimbleness. Therefore, Differential Capital has developed systems to assist analysts in analysing the impact of new information on the investment universe.

Preference Asymmetry: Investors operate with vastly different preferences and mandate restrictions. Examples include the fact that value managers prefer “cheap” stocks and the fact tracking error limits sometimes mean that investors cannot fully express their views. We believe that these restrictions have the potential to product mispricing and delayed reaction to information. For instance, a value manager may be reluctant to incorporate “expensive” growth stocks even if the macro is conducive for the stock. Similarly, an investor may be unable to act on new information and buy a given instrument due to tracking error constraints and concerns. These can lead to a protracted absorption of new information as expectations change in response to information (both macro and micro).

The mispricing created by this asymmetry creates opportunity for style-agnostic investors that are nimble enough to incorporate new information as it arrives. Therefore, Differential Capital’s investment process aims to capture how macro trends and data points influence different types of sectors and styles, while also allowing for the impact of micro data points on specific investments.

Who is your FAIS complaints officer?

Vincent Anthonyrajah (COO/MD)

Please provide the link to the complaints policy on your website: https://www.differential.co.za/policies

What is the ownership structure of the company?

Vincent Anthonyrajah: 25%; Sam Houlie: 18%

Musa Malwandla: 15%; Naeem Badat: 7%

Other Founders: 10%; The Standard Bank of South Africa: 24.99%

Who are the directors of the company?

Vincent Anthonyrajah, Sam Houlie, Musa Malwandla

Do staff and management have an interest in ownership?

Please provide the percentage held by staff and management:

Staff and management collectively own 68% (excluding Naeem’s 7% shareholding).