Coronation: The asset allocation lessons we’ve learned over two decades - October 2021
The Coronation Market Plus fund reached its 20-year milestone earlier this year. Co-manager Neville Chester reflects on the lessons learnt for asset allocators.
Over 20 years to the end of August, the Coronation Market Plus fund produced an annualised return of 14.9%. That is ahead of the 13.3% return of its composite benchmark and the 14% per annum from the FTSE/JSE All Share index.
This is a notable track record, particularly given how it has been achieved. Although the fund sits in the ASISA worldwide multi-asset flexible category, it has always been predominantly invested in South African assets.
Its latest fact sheet shows a 49.5% allocation to South African equity, 20.7% to local bonds, and 20.2% to international equity.
Co-portfolio manager Neville Chester told Citywire South Africa in an interview that understanding the optimal asset allocation for a South African investor has always been a key concern.
‘We always had in mind that this portfolio should be how a balanced fund would look for the average South African investor if they were not constrained by Regulation 28,’ Citywire A-rated Chester said.
Local asset allocators can therefore learn a lot from how the fund has been managed. And a healthy exposure to local stocks has always been a part of its approach.
‘Despite the last five years, domestic equity has still been far and away the best-performing asset class in rand over the long term,’ Chester said. ‘So, getting offshore exposure is not just about taking all your money offshore.
‘The average South African investor retiring on a small pot also can’t deal with the volatility of having all of their money invested offshore because we know the currency can do peculiar things. For example, just after the fund started in 2001, the rand sold off and everyone rushed their money out of South Africa at exactly the wrong time. They invested in very expensive equity in the US and suffered very poor returns as a result.
‘The average South African investor living in South Africa, dealing with South African inflation and South African conditions still wants the majority of their assets invested in South Africa, but with decent diversification outside of the country.’
Chester added that when Regulation 28 only allowed 15% of a portfolio to be invested offshore, the offshore allocation decision was even more difficult. The portfolio managers on this fund have, however, always enjoyed additional flexibility.
‘When you have a limited amount that you can take offshore, you are loathe to bring any of that back when the rand sells off massively,’ he said. ‘If 15% is all you are allowed, you want to keep that offshore at all times. When you have the ability to have more offshore, that actually gives you the flexibility to bring money back.
‘That’s what we did in the most recent period. Going into the crisis last year we had a decent amount offshore, but when the rand sold off to R19 to the dollar, we felt comfortable bringing a chunk of that back. That is something that has proved its worth. Offshore allocation isn’t perpetual. If you have more flexibility around it and you can take out more when the rand is strong, you are inclined to bring it back when the rand is cheap.’
Diversification at a cost
He added that you also have to consider the opportunity set at different times in the cycle.
‘If you are offshore at the moment, you only have one asset class to invest in, which is equities,’ Chester said. ‘But if you have a lot of money domiciled locally, it’s not just an equity bet. The bond market does offer value as well.
‘A fund that has taken everything offshore is in a more difficult position. It’s a tough mind shift for them to say I’m now going to bring it back and buy South African government bonds.
‘There is lots wrong with the South African economy, but currently, we are benefiting from very positive terms of trade and real interest rates are significantly positive. You are earning an 8% to 9% positive return differential. It’s very difficult to see how that return in rands is going to be beaten by money sitting in dollar cash earning zero. You require 10% currency depreciation per annum, which even by the rand’s standards would be extreme.
‘Those are the payoffs you are looking at. You can take your money offshore, but that diversification is coming with a cost.’
Originally published on Citywire South Africa on 15 October 2021.