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Coronation Top 20: A tale of two decades

South Africa’s second largest equity fund recently reached its 20-year milestone, and the first decade was a lot better than the second.
Image: Shutterstock

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.

Changing market

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.

Concentration

‘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.’

Relative returns

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.

Outlook

‘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.

COMMENTS   11

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Section Outlook…

How can even newcomers to investing read this and be inspired to part with money with Coronation, PSG and the troop brigade of boutique investment funds (+ extravagant fees) on local when they have international investment advice on their phones via at the very least through EastEquities?

Yes..there is BAT, LVMH, Sasol or even the Citizen Newspaper / MW owner CTP/Caxton (under valued) but the rand has more volatility than a traveler with Dehli-Belly…why the anxiety?

Couple of things:
1.) Top20 market cap is R20.32b. There are about 80 counters with a larger market cap on the JSE. If the fund invests in a company with market cap less than AUM then liquidity can be an issue at some point.
2.) The Top20 is an open ended fund, so the size of the fund is in theory unlimited. This is great for the manager, but not so good for the investors. As the size of the fund increases, the investable universe shrinks and the ability to outperform the market does as well. Why have an open ended fund? – for the fees of course (greed).
3.) How many of the 80 counters have real pricing power? Of the 10 top holdings, perhaps 1 or 2.
4.) South Africa is a cash-flow negative country. Things can go pear very quickly once money starts flowing out of the country.
5.) Arguments have been made that valuations are attractive? What discount rate do you apply in a country where there is no rule-of-law or property rights?

A few points:
1) While arguments relating to size and liquidity are important you cannot base arguments on 100% of the Fund being invested in one stock
2) All unit trusts are open-ended plus Coronation has been one of only a few fund managers to close strategies
3) Entire equity sectors have no real pricing power but I can assure you Coronation know whatever pricing power they do have much better than you
4) Money has been flowing out of what was previously a ‘closed’ country for decades – it does not mean there are no stock-picking opportunities on the JSE
5) Again, Coronation know a lot more than you do about the appropriate discount rates to use and some may even be higher than yours

From your comments, you are an ‘amateur’ lecturing to the professionals and a fund manager who can legitimately be called world-class but you have good arguments for the weekend braai.

What is a world-class fund manager?

In this context, it is my personal opinion after having researched fund managers around the world for some 25 years.

“Pieter Koekemoer (pictured)”

Looks like a stack of stones to me.

Ironically that is very much my view of Coronation.

Simply not worth investing.

Ten years of charging fees only to match the benchmark, that is what catches my eye. And if outperforming has become ‘so difficult’ should your fees not be reduced, because your promise of adding value is getting smaller. If 20% of managers outperform, this is a very strong argument for buying the index. Clearly our market is becoming more efficient, meaning the index is smarter than 80% of the stockpickers. Not surprising, in line with global trends. You would think that brings the egos down a notch but no.

Here’s a question: If 20% of active funds outperform and 0% of passive funds outperform after costs (on the same basis of comparison) which is the better approach?

Colson, while 20% of active funds outperform the index. It is never the same 20%. So it is all just a gamble. The one that outperformed it one year, will fail the next.

While 0% of index funds outperform the index (this should be obvious), non of them will underperform it to the same extent as the active managers. So this is a win for the passive investor.

Statically speaking it has been proven that for average Joe, index investing is far superior. Warren Buffet also proved this with his $1m challenge against active managers.

It is now a well established fact that the biggest killer of growth over time is the FEES. Active managers charges more fees so the results (a dismal 20% pass) should be no surprise.

Passive is the way to go.

I don’t disagree with you and low-cost, high-tracking index funds will put the odds in the investor’s favour. But not all index funds are low cost and not all track well. Plus not all active funds are expensive and not all are ‘average’ i.e. superior active management exists in all markets. You may be happy to receive market returns but others may seek to outperform and attempt the difficult task of selecting active managers i.e. there is the element of preference. Finally, I have analysed ALSI tracker funds and, as a group, they have underperformed the ALSI by 1.5%per annum over 25 years. That’s huge. Indexing can also fail, it is not a panacea.

End of comments.

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