RYK VAN NIEKERK: Welcome to this Market Commentator podcast. It’s my weekly podcast where I speak to leading investment professionals. My name is Ryk van Niekerk, and my guest today is Sara-Jane Alexander of Coronation. She has been in the investment business for nearly 20 years and co-manages several funds at Coronation, including the Balanced Plus Fund and the SA Equity Fund.
Sarah Jane, thank you so much for joining me. I looked at the Coronation website, and it’s very evident that the majority of your funds are co-managed, so you don’t have individuals taking responsibility for managing individual funds. Is this a Coronation strategy?
SARA-JANE ALEXANDER: I think this is something that has sort of evolved over the last years. There’s a lot of depth in the team and I think that reflects some of that, and we try to create some sort of robustness of debate as well. So I think the co-managed model is great for increasing the sort of accountability and ownership of these funds, and really driving the debate within those funds.
RYK VAN NIEKERK: Are there big differences between different individuals?
SARA-JANE ALEXANDER: Coronation largely all feeds off one research process. So all of our funds would have access to the same research, and a lot of the debates would really take place when that research is being done – between the analysts and weekly meeting, and between the portfolio managers themselves. It’s not to say that there are no differences but, because you have a sort of single-research process really driving that debate and feeding those views, the funds and the views are more similar than they are different.
RYK VAN NIEKERK: Let’s look at the market and let’s start with what has happened recently. It’s evident that the interest-rate cycles – in the US at least, and in South Africa as well – have bottomed out, and we probably won’t see any significant, further cuts in interest rates, if any. Has that changed the way you look at the market, both locally and potentially internationally?
SARA-JANE ALEXANDER: We still expect pretty lacklustre demand out of South Africa. So I wouldn’t necessarily call the bottom here, just given [Thursday’s] decision. Our valuation methodology is always to try and look through the cycle. So when we think about buying an asset class or an equity, we’re trying to look at the sort of cash-flow stream that we think we’ll get out of that asset over the next three to five years. And so, as a result, we don’t really change things around a lot because of a movement in the interest rate. We try and look through some of that short-term noise and volatility.
RYK VAN NIEKERK: What are you looking at currently, because valuations based on potential earnings do not seem to be high on the valuation agenda.
SARA-JANE ALEXANDER: I think we are still seeing a lot of opportunity. We’ve got pretty reasonably sized exposure to equities – that’s where you started. If you look at the local market, I think we’re actually struggling to balance the number of buy ideas and the funds. You know, we still have resource shares that trade here, that trade on single-digit multiples a couple of years out, with strong free cash-flow profiles. We’ve got a number of global stocks that happen to be listed in South Africa. We also have attractive growth prospects for their own reasons, whether we talk about something like a Naspers or a Quilter in the UK.
And then there are some of the SA stocks that are starting to look cheap. We’re not buying them wholesale.
We think that there are risks, but we think that there are also resilient business models within South Africa that will continue to thrive, even in a tough economy, and I would put some of the food retailers into that bucket.
So we are certainly not short of ideas in an equity market.
Then, if we look outside that at some of the other asset classes, we see the kind of yields that South African bonds trade on today. Those have very attractive returns, even compared to equities on a multi-year view. That doesn’t come without risk, but we think those returns do look attractive.
RYK VAN NIEKERK: I’m looking at the fund fact sheet of the SA Equity Fund, and it’s very evident that you are looking at big international companies with not insignificant exposure to the local market. Naspers is the top holding at nearly 17%. Then it’s Anglo American, British American Tobacco, Quilter, Prosus. And in the sixth place you only get to RMB Holdings and then Aspen, Bidcorp, Impala and Shoprite. So there’s definitely a bias towards big international companies, as opposed to the so-called SA Inc stocks.
SARA-JANE ALEXANDER: That’s definitely true. Within the South African equities we have held the sort of global stocks that happened to be listed here in size for some time now. And even if we go back to pre-Covid, that goes to our concerns on the South African economy and the lack of growth that we’ve had here. South African businesses generally face very high structural inflation year after year, whether it’s rates or wage increases. And, as a result of that, we’ve worried for some time about their ability to grow earnings in this environment.
As I said, we do have a number of global businesses that are listed here which, for individual reasons, look very attractive. So the fund is overwhelmingly exposed to those with a local equity component being just under 30% of that equity bucket.
RYK VAN NIEKERK: Who should invest in in this SA Equity Fund, because South African equities have performed dreadfully over the last five years compared to international performances. Who do you think should look at this fund, and not maybe select a more internationally exposed fund?
SARA-JANE ALEXANDER: I think it’s definitely true that’s South African growth asset classes have had a very disappointing five-year view, but we think for people who live here and have exposure to this economy, there is a role for South African equities in their portfolio. They do offer protection against longer-term risks like inflation. And that remains no different today – albeit we’ve had a few tough years.
RYK VAN NIEKERK: How actively do you trade in this fund?
SARA-JANE ALEXANDER: This has been an unusually active year, just because of the size of some of the price dislocations. We respond to valuations and, when stocks sell off meaningfully, that obviously creates an opportunity to add to ideas. So certainly during this crisis we’ve put some new names into that portfolio. Those global stocks that you mentioned, though, have been the cornerstones of this portfolio for a very long time. There’ve been those positions in Anglo American, or Naspers in the portfolio for several years.
But we were also able to add what we think is a really good quality business like Bidcorp, which sold off very meaningfully as there were fears on out-of-home consumption and how much of that would continue. Covid obviously it had a short-term impact on people’s ability to eat out of home, but we’ve certainly see no change in the desire to eat more meals out of home longer term. So we have had the opportunity during this crisis to add some names to the portfolio.
RYK VAN NIEKERK: It is also interesting that in the top 10 holdings of the fund, I don’t see any banks. The banking sector seems to offer some value.
SARA-JANE ALEXANDER: We do own the banks. We own FirstRand, which we think is, again, a good quality business within its context. We think it’s done extremely well in terms of its investment into its digital capability that it offers its customers over the past few years. And we think that its strength is really reflected in its ability to continue to add customers.
Unusually for a South African bank, this has been a bank that’s really focused on growth to drive down its cost-to-income ratio. So we do own FirstRand.
RYK VAN NIEKERK: Let’s look at the Balanced Plus Fund. This is a big fund within Coronation – over R18 billion invested in there, and it does outperform the benchmark. Tell us about this fund.
SARA-JANE ALEXANDER: Balanced Plus is our multi-asset portfolio. It’s invested across the asset classes. When I was talking earlier about the bond positions, this is what I was really talking about. We actively allocate across those asset classes and take a view on the long-term value they offer. And I think this fund has really had an interesting year when we look at some of the behaviour in markets and some of the changes in asset pricing.
So here we took quite active views quite early in the crisis, putting protection into these funds, given the high equity exposure that we had coming into this year, We felt that equities were undervalued, but obviously couldn’t forecast anything like the kind of crisis that we saw at the beginning of the year. So we did actually put protection into these funds and also took it off quite close to the lows. So that helped the fund that was otherwise part long-equity going into a crisis. And so we then increased exposure, and that has obviously done well for us this year.
RYK VAN NIEKERK: I see, if you look at the top 10 holdings, Naspers is at the top again, around 6% of the fund. Then a few international companies, Egerton, Maverick Capital, Anglo American plc, British American Tobacco. So very similar thinking in this fund – especially in relation to equities – to that in the SA Equity Fund.
SARA-JANE ALEXANDER: The domestic equity portion of this portfolio would look just like the SA Equity Fund. You’ll get exposure to the same sort of best ideas out of South Africa. And then, in addition to that, you have exposure to our International Fund of Funds. So that’s where some of the best fund managers that we have, have exposure to globally what you would get exposed to through this fund.
RYK VAN NIEKERK: And 20% of the fund is invested in bonds. What are your views on the prospects of bonds?
SARA-JANE ALEXANDER: I think bonds are probably one of the areas that we have the most robust debate about at the moment, just given the very attractive returns they offer. But, as you all know, that’s not without risk and there’s certainly a view by the market, or increasing doubts on the ability of government to pay some of this debt. We think the yields are extremely compelling. If we go back a year ago, cash was offering a reasonable return.
But, when we look at the low cash yields that you have today, being able to get about a 10% yield from a bond, if you hold that to maturity, is certainly very attractive.
RYK VAN NIEKERK: Indeed. But there’s a lot of uncertainty around. Is now the time to be aggressive or to be conservative?
SARA-JANE ALEXANDER: I wouldn’t put the positioning down as aggressive. I think we need to think about risk when we put anything into a portfolio like this, and we certainly do that. And that comes through the sizing of the position, as well as where you buy exposure on a curve, and the types of exposures that you buy. As I said, we do think there’s a balance to be struck here between risk and return. And we hope that comes through in some of the portfolio sizing. Bu we certainly don’t think a 10% yield can be ignored. That’s a very handsome return to earn in the coming years.
RYK VAN NIEKERK: It’s not a Regulation 28 fund, and you have around 35% of the assets offshore. How does that 35% compare to previous levels?
SARA-JANE ALEXANDER: One of the other areas that we added to in the crisis was we meaningfully increased the global exposure of this fund. So again, we went into the pandemic probably too light in terms of our exposure to global equities. And, as they sold off, we added to that just on our view that developed markets would be far more resilient coming out of this than the domestic market. So we did, we did tilt that more towards global equities, and we also do have a small exposure to Africa in there.
RYK VAN NIEKERK: Do you have exposure to the Fangs [Facebook, Amazon, Netflix, and Google]?
SARA-JANE ALEXANDER: There will be some exposure through those underlying managers, but I would emphasise that, you know, when we speak to our global managers, they remain extremely excited about the number of opportunities in their respective markets. And I think, a bit like in South Africa, you’ve had huge divergence in those markets where there are still a lot of stocks that are really a long way off their previous peaks. It’s a bit like the South African market, where we’ve had a couple of stocks that have really delivered the bulk of the return, while the average stock has done very poorly.
RYK VAN NIEKERK: Well, the future is very uncertain, especially economically. I think in many countries we will see significant economic declines in 2020, due to various lockdown regulations. How do you position yourself in such a scenario where you will see a bounce next year? But we won’t be back at pre-Covid levels – probably for several years. Do you adjust your investment strategy in that context?
SARA-JANE ALEXANDER: We certainly adjust our expectations of what the underlying companies can deliver.
I mean, when we look at domestic companies, as you mentioned, we wouldn’t expect them to deliver the sort of revenue they did in 2019 for several years. It probably looks more like 2023 for many of them. So then the question really comes down to how well they can manage their costs.
I think, so far, when we look at this earnings-results’ season that we’ve had, we’ve been pleasantly surprised by the cost action that many of these businesses are taking. I guess the difficulty comes in questions around some of the second-round impacts of those cost cuts. A lot of them will come from jobs. And what does that mean for the economy in medium terms?
So we certainly are responding to it, we certainly are re-running our thoughts on numbers in a more global context, As I said, I think those markets will be more resilient than South Africa. And we certainly have better economic outlooks for those countries in general, when I talk about developed markets.
The challenge in South Africa is that we just went into this at a point in which the economy had really been sort of mismanaged for a decade and was very weak going in. So it really just exacerbates that pain.
RYK VAN NIEKERK: I see the fund was launched in 1996, it’s the Balanced Plus Fund, where the cumulative return has been 2206%. That is a phenomenal achievement. If you look at that statistic but if you look at the performance over the last few years, you haven’t managed to beat the benchmark. You had just slightly down every year to the benchmark. First of all, what is the benchmark, and how do you think investors should look at a fund like this, which has performed absolutely phenomenally probably in its first decade or so, and then maybe just matching the market subsequently,
SARA-JANE ALEXANDER: As we discussed earlier, some of the challenge in the South African market has just been the very, very poor performance of the growth asset classes. So any exposure to equities, which have returned very little over five years, or property, would have hurt you relative to a benchmark. And then cash has done exceedingly well over five years, and bonds also delivered reasonably good returns. So it does come down to the asset mix. We do have reasonably high exposure to growth assets in this fund, and we believe over the long term those growth assets will offer you protection.
We certainly don’t think cash on very low yields today is an attractive offer to investors.
So I think that these tough conditions for growth assets have really being the result of the low absolute returns in the past few years,
RYK VAN NIEKERK: But the benchmark is a composite of equity and bonds. Can you just explain that benchmark?
SARA-JANE ALEXANDER: The benchmark is about half equity, and then it’s got just over 20% exposure to bonds. So, as I said, depending on your size and equity, obviously that’s been a huge attractor – any exposure to property. Similarly, these benchmarks are always difficult. We try and think about risk in as clean-slate a manner as we can. And we try and buy asset classes where we think that they’ll offer a long-term margin of safety. As I said, we’ve been well exposed to growth assets, which have had a sluggish few years, but we certainly think that the returns there continue to look attractive on a medium-term view. And then bonds similarly, having offered 10% yields today, we think offer good returns.
RYK VAN NIEKERK: That was Sara-Jane Alexander of Coronation.