RYK VAN NIEKERK: Welcome to this Market Commentator podcast, it forms Moneyweb’s series of interviews with leading investment professionals. Our guest today is Karl Leinberger, he’s chief investment officer of Coronation Fund Managers. Karl, welcome to the show, there seems to be a lot of volatility in the market at the moment, it has been pretty volatile for quite a while, what is your take on what is currently happening?
KARL LEINBERGER: I think that our key view is that we think that assets around the world, with one or two exceptions, are very expensive. We’ve had six or seven years now of anywhere between cheap and free money, and it’s done the job which it was intended to do, which is to reflate markets and increase asset prices and increased risk appetite. All of that has happened and a lot of money has been made by people in the world in most assets and I think that we’ve reached the point now where assets are expensive and certainly in the funds we manage we’re very conservatively positioned. I think that the key job is to preserve the very real gains that have been made in the last five or six years.
RYK VAN NIEKERK: So are you adopting a more defensive strategy?
KARL LEINBERGER: Yes, both within our security selection, so stock picking within equity funds and within our asset allocation, in all of our asset allocation funds we would be very conservatively positioned.
RYK VAN NIEKERK: But are you actually reducing your exposure to equities?
KARL LEINBERGER: Yes, we’re at the low end of our historical equity exposure in most of our asset allocation funds and then the underlying security selection with that is also conservative. So I think the fund overall is particularly conservatively positioned.
RYK VAN NIEKERK: What do you think will play out? A lot of people predict quite a sharp correction, others predict a volatile sideways pattern, how do you foresee the short and medium term performance of the market?
KARL LEINBERGER: I think our strength is that we don’t even apply our minds to that, one just doesn’t know. What we spend a lot of time thinking about is just making sure that we’re right, that assets are expensive and if we think that that’s the case then we will cut exposure and wait for time to pass. I’ve got no idea what will crack this market, it’s been incredibly strong for a long time, for many years, it’s been a bull market that’s really climbed a wall of worries. But assets are expensive and time and time again we’ve seen that if you own expensive assets you’re going to pay eventually and that’s all we’re really concerned with.
RYK VAN NIEKERK: How do you gauge the views of your investors? Coronation has done phenomenally well over the last few years and if you are correct those returns will taper, how do you manage your relationship with your investors? How do you just taper their expectations?
KARL LEINBERGER: I think if you want to tell someone something that they don’t want to hear and you want them to believe you, you’ve got to tell them that a lot of times and that’s been our strategy. For two or three years we’ve been warning our clients of lower returns and higher inflation and it’s not a story they want to hear and also it hasn’t come to pass. I think a lot of people are disregarding that message but we’re consistently giving that message to clients and giving the consequences of that for drawdowns and other things they need to think about in the way they manage their affairs. I think that if you give them that message enough times you will succeed to some extent in managing expectations, and that’s all you can do as a fund manager.
RYK VAN NIEKERK: Your flagship fund is the Coronation Balanced Plus Fund, it has more than R80bn in assets, it’s a big fund, it’s probably one of the biggest funds in the country, is it difficult to manage a big fund in such an environment?
KARL LEINBERGER: Well, I think in all environments larger funds are challenging to manage but I think the key point for us is that we’ve always been a large manager, we’ve always run large funds and we’re accustomed to it and our track records have been built with that kind of size of assets under management. So I think if you’re going to manage a large fund with a short time horizon, in other words you’re going to try and trade markets and build portfolios on one-year views of asset classes I think you’re going to get carried out. But if you manage money as we do with a five to ten-year time horizon then I think it makes it a lot easier to manage a large fund like that.
RYK VAN NIEKERK: The holdings of that fund is Naspers is still a big holding in that fund. Intu and Capital & Counties are also significant counters in the international property sector. Is that currently a focus area for you?
KARL LEINBERGER: Well, we’ve actually been very heavily invested in international property in the last five or six years and a lot of that has been reduced now, to the extent that we’re really only left with German residential property, the two stocks you’ve referred to and then we’ve got a holding in a Brazilian property stock that we like. So we do have exposure and it’s fairly meaningful but it is a lot lower than it has been in the last five or six years because global property has done so well.
RYK VAN NIEKERK: Naspers, the favourite of the JSE, a lot of different views on it, what is your view?
KARL LEINBERGER: We’ve been an anchor shareholder there for all of the last ten years and we’re one of their largest shareholders. We are great believers in the assets and the management team. As the share continues to power ahead it becomes more difficult to find value, so we have taken profits quite meaningfully over the last year in the counter but it remains a big position. We still think that if you ignore the underlying assets and add up the values of the assets as we would value them we still find some value and that is important in a market as overvalued as the JSE is today. So we think that rich reward is still in your favour but it obviously anything like as compelling as it was several years ago when our weightings were actually higher in it.
RYK VAN NIEKERK: And Anglos, the commodity sector has shown some life, it’s definitely not out of the woods yet but how do you view the commodity sector?
KARL LEINBERGER: Ja, I don’t think we’re out of the woods at all, we certainly are bracing ourselves for a multi-year tough period in commodity markets, most markets are fundamentally over-supplied and they all depend on Chinese demand, which has quite big question marks over it. So our holding in a company like Anglo American is not premised on the industry coming right in the next year or two, it’s premised on fairly significant long-term value over a five-year time horizon, which is how we value assets and build portfolios. I think if one owns commodity shares, one shouldn’t be doing it on the expectation that markets have bottomed and it’s going to get easier and you’re going to do really well in the next year. That isn’t our thinking, we just think that there is compelling long-term value, many of these commodity shares are down 50%, 60%, in some cases 80%, 90% from the highs six years ago when everyone wanted to own commodity shares and we argued strongly against owning commodity shares. So we think this is the time to own commodity shares, not six or seven years ago.
RYK VAN NIEKERK: And the counters that you like, Anglo or any others?
KARL LEINBERGER: Anglo and the platinum shares, we think that the platinum shares have been in a down cycle for longer than most of the other commodity shares, we think that prices are at industry cost. Whereas a lot of key commodities like oil and iron ore are substantially above industry cost, which means that there cannot be much more downside in the PGM prices in our view. We think that the long-term fundamentals are good, these markets are in deficits and those deficits we think will increase over time. We think people have given up because nothing has happened for two or three years but we have a long time horizon, we’re completely happy to wait. If we think the underlying fundamentals are as strong as we think they are we will wait patiently.
RYK VAN NIEKERK: You also have a significant stake in Steinhoff, it has done really well over the last 18 months or so but there is also this European listing on the cards, do you think that could influence the value even more?
KARL LEINBERGER: For us it wouldn’t meaningfully influence the value of the company because we value cash flow streams and earnings streams but I wouldn’t be surprised if the market takes it higher on that listing. There are technical factors such as the fact that you open yourself up to different investor bases, which does influence the pricing of assets. Our internal valuation process wouldn’t meaningfully change the valuation of any of those earnings streams but I wouldn’t be surprised if it does help the company.
RYK VAN NIEKERK: Just lastly, the corporate bond market, Magda Wierzycka from Sygnia made an interesting statement this week and she said that the corporate bond market is frozen following the demise of African Bank, she says you can buy corporate bonds but you cannot sell it, do you agree?
KARL LEINBERGER: I think she’s referring to the secondary market and that is right, we’re noticing more trade starting to go through in the last few weeks. But I think that for long-term investors what you’re seeing in the credit market in South Africa is really great news because credit spreads went to very unhealthy levels, very low levels, when risk appetite was stronger 18 months ago and what you’re finding now is those spreads have opened up very nicely, risk/reward is much more skewed in your favour as a holder of credit bonds. So we think it’s a time of opportunity right now.
RYK VAN NIEKERK: Are you actually buying corporate bonds now?
KARL LEINBERGER: Yes.
RYK VAN NIEKERK: Karl Leinberger is chief investment officer of Coronation Fund Managers.