How Coronation grabbed the crown

20 February 2014 - Stephen Cranston

There have been several walkouts to set up new fund managers over the past 20 years. in 1998 about 16 people left gensec asset management (part of sanlam) to form gryphon. a few months later there was a similar-sized walkout from old mutual to form velocity.

Inevitably, these firms wanted to be seen as the next Coronation. Because by far the most successful of the walkouts was in 1993 when 15 people walked out of Syfrets Managed Assets (SMA) to form Coronation.

Coronation's success today is apparent from its financial results. There is huge, perhaps excessive, confidence in the future of the business from the market: the share price has doubled in a year. Coronation now has a market capitalisation of R30bn, making it the largest share in the financial services sector after Investec. It has a higher market cap than Pick n Pay, which has 50000 employees compared with Coronation's 250.

Coronation is also worth more than industrial stalwarts of the JSE such as Nampak and PPC, and is within a hair's breadth of overtaking Gold Fields' market cap.

Coronation Fund Managers is a simple business that focuses on asset management - it does no insurance, private banking or corporate finance on the side.

Unlike Pick n Pay, Coronation has just one product on its shelves, investment performance (see next story). Proof of its success is that it has won the Morningstar larger fund range award for a fourth consecutive year.

The same investment team, now under chief investment officer Karl Leinberger, offers investment performance at different levels of risk with everything from equity-only long-term growth (the Top 20 fund) down to income only (Strategic Income or for the ultra conservative Money Market). It is a large team: 65 fund managers and analysts, with an average of 11 years in the industry and eight years at Coronation.

Its oldest product, Coronation House View equity, has outperformed the all share index by 3,6%/year over 20 years.

Past investment is not a good indicator of the future, but Coronation is seen as a winner by many consultants and financial advisers. In the 2013 financial year, assets under management increased by 45% to R492bn. In 2013, revenue for Coronation Fund Managers was up 84%, to R3,63bn, outstripping the 67%, to R1,69bn, of the previous year and leading to a doubling of operating profit to R1,97bn. And as it is not a capital-intensive business, it was able to pay out virtually all its earnings in dividends (416c out of 416,1c).

It has been a long walk to success. The 1993 walkout took place because, not for the first or last time, retail bankers were making a mess of running an asset manager. Syfrets, owned by Nedbank, had become the leading unit trust brand since it set up an institutional asset manager in 1987. The Syfrets Growth Fund, run by Tony Gibson, took a dynamic and independent approach at a time when other equity funds were packed with stodgy house shares and rarely looked at up-and-coming mid- and small caps.

But Nedbank was not prepared to reward its staff through profit share; the investment staff should have been grateful that they had a job. SMA CE Leon Campher began secret negotiations with David Barnes and Gavan Ryan at a little-known financial services boutique called Coronation Holdings, and eventually started the asset manager with 15 staff at Fedsure House on the Strand in Cape Town, a much rougher neighbourhood than Syfrets' offices opposite St George's Cathedral in Wale Street.

Says Gibson: "We were disappointed that more clients didn't move with us from Syfrets, but we were equally surprised at the completely new business that came from clients who were attracted to an independent asset manager."

Coronation adopted a unique remuneration model in which there was a low basic salary by industry standards (originally R250000/year) but 30% of the profit was set aside for the bonus pool.

There had been independents before such as Allan Gray, Foord and Investec (which, though owned by a bank, operates independently). But these firms had strong charismatic founders in Allan Gray, Dave Foord and Investec's Hendrik du Toit, who personified their businesses.

Campher, the first Coronation CE, has his own inimitable brand of charm, but from day one Coronation was a collegiate asset manager. The founders include Gibson, the first chief investment officer who remains head of the global fund of funds unit, and Louis Stassen, now head of global equities.

There was also Thys du Toit, a bond manager who took over from Campher as CE in 1997 until 2007. He is now a prosperous Boland businessman.

It also had one of just a handful of female portfolio managers in SA at the time, Vanessa Carlow (now Hofmeyr), now running equities at Citadel. She was the youngest in the team, along with Andrew Salmon, who now runs investments at Old Mutual Wealth.

Gibson says Coronation was a more individualistic company then but has since evolved a more coherent investment philosophy, which he describes as valuation-based and high conviction but undogmatic. "It is much clearer what we stand for now."

The very disciplined approach today is quite different from the seat-of-the-pants style with which Gibson ran Syfrets Growth and Coronation in the early days.

Gibson says it is still a relatively small company, with 250 staff and it retains a small team ethos, with a high level of staff ownership.

Unusually, Coronation draws on the skills of three former chief investment officers: Gibson, Stassen and Charles de Kock (previously from Old Mutual).

Succession planning has been strong in the investment team, with Gibson passing the baton to Stassen, who built up the current investment team, with Leinberger becoming chief investment officer in 2008, Neville Chester the point man for aggressive portfolios and Gavin Joubert in charge of emerging markets.

De Kock, who runs the absolute return funds, is a rare example of a senior professional coming in from the outside, and he was head hunted by Stassen to bring some grey hair (well some hair) into the investment team.

The next generation is now being groomed with Quinton Ivan as head of research and Duane Cable supporting him as head of equity research.

Coronation has lost talented people who walked out and now run their own shops such as fixed income manager Arno Lawrenz, who heads Atlantic Asset Management, Walter Aylett at the creatively named Aylett & Co, and the trio who ran the house view institutional portfolios in the early 2000s, Morne Marais, Rob Oellermann and Richard Kommel, who run the Tantalum hedge fund along with Melanie Stockigt, a former head of fixed interest.

Gibson says the business has professionalised, with a much higher calibre of not just investment staff but compliance and administration staff. But he believes it is not so big that it needs to be bureaucratic.

"There is plenty of debate, the skills base is higher than it was 20 years ago, and I see that people are still having fun," he says.

Results seem to show that this generation is the best investment team Coronation has ever had.

Coronation has been a creative business. It was the first to the market with absolute return funds in 1999, which are risk-aware balanced funds. The flagship absolute return fund, Capital Plus, has R20bn under management.

And in 1997 it pioneered international funds of hedge funds, and was one of the first substantial fund of hedge fund businesses anywhere. Gibson moved to Dublin for a few years to set up the business.

Its biggest success internationally has been its emerging markets fund. It has attracted more than R31bn, of which more than half is from foreign clients.

The critical moment in Coronation's evolution came at the end of 2004. Coronation had lost experienced staff such as its head of financials, Kokkie Kooyman; its business development tsarina, Magda Wierzycka; and chief investment officer, Morne Marais, and his colleagues. Even founder Louis Stassen booked his passage to Australia to work for Allan Gray chairman Simon Marais.

It was then that David Barnes of Coronation Holdings was forced to sell equity in Coronation Fund Managers to staff, which led Stassen to change his mind and return as CIO.

"We could then focus on the long term and have the patience to invest for the long term in ventures such as our emerging markets team," says Stassen.

Senior staff with skin in the game now give longer notice so as not to make clients uncomfortable. Hugo Nelson, who stepped down as CE a year ago, and Edwin Schulz, the former head of absolute return, both gave a year's notice.

Leinberger says that from 2005 it was possible to create an environment which was the opposite of a big corporate with anything but a committee-driven approach: "We don't have heavily proscriptive job titles. I believe we have the soul of a boutique. It is important that we work in open-plan [offices] and constantly exchange ideas."

Leinberger says even though there is a common long-term philosophy, he wants the analysts to think differently. "I want to see not two but seven independent views on a share."

Nonetheless, the team often talks about the Coronation DNA. The house, unlike competitors such as Investec, Stanlib and Old Mutual, does not have separate investment boutiques - though it came close 15 years ago with its focused absolute return team under Stassen.

Leinberger says it is particularly important that all clients with the same mandate get the same investment return. "We do not run retail funds any differently from institutional funds. We would be distressed if a client saw our investment return in a survey but received less than that."

The business is more centralised but not in a negative way. Coronation's current CE, Anton Pillay, is certainly not an all-powerful autocrat. In fact he is the first CE not to come through the investment team. He is an accountant and was a financial manager at the old Board of Executors (now BoE), rising to executive assistant to its then boss Tom Boardman and then head of banking at BoE private clients.

"I much preferred working for BoE when it was independent, but got steadily more frustrated after Nedbank bought us in 2002. BoE had 600 staff, the enlarged Nedbank 27000.

"Coronation gave me the chance to work in a smaller firm again in 2006, first as chief operating officer, and it played to my strengths."

Pillay has presided over an extraordinarily strong period, both for growth and investment performance. History shows such a purple patch cannot last indefinitely, luck plays a big role in fund management. Pillay argues that everything Coronation does is based on its long-term approach.

"Our clients should know that we will not perform in a straight line because we invest with high conviction and do not change our philosophy. We are not in the business of speculation."

Leinberger says that it is non-negotiable to take a long-term view. "Any analyst who uses the word 'catalyst' probably won't have a job here for much longer."

Other things that are not tolerated are ego, arrogance and complacency, though the team is far from perfect.

Pillay says arrogance would be disastrous for the business. "We need to remain humble and remember it is not our money. We are here to help clients preserve and grow their savings. I think it helps a lot that we do not have any captive money, unlike the life office-owned asset managers.

"All our money can be withdrawn at 24 hours' notice."

Leinberger says the house encourages long-term thinking by, for example, paying only a part of a bonus in cash and leaving the rest to vest over several years. He says Coronation aims to be a genuine meritocracy with a high-performance culture.

"The team is empowered to deliver and we believe in quick decision-making. And we aim to be quick in our response to clients, as well."

Leinberger says the collegiate approach and the depth of skills gives it a strong asset allocation team, as it has strength in local equities, bonds and property, as well as global assets. Coronation has added value through an overweight position in global equities and being out of local bonds.

Says Leinberger: "I believe that rather than sitting on separate floors or buildings, it makes sense to have the investment team on one floor, making it easy to discuss
investments. We are fortunate to have our international analysts on the same floor as well."

Even though Coronation has closed its institutional balanced and equity offerings to new business, it still achieved R20,7bn in new institutional flows, much of it into the global emerging market fund (GEM). GEM has outperformed its benchmark by 9,3%/year and it is second in its peer group out of 63 funds. And the Coronation African Frontiers fund has achieved 11,5% outperformance of the Africa (excluding SA) equity market index.

Coronation is soon expected to overtake Allan Gray as the largest independent fund manager in SA. In its last financial year Coronation attracted 23% of the R169bn attracted into unit trusts.

If Coronation missed an opportunity, it was that it did not make more of its international expansion. In 1997, it was one of the pioneers of the fund of hedge funds business but did not have the resources to build this business. Says Gibson: "At the time we were constrained as we were still controlled by Coronation Holdings, which would not allow us to build an international business."

He agrees that Coronation, with hindsight, should have started its direct international asset management five years earlier. "But remember, it is only recently that international clients have been prepared to have money run from Cape Town instead of London or New York."

Coronation has certainly changed its approach to marketing. It was little known to the public at first. It did not offer unit trusts until 1996 but it was only about 10 years later that it began national advertising, including the butterfly, lion and elephant campaign, as well the memorable Vincent van Gogh campaign focused on uncovering value in assets.

It is one thing to operate as an institutional asset manager in which you have to be known only to a handful of asset consultants. But Pillay says it needs to build public confidence in the brand.

"Individuals are playing a much bigger role in choosing investment managers as they find they need to make choices in defined contribution funds."

Investors who buy Coronation shares at current levels (it is on a 20 price:earnings multiple) need to have faith that the asset management business is growing. It will battle to gain market share: it manages assets for 85% of the top 200 retirement funds, and has closed its book to new institutional business except fixed income and emerging markets.

Unit trusts are still very much open, but unit trust flows are notoriously fickle and can turn quickly against a house, as Allan Gray found three years ago.

For the past few years unit trust markets have been growing, but can they continue to do so in a sub-2% growth environment?

Pillay says one of the spurs to growth in savings is the new tax-incentivised savings account. New rules allow each person to save up to R30000/year in a special savings account with no interest or dividend tax and no capital gains tax.

There are also plans to make retirement funds more common by forcing employers to offer their employees a cheap and standardised retirement programme.

Right now Coronation would be a strong contender as the default if individuals had to pick their own funds. But Leinberger warns that Coronation can't stay in the number one slot indefinitely. Last year's performance is now water under the bridge.