Despite setbacks associated with the spread of the Covid-19 virus’s new Delta variant, the global economic recovery remains on track. Vaccinations in developed nations have progressed well in most countries and the route to a more normal world is looking increasingly likely. The rollout of vaccines in the emerging world, including South Africa (SA), has been far slower, and the normalisation of these societies and economies will consequently take longer.
The strong performance of commodities and the positive impact on SA’s terms of trade have kept the current account in a substantial surplus and has supported the rand. Measured against the US dollar or the euro, the rand is now back to levels last seen five years ago in 2016. The firmer rand has also had a beneficial effect on expected inflation, giving the South African Reserve Bank enough room to keep interest rates at the current low levels for longer.
The past quarter was also marked by a number of positive political developments. The sale of the majority stake in South African Airways, the commitment to give independent private producers the right to generate power of up to 100 megawatts and the cancellation of the Turkish powerships on environmental grounds are signs that practical measures rather than ideology are winning these battles. The fight against corruption has also moved forward with several bold steps, including the suspension of ANC Secretary General, Ace Magashule, the placement on special leave of Health Minister, Zweli Mkhize, and, finally, the jail sentence handed down to former President Jacob Zuma by the country’s highest court. These significant steps bode well for the future of a cleaner government.
Balanced Defensive posted a return of 1.7% over the second quarter of 2021 (Q2-21) and 13.4% over the past year, while Capital Plus returned 2.1% for the quarter and 17.7% over the past year, both well ahead of their respective inflation plus 3% and 4% targets. Real returns over longer periods are ahead of inflation over most periods. Since inception, Capital Plus and Balanced Defensive achieved very pleasing real returns of 5.8% and 3.6%, respectively.
We often write about the importance of long-term investing and measuring success or failure over long periods of time. In July, Capital Plus celebrates its 20-year anniversary, a period during which its investors have seen bull and bear markets, crashes and booms, currency collapses, the Global Financial Crisis and, more recently, the Covid-19 pandemic. Throughout it all, the investment team at Coronation has tried to navigate these turbulent times by investing in such a way as to grow the portfolios at a rate in excess of its targeted real return of inflation +4% while preserving capital as well. It is indeed pleasing to look back at the 20-year history and to be able to report that the Fund has delivered a real return of 5.8% p.a., net of fees.
From an asset allocation perspective, we added exposure to equities after the big pandemic-induced selloff in early 2020. The higher equity exposure and consequent strong price recovery contributed the most to the funds’ one-year performance. Within equities, Anglo American, Altron, Northam Platinum, Impala Platinum and FirstRand were the biggest contributors to Fund returns, while British American Tobacco, gold shares and Naspers detracted marginally.
Over the past year, we were very active in Richemont, the luxury goods company and owner of jewellery brands such as Cartier and Van Cleef & Arpels. The funds sold their entire holding in early 2020 on the view that the pandemic-induced travel restrictions affecting China, in particular, would be very negative for the sale of luxury goods. However, towards the end of Q3-20, we took the view that the pandemic will most likely be controlled through global vaccinations, leading to a strong rebound in the sale of luxury goods. We therefore reestablished a sizeable position in Richemont. The share price has since recovered well. Although quite highly rated now, its prospects for when global travel resumes, and its exceptionally strong balance sheet are valid reasons to maintain it as one of the funds’ top 10 holdings.
At the time of writing, SA is in the midst of the third wave of the Covid-19 pandemic and the vaccine rollout has been far too slow. One can easily succumb to emotions of despair or anger when confronted by this pandemic, but when making investment decisions, one should try to put these emotions aside in order to remain measured, analytical and objective. Our analysis continues to show very good value in many JSE-listed stocks. Our investment approach of looking through the cycle and focusing on normal earnings leads us to remain fully invested in equities at this time. Subsequent to the selloff of early 2020, we added to our equity exposure and, whereas we have trimmed our global equities somewhat on valuation concerns, we maintain our higher SA-listed stock exposure where we see good value across many sectors and companies.
It is in the global investment universe where we have more concerns. Global government bonds offer very poor value, in our view, and the valuation of equities does not leave much room for disappointment either. The funds are, consequently, not at their full offshore weighting.
We do believe returns in excess of our inflation plus 3% and 4% targets for Balanced Defensive and Capital Plus, respectively, are achievable with the combination of assets currently held within the funds.