Coronation World Equity Fund of Funds
01 January 2011 - Tony Gibson
As we move into 2011, you will by now be aware of our well communicated promotion of the merits of international investing. We are strongly of the opinion that high quality international equities offer attractive value over the medium term. This is both on an absolute basis – when viewed in the context of their abysmal returns of the past 10 years, and on a relative basis – when compared to the buoyant returns enjoyed by investors in the South African equity market. As an illustration of this, for the 10 years ended 2010, the South African equity market returned an annualised 18.1%, whereas the MSCI World Index (in rand) returned a paltry 1.5% p.a. As an overlay to this view, it is also our belief that the rand is unsustainably high, and that it will depreciate sharply at some point over the medium term. We do, however, acknowledge that the timing of this forecast is notoriously difficult to finesse.
A cynic might well observe that this opinion is hardly original at present, as it is shared by a number of our investment company competitors in South Africa. That said; when analysing the inflows into the local unit trust industry, there is little evidence to suggest that this is a consensual view. On the contrary, the overwhelming majority of inflows continue to be channelled into the domestic equity and balanced unit trust funds.
With the introduction as context, we thought it appropriate to provide an update on our international equity funds of funds. We currently manage in the region of US$1.2 billion of client assets in our three equity funds of funds. Two of these funds are domiciled offshore – in Ireland and Cayman – while the third is domiciled in South Africa. The offshore domiciled funds are aimed at investors with access to US dollar capital, while the South African-domiciled fund is suitable for investors wishing to use rand-denominated capital to access international equity investments.
Across the three funds we have allocated capital to 14 different equity managers, some with regional mandates, and others with global mandates. In all cases, we have selected managers who are as close as possible – in terms of investment philosophy and practice – to the way we select equities within the Coronation investment team. In essence, we will only allocate our clients’ capital to managers who meet the following overriding characteristics:
- They are valuation driven – applying fundamental bottom-up stock picking with a long (five-year) time horizon.
- They focus on modelling earnings and free cash flows going out five years, calculating fair values and buying shares trading well below fair value.
- We avoid managers who are momentum traders, index huggers or macro top-down managers.
- We essentially allocate capital to individuals of such quality as would make us proud to employ them within our Coronation investment team.
As mentioned above, the Coronation World Equity Fund of Funds is domiciled in South Africa. Due to this fund falling under the very onerous regulations insisted on by the South African Financial Services Board (FSB), it has in the past proven extremely difficult for us at Coronation to source managers who are both talented, but at the same time meet the FSB’s criteria. This has, at times, proven to be rather frustrating.
Looking into 2011 we are, however, confident that the current structure of the fund is the best that it has ever been and it now comprises a collection of world-class managers who fully meet our selection criteria as highlighted above. In recent months, two factors have changed which have enabled us to structure the fund more favourably. These are:
- A number of managers – who met our criteria but did not offer products fully in compliance with FSB requirements – have helped us by either adapting their funds, or creating new ones, so as to qualify for inclusion into our fund of funds.
- The Coronation international investment committee has taken the decision to run the fund on a more concentrated basis than our other funds of funds. The logic behind this decision is that, given the relatively small universe of talented and qualifying managers, where we hold high conviction views on a manager we should take them up to the full permissible weighting of 20%.
The net result is that the Coronation World Equity Fund of Funds presently comprises eight managers, with the top three representing 50% of the portfolio. Below we have detailed the current fund structure: showing the manager, the percentage allocation, and the annualised alpha generated by the underlying managers since their inception dates.
Focusing on the annualised alpha numbers against the managers’ benchmarks, all are excellent. History (and performance surveys) shows that managers who consistently generate alpha of 2% p.a. would place the manager in the top 10% of their investment universe of competitors. By definition, each of the managers selected by Coronation makes up a highly successful fund.
In summary, we believe that investors should seriously consider the following points.
- If you believe in Coronation’s current outlook regarding the relative and absolute attractions of international equity markets – do you have adequate exposure to international equities?
- Do you believe that Coronation’s investment philosophy and equity selection criteria are well considered and effective? If so, this fund is fully consistent with the Coronation philosophy.
- Coronation World Equity is a concentrated fund of funds, with exposure to a small number of highly skilled and successful equity managers.