The importance of risk management in the investment process

BY NOMATHIBANA MATSHOBA CFA, Managing Director, Terebinth Capital

Terebinth Capital is a Cape Townbased, 100% manager-owned boutique asset management company. It is a B-BBEE level two company focused on treating customers fairly, advancing female and black talent, and creating a work environment that allows employees the freedom to thrive. These objectives are strengthened by solid processes and procedures that rival some of the bigger firms.

Our investment philosophy is anchored on the interaction between macro-economics and quantitative research and modelling, with the aim of understanding the link between interest rates and inflation. The growth of the assets under our management is ensured by our macro-economic approach that allows us to implement replicable strategies in the deepest and liquid parts of the income universe.

As a boutique firm, with a scalable, repeatable and, very importantly, transferable investment philosophy, supported by solid processes and procedures, we set an environment for young talent to craft their path independently and proficiently. This debunks the notion of key-person risk as commonly assumed within most boutique firms. Risk management and compliance is a standard requirement for any investment firm, irrespective of size. Therefore, with risk management and compliance central to our overall investment approach, all processes are adequately documented. To illustrate, our investment ideas are interrogated by the whole investment team and the implementation of ideas is documented to ensure adherence to pre- and post-trade compliance checks. These archives are available to the whole investment team, with documentation of all trades in a blotter for each fund, to allow junior team members to assess the actions of the more experienced members of the team.

This investment approach has ensured that all our funds consistently perform competitively in their respective categories. Most allocators argue that historic performance matters but is not a guarantee of future performance. Therefore, a thorough interrogation of strong historic performance, to test for repeatability in the future, should confirm the potential investment case.

We outsource non-core functions to the best-in-class service providers in their respective fields. As a boutique firm, in an environment of declining fees, we understand that the responsibility still resides within our small but knowledgeable team. However, it is not uncommon to find boutique firms that are efficiently run from an operating cost perspective. We believe that the outsourcing model allows the team the best possible opportunity to focus on what we deem important to our business – treating customers fairly by dedicating the maximum amount of time and resources to the market.

The environment for boutique firms has evolved, given the key focus on risk management and compliance. This can only be achieved with scalable, repeatable and transferable systems and procedures. At Terebinth, risk management is central to our investment process – an objective we achieve without altering who we are at the core.