Karl is CIO and a member of the executive committee. He joined Coronation in 2000 as an equity analyst, was made head of research in 2005 and appointed CIO in May 2008. Karl co-manages the Coronation Houseview Portfolios as well as the Coronation Equity and Balanced Plus funds.
Sarah-Jane joined the Coronation investment team in 2008 as an equity analyst. Her current responsibilities include co-managing the Coronation Industrial Fund and researching food producers and hospital stocks amongst others. Prior to joining Coronation, she formed part of the investment team at JP Morgan Asset Management in London where she was a European research analyst and then co-manager of their UK Smaller Companies Fund.
Coronation Balanced Plus comment - Mar 19
The fund had a good quarter, returning 8.5%. This was mainly due to strong global and domestic equity markets. The fund has performed well against its peer group over meaningful time periods.
The broad-based asset class declines experienced in 2018 reversed dramatically in the first quarter of 2019. The MSCI All Country World Index ended the quarter up 12.2% in US dollar terms, despite a deteriorating macroeconomic environment in which central banks have become meaningfully more dovish than they were late last year. Developed market equity markets, and in particular the US, performed strongly and recorded their best quarter in nearly 20 years. The fund has benefited from its large exposure to global equities and our overweight position in emerging market equities contributed meaningfully to performance during the quarter.
The Citi World Government Bond Index appreciated by 1.7% in US dollars for the quarter. Bond yields fell, with investors buying up debt as a haven amid mounting evidence of a global economic slowdown, continued political uncertainty and a more dovish outlook among global central bankers. This shift has seen the US Federal Reserve (Fed) signalling that rates will remain on hold for the rest of this year and announcing that the bank will end its balance sheet run-off programme. In addition, the European Central Bank announced future stimulus measures and that it too will leave rates on hold until the end of 2019. At the end of March 2019, the amount of global government debt with negative yields rose above the $10 trillion mark and European corporates such as LVMH and Sanofi were even raising debt at sub-zero rates (meaning you have to pay for the privilege to lend to these companies). The extent to which central banks continue to distort debt markets is concerning and we remain cautious on the outlook for global bonds.
The All Bond Index (ALBI) ended the quarter strongly (+3.8%) as the market started to price in potential interest rate cuts later this year. We believe the high real yields on offer are a reasonably attractive investment opportunity. Given recent global monetary policy developments and the South African Reserve Bank’s benign inflation outlook, coupled with weak economic growth, we expect policy rates to remain on hold for an extended period of time. The property sector underperformed during the quarter on broad-based weakness. Distribution growth rates are increasingly at risk given negative rent reversions in certain sectors and nodes, high vacancy rates in the office sector, and leveraged balance sheets. The fund’s property exposure, which is focused on the higherquality portfolios such as Redefine and Investec, together with our exposure to the A property shares, should weather the storm better than peers.
Overall, the JSE had a good quarter, with the JSE Capped Shareholder Weighted All Share Index appreciating 3.9%. Resources had another very strong quarter and were up 17.8% - bringing the sector’s rolling 12-month total return up to a whopping 41.6%. Platinum stocks in particular had a very strong quarter on the back of a rising platinum group metals (PGM) basket price.
During the quarter, all mining companies reported their annual or interim results for the period to end-December 2018. These results were characterised by a strong performance from the bulk metals (iron ore, coking coal, thermal coal and manganese). The theme of strong cash flow, deleveraging, and capital returns to shareholders continues. Shares reacted positively to financial results announcements and a strong commodity price environment, driven by tight supply-demand balances and an abatement of US-China trade war fears. Our large exposure to Anglo American (+22%) contributed to performance.
After a long and frustrating wait, PGM shares have finally begun to rally strongly with our holdings in Northam (+47%), Anglo American Platinum (+38%) and Impala Platinum (+66%), as well as our position in the Palladium ETF (+12% in US dollars) all contributing meaningfully to returns for the quarter. We feel that this is a vindication of our disciplined, long-term approach to investing, where we aim to assess information objectively and dispassionately avoid being swayed by the news and sentiment of the day. Subsequent to ‘Dieselgate’, negative headlines called for the death of the internal combustion engine and platinum demand along with it. PGM prices dropped below marginal costs of production. At the same time, electric vehicle commodities such as lithium and cobalt were rallying strongly (up three times). Tesla’s share price rose seven-fold in the last seven years and its market capitalisation is comparable to traditional automakers such as General Motors (GM) and Ford, despite the fact that the company has struggled to turn a profit and produces only 3% of the vehicles that GM produces. While we are long-term believers in battery electric vehicles, we expect the process to be evolutionary rather than revolutionary. In the medium term, we also expect PGM demand to surprise positively as a consequence of tightening emissions standards globally. In addition to this, material underinvestment in mine supply over the last decade means it will take many years before a sufficient supply can respond to current market deficits. We therefore expect structural PGM market deficits to persist for at least the next decade. After a challenging 2018, it was also particularly encouraging to see that a number of the fund’s other high-conviction ideas contributed meaningfully to returns during the quarter. These included Naspers, British American Tobacco and Quilter.
Naspers (+19%) benefited from a strong recovery in the Tencent share price as sentiment towards China shifted positively on the back of a reduction in trade war fears and a resumption in the licensing approval process of online games by the Chinese authorities. Naspers also surprised the market in March by announcing the offshore listing and part unbundling of its offshore internet portfolio (i.e. Tencent, Mail.ru, OLX, Food Delivery, et al.) in an effort to reduce the discount at which it trades relative to its underlying intrinsic value. While this is certainly no ‘silver bullet’ that will immediately remove the entire discount, we nevertheless view it as a marginally positive step in the evolution of the group into a global consumer internet powerhouse and will allow it access to a wider investor base.
The British American Tobacco share price (+27%) recovered strongly during the quarter on the back of reporting good results which allayed market fears around US volume declines, its debt levels, and the outlook for its next-generation products. It also appears that investor fears about the regulatory headwinds faced by the US business are abating and sentiment is finally starting to turn positive on the stock. Even after this short-term price rally, British American Tobacco is still trading on only 9.5 times one-year forward earnings and a 7% dividend yield. We still believe this to be very attractive for a stock of this quality and it remains the second biggest position in the fund.
Quilter (+28%) performed very well over the period. Its maiden full-year results materially exceeded market expectations. Quilter provided medium-term guidance on their profit-before-tax-margin aspirations. At 34%, this too exceeded expectations. The long-term outlook for integrated wealth managers with advice forces at scale remains very attractive. This positive outlook is driven by a decline in advisers following the UK’s adoption of the Retail Distribution Review, ‘pension freedom’ boosting demand for advice, and opening up the post-retirement market to wealth managers; as well as a shift away from defined benefit funds to defined contribution funds.
Stocks exposed to the domestic economy came under significant pressure during the quarter as the realities of operating in a ‘no-growth’ economic environment filtered through into corporate earnings. The quarter kicked off with a string of profit warnings from the domestic retailers, and the likes of Mr Price (-23%), Massmart (-22%), Truworths (-18.5%) and Dischem (-16%) all ended the period materially lower. Fortunately, the fund had no exposure to any of these stocks. Eskom remained in the headlines as it hit Stage 4 load shedding in the middle of March. Years of mismanagement, corruption and underinvestment are finally coming home to roost. Although, for now we appear to have received a temporary reprieve from the worst of load shedding, it has become clear that we are only starting to understand the true extent of the power utility’s problems and that its numerous issues could indeed take years to rectify. Unfortunately, if persistent load shedding becomes the norm over the next few years, the impact on consumer sentiment, business confidence and GDP growth will be devastating. We therefore continue to remain cautious on stocks that are heavily exposed to the domestic economy and our preferred exposures are through high-quality domestic defensive businesses that should weather the challenging environment better than their weaker, economically sensitive peers.
Notwithstanding the uncertainties that abound, our objective remains on building diversified portfolios that can absorb unanticipated shocks. We are happy with the current portfolio positioning and are excited about future return prospects. We will remain focused on valuation and will seek to take advantage of attractive opportunities that the market may present to us and in so doing generate inflation-beating returns for our investors over the long term.
A fully managed investment solution diversified across the various asset classes and sectors. Its asset allocation is compliant with Regulation 28 of the Pension Funds Act.