Corospondent - April 2021
Coronation Balanced Plus and Coronation Equity funds - April 2021
Both funds had a good first quarter. The Balanced Plus Fund returned 8.9%, benefiting from both value-adding asset allocation decisions and alpha generated within the domestic and global equity building blocks. The Equity Fund returned 12.3%. Both funds have performed well against their peer groups over all meaningful time periods.
Given the considerable strength in global markets, we reduced the holding in global equities to a neutral level in Balanced Plus. We remain cautious on global bonds, given the low yields at which they continue to trade, high levels of government indebtedness and the risk of inflation.
The Equity Fund’s allocation to global equities has benefited the portfolio over time, bolstering returns and improving risk management. Key contributions to portfolio performance in the first quarter of the year (Q1-21) came from investments in Covid-19 casualties. These businesses saw a meaningful decline in their share prices during 2020, as the pandemic hit their near-term earnings potential. This provided an opportunity to build stakes at prices below our assessment of fair value. We expect the revenues of these Covid-19 casualties to recover strongly into 2022, as developed markets achieve herd immunity and economic activity normalises. Examples include Trip.com, MakeMyTrip and Melco Resorts & Entertainment (Melco), all of which contributed positively in Q1-21.
The Fund built a considerable holding in Melco in the latter half of 2020, as travel restrictions between Mainland China and Macau left Melco’s casinos empty. Melco’s balance sheet was sufficiently strong to withstand the near-term earnings pressure. Costs were restructured to minimise cash losses. Despite these headwinds, our views on the long-term fundamentals of this business are unchanged. The Chinese consumer is in rude health, as evidenced by Mainland luxury spend, and consumers’ desire to visit these assets is undiminished. We expect a strong recovery, as restrictions continue to be eased. In addition, the casinos are highly cash generative, which should drive rapid deleveraging. Despite the strong run in global markets, we continue to see opportunities such as these for stock picking.
After a marked deterioration in South Africa's fiscal metrics during 2020, Q1-21 brought improved news flow. The current account delivered a healthy surplus backed by mining cashflows and a robust agricultural sector. Tax collection efforts exceeded expectations. The February Budget was encouraging, with a commitment to rein in expenditure, specifically the public sector wage bill that has compounded at a rate above inflation for many years. Implementation of the Budget plans will require a sustained commitment to austerity. Much-needed economic growth is frustrated by load shedding, policy uncertainty and a lack of investor confidence. While the projected debt-to-GDP ratio has come in lower than expected, it remains high, and the risk of a debt trap is not immaterial. This tenuous situation is reflected in South African government bonds yielding returns well above cash. We see better value at the long end of the curve, where lower bond prices offer more protection against restructuring. The Balanced Plus Fund is slightly underweight fixed-rate government bonds, striking a balance between the attractive returns and risk.
Having increased exposure to local equities during the third quarter of 2020, we took profits in Q1-21, given the strong run. Despite the selling, the Balanced Plus Fund remains overweight South African equities, given the breadth and attraction of the value on offer. The funds both benefited from large holdings in resources. We continue to hold considerable exposure to rand-hedge names that remain attractive for various stock-specific reasons. Major holdings include Naspers (+17%), British American Tobacco (+4.9%), Quilter (+5.5%), Bidcorp (+8.7%), Textainer (+45.1%) and Aspen (+15.1%).
Within South African equities, the funds reduced the extent of the domestic underweight during 2020, given the move in valuations. Despite reduced medium-term prospects, domestic shares offer attractive upside to fair value. In keeping with the second half of 2020, earnings results from domestic shares have exceeded our expectations in Q1-21. We believe exciting stock-picking opportunities exist, as strong players use the crisis to become even stronger. This was evident in the results of a business such as Shoprite (+12.2% for Q1-21), which delivered strong topline growth and resilient gross profit margins despite economic headwinds.
South African banks have navigated the crisis well. Books appear well provided as borrowers resume debt repayments and low interest rates improve affordability. Capital ratios remain healthy and future earnings should be well supported, given the level of provisioning. Despite sector earnings roughly halving over 2020, Standard Bank and FirstRand returned to paying dividends. The outlook for advances growth is muted, given constrained economic growth. Slow vaccine rollout and possible retrenchments pose additional risks to economic recovery. Life insurers were forced to take additional Covid-19 provisions as a second wave drove a spike in mortality. Still, as with the banks, life insurer balance sheets remain well capitalised. Sanlam, Momentum Metropolitan Holdings and Old Mutual declared dividends. Momentum Metropolitan (+12.1%) remains an attractive investment, trading at a meaningful discount to embedded value. While additional Covid-19 provisions detracted from results, we believe management's actions are delivering underlying operational improvements. Despite the selloff in property shares, we have not built up the position, given concerns over the long-term outlook for rentals and weak balance sheets.
Within the resources sector, the funds benefited from overweight positions in the diversified miners and underweight holdings in gold. Anglo American and Glencore rose 22% and 24%, respectively. Resource shares remain a meaningful part of equity exposure despite their outperformance. Our investment thesis is unchanged – undemanding valuations, solid free cash flow and tight markets. Commodity demand is expected to remain robust, given Asian resilience and a recovery in the rest of the world. Joe Biden’s presidency should strengthen the US’s commitment to transitioning away from fossil fuels. Battery metals have an important role to play in decarbonising the world’s energy mix, and we expect copper and cobalt to be particularly tight as this shift accelerates. Glencore (+24%) should be a key beneficiary.
The platinum group metals holdings in the portfolio (Northam +22.8% for Q1-21 and Impala Platinum +40.7% for Q1-21) performed well. Metal prices remain high given growing demand, supply disruptions and a decade of underinvestment. We have trimmed the positions but remain invested, given anticipated high levels of cash return.
Equity markets have rebounded strongly off the lows of a year ago. While we have trimmed equity exposure in Balanced Plus, we remain overweight and continue to see exciting investment opportunities for stock pickers. We believe that these positions will deliver compelling returns for clients in the coming years.+