Corospondent - January 2019
Kirshni on point - January 2019
2018 IN REVIEW
As years go, it’s safe to say that 2018 is right up there with some of the roughest we have seen. But it was also a year in which Coronation turned 25. Such a milestone birthday is naturally a good time to reflect on how far you have come, where you find yourself, and where you are headed.
It’s clear that, while we have operated through years of immense change since launching in 1993, our singular focus on our clients and delivering them long-term investment outperformance and service excellence has always remained constant. Starting with no assets and no clients, we have grown to become a significant, independent South African asset manager.
It is our compelling long-term track record, steadfastness and experience that gives us the solid foundation to withstand years like 2018. It was a dismal one for investors globally, with price declines in most asset classes. Treasury Bills beat the returns of almost every major asset class last year.
To put the returns into context, Goldman Sachs shows that, over the last century, there have only been three other periods in which treasuries have had such outperformance: when the US hiked interest rates to 20% in the early 1980s, during the Great Depression, and at the start of the First World War.
LIFE BEYOND RAMAPHORIA
For the South African economy and markets, it’s been the worst year since the dawn of our new democracy. The FTSE/JSE All Share Index ended the year down 8.5% and the rand weakened by 13.8% against the US dollar.
Many South Africans started out hopeful for a post-Zuma recovery under new president Cyril Ramaphosa. But growth continued to disappoint and instability in the treasury continued. The current account deficit widened, the mining sector contracted, and manufacturing output was weak. The agricultural sector, which was already under pressure due to rand weakness, land reform and food price inflation, was hit hard by the prolonged drought. Thank goodness for those winter rains we saw in Cape Town, which brought some welcome relief and a slight extension to the now globally infamous two-minute shower.
Hard truths also rained down at the Zondo Commission, revealing the depth and cost of corruption at the highest levels of business and government. All of this, along with a disturbingly high unemployment rate of 27.5%, put South Africans under immense strain last year. When the day-to-day gets tough, it’s so much harder for people to save. This pressure has impacted the long-term savings environment. Read more about the South African economy in Coronation economist Marie Antelme’s review.
I don’t see an easy path forward, but I was encouraged to hear finance minister Tito Mboweni’s plans for remedial actions in his 2018 Medium-Term Budget Policy Statement. Moves against corruption by revisiting the state wage bill, the size of Cabinet and the financing of failing state-owned institutions will be a significant step towards restoring consumer and investor trust in South Africa.
And not to mention that it's almost time for the Default Pension Regulations - an ecosystem of advice, counselling and annuity strategies. After two years of planning, we will now start to see the impact of this change on the South African savings landscape.
THE GLOBAL ENVIRONMENT
If ever there was a year to provide endless global topics for conversation, it was 2018! From Trump and his Trade Wars to the volatile year in tech. From the arduous path to Brexit to rising global populism and a busy election year for many countries. How will we forget the meme-fuelling moments such as Mark Zuckerberg’s US senate hearing and Elon Musk’s erratic behaviour?
But we also saw rising political tensions often escalated by single events such as the murder of Saudi journalist Jamal Khashoggi in Instanbul.
The news was not all bad, or fake. In 2018, North and South Korea vowed formally to end the Korean War and they symbolically marched under one flag at the Winter Olympics. In the US, the first Muslim and Native American women were elected into Congress and in Saudi Arabia, women were finally allowed to drive. Further afield, NASA's InSight touched down on Mars and captured the first sounds of wind on our neighbouring planet.
Back on Earth, we had our own headwinds to deal with. Global growth slowed at the start of 2018, stalling momentum built through 2017, mainly due to increased trade tensions and rising debt levels. Developed markets were down 9.4% for the year as measured by the MSCI All Country World Index in US dollars. Market losses were the most brutal over the last quarter, with December wildly volatile, especially in the US. Marie Antelme provides in-depth analysis in her global economic review.
THE MARKETS HAVE A NEW RHYTHM
Active managers have had a torrid time in the market for the past few years. It is impossible to attribute out the large number of drivers and triggers to both the market returns and the lower returns seen by many active managers, but markets appear vulnerable to abrupt dislocations at present. As a consequence, active funds have seen material outflows, with a record amount in December 2018.
We also cannot ignore that we have seen a change in the rhythm or tempo of the markets. How much of this is driven by the prevalence of ‘algos’ or quant-like strategies is difficult to determine, but the impact is certainly not inconsequential. Today, prices move sharply on the back of very little fundamental news (sometimes none at all). On more than one occasion over the past year, our dealing room has shown me charts that indicate the time from a Bloomberg alert to first material share price moves being in the order of 11 seconds. No human can do that. So I certainly believe that markets are evolving – as they have done numerous times in history. In fact, it is estimated that quant strategies and high frequency traders account for more than 50% of US equity trade.
All of this adds to the short-term noise in the market. It has also driven a more short-term-focused investor mindset. We believe that for those who have the courage to stick to a long-term, valuation-driven investment approach, material opportunities are created.
Our longer-term performance remains excellent, but we experienced bruising short-term underperformance in certain strategies in 2018. Our Fixed Interest and Frontier Markets strategies had a remarkable 12-month period, but our South African Equity, Global Emerging Markets Equity and Multi-Asset portfolios fared less well. We never expect return patterns to move in a straight line only and have always understood that these periods of under performance occur regularly for active managers. But it’s always painful to experience. History is no predictor of the future, but lessons can and are being learnt.
We are working hard to rectify this, and I sincerely appreciate the confidence our clients have in us in trusting our investment philosophy in the face of short-term challenges. We remain singularly focused on delivering long-term performance. Our Chief Investment Officer Karl Leinberger reflects on this recent performance within our South African portfolios here and Gavin Joubert on our GEM portfolio here. Both re-iterate our commitment to our tried and tested investment approach.
With increased investment in our infrastructure, technology and people over the past year to support the provision of excellent service, we are confident that we will continue to deliver sustainable long-term value to our clients.
And it is always worth noting that this philosophy has worked well for investors historically. Since launching our global franchise more than 10 years ago, we have established a world-class track record in our specialist Emerging and Frontier Market strategies. This expertise was lauded in 2018 when Coronation was named Best Africa Fund Manager for the third consecutive year in the Africa investor Institutional Investment and Capital Market Awards.
Implementing our new administration model
In July, we successfully completed the transfer of the asset administration of our domestic strategies to JP Morgan. This consolidates our asset administration service across local and offshore portfolios, enhancing our ability to offer our clients world-class service. Thank you for your patience during this significant change.
Supporting black businesses in financial services
We also dedicated significant resources in terms of both people and technology to establish Intembeko Investment Administration (IntIA), one of the first black-owned and managed transfer agency service providers in South Africa. I believe the result will not only be a great experience for our clients but also the achievement of the objectives of B-BBEE through the distribution of InTIA profits to black beneficiaries, once again reaffirming our 25-year journey of achieving meaningful transformation in the South African Financial Services sector.
At Coronation, our focus is on the long term in everything that we do, and we take our role as an influential corporate citizen seriously. As a manager of people’s long-term savings, we think beyond our generation and consider the long-term impact of our actions on our clients and stakeholders, the wider community and the environment.
Investing responsibly and consciously is critical to us. We continue to strengthen the incorporation of environmental, social and governance (ESG) factors in our investment processes in a way that is fully in line with our clients’ long-term investment horizon.
In response to corporate governance failures, highlighted by, but not contained to, Steinhoff, we have supported the move to audit firm rotation, and we continue to deepen our company analysis and increase our scrutiny of the potential for ‘bad actor’ business leaders.
For more on some aspects of our approach to responsible investing, you can read Coronation Portfolio Manager Pallavi Ambekar’s article here.
After a humbling year for the markets and our business, we have reflected intensely on what we have learned and what we could do better. I have great faith in our people - their integrity, intelligence, skills, experience and determined spirit. These attributes have successfully sustained Coronation over our 25 years and will continue to do so.
More than ever, I value the trait of curiosity in each of us. A recent Harvard Business Review featured the importance for curiosity in business. Encouraging it at all levels helps us to adapt to uncertain market conditions and external pressures and think even more deeply and rationally about the steps ahead. We have learned many lessons this year and exercising enhanced scepticism has become critical in response to events such as corporate governance failures.
Looking ahead to the next 25 years
While 2018 has been tough, the good news is that the outlook and potential returns from this point on is more positive.
We remain firmly committed to our long-term investment philosophy, which is the cornerstone of our business. While periods of short-term underperformance may be uncomfortable and testing, we have endured them many times throughout our history in building our compelling long-term investment track record.
We are cautiously optimistic about return opportunities reflected across our portfolios, all of which are underpinned by extremely compelling valuations. Markets like these test our pain thresholds significantly and investors are often tempted to switch into safer assets. But history has shown these to be the wrong times to do so.
I want to sincerely thank you all our clients for your continued support. We remain committed to earning your trust and delivering on our purpose of growing your savings portfolio meaningfully over time. I wish you a happy, healthy and prosperous 2019.