Corospondent - July 2020
Coronation Global Capital Plus, Global Managed and Global Equity Select Funds - July 2020
OUR FUND RANGE with a developed market bias includes Global Equity Select and two multi-asset funds – the long-term, growth-oriented Global Managed Fund and the more conservative Global Capital Plus Fund.
As you would expect during a period when markets recovered strongly, the funds performed in line with their risk budgets over the quarter in review, with Global Equity Select, Global Managed and Global Capital Plus producing US dollar returns of 18.4%, 12.3% and 6.5%, respectively.
At quarter-end, Global Managed was positioned in 62% growth assets and 38% more stable, diversifying assets. The growth-asset allocation consists of 53% effective equity exposure and smaller positions in listed property, convertible bonds and high-yield corporate bonds. The more stable part of the portfolio consists of Treasury bills, hedged equity, inflation-protected securities, commodities and investment-grade corporate bonds.
The more conservative Global Capital Plus owned 40% in growth assets, including 22% effective equity exposure and 60% more stable and diversifying assets, including 20% in investment-grade corporate bonds and 13% in Treasury bills.
Spotify, which more than doubled in value over the quarter, was the largest single contributor to returns in Global Equity Select and Global Managed. Streaming now accounts for the majority of music industry revenue. While there are now over 300 million paying music streamers globally, music remains extremely under-monetised in our view, given the 3.5 billion smartphones in the world today. Headline subscription prices have not changed much in years and average revenue per user has in fact declined due to family and student discount plans.
Music spending per capita has halved in real terms since 1999. As the largest audio platform outside of China with 130 million paying subscribers and an additional 163 million ad-supported users (compared to Apple Music, which has 60 million to 70 million subscribers), and with a better product and ongoing innovation, Spotify is well placed for long-term growth.
We are also bullish on Spotify’s podcast strategy. Terrestrial radio remains a large advertising revenue pool globally and Spotify is trying to disrupt this, acting decisively and investing in leading podcast creation tools, studios and exclusive content from top podcasters such as Joe Rogan.
Since 2015, Spotify has grown its revenue by 37% per annum and we expect strong growth to continue. In the words of co-founder and CEO Daniel Ek, “everything linear dies”. As the leading player and innovator in the fast-growing audio streaming market that is led by an exceptional management team, we believe Spotify is well positioned to capitalise on this trend.
Other contributors to returns include long-held positions in Alphabet, Charter Communications, Naspers, UnitedHealth and Bayer.
SMOKE WITHOUT FIRE
Philip Morris International (PMI) was the largest detractor from performance, although with a decline of -2.6% the effect was only marginally negative. PMI is a global tobacco company and the leader in potentially reduced-risk, next-generation products through its IQOS heated tobacco franchise. IQOS is already contributing c.20% to company revenues. PMI has invested significantly in the IQOS franchise over a sustained period and has first-mover advantage in the heated tobacco category. IQOS has been a phenomenal success in our view, ranging from truly extraordinary results in Japan to solid, steady progress across many European markets.
To date, c.11 million smokers have completely quit smoking combustible cigarettes and moved to IQOS. At the time of writing, the US Food and Drug Administration has just authorised IQOS to be sold in the US with a reduced risk exposure claim.
As IQOS grows, it is accretive to PMI’s revenues and profits, and there is still a long runway of growth for IQOS globally. Despite the resilience of tobacco as a consumer category, PMI has not been immune to Covid-19 lockdowns. PMI has been negatively impacted by lost duty-free sales, lockdowns and temporarily slower IQOS user conversion.
We expect that over the medium term these lost sales should be recovered and that IQOS should fairly quickly resume its growth trajectory. PMI remains a top 10 holding.
THE WHEAT FROM THE CHAFF
Last quarter, we felt there were attractive opportunities for those investors with a long time horizon and the ability to filter companies whose prices had been dislocated with little impact to their sustainable earnings power. After a sharp rally, these opportunities are now harder to find.
In addition, the need to reassess the prospects of many businesses continues as investors assess fundamental virus-induced behavioural changes versus short-term noise. Fundamental changes, however, play to the strengths of fundamental investors, and we continue to find a select number of stocks with attractive long-term prospects that are reasonably priced, while appropriately managing exposures across a range of asset classes.
Thank you for your continued support and interest in the funds. +
Coronation Global Capital Plus: Highest annual return 17.1% Jul 2010 - Jun 2011;Lowest annual return (7.4%) Sep 2014 - Aug 2015
Coronation Global Managed: Highest annual return 23.4% Jan 2019 - Dec 2019; Lowest annual return (14.4%) Mar 2015 - Feb 2016
Coronation Global Equity Select: Highest annual return 37.1% Jan 2019 – Dec 2019; Lowest annual return (20.4%) Jan 2018 – Dec 2018