Coronation Market Plus Fund

PERFORMANCE

The Fund returned 4.7% for the quarter and 7.9% for the last 12 months. The long-term returns of the Fund remain pleasing.

FUND POSITIONING

News flow during the quarter centred on three key themes globally: 1) US macro, 2) the ongoing war in the Middle East, and 3) rapid share price increases for artificial intelligence (AI) beneficiaries.

Soaring energy prices drove an uptick in global inflation through April and May. While the European Central Bank responded with a rate hike in June, both the Bank of England and the US Federal Reserve held interest rates steady. However, new Fed Chair Kevin Warsh struck a more hawkish tone in his maiden speech, committing firmly to price stability. Combined with the continued robustness of the US economy, this shifted market expectations toward future Fed rate hikes.

While the market was quite broad-shouldered in looking through the Middle East conflict and assuming a solution would be found, the conflict still introduced a significant amount of volatility and pushed inflation expectations higher. The late-June ceasefire announcement[1] saw high oil prices unwind rapidly. Oil, which peaked at $118 per barrel in April, retraced to around $70 per barrel by the end of the quarter.

AI remained a dominant theme throughout the quarter. Rapid stock price rises for those businesses situated at key supply bottlenecks (e.g., memory) contributed to a narrow market, with returns coming from a small selection of stocks. As index-focused market participants bought those stocks, it saw downward pressure on the rest of the market, which as a collective were sold down in order to be used as funding sources for the memory stocks. This was exacerbated by “AI skittishness”, whereby stocks that the market felt would be ‘losers’ due to AI upending the industry profit pool were sold off indiscriminately.

FUND ACTIVITY

Total equity exposure for the Fund ended the quarter at 71.5%.

We added to our global equity position during the quarter. While index levels may be high, we are finding exceptional businesses trading at large margins of safety relative to their intrinsic values. As a result, the Fund’s global equity carve-out has close to the highest upside in its history, with a very strong quality skew.

South African (SA) equity had a tough quarter at an index level, with the FTSE/JSE Capped All Share Index returning -2%. The Fund fared better than this, largely due to meaningful underweights in gold and PGM stocks. The gold price and gold stocks came under tremendous pressure over the quarter. From its late January peak of around $5,500/oz, gold now trades almost 30% lower at $4,000/oz. Frenzied ETF momentum buying, which contributed to gold’s parabolic rise, turned to selling. One of the bigger drivers of this was more hawkish US monetary policy (as mentioned earlier), which saw real policy rates reassert themselves as a key influence on the gold price.

While our base case was that high energy prices as a result of the Middle East war would be short-lived (and thus not to be traded), we took the view that there would be an enduring impact on the PGM markets. This was the first energy crisis where car buyers had an alternative to the combustion engine. We see the price spikes as pulling forward the shift to battery electric vehicle (BEV) adoption – something we have always forecast but now expect to happen sooner. This worsened supply/demand balances along with our price expectations. As a result, we materially reduced our PGM holdings.

We added to our holdings in Naspers/Prosus on share price weakness, rotated some of our diversified miners like Glencore into cheaper alternatives (Exxaro, South32), rotated our small gold position towards Harmony Gold and added to our ABSA position.

Total bond exposure ended the quarter at around 16.7%. We continue to hold no developed market debt, as we view yields as unattractive, considering high government debt levels. We hold a small position in global credit, although we reduced it meaningfully on a significant contraction in credit spreads.

SA bonds performed strongly during the quarter, with the FTSE/JSE All Bond Index returning 8%, meaningfully outperforming cash (+2%). Bonds started their rally after the strong Budget in February (which showed strong fiscal credibility), paused during the Middle East conflict, and continued their upward march after the ceasefire. Our domestic government bond holding has a mild tilt towards inflation-linked bonds.

SA property performed extremely well during the quarter, echoing the themes seen in SA bonds. The FTSE/JSE All Property Index ended the quarter 10% higher. We have maintained a healthy weight in SA-listed property stocks at 9.2% of the portfolio. We consider our SA property and SA bond holdings together, as both satisfy the yield component of the portfolio. SA property earnings tend to be sensitive to interest rates, and, at current levels, the income yields available in the property sector are particularly attractive. During the quarter, we reduced our holding in Hammerson (it saw strong share price performance against a weak UK macro backdrop) and bought Fortress and Resilient.

OUTLOOK

We find good upside across all of our building blocks, notably global equities. We expect this upside to deliver compelling real returns over the long term.

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

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