This article was first published in the second-quarter 2013 edition of Personal Finance magazine.
This year, Coronation won the Raging Bull Award for the Management Company of the Year for the fourth time, based on the performance of all its funds under management for periods to the end of 2012.
It claimed the award previously in 2003, 2005 and 2006, and has been among the top three management companies eight times in the past 12 years.
Coronation has consistently collected Raging Bull awards and certificates for its funds since 2001, and this year it received the Raging Bull Award for the Best Domestic Asset Allocation Prudential Fund (on a risk-adjusted basis over five years) for its Balanced Defensive Fund.
Throughout the years, Coronation has stuck to its investment philosophy, consistently telling its investors that it is a long-term investor that invests when valuations (price relative to fundamental value) are attractive. That means it identifies shares, bonds and other assets that are trading at a discount to the long-term value of the business, known as fair value.
Coronation’s long-term approach also means that it considers the earnings it can get for you from shares or other assets throughout the economic cycle – what it calls normalised earnings – rather than focusing only on forecasts for the next year or two. Consequently, Coronation is referred to as a bottom-up manager: it selects shares based on their valuations and on the fundamentals of the company.
Coronation began in 1993, when its four founders and 16 of their colleagues left Syfrets Managed Assets. It launched its unit trust business in 1996 and was then one of few managers not connected with a large life assurer. It has since grown into a fairly large manager and in 2003 it listed on the JSE. It has remained focused on managing investments, however, and has not diversified into other financial services.
When successful small managers grow larger – Coronation now has assets of over R375 billion – they are often accused of losing their ability to invest well. Last year, Coronation took measures within its institutional business to protect future returns. The company closed its domestic equity portfolios to institutional clients in March 2012 and its Balanced and Absolute Return product ranges at the end of last year.
Coronation manages its foreign and offshore funds from South Africa and has 63 investment professionals among its 218 staff. In its 2012 annual report, Coronation boasts that these professionals have, on average, 11 years’ experience in the industry and seven years with Coronation.
It incentivises its staff by linking bonuses to the strength of the company’s investment performance and retention of clients. Some 30 percent of the company’s pre-tax profit is used to reward staff for their contribution towards the success of the company and to allocate investments in Coronation shares and unit trusts to staff, which vest over a number of years.
Personal Finance put some questions to Coronation about its recent good performance and how it manages investments. Pieter Koekemoer, head of personal investments, responded.
Personal Finance: Coronation has a great track record; what does it do that other managers do not to produce such consistently good performance?
Pieter Koekemoer: Fund management is a competitive industry and it is easy for clients to switch from one manager to another. However, outcomes should be measured over the long term, as most investors – especially those saving for retirement – have a multi-decade time horizon. Achieving consistent competitive advantage starts with remembering that earning the trust of your clients is a privilege, not a right. That is closely followed by the need to employ a robust investment philosophy.
At Coronation we believe in evaluating investment opportunities based on the normalised cash flows a particular security can be expected to produce over time (five years or longer). This provides a competitive edge in a market that is typically more focused on what will happen over the next 12 months. We combine this with reliance on our own proprietary research covering all the major global asset classes.
Finally, we are an independent fund manager focused solely on managing our clients’ assets, which means that we stand or fall by the results produced for clients and reduce the potential for conflicts of interest.
PF: As an active fund manager, Coronation must assume that the market is inefficient. Where are the inefficiencies in the market currently and how do you take advantage of them in your funds?
PK: We believe that time horizon is the key exploitable inefficiency in the market. Corporate management teams, analysts and most fund managers face significant pressure to focus on the quarter, the half-year, or the financial year’s results. When fund managers produce disappointing short-term performance, the pressure on them to change the composition of their portfolios is intense, as they may lose clients. A long-term approach is possible only if your clients are prepared to give you the benefit of the doubt.
Taking a generalist approach, in which you consciously build capacity to evaluate opportunities across asset classes and geographies, is also useful, as this provides more perspective on the relative value of different securities. It also makes it easier to evaluate how to best use “in-the-gap” asset classes, such as corporate credit and inflation-linked bonds.
Our current views on the best available opportunities are reflected in the composition of our multi-asset portfolios: overweight in global exposure and underweight in local equities and listed real estate, with a preference for commodity rather than consumer stocks within South African equity, and with virtually no exposure to traditional long bonds, both here and abroad.
PF: Coronation states that it is a “high-conviction” manager. What does this mean in relation to the number of securities held in your different portfolios and the asset allocation calls the manager makes?
PK: We use the term in two subtly different ways, describing portfolio actions and their outcomes.
Our portfolios tend to be more concentrated and less benchmark-orientated than the norm. Our flagship equity fund, Coronation Top 20, won’t own more than 20 of the 50 largest companies listed on the JSE. The average local general equity fund holds 50 or more shares. Another example of a portfolio that is very different to the benchmark is our Coronation Global Emerging Markets Fund, which holds only seven percent of the 821 companies and only one of the top 15 companies included in its benchmark, the MSCI Emerging Markets Index.
In periods of short-term under-performance we continue to hold positions that are temporarily unpopular unless events lead to a permanent impairment of value.
A good example of this approach in action comes from the late stages of the commodities boom in 2007/8, when we had a strong preference for defensive businesses over commodity-producing companies, as we believed the latter to be grossly overvalued. For the year to the end of June 2008, Coronation Top 20 was nearly 17 percent behind its benchmark, the JSE Top 40 Index, and clients were questioning our positioning and putting immense pressure on us to increase our exposure to commodities.
But we stuck to our guns, and by December 2008 our decision had been vindicated: commodity company share prices halved and Coronation Top 20 outperformed its benchmark by nearly 15 percent for that calendar year.
PF: Coronation was always one of the first investment houses to take advantage each time exchange controls were relaxed and funds were allowed to increase their direct offshore exposure. If the National Treasury announced today that institutional investors could invest another five percent offshore, would you grasp the opportunity, and why? If yes, where do you see opportunities?
PK: While the rand has weakened by about 15 percent over the past 12 months, we still prefer offshore to domestic growth asset exposure. This argument is purely valuation based: local share and listed property valuations are typically full, while their global alternatives are much more reasonably priced.
We do not forecast short-term price movements, but do believe the rand is more likely to decline than strengthen over the longer term, given the unfavourable inflation differentials between South Africa and our main trading partners. Therefore, for portfolios with longer-term orientation, compliant with regulation 28 of the Pension Funds Act, and with larger-risk budgets, such as the Coronation Balanced Plus Fund, we would probably externalise the full additional five percent.
We might not be as aggressive in more conservative funds, such as the Coronation Balanced Defensive Fund, where the potential for short-term volatility would reduce the attraction of higher expected long-term gains in a fund in which investors expect positive returns over all 12-month periods.
We would continue to find opportunities in both developed and emerging markets.
PF: Coronation has reduced the fees on its Strategic Income and Capital Plus funds. Why only on these funds and not across the full range?
PK: We re-evaluate our fee structures at least annually to ensure they are reasonable. Performance in the unit trust industry is evaluated after fees, and our ability to outperform benchmarks and peers will be compromised if fee rates are too high.
Our fee philosophy for long-term, growth-oriented funds is to charge a below-market-average fixed fee with the potential to earn an above-average fee when we produce above-average results. An exception is the flagship Coronation Balanced Plus Fund (multi-asset high equity), aimed at pre-retirement savers, where we charge a below-average flat fee to keep the fee structure simple and the fund accessible to as many investors as possible. For lower-risk funds, where we have the dual objective of producing decent long-term returns and preserving capital in the short-term, fee structures also include discounts in periods where we fail to protect clients’ capital.
The fee reductions for the Coronation Strategic Income (multi-asset income) and Capital Plus funds were directly related to the current abnormally low interest rate environment.
Strategic Income is an immediate income fund, positioned as an alternative to term deposits at a bank. As such, this fund needs to produce a healthy premium relative to cash rates to remain competitive. It is more difficult for a market-linked income fund to achieve this in periods when interest rates are moving sideways or rising, which we expect to be the case for the foreseeable future. We therefore reduced our fee rate on this fund by 15 percent.
Capital Plus is aimed at early-stage retirees who need to draw an income from their retirement capital over an extended period of time. Our message to these investors is to expect lower returns than those historically achieved, and we felt it was appropriate to reduce our margin expectations accordingly.
We have, in the past, also reduced the fees applicable to other funds, including our money market fund, our flagship equity fund (Coronation Top 20) and our flexible fund aimed at discretionary savers (Coronation Market Plus).
RAGING BULL AWARD WINNERS
At this year’s awards, for performance to the end of 2012, two of the 10 major awards went to Coronation. Personal Finance asked the other eight winners for a snapshot of the secrets of their success.
SASFIN VALUE FUND
Best Broad-based Domestic Equity Fund
(straight performance over three years)
Fund manager David Shapiro: I look for undervalued shares with a sustainable track record of good earnings. If a share’s price returns to fair value, but still has some momentum and will continue to deliver good earnings and dividends, I hold on to it. I replace it only if I find a better share in the market.
STANLIB BOND FUND (A)
Best Domestic Fixed Interest Fund
(straight performance over three years)
Fund manager Victor Mphaphuli: We are active managers that look for value-add opportunities arising from market inefficiencies. We maximise these returns in a risk-controlled manner. Our long-standing and tested investment philosophy and expertise enable us to invest with high conviction. The past three years’ returns were largely from positioning relative to the yield curve (the interest rates relative to periods to maturity of bonds) and an overweight position in corporate bonds.
OLD MUTUAL GLOBAL EQUITY FUND
Best Foreign (South African-domiciled) Equity Fund
(straight performance over three years)
Fund manager Ian Heslop: We use five themes to identify mispriced shares and turn the volume up or down on those themes as the market dictates. One of the themes is to invest when share valuations (price relative to fundamental value are low. But we also identify shares that will benefit from strong medium- and short-term trends, even though their prices do not reflect this; shares of companies that have strong growth potential; shares likely to benefit from information that has not yet reached the market; and shares of companies with a strong management team.
FRANKLIN GLOBAL SMALL-MID CAP GROWTH FUND
Best Offshore Global Equity Fund
(straight performance over three years)
Fund manager Edwin Lugo: The fund chooses shares on their fundamentals and their valuations, and we consider each share as if we were buying the business. Companies must have a long-term competitive advantage and a strong balance sheet. The portfolio is concentrated, with between 30 and 60 shares, but has low volatility because of a strong focus on avoiding shares that could under-perform.
REZCO VALUE TREND FUND
Best Domestic Asset Allocation Flexible Fund
(risk-adjusted performance over five years)
Fund manager Rob Spanjaard: The flexibility of small boutique, good stock-picking and high conviction are key. The fund invests in businesses that have a competitive advantage, will be in a good environment for the next five years, are well run and have expanding margins or sales. We favour mid-cap and large-cap shares over the more illiquid small-cap shares, so the fund can get in and out of holdings quickly. The fund holds only 15 to 20 shares in the portfolio.
MARRIOTT DIVIDEND GROWTH FUND
Best Domestic General Fund
(risk-adjusted performance over five years)
Investment team member Duggan Matthews: A focus on shares that produce reliable dividends for the right price delivers superior returns. The fund invests in industries with reliable income streams, such as banking, food, clothing, pharmaceuticals and telecommunications, while avoiding shares with unpredictable revenues, such as commodity and construction stocks.
INVESTEC GSF GLOBAL STRATEGIC MANAGED FUND
Best Offshore Global Asset Allocation Fund
(risk-adjusted performance over five years)
Fund manager Philip Saunders: The fund takes into consideration both macro-economic factors and factors that affect individual shares or securities, and each asset class is managed by an expert. Investec’s 4Factor approach identifies companies that have created shareholder value in the past, offer good value and have improving profit forecasts and strong share prices. The focus on specific securities is complemented by themes that are identified as likely to do well.
LLOYDS TSB
Offshore Management Company of the Year
(risk-adjusted performance over five years)
Country manager for South Africa, Ryk Becker: Lloyds funds are managed by the Scottish Widows Investment Partnership (Swip), one of the largest asset managers in Europe. Swip believes in using research to ascertain the true worth of an asset and makes the most of assets identified as mispriced – often because short-term factors eclipsed medium- and long-term influences.