THE FUNDS ARE managed to meet the needs of more conservative investors drawing an income from their portfolio over an extended period, and to provide a well-considered balance between risk and return. The more conservative Balanced Defensive Fund recovered by 10.3% in the second quarter of 2020 (Q2-20), taking the one-year return to a positive 2.8% and the three-year return to 5.2% p.a., ahead of inflation but unfortunately not at the targeted level of inflation plus 3%.
The moderate-risk Capital Plus Fund recovered by 11.8% in Q2-20, taking the one-year return to a positive 0.4%. Its three-year return of 3% p.a. did not beat inflation. Both funds’ longer-term returns are still comfortably ahead of inflation and achieved their real return targets of inflation plus 3% and 4%, respectively.
The increased volatility in the markets presented opportunities to add value through active asset allocation decisions. After adding to bonds during the crisis in March, we reduced our position during Q2-20 as long-term bond yields recovered. The South African fiscal situation has deteriorated alarmingly and a budget deficit of near 15% of GDP is now expected this financial year. The additional bond issuance this requires will keep pressure on the market and we are concerned about the possibility of entering a debt trap. Although real yields appear very attractive, the risk has also increased, and we will not add more duration risk at this point.
Within domestic equities, we added to Bidcorp and Anheuser-Busch InBev, two companies that operate globally and should reap some benefits from the recovering global economy. We switched some Northam Platinum into Impala Platinum, but still retain a sizeable position in Northam. We also added to domestically exposed businesses FirstRand and Mr Price at very attractive prices. These two companies are, in our view, well-managed, high-quality companies that will survive the crisis and gain market share.
In the global portion of the funds, we were also active, adding to global equities and then, later in the quarter, buying put protection on the view that the market recovery may have been too rapid and that a second wave of the pandemic was not priced in.
These actions, plus the effect of the rising market, took our exposure to growth assets from 38% at the end of Q1-20 to 43%, and our effective international exposure increased from 21% to 26.6% in the case of Balanced Defensive. For Capital Plus, growth asset exposure increased from 50% to 53% and effective international exposure increased from 22% to 27.4%.
MORE RISK IS KEY
The outlook amid this unfolding pandemic remains murky. However, the unprecedented stimulus and massive liquidity provided are positive for the markets. In addition, inflation is far lower than expected over the near term and the South African Reserve Bank has acted aggressively to cut interest rates to the lowest level we have seen since 1973. This is supportive of risk assets. Returns on cash will likely be below 4% for the next few years, a rate unlikely to exceed inflation. To reach our return targets, a reasonable exposure to risk assets will therefore be required.
Over the longer term, we are watchful of a resurgence in inflation globally as well as locally, as there will eventually have to be a cost to the massive monetary and fiscal stimulus provided in an attempt to limit the devastating impacts of the lockdown on economies around the world. +
Coronation Capital Plus: Highest annual return 33.8% Aug 2004 - Jul 2005; Lowest annual return (9.3%) Apr 2019 - Mar 2020
Coronation Balanced Defensive: Highest annual return 21.2% Jun 2012 - May 2013; Lowest annual return (5.8%) Apr 2019 - Mar 2020