Coronation Financial Fund

PERFORMANCE

The Fund returned 7.6% for the quarter (Q2), against a benchmark return of 8.0%. Since inception, the Fund has generated an 11.8% annualised return, 83 basis points (bps) p.a. ahead of the benchmark.

The quarter was dominated by the Middle East conflict and its impact on energy prices. Oil spiked early in the conflict and remained elevated for much of the period, before a US-Iran ceasefire[1], and the reopening of the Strait of Hormuz brought prices back to near pre-conflict levels. The global economy has, however, suffered some damage. The shock lifted inflation and prompted tighter monetary policy in some countries, with June’s central bank meetings highlighting divergence: the European Central Banks raised rates, while the US Fed and Bank of England held steady but struck more hawkish tones. Despite the geopolitical backdrop, equity markets performed strongly, led by emerging markets and AI-related semiconductor stocks. The AI investment boom offset much of the oil-price drag, helping the MSCI All Country World Index rise 15% over the quarter.

The South African market lagged global peers over the quarter, with the FTSE/JSE Africa All Share Index declining 2% in rand terms, though rising 0.8% in US dollars. Weakness was concentrated in Resources, which fell 19% for the quarter as precious metals, including gold and platinum, gave back some of the strong gains achieved over the past year. This was partly offset by positive returns from Industrials and Financials, up 5% and 8%, respectively, over the quarter. Within Financials, banks outperformed life insurers for the quarter, returning 10% versus 6%.

Contributors to relative performance included an overweight position in PSG Konsult and underweight positions in Ninety One plc, Old Mutual, Investec plc and Remgro. Detractors included overweight positions in WeBuyCars, St. James’s Place plc, Optasia Group, and Reinet Investments (Reinet) as well as an underweight in Momentum Metropolitan Holdings.

After selling Pension Insurance Corporation and its entire British American Tobacco stake, Reinet was left with cash at just over 80% of net asset value. The market had expected a significant return of capital to shareholders, but Reinet instead signalled plans to redeploy the cash, prompting a sharp sell-off to levels close to the portfolio’s cash value. In response, Reinet announced a €500m share buyback, representing almost 10% of shares in issue. We view this positively, as it allows Reinet to effectively acquire its own assets at close to a 30% discount.

FUND ACTIVITY

During the quarter, we increased the Fund’s exposure to Absa, Sanlam, FirstRand, and Capitec. We also initiated a position in NuBank Holdings (Nu), while we reduced exposure to Nedbank, Investec, and St. James’s Place.

Nu is a high-conviction investment and one of the most compelling long-term opportunities in Latin American financial services. The investment case is anchored in Nu’s very large addressable market, its digital-first cost advantage over legacy banks, and its increasingly sophisticated use of AI and data-driven underwriting, strengthened by the Hyperplane acquisition. We believe Nu’s superior risk modelling enables it to extend credit more intelligently while maintaining strong capital positions across its markets. We are mindful of risks such as potential net interest margin compression, intense competition in Mexico, and recent management changes, but see these as manageable within the context of a business that remains deeply customer-focused, attracts exceptional talent, and is well positioned to benefit from the continued growth of Latin America’s emerging middle class. We believe the recent sell-off in the share, driven by credit risk concerns, is overblown and more a function of Stage 1 provisioning on loan extension. This presents an attractive opportunity for the Fund.

OUTLOOK

While geopolitical issues continue to dominate the news flow, in the long run, markets and shares are driven by the fundamentals of earnings and FCF growth. As such, we continue to focus the Fund’s exposure to high-quality businesses able to weather tough markets while delivering on earnings growth and generating strong free cash flow under the stewardship of management teams with a strong capital allocation track record.

[1] Conditions remained fragile at the time of writing.

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