Karl Leinberger is Chief Investment Officer and has 23 years of investment industry experience.

Sarah-Jane Alexander is an analyst and portfolio manager with 20 years of investment industry experience.

PERFORMANCE

The Fund had a good year, returning 7.8% in the final quarter of 2023 (Q4-23) and 14.9% for the 12-month period. Both asset allocation and security selection contributed to this performance. The Fund has also performed well over more meaningful periods of time.

FUND POSITIONING

After rapid rate rises throughout 2022 and the first half of 2023, inflation in developed markets receded swiftly in Q4-23. Prospects of rate cuts into 2024 fuelled global markets in the last quarter, with the MSCI All Country World Index returning 11% in Q4-23 (to end the year up 22% in USD). Fears of a US recession were allayed by resilient labour markets and a robust consumer. Several high-profile bank failures were well-contained and did not lead to any broader systemic issues.

After steadily building exposure to global equities during the market sell-off of 2022, the Fund entered the 2023 calendar year overweight growth assets (and particularly global equities). This position has contributed meaningfully to performance. However, the extent of the market recovery in 2023 means that further upside in global equities will have to come from stock picking. Consequently, we have moderated the global equities position to reflect the likelihood of lower returns in the future.

The much-touted post-Covid Chinese recovery has disappointed with weaker-than-expected growth (MSCI China -4% in Q4-23 and -11% for the year in USD). Lower growth prospects and a weak real estate sector do, however, open the door to further stimulus in the year ahead. Notwithstanding the risks of investing in China, we believe a holding in the portfolio is warranted, given the very low prices at which many high-quality businesses trade.

Oil prices softened during 2023 (-10%) given weaker-than-expected demand, resilient supply out of Russia and stronger non-OPEC supply. The market is sceptical that OPEC can defend higher oil prices. To our surprise, the oil market comfortably absorbed a dramatic increase in tensions across the Middle East. Geopolitical uncertainty does, however, remain heightened, given the Middle East conflict, the ongoing Russia-Ukraine war and tensions between China and the US.

Bond yields retreated off their highs as inflation forecasts have receded. The Bloomberg Barclays Global Aggregate Bond Index (USD) returned 8% for the quarter (+6% for the year). The Fund has no exposure to developed market sovereign bonds given our view that yields offer insufficient compensation for heavily indebted sovereign balance sheets. However, the Fund has a sizeable holding in offshore credit bonds. These bonds trade on high single-digit US dollar yields. The basket of offshore credit offers diversified exposures across multiple geographies and sectors. We believe these holdings present a compelling alternative to the risks inherent in South African (SA) government bonds and the very narrow credit spreads in our domestic credit market. US and European High Yield credit bond indices posted strong returns in 2023 of 8.5% and 8.0%, respectively (in USD). Notwithstanding these returns, we continue to expect good returns through the remaining holding period.

In SA, the economic outlook remains constrained by failing infrastructure, a thinning talent pool and the rising costs of doing business. We, therefore, expect domestic inflation to be stickier than many expect it to be. Although lower levels of loadshedding should bring some relief for businesses, we don’t believe that it will be sufficient to materially change the muted growth prospects for the domestic economy.

The FTSE/JSE All Bond Index delivered a return of 8% for the quarter (+10% for the year). We remain concerned about the sustainability of SA’s high sovereign debt level, given the poor fiscal outlook and the inability of the government to reign in expenditure. Rising debt service costs, wage increases, ongoing bailouts of failing municipalities and State-owned enterprises, as well as social support in the form of grants all place a heavy burden on the fiscus. Despite high government bond yields, the Fund has an underweight position given the longer-term risks.

The currency weakened by -7% against the US dollar for the year, undermining the relative returns of the domestic asset classes when compared to the global alternatives.

The FTSE/JSE Capped Shareholder Weighted Index returned 8% for the quarter to also end the year up 8%. Amongst the domestic asset classes, the Fund favours SA equities. SA equities offer attractive return prospects and diversification away from a tough domestic economy given the high offshore exposure of many JSE-listed companies. Fund holdings include global stocks listed on the JSE and selected resources and domestic stocks. Domestic stocks offer good stock picking opportunities. But avoiding value traps is critical. A slew of weak domestic results throughout 2023 illustrated the pain that comes when costs grow faster than the top line. We favour strong businesses that can grow faster than the underlying economy and can pass cost pressures on to customers.

The financial sector returned 12% for the quarter (+21% over 12 months). The Fund held a sizeable position in the SA banks during 2023 given their low ratings, high dividend yields, and the prospect of strong revenue growth supported by interest rate rises. This enabled our holdings to deliver earnings growth despite higher credit losses. Credit losses are expected to subside as the interest rate cycle turns. Given the attractive valuation of banks, we believe they continue to merit a place in the portfolio.

The resource sector returned 3% for the quarter to end the year down 12%. The Fund holds an underweight position in resources, given early profit-taking across most of the sector (diversified miners, PGM miners and gold shares). The long-term PGM outlook is bleak as electric vehicle adoption accelerates and local producers battle rising production costs. The underweight position in PGMs has benefited the Fund, which continues to have no exposure to pure-play PGM producers. Gold prices rose during the year (+13%), supported by central bank buying and heightened geopolitical uncertainty. The gold equities are discounting gold prices close to spot. Consequently, we do not believe they offer a sufficient margin of safety.

The Industrials Index rose 6% for the quarter (+17% for the year). The Fund’s core holdings include many of the global stocks listed in SA: Naspers, Richemont, Aspen, Bidcorp, British American Tobacco, and Anheuser-Busch InBev. The Fund has been a long-term shareholder of Textainer, indirectly through a holding in Trencor (of which Textainer was the major asset) and directly (post the 2020 unbundling). Coronation actively engaged with Trencor management over many years to achieve the Textainer unbundling. It was pleasing to see recognition of the value that had been trapped in the Trencor structure with the private equity offer for Textainer at a meaningful premium during Q4-23. The Fund exited its position on the back of this.

While the medium-term outlook for the property sector remains constrained, double-digit dividend yields have allowed us to add selected exposure through a few key stock picks.

OUTLOOK

Given the market strength in 2023 (and a particularly strong fourth quarter), market indices offer less upside. However, stock picking opportunities abound. We believe that a carefully selected portfolio of global equity and global credit holdings offers attractive risk-return benefits. These offshore holdings are supplemented by a basket of cheaply priced local assets. We believe that the Fund should continue to deliver attractive returns over the medium to longer term.


DisclaimerSA retail readersComprehensive fact sheet

Karl Leinberger is Chief Investment Officer and has 23 years of investment industry experience.

Sarah-Jane Alexander is an analyst and portfolio manager with 20 years of investment industry experience.


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