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What is Coronation trying to hide?

Coronation seems to be spin-doctoring its Abil loss.

The success story of Coronation Asset Management over the last twenty years or so is truly remarkable.

Here is an upstart independent asset management company, that without a massive sales force like the assurance companies or tied agents like the banks, managed to build a meticulous reputation as an asset manager of integrity and, also, outperformance.

Hence the massive flows of funds, both on a retail and institutional level, to such an extent that it now manages well over R600 billion of assets on behalf of its clients.

The company also enjoys massive support from the tens of thousands of independent financial advisors who, as a result of this outperformance and demand from the public, would be remiss not to include one of the several top-quality funds in the construction of portfolios on behalf of their clients.

I count myself as one of these advisors and commentators, and have on many occasions rated Coronation as a fund company, both in print and on radio, as a company whose funds one cannot exclude if you are looking for consistent outperformance.

The Coronation Top 20 fund has been one of my top recommendations to investors, especially young ones, when asked why they shouldn’t simply put their money into an index fund, as is so often the recommendation by proponents of passive investing. Over a ten-year period the Coro Top 20 has produced a return of 757% versus the Satrix 40’s 514% return.

It’s been very hard to argue against such outperformance over time.

Trust is earned
Coronation annually spends millions of rands on advertising – keeping its name uppermost in mind, to such an extent that its endless television ads are now the signal to go and make a cup of tea…

It’s ironic that the slogan of its latest television advert, ostensibly featuring a blind doctor who continued practicing for 22 years, is: “Trust is earned”.

This blind trust, I feel, has been shaken a little by the events of the past week or so following on (the latest) cataclysmic news from African Bank (Abil) and its horrendous plunge in the share price from over R6 a week ago to its closing price of around 30c on Friday.

It’s been a well-known fact for many years that Coronation – with its approximately 22% stake via its various funds – has been the largest single shareholder in Abil. What is not known is when this stake was acquired and at what average price.

What I have been able to establish is that Coronation has been a buyer of more Abil shares in recent times, even after the rights issue at the end of last year which was meant to solve the company’s financial troubles. More about that a little further on.

Coronation, via its fund managers Neville Chester and Karl Leinberger, has been defending its large exposure to Abil on various platforms, including Moneyweb and SAfm, among others.

So when Abil’s shock announcement broke last week, together with the utter devastation in shareholder value as the share price collapsed, the big question on everyone in the investment industry’s lips was: “What is Coronation going to say?”

For two days there was absolutely no comment from Coronation, to such an extent that Lindsay Williams, host of the CNBC Business show, after trying for hours to get comment from Coronation on this issue, openly berated the company for its lack of response.

“Every time Coronation wins a prize of some sort or has something to brag about, they are on TV in a flash, but when the news is bad they are nowhere to be found….” he said on Wednesday evening in a moment of exasperation.

On Thursday morning Coronation sent out a cryptic statement to the media and its clients which concealed more than it wished to reveal. It merely referred to the Abil-exposure in its “flagship” funds, namely the Coronation Top 20 and its Coronation Market Plus Fund. There was no reference to the Equity Fund or the Financial Fund. Are they not flagship funds, I ask?

If Coronation thought it was going to fool the investment community with this statement, it was badly mistaken.

Sleight of hand statement

Several sharp-eyed commentators on Moneyweb quickly pointed to this financial sleight of hand. The investment community didn’t want to know how much exposure Coronation had to Abil after the collapse, but before the collapse in the share price, and how much has been wiped out by the collapse in Abil.

Over the weekend Coronation replaced the original statement with a slightly more comprehensive statement, outlining its exposure in all its equity funds, but still only referring to the values as at August 6 2014.

What is clear from some information published on Moneyweb last week as well as a perusal of its fund fact sheets, was that Coronation was a buyer of Abil in the last couple of months.

As recently as June the Coronation Equity Fund purchased more than 16 million shares in Abil whereas it previously had none.

Abil-stake as of December 2013

In the December 2013 fund fact sheet for the Coronation Top 20 Fund it was revealed that its holding in First Rand was swapped for Abil (ouch!).

It states: “Domestic banks continued to de-rate significantly in 2013, as concerns around unsecured lending impacted on share price performance. Our strategy was to hold big banks that were well managed, well capitalized and with diversified income streams. This strategy worked relatively well, but during the past quarter (December 2013) we decided to replace our First Rand Holdings with Abil. Abil’s share price more than adequately reflected investor negativity around its unsecured business model, their capital raising and threat of regulatory intervention. As such we felt that the margin of safety was large enough to take a position”.

The share price of Abil during the December 2013 quarter ranged from a high of R15 to a low of R10 a share, a million miles away from the share levels last week. By the end of March 2014 Coro Top 20’s exposure to Abil was 2.7% of the fund value – substantially more significant than what Coronation was trying to portray last week.

To my mind, the issue is not that Coronation took a contrarian position to the market on Abil. It was well known that there were major problems with both Abil and Ellerines, that several top managers had left the company in recent times and that the deteriorating SA economy was crushing the ability of millions of debtors to repay their short-term debt.

Jean Pierre Verster from 36ONE Asset Management has been warning long and hard that Abil will go bankrupt and had been shorting the shares for almost two years now. Hell, even US hedge fund manager David Stemerman has been going around the hedge fund industry in New York saying Abil is the best short in the world. He said this to several hundred attendants at the Ira Sohn Conference in New York in March 2013.

Despite this, Coronation still kept its nerve and even bought more.

Most investors and investment advisors who invest in a fund such as the Coronation Top 20 will have no problem with such a strategy. After all, it is these kinds of strategies that can make fund managers and their clients big money when the bet comes off. I am most certainly not blaming the fund managers for such a move. After all, that is what the fund says on the label.

What I do have a problem with is how Coronation is trying to spin this issue. Maybe it’s been getting some lessons in spin-doctoring from my old friend Mac.

Why not simply come out and say: “Yes, we had a large stake in Abil. The decision was well-reasoned and based on our view that the company will survive and even prosper in the future. Our exposure was within prudent parameters.”

Instead, it’s left the issue floundering in the wind, with all sorts of estimates/guestimates as to what Coronation has actually lost in Abil. Is it R2 billion, R4 billion or even R8 billion as some commentators have ventured?

At least it didn’t have an exposure of almost 11% of its funds to Abil, as the Momentum Value fund had. That, in my view, was gambling by the fund’s manager Sam Houlle.

Coronation will learn that while it takes many years to build up trust, it can disappear in the blink of an eye.

As investors and clients we deserved better Coro.

Magnus Heystek is the investment strategist at advisory firm Brenthurst Wealth. He can be reached on magnus@heystek.co.za for ideas and suggestions.

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