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 SA Equity comment - Mar 19
The fund had a good quarter, returning 8.2% on the back of strong domestic equity markets. This is a relatively new fund without a meaningful long-term track record.
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 17.9% - bringing the rolling 12-month total return 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 results 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 and 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, 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. It 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. This allayed market fears around US volume declines, its debt levels, and the outlook for its nextgeneration products. It also appears that investor fears towards 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; and 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 highquality domestic defensive businesses that should weather the challenging environment better than their weaker, economically sensitive peers.
Notwithstanding the uncertainties that abound, our objective remains to build 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.
1. The manager will follow an investment policy which will seek to maximise long-term capital appreciation. In order to achieve these objectives, the investments normally to be acquired for the Coronation SA Equity Fund will primarily be a broad spectrum of financially sound securities in companies listed on the JSE Securities Exchange all to be acquired at fair market prices.
2. The portfolio may also include participatory interests or any other form of participation in portfolios of collective investment schemes or other similar schemes.
3. The manager may include listed and unlisted financial instruments subject only to statutory limitations.
4. Nothing in this supplemental deed shall preclude the manager from varying the ratios of securities, to maximise capital growth and investment potential in a changing economic environment or market conditions or to meet the requirements, if applicable, of any exchange formally recognised in terms of legislation and from retaining cash or placing cash on deposit in terms of the deed and this supplemental deed; provided that the manager shall ensure that the aggregate value of the assets comprising the Coronation SA Equity Fund shall consist of securities and assets in liquid form of the aggregate value required from time to time by the Act.
5. The manager will not invest in offshore investments on behalf of the Coronation SA Equity Fund.
6. For the purposes of this portfolio the manager shall reserve the right to close the portfolio to new investors. This will be done in order to be able to manage the portfolio in accordance with its mandate. This critical size shall be determined from time to time by the manager.