The Coronation Top 20 fund was launched in 2000. Since its inception, the fund has handsomely outperformed its benchmark, the FTSE/JSE Capped All Share Index, by 3.7% per year. Cumulatively, that is alpha of a fraction under 100%.
However, this outperformance is entirely concentrated in the first 10 years of the fund’s existence. This is reflected in the statistics below, showing the return of the unit trust to the end of September last year, when it reached its 20-year milestone:
Source: Fund fact sheet
All of the alpha generated by the fund came in its first decade. In its second, it generated returns in-line with the index.
Over the last few months, the portfolio has out-performed slightly and it is therefore showing a positive active return over the past 10 years. However, the broad pattern remains true.
For Pieter Koekemoer, head of personal investments at Coronation Fund Managers, this tells a story of how the local market has changed over this time.
‘The local market has become increasingly concentrated,’ he said. ‘In the second decade, the Alsi (FTSE/JSE All share Index) has moved to a point where half of the index value is represented by just four shares.
‘If you take Naspers and Prosus together as one economic exposure, that takes you to about a fifth of the market cap, and then you have Anglo American and BHP Group and Richemont. Between those four economic exposures, you have half the market cap or value of the index.’
This has created an increasingly difficult environment for active managers.
‘For the last five years to the end of 2020, only 20% of JSE-listed counters outperformed the market, while 80% underperformed,’ said Koekemoer. ‘That is the heart of the problem.
‘Because the Alsi has become so concentrated in the big global stocks that have dominated returns, it has become somewhat unrepresentative of what a diversified South African equity portfolio would look like. Even in a concentrated portfolio like the Top 20 fund, you wouldn’t run such concentrated positions.’
The most obvious example of this is that, according to its latest fact sheet, the fund has 15% of its portfolio in Naspers. That is a hefty chunk. Yet, relative to the combined 21% weighting that Naspers and Prosus have in the Alsi, it is still underweight.
‘That means that even if you think one of the best opportunities on the JSE is Naspers, it becomes impossible to have an overweight position,’ said Koekemoer. ‘And that market concertation issue is really the big driver in the difference in outcomes over the past two decades.’
He does, however, point out that even though the fund has not delivered any alpha relative to its benchmark over the past decade, it is still a significant outperformer relative to its peer group.
‘Over its first 10 years, it was the top-performing South African general equity fund,’ Koekemoer said. ‘In its second decade it outperformed 89% of the competitor group.’
This is an indication of difficult the index has become for any manager to beat.
‘As long as the big global stocks that happen to be listed in South Africa – and that is really tech and mining – continue to outperform the rest of the market, then those conditions are going to remain.’
The obvious question that all local managers are grappling with at the moment is precisely how likely it is that this situation will indeed persist.
‘You have two camps,’ said Koekemoer. ‘There are those who believe that the South African economy is in such trouble, the government is facing a debt trap, and they are not going to make viable economic reforms. Therefore, you should not invest in South Africa because you are going to be disappointed again, as you have been for the last decade.
‘The other view is that the SA Inc. component of the market has become so undemandingly valued that you don’t really need any kind of economic improvement to see decent returns from South African equities. They are so unloved, so underowned, and valuations are so attractive that even in a muddle-through economic situation you can still do well.’
Coronation is more in the latter camp.
‘We do think there are more opportunities available just because valuations are so attractive,’ Koekemoer said.
As an example, the Coronation Top 20 fund has 27.6% of its portfolio in financial stocks. This includes top 10 positions in Nedbank, Standard Bank and Momentum Metropolitan Holdings.
‘We think there is the opportunity, over time, for a more normalised world,’ Koekemoer said. ‘At the same time, we still think that those big mega stocks that dominate the Alsi performance are attractive. We think you want to be invested in things like Anglo American and Naspers. We think they can do well too. But we don’t think the market will be as narrow in terms of where the returns are going to come from over the next five or 10 years.’
Patrick Cairns is South Africa Editor at Citywire, which provides insight and information for professional investors globally.
This article was first published on Citywire South Africa here, and republished with permission.