Q3: Coronation Industrial Fund

This commentary is for the retail class of the fund.

PERFORMANCE

The Fund has returned -10.8% year to date, ahead of the benchmark’s -13.6% return. Much of this relative return was achieved in the third quarter (Q3), with the Fund producing an active return of 2.9%. Since inception, the Fund has generated a 14.6% return, 1.8% ahead of the benchmark

The quarter was dominated by the geopolitical and market volatility we have become accustomed to over the last few years. The continuation of the war in the Middle East, the buildout of artificial intelligence (AI) infrastructure, and rapidly rising borrowing costs around the world have remained key features driving news flow and markets.

Contributors to relative performance in the quarter were our overweight positions in Advtech, Stadio, and Bytes Technology Group. Detractors were underweight positions in Vodacom and Bidvest, which both had relatively strong quarters. Absolute returns have been soft, with many SA Inc. stocks continuing to de-rate and ongoing pressure in most of the offshore names.

Companies with exposure to the South African economy continue to be under pressure. A decade of slow economic growth, high levels of unemployment, and infrastructure challenges has weighed on the economy. Our optimism on the outlook has increased over the last two years. This as reform has started to have a positive impact, the GNU brought in some political stability, and the commodity boom, combined with some fiscal restraint, has helped to make our debt trajectory more stable. Unfortunately, all of this good work is starting to be undone by the massive increase in fuel bills and the inflationary impact on consumers. In addition, persistently high levels of funding costs further dampen consumer health. The recent anti-illegal immigrant push has also resulted in a large number of consumers leaving the country.

As a result, the cautious optimism we have felt about the economy has receded as these conditions have dragged on throughout the year. And when we look at the actual results being reported by SA Inc. businesses, the pressure is there for all to see. Our focus for some time now has been on ‘winning companies’ who, in South Africa, are able to grow profitably in a challenging economy with persistently high administrative input cost pressures such as electricity, water, rates and security. The top contributors to performance this quarter, and in fact over five years in the case of Advtech, are emblematic of these winning businesses. (You can read a more detailed review of Advtech here.) Both Advtech and Stadio are in competition with a struggling state education sector, and they offer compelling value-for-money education across physical or distance learning. We believe their growth runways are more than a decade long and despite their strong share price performance we remain fully invested in the businesses.

We initiated a position in Vodacom during the quarter and added to our Anheuser-Busch InBev and Prosus positions. These purchases were funded primarily by our holdings in Bytes Technology, Dischem, and Grindrod.

OUTLOOK

The Fund remains slightly underweight the South African economy, and is focused in the various winning businesses that we have identified. The bulk of the portfolio continues to be made up of the globally-operated stocks in the index. If one were to assess the portfolio as a single company, it is trading on a 12.7x forward PE, converting 80% of its earnings into free cash flow and stands to grow earnings by 15% per annum over the next three years. We think this is a very attractive proposition and are optimistic about returns from this base.

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