Coronation: top of the heap

20 February 2014 - Stephen Cranston

IT IS unusual for a house to be so dominant across unit trusts and institutional funds at the same time. But Coronation today is an exception. Over five years, all five of its flagship unit trusts are in the top quartile: Top 20, Balanced Plus, Capital Plus, Balanced Defensive and Strategic Income.

Its institutional performance is just as strong, as shown by the institutional surveys. In the global Large Manager Watch, which includes the 25% offshore allocation, it is first over five years with a 20,1% return and first over one year with 28,9%. In the SA Manager Watch, which excludes international assets, it unseated the formidable Foord Asset Management over one year with a 21,8% return, but over three and five years the irascible Dave Foord remains ahead.

Kirshni Totaram, head of Coronation's institutional business, says the house view and aggressive equity portfolios performed as well as their unit trust counterparts. And a third institutional equity fund, Core, which more closely hugs the index, has given a comfortable 3% return ahead of the index.

The aggressive equity flagship, Coronation Top 20, can be seen as a reply to the index fraternity that active management can work. It has provided more than double the market return since it launched in 2001.

Fund managers Neville Chester and Pallavi Ambekar say the main contributor for the year's performance (27,9% or 5,1% ahead of the market) was Mondi, a low-cost producer in a commoditised packaging sector. They also liked global businesses such as Naspers, BAT and MTN. There are similar themes in the less-concentrated Equity fund run by Karl Leinberger and Quinton Ivan.

Both funds have about 33% in the out-of-favour resources sector. Leinberger says investors in the sector will be forgiven for thinking they were given a lump of coal in their Christmas stocking as the return for 2013 was just 1,4%.

"It is human behaviour to extrapolate past performance when making future investment decisions." But he says Anglo American, for example, is already cheap on seven times normalised earnings and 0,8 times book value.

Coronation's skill at asset allocation is demonstrated in the Balanced Plus fund, which, over three years, is sixth out of 84 funds in the high equity multi-asset category‚Äč.
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Leinberger says he prefers global to local equities and has the full 25% allocation overseas. He says returns from cash and bonds will be poor for some time. He holds no foreign government bonds though he has put his toes in the water to buy local government bonds - to complement a holding in inflation linkers.

Though he is not keen on property yields he says there are some stocks which will outperform the index.

The Global Emerging Markets fund is one of the most notable recent successes for Coronation. Over the past five years it has given a US dollar annual return of 21,3%, better than all its peers and well ahead of the 8,3% from the famous Templeton Emerging Markets Fund.

Coronation's fund manager, Gavin Joubert, has deviated quite significantly from the index, with 25% of assets in Brazil. He has even bent the rules by investing in Porsche, the major shareholder in Volkswagen, which is listed in Germany but has 45% of sales in emerging markets.

Naspers makes up 5% of the fund, which was a boost as it was up 83% in rand, but it was by no means the largest contributor: there was a higher contribution from Magnit (up 85%), which is the largest retail chain in Russia, from Chinese automaker Great Wall Motors (113%) and Chinese Internet search engine Baidu (96%).

Joubert says he has not owned many of the very high-quality emerging market consumer shares such as Hindustan Lever, Ambev and Shoprite because they are overpriced. "But as the news flow and equity market performance continues to be poor, we are able to find selected good value in individual companies."

It also means selling shares that have reached fair value. Joubert sold SABMiller, Yum Brands (owner of KFC) and Colgate Palmolive, which had all hit his target selling price.