Coronation Fund Managers reported an increase of 22% in headline earnings per share in the 12 months to September 2021 and hiked dividends by close to 23% – the consequence of an increase of 11% in assets under management to R634 billion by year-end.
Gross management fees amounted to R4.26 billion compared to R3.64 billion in the previous year.
“Despite a challenging backdrop, the past year has been exceptional for Coronation’s clients and shareholders,” says Coronation CEO Anton Pillay. “Markets continued to perform strongly in 2021 after coming off the low base of March 2020.”
It is noticeable from Pillay’s comments that he remains cautious, saying that while the global economic recovery continues, the recovery is uneven, made worse by a significant divergence in policy support and vaccine roll-out across developed and emerging economies.
“Although the economic outlook is positive, it needs to be seen in the context of elevated risk and high asset prices,” says Pillay.
“The risk of new coronavirus variants, enduring inflation, the withdrawal of unprecedented [supporting] monetary and fiscal policy and rising geopolitical tensions make for uncertain times.
“Locally, the economy remains under pressure due to ongoing systemic risks, including unsustainable levels of government debt, corruption, the poor condition of state-owned enterprises, load shedding and increasing levels of already high unemployment,” says Pillay.
And South Africans are not saving enough.
“Despite the very positive reporting period for our clients and shareholders, the pressure of economic lockdowns continued to exacerbate the plight of the already stressed local savings industry,” says Pillay.
“As a sizeable industry participant, it is likely that Coronation will continue to reflect the outflow experience of the broader SA savings industry. We expect this to remain the case for the foreseeable future.”
He mentions that Coronation actually saw outflows of 5% of the average assets under management, indicating that the total fund base grew largely as a result of strong financial markets and in-house expertise to deliver good investment returns. In essence, investors lost out on part of the strong growth.
Coronation discloses that during the 12 months under review, the MSCI All Country World Index increased by 11% (in dollar terms), the MSCI Global Emerging Markets Index was up 18% (also in dollar) and the local FTSE/JSE All Share Index was up 23% (in rands).
Coronation claims that its portfolios outperformed the market, and that the good investment performance is the result of an unwavering commitment to active, long-term investing, in-depth proprietary research and the benefits that come from a stable and experienced team.
However, Pillay highlighted that, as an investment-led business, Coronation’s primary focus is on growing the value of the client assets entrusted to them over the long term, rather than simply looking to grow the pool of assets under management.
The volume imperative
Still, investors who prefer to manage their own share portfolios and invest directly on the JSE would be quick to point out that asset management is also a volume-driven business. As long as assets grow, management fees follow.
The secret to happiness for an asset manager’s shareholders is that these management fees must grow faster than operating costs.
Coronation’s income statement shows that this was the case. Total operating expenses increased by 8% compared to the previous financial year compared to the 17% increase in fee income.
Management says this was higher than normal due to high growth in the cost of an ever-increasing regulatory burden, as well as investment in information systems and technology.
Pillay notes that the company continues to invest in information systems and technology infrastructure, which is key to delivering client service in the new digital world.
Coronation points out that both its institutional funds and retail offerings achieved excellent returns during the last year, but warns that the economic outlook remains mixed.
“The global economy continues to recover strongly, supported by pent up demand, a tight labour market and strong consumer balance sheets. The key risks for investors are stretched valuations, inflationary pressures and the ever-present risk of a new and more dangerous coronavirus variant.
“We expect the SA economy to remain under pressure, with formal employment growth meaningfully lagging the recovery in economic activity and the corrosive nature of structural headwinds, such as load-shedding and failing municipalities,” says executive management in their commentary to the results.
“Notwithstanding this weak economic environment, we continue to find excellent value in the domestic and emerging equity markets and domestic fixed income markets,” says Pillay.
“The Covid-19-induced volatility created investment opportunities that do not present themselves often. As an active manager with a long time horizon, we took advantage of many of these on behalf of our clients, which resulted in outstanding performance across much of our product range,” he says.
Coronation warns that it expects inflows into the savings industry to remain subdued given the growth constraints faced by the SA economy and a general lack of domestic investor confidence, which is likely to continue to depress investor demand for long-term investment funds.
“In addition, current exchange control limits applicable to collective investment scheme managers may force us into a position where we will not be able to meet the full demand for our rand-denominated international fund range in future,” according to management.
Shaun Murison, senior market analyst at IG, says Coronation’s headline earnings growth of more than 20% reflects the favourable market conditions in a “solid year” over the last 12 months.
“Shareholders are being rewarded with around a 10% increase in the final dividend.
“That brings the total dividend yield for the year to nearly 8.5%, quite an attractive offering,” he says.
“The market reaction to the results is hard to gauge in view of a volatile day, but the results weren’t a surprise given the forward guidance issued as a precursor to today’s release.
“The group’s outlook does, however, paint a bleak picture for the domestic economic climate,” he says, noting that it is impacted by both external factors (the pandemic) and local headwinds (electricity supply).
“Low levels of personal savings and high levels of indebtedness might also impact on the growth in assets under management going forward,” he adds.
Coronation’s share price in itself shows the opportunities to be had in March 2020. It hit a low of R25.50 after falling from R56 a year earlier, and recovered back to R55 since.
Listen to Simon Brown’s interview with Coronation fund manager Neil Padoa in this MoneywebNOW podcast (or read the transcript here):