Q3: Coronation Financial Fund

This commentary is for the retail class of the fund.

PERFORMANCE

The Fund returned -5.1% for the quarter against a benchmark return of -3.7%. Returns over the past 12 months were 18.1% versus 23.4% for the benchmark. Since inception, the Fund has generated an 11.5% annualised return, 0.8% per annum ahead of the benchmark.

The third quarter of 2026 (Q3-26) was characterised by a resilient July and August, followed by a pull-back in September. The war in the Middle East continued to weigh on energy markets. Late in the quarter, the attack on Saudi oil infrastructure once again pushed oil prices above $100 per barrel. Renewed inflation concerns prompted central banks to resume tightening: the US Federal Reserve raised rates by 25 basis points (bps) to a range of 3.75%-4.0% in September, and US 10-year yields rose more than 50bps in that month alone to end at 5.3% – a level not seen since 2007. Global equity markets were resilient in the face of higher bond yields, but gains remain extremely narrow, with AI-related technology shares continuing to rally while the broader market struggled. Over the quarter, the MSCI ACWI gained 1.6% in US dollar terms, while the MSCI Emerging Markets Index was marginally negative (-0.4%).

Domestically, the quarter was equally uneven. SA Resources rose 15%, driven by strong precious and industrial metals prices through August, before giving back a portion of these gains in September as gold fell. SA Industrials and SA Financials declined, leaving the Capped All Share Index marginally lower (-0.3%) for the quarter. After pausing in July, the South African Reserve Bank hiked the repo rate by 25bps to 7.25% in September, citing the persistence of the oil-driven supply shock and the risk of second-round inflation effects. Within the financial sector, banks (-4%) and life insurers (-6%) both declined, while non-life insurers gained 6%.

The top contributors to performance relative to the benchmark were overweight positions in Brait, Capitec, and OUTsurance. The top detractors were underweight positions in Nedbank, Remgro (to which the Fund has no exposure), and Investec plc.

PORTFOLIO ACTIONS AND FUND POSITIONING

During the quarter, we increased the Fund’s exposure to St. James’s Place (SJP), Nu Holdings and Standard Bank, while we reduced exposure to Investec, Optasia, and Brait.

SJP was the largest purchase and it is now a position of about 2% of the Fund. We think the wealth managers are attractive businesses: SJP, together with Quilter and PSG Financial Services, make up 8% of the Fund. The UK wealth managers in particular are likely to experience many years of growth as pension freedoms reform results in individuals increasingly seeking financial planning advice. SJP’s share price has been dragged lower by the departure of a large partner firm and a well-flagged change to its charging structure impacting negatively on current earnings. More recently fears of disintermediation by AI have resulted in a de-rating of all wealth managers. We don’t dismiss the threat that AI poses to these companies’ business models – we expect that digital will grow at a faster rate than in-person advice as younger people make use of these tools. But we still expect in-person advice to grow strongly given the market tailwinds and the fact that the main demographic that these businesses will serve for some time will continue to value and trust human advice in managing their life savings. SJP generates strong free cash and is expected to compound earnings in the high teens over the medium term. Yet it currently trades on only 10x forward earnings – a rating that we believe more than adequately discounts these risks.

As a broader comment, we are cognisant that we are in an era of unprecedented technological advancement that will affect many industries and business models. Financial services is certainly not exempt. We are not complacent. We continually rethink and challenge our assumptions about the long-term prospects of the businesses we hold. We continue to favour those with strong customer franchises, scale and the capacity to invest in new technology rather than be displaced by it. We consider SJP to be one such business.

OUTLOOK

The environment entering the final quarter of the year is more challenging than many anticipated at the start of 2026. Oil prices above $100 per barrel have revived inflation, and central banks that had been easing are now tightening again. We expect SA interest rates to remain higher for longer, while the conflict in the Middle East and policy unpredictability under the Trump administration will likely keep volatility elevated. The rise in global bond yields, driven in part by heavy issuance to fund AI-related capital expenditure, adds a further source of pressure on asset valuations.

In their June results the banks reported remarkably benign credit losses. A sustained period of higher interest rates and inflation has the potential to cause this to reverse, while for insurers the impact is likely to be felt in new business and persistency. We continue to focus the Fund’s exposure on higher quality businesses with strong returns on equity, sound capital positions and management teams with a good capital allocation track record, which should be better able to navigate volatile and unpredictable economic circumstances. Where possible, we also look to achieve diversification across geographies to gain exposure to stronger growth economies and mitigate single-country risk.

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