For the 2020 calendar year, Coronation Equity delivered 14.2% relative to the benchmark return of 8.4%, while Balanced Plus delivered a return of 8.9%, benefiting from value-adding asset allocation decisions and strong alpha in domestic equity. For Q4-20, Equity returned 13% and Balanced Plus returned 9%. The funds have performed well against their respective peer groups over meaningful time periods.
The portfolios were well positioned in the domestic equity market, with a high exposure to the rand hedge names and resources. Selected rand hedge stocks remain attractive for a variety of stock-specific reasons. Major holdings include Naspers (+32%), British American Tobacco (-1.5%), Quilter (9.1%), Bidcorp (-19%), Textainer (104.9%) and Aspen (+5.2%). Despite slashing our expectations for domestic shares, their meaningful underperformance during the year means many of these names now look undervalued, with investor concerns reflected in single-digit price earnings. Over the last few quarters, we increased our weighting in the banks (predominantly FirstRand), life insurers (Momentum Metropolitan Holdings and Sanlam) and several others. Results from domestic businesses have exceeded our expectations thus far with more top-line resilience and better cost control than we had anticipated. We remain concerned about headwinds into 2021 as a weak macroeconomic environment persists and cost-cutting efforts result in another round of retrenchments. Banks, too, have exceeded our expectations as borrowers resume debt repayments and low interest rates improve affordability. Sizeable provisions offer near-term protection to bank earnings in a weaker economic environment. The funds remain underweight domestic businesses. 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.
RESOURCES REMAIN ATTRACTIVE
Notwithstanding the outperformance by the resource shares, they remain a meaningful part of equity exposure, given undemanding valuations and solid free cash flow. The diversified miners are benefiting from tight markets, given the resilience of Chinese demand and a limited supply response due to disciplined capital expenditure over the last few years. The funds continue to hold a sizeable position in Anglo American, which despite its performance (+25.9%, +19.1% for the quarter) still trades on an attractive price-to-earnings ratio of less than 10 times one year forward. The fund also holds a position in Glencore (+8.0% for the year and +33.3% for the quarter), which, with its attractive commodity basket, should benefit meaningfully from decarbonisation. We see material upside, even after applying environmental, social and governance (ESG) factor penalties.
The platinum group metals holdings in the portfolio (Northam +69.5% for the year and +23.1% for the quarter; Impala +47.7% for the year and +38.8% for the quarter) performed very well. They are expected to deliver material returns to shareholders as earnings growth is underpinned by tight markets on the back of mounting emissions regulations and a decade of underinvestment by the sector. Strong balance sheets and bounteous free cash flow generation enable high levels of cash return.
With the strong movement in the gold price, our underweight position in the gold equities hurt performance, given the leveraged nature of earnings for their high-cost, short-life assets. We used the selloff in the fourth quarter of 2020 (Q4-20) to start buying AngloGold. Balanced Plus benefited from exposure to physical gold in the year.
A TENUOUS SITUATION
Although Covid-19-related economic shutdowns and fiscal stimulus resulted in deteriorating fiscal metrics around the world, the South African situation was compounded by the country entering the pandemic with an already weak balance sheet. The October Medium Term Budget Policy Statement proposed a plan to cut levels of government expenditure by reducing the wage bill, but this will require union support and a willingness to endure sustained austerity. Without these cuts, South Africa’s debt-to-GDP levels will continue deteriorating and debt restructuring will be required. This tenuous situation is reflected in bonds yielding well above cash returns. We see better value at the long end of the curve where lower bond prices offer more protection. Despite the attractive yield, we continue to reassess the Balanced Plus Fund’s exposure to bonds, given the risk.
OFFSHORE TECH BENEFITED
Both funds benefited from their offshore allocations as international markets rebounded more rapidly, given better management of the pandemic. In particular, the exposure to technology companies aided performance where Covid-19 resulted in an acceleration in the digital economy as many parts of the physical economy were locked down.
The Equity Fund’s investments in JD.Com, Spotify, Alphabet, Facebook, Alibaba and MakeMyTrip all contributed to performance during 2020. MakeMyTrip was hard hit by the initial selloff, but recovered strongly in Q4-20 on an anticipated recovery in travel. A new position was established in Tencent Music Entertainment Group, which owns the leading music streaming platform in China. The business already has more than 650 million monthly users, but still has relatively low levels of monetisation.
The growing strength of technology companies in many sectors has increased scrutiny and is likely to result in tighter regulation. Despite this headwind, we believe the potency of the business models, with their compelling user offers, means these businesses will continue to grow strongly in the years ahead. The valuations therefore support continued ownership.
Throughout the volatility experienced during 2020, we have retained our commitment to investing for the long term. We have tried to use the uncertainty created by the pandemic to build robust portfolios of assets where we believe the market is mispricing the long-term fundamentals. We believe that this will continue to deliver compelling returns in the coming years.