Kela Securities Partners with Mill Street Research: Expanding Opportunities in the Market

Lesedi Kelatwang, CEO, Kela Securities The solution that we have, or this partnership, came about as a result of client demand, local client demand. So what happened is with REG 28 changes allowing local pension funds to invest more money offshore, some local asset managers found themselves with both an opportunity and a problem. The opportunity lies in the fact that they get to manage offshore money or more offshore money, but the challenge is that as much as some of these asset managers are well-versed with the South African market, when it comes to the global stage, they need a bit of assistance. So it's on that basis where we actually started speaking to Mill Street Research and some of the employees at Mill Street Research actually come from Credit Suisse, so it was a natural conversation. So in essence, here's the challenge, some of the local asset managers need a bit of help going offshore, so let's partner, let's assist these local asset managers, that's how the partnership came about. So with respect to how we intend to assist the local asset managers, so Mill Street Research, they've got a fantastic quantitative research product. In essence, to put it in very simple terms, what they do is using a range of components, essentially they rank global stocks. So they currently look at 6,500 companies globally, and using factors such as fundamental momentum, price momentum and valuation, they rank these companies. So there's the top-down approach, which is where you look at the bigger picture, should you be in equities versus bonds, should you be in mid-caps versus large-caps, and then there's the bottom-up approach, which is where you look at the individual stocks, and then obviously the idea is to put this whole picture together and come up with an investment strategy. So where this adds value to the local asset managers is that because of the ranking, in essence it filters or it selects stocks which are deemed to be more favorable or which are likely to outperform, and then also ranks stocks which are least likely to outperform. So then it helps the asset managers in terms of trade idea generation, it helps the asset managers in terms of validating the existing trade ideas, and then also it assists them with assessing their current portfolios. So for instance there might be stocks which this product might imply that you need to lighten up on, and also at the same time there might be stocks which you should actually be adding to your portfolio. So in essence it's a very neat tool which is used, which is highly regarded by some of the global asset managers, and is intended to assist the local guys better do their job. I'm certainly hoping that we'll be able to bring them on board from time to time and we can speak about those broad asset strategies that you are talking about. And what's been take up like? It's been well received. There's strong demand, because of this push to move money offshore, yes I mean there's strong demand for these type of products, and there are very few reputable offshore providers for these type of services, so it's been very well received. Because I was going to ask actually the question, who are these guys? Because I see here you say they've been in business over 25 years and we're talking broad strategy analysis as well as insightful commentary. What do they bring for that investor who is looking at this kind of opportunity? Yeah, so I mean as I mentioned... Maybe a little speak to their reputation here. Yeah, so I mean in essence, I mean to put it in simple terms, these are individuals that work within the large international investment banks, and at some point I mean like most entrepreneurial people do, they decide that you know what, we can actually do this on our own, and that's essentially the history behind Moor Street Research. Like I said I mean some of my, how that relationship came about is because some of my former colleagues at Credit Suisse actually moved to Moor Street Research in essence. Yeah, and these guys are experts including of course in the US as well. Alright, okay, let's talk about Kela though, because you are growing. As I said, we had our conversation here when you teamed up with the Credit Suisse guys, and here we are now talking about more expansion of the product offering that you have into the market. Let's talk about where that's going. Yes, it's going very well. So there's two key products that we'll be launching over the next couple of weeks. The first one is around script lending. Look, globally script lending is a norm, but in South Africa it isn't really taken off, right? So there's a whole host of reasons for that, but then our goal is to increase the education around script lending. Yeah, I was going to say actually what is it? Is it education? Yes, I think it's mainly education and it's also, I mean, South Africa, I mean, for the lack of a better word, tends to be a bit captured if you want to call it that way. There's few institutions that dominate the whole space, and then in terms of the fees that the end users tend to receive, you know, are not really fair from that perspective. That's where we see the opportunity, right? Where we can actually pay a bit more to the pension funds. So it's education and also there's this perception that there isn't money to be made within script lending, whereas in reality there is quite a bit of money to be made. I like the concept because the people who are at CNBC Africa, we've done a little study and we have established that we've got young people who are trying to tiptoe into the markets and understand, then of course you've got your professionals. Well, it's a bridge between the two, but I want to talk to those guys who are trying to understand what script lending potentially might be. Okay, so it's all stems from short selling, right? So short selling in essence, so if you want to make, let's say if you think a company, the price is going to go up, what you would do is you'd buy the company at the lower price, you'd wait for it to go up, then you'd sell, make your profit. So now what happens if you think the share price is actually going to go down, right? So if you own the shares, the prudent thing to do would be to sell the shares, right? And then maybe buy them back at the lower price. But then what happens if you don't own the shares and you think the share price is going to go down and you want to make money? So that's where you go to somebody that's a long-term holder of the shares, like a pension fund, and you borrow those shares from them. And then now once you borrow them, the shares are in your name, so then you then go into the market, sell those shares, wait for the share price to go down and buy them back, bank your profit and then give them back to the pension fund. So it's win-win, right? Because the pension fund doesn't care about a 30-day price correction, they care about the 30-year story, whereas like your hedge funds, they care about what's going to happen tomorrow to the share price. So it's win-win. And to be clear, of course, we're not providing advice here. We are talking broad terms about the things that are out there in the market, but you're also thinking derivatives trading. That's where the huge opportunity lies. The reason for that is because the space is dominated by the banks. Reason being, of course, in order to dabble within that space of derivatives trading, you need a lot of capital. That's why it's mainly the banks that play in that space. And also, you need the expertise. So within Gela, we are fortunate in that we've got the expertise, but then the issue was the capital, right? So finally, we've finally managed to get a very decent backer of our product, which will allow us to actually launch the product. So where the opportunity lies, right, is that because it's dominated by the banks, banks tend to be in a comfort zone, right? In that, you know, they're making a billion rand here, a billion rand there, et cetera. So, I mean, all these low opportunities that fall below, let's say, a hundred million rand per annum, the banks tend to overlook them. Why? They're making so much money here and making so much money there, et cetera, right? And because of those dynamics, you end up in a situation where within derivatives trading, because those opportunities, they fall below the threshold, banks typically do not service that area, right? For them, a hundred million rand is not a lot of money, whereas for us, Gela, a hundred million per annum is a lot of money, right? So that's where we see the opportunity to actually dabble in that space where the banks are not really keen to play, because, I mean, it's an opportunity for us. And so we expect to go live within the next couple of weeks. Okay. We will walk with you that journey. Since I have you here, we've got to talk, of course, about the markets and talk a little bit about this whole political situation where we landed up in, in South Africa, where we are looking for a government of national unity that's proving to be difficult to establish. But from a trading perspective, what kind of challenges does that present or opportunities? Yeah. I think, talking to certain political parties and also certain asset managers, right? So the sense that I get is that we don't really have an issue when it comes to policy. The main issue that you have is around perceived corruption. This is from a markets perspective? Markets, yeah, markets, and also it's something that's validated by the political parties, right? We're saying, look, it doesn't matter whether, you know, we've got a different policy to the ANC, what the people want or what the market wants is how you're going to tackle corruption, right? Yeah. So if you want to make a call, in my view, right? If you want to make a call on South Africa, that's something that you've got to look out for, right? Will this GNU translate to lower perceptions of corruption? If the answer is yes, then yes, buy South Africa, buy the RAND, right? It's not that the RAND is a card-carrying member of the Democratic Party. Look, the RAND approves of this perception of lower corruption, essentially, right? So I guess then, yeah, with that said, maybe it implies that the DA is perceived to be hard on corruption, yes. So, I mean, one thing to look out for, especially for the GNU, right? If you see strong action towards individuals that have been implicated in corruption, if you see strong action from the state on their front, that's a very, very bullish sign. It's a positive sign. The other perception, of course, is that in this environment, for you guys who are the traders, the volatility is good. What kind of volatility have we seen here? Well, with the RAND, the RAND has been very volatile. Extreme. Yeah, it's been, it's higher than normal. Yeah. What does that create, though, in terms of trading opportunities? Is that simply just riding the different peaks, or is that more about actually managing your risk as well? Yeah, so, I mean, look, historically, high volatility implies high uncertainty, right? So, yes, as much as from a trading perspective, it creates opportunities, etc., it's a good thing. But then, at the same time, let's not forget that the high volatility is a function of high uncertainty. Right. So, you want to eventually end up in a place where there's low volatility. And also, low volatility does translate to high share prices. Historically, yes, if you look at periods of high share prices, where the markets are falling. Because of low volatility. Yes, low volatility implies high share prices. High volatility implies uncertainty, hence lower share prices. So, over long-term, yes, you want to see low volatility. I'm going to ambush you a little bit. So, a few months ago, the JSC coming up with a slew of reforms to try to get more listings on the JSC, and we're beginning to see some action on that front. Just your thoughts in terms of what the JSC is trying to do, and the kind of, you talk to the people who are doing the deals behind the desks, the kind of activity we're seeing on that front. Yes, yeah, unfortunately, I mean, over a period of years, we have seen more and more companies delisting from the JSC. Ultimately, from a transparency perspective, you want more companies than less to come onto the JSC, right? And also, I mean, the cynic as well would argue that, yeah, the reason that some of these companies actually delisting is because of the higher scrutiny. Maybe they want less scrutiny, right? They want less transparency. Exactly, yeah. But the other argument is that, you know, the cost of being listed is much, much higher, right? Because, I mean, in terms of what the JSC requires of you, the associated costs with that versus the benefits, some people view it as it's better to just be unlisted. Another day. Let's continue that conversation. Lesedi, thank you very much. Indeed, that's Lesedi Kelatang. He's the CEO of Kela Securities.

CNBC Africa’s Godfrey Mutizwa is joined by Lesedi Kelatwang, CEO, Kela Securities for this discussion. 

Kela Securities partners with Mill Street Research

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