Coronation Smaller Companies Fund

PERFORMANCE

The Fund delivered a return of 4.5% for the second quarter, a pleasing result against a backdrop of heightened macro uncertainty. Our three-year compound annual return has strengthened to 17.8%, placing the Fund 1st in its peer group – an outcome that reflects the value of patient, bottom-up stock selection in the mid- and small-cap segment. The quarter was not without its challenges. South African (SA) equities moved broadly sideways through April and May as markets absorbed a sharp rise in fuel costs following continued disruption to Middle Eastern oil supply due to the ongoing conflict. Diesel prices remained materially elevated, with producer price inflation jumping to 4.8% year-on-year in April, the sharpest monthly acceleration in several years. Inflationary pressure built to the point that the SA Reserve Bank raised the repo rate by 25 basis points to 7% at its May meeting – its first hike since 2023 – citing deteriorating inflation forecasts and second-round effects from fuel costs. Financials were the most resilient domestic sector, while resource stocks remained under pressure amid a retreat in precious metals from early-quarter highs. In the Fund’s universe, the environment was mixed: consumer staples and value retailers held up well given their defensive characteristics, while businesses with fuel-cost exposure and discretionary demand characteristics were more challenged.

FUND ACTIVITY

Two of the largest buys during the quarter were Pepkor and Exxaro Resources. Pepkor is SA’s dominant discount retailer, with the PEP and Ackermans brands serving the bottom half of the income distribution – precisely the segment that holds up best when consumers are under pressure from rising fuel and food costs. The business continues to execute well on its financial services strategy. The share price has de-rated in line with broader apparel retail weakness, creating an entry point we found attractive given the quality and defensiveness of the franchise and Pepkor’s proven track record of execution.

Exxaro’s investment case is relatively straightforward: the company is SA’s largest domestic coal producer, with a dominant Waterberg position supplying Eskom under long-term contracts and a strong net cash balance in excess of R18 billion, which allows the payment of an attractive dividend, yielding around 8.5%. At current prices, the market appears to be applying an accelerated coal obsolescence discount that we view as excessive given the realistic longevity of Eskom’s coal demand.

Two of the largest sells during the quarter were Grindrod and Quilter. Grindrod has been a strong performer for the Fund on the back of strong execution of their strategy to move more volumes through their various ports and terminals. After a period of meaningful share price appreciation, we feel that the valuation has moved to reflect the improved earnings trajectory and that upside from here was more limited. We reallocated the proceeds into names offering better risk-adjusted returns at current prices.

Quilter, the UK wealth management platform and advice business, has been a holding that has delivered well for the Fund, but we have become increasingly cautious about the structural outlook. The FCA’s regulatory scrutiny of the UK advice market, combined with their desire to provide advice access to more UK consumers, could be either negative or positive for Quilter. It’s, however, too early to say which outcome is likely. We reduced our overweight to a more neutral position.

OUTLOOK

Looking ahead, the portfolio is positioned to navigate a more difficult consumer environment with limited exposure to the more discretionary part of the economy. While market uncertainty remains elevated, we are finding selective opportunities in quality businesses that have been caught in broader sector de-ratings. The Fund’s balance of defensive consumer names, carefully chosen commodity exposure, and high-quality mid- and small-cap franchises leaves us well placed to continue compounding returns for unitholders over the medium term.

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