Coro: We are at pretty much full equity exposure - November 2021
Even two decades after the fund’s launch, the managers of the R13.4bn Coronation Capital Plus fund are discovering new lessons to be learnt.
Co-manager Pallavi Ambekar told Citywire South Africa that the turmoil of the last 18 months has highlighted to her the value of a portfolio’s tactical asset allocation.
‘Our fund, going into Covid, was actually not really well-positioned,’ she said. ‘We were pretty high in risk assets, so we were very impacted from a performance point of view. But you had to park that aside and look with fresh eyes at the opportunities that then became available.’
This was not easy to do given the abundant uncertainty in the first half of last year, but that is the kind of environment where Ambekar believes fund managers needed to prove their value.
‘It was a very difficult time, but you had to keep your head straight to take advantage of the enormous investment opportunities sitting at your feet at that time. It wasn’t obvious that that’s what they were, but in hindsight, you can safely say you could have bought any asset class other than gold, cash or US Treasuries and you would have done really well as a South African investor.
‘The power of making good asset allocation decisions really came through for me in that. I think at that time of heightened risk and stress, the ability to fight your own human nature and fear, and be willing to look at valuations in a cold and clinical manner was a big lesson.’
Ambekar believes that there were a few specific decisions that she and co-manager Charles de Kock made that were particularly important.
‘We went into the crisis with a reasonable position in South African fixed income. In March, that didn’t really help us, because even though bonds are supposed to be a buffer against equity falling, our fixed income yields also blew out. But as things were playing out, the first thing we did was step up our fixed income exposure.
‘We bought 10-year bonds on yields that had blown out to the teens because we thought that was a very attractive risk-return payoff. And as yields normalised, we sold some of those bonds and redeployed that capital into global equities that had sold off.’
This was a lesson in how asset allocators must be prepared to act quickly in identifying which opportunities are most attractive in a rapidly changing environment.
‘Throughout the course of last year and most of this year, that has been one of the hallmarks of managing this fund,’ Ambekar said. ‘We have been very active in our asset allocation. We initially stepped up global exposure, then as global equities rallied and South African equities lagged, we picked up more local equity exposure. Now we are pretty much sitting full in terms of equity exposure.’
Although the Coronation Capital Plus fund has moved out of the multi-asset medium equity category and into the multi-asset high equity category from the start of August, Ambekar noted that there is still more emphasis on risk management in this portfolio than there would be for a flexible or typical high-equity fund.
‘The biggest difference in my mind is how we diversify amongst asset classes and then within asset classes as much as possible,’ she said. ‘We are not reaching for return at the expense of risk. When we compare our South African equity holdings against those of our higher-risk multi-asset funds, we would be a lot more diversified.
‘For example, we would hold all four banks instead of just one or two that are the most attractive. And we would limit our exposure to cyclical sectors like resources. Even though we have a view that resources are generally quite attractive, our exposure to a sector like that would be limited to a certain size to mitigate volatility.
‘Another big thing is the way we think about put protection. We currently have protection against both global and local equity. We also evaluate the value of that against its cost. So far, we are finding that the put protection we have taken has been relatively cheap and we’ve been quite willing to take it on as insurance against any extreme event.’
Ambekar also has a focus on managing the interplay between asset classes.
‘We have quite a high exposure to risk assets, but we have balanced that with how we are positioned in fixed income,’ she said. ‘Although we are seeing attractive yields at the long end of the curve, we are managing our duration so that we are not duplicating risk in South African fixed income and South African equity.’
The fund is also carefully managing its offshore exposure. While Ambekar recognises the diversification benefit, that has to be weighed up against the return potential.
‘It’s fair to say that global equity, especially US equity looks quite expensive. Government bonds with mostly negative real yields don’t look very attractive. There might be selective opportunities in global property, but I wouldn’t put the majority of my offshore exposure in property.
‘So, we are not at our maximum offshore allowance. The overall view expressed in the portfolio is that South African assets have more valuation upside than offshore assets, so our offshore exposure is currently around 24%, of which 20% is global equity.
‘We think there are stock-picking opportunities in global equity and that view is being expressed. But for us, the other global asset classes don’t present good risk-adjusted returns.’
Originally published on Citywire South Africa on 2 November 2021.