Coronation chief investment officer Karl Leinberger. Picture: HETTY ZANTMAN
Coronation chief investment officer Karl Leinberger. Picture: HETTY ZANTMAN

Should Coronation, a focused asset manager with fewer than 300 staff members, still deserve to command such a large market cap?

After all, at nearly R25bn it is twice as valuable as the JSE itself, and similar in value to the much more asset-heavy Barloworld.

Fund managers have proved to be fickle investments, and their assets under management can diminish quickly.

Coronation chief investment officer Karl Leinberger says the house has underperformed on average one year in three.

The company aims to follow a conservative approach to investing and tries not to chase expensive fad stocks.

This wasn’t one of those meltdown years: over the 12 months to April Coronation was fourth out of 11 in the Alexander Forbes Global Manager Watch, with a 7.3% return, and third over three years, with 9.2%. In 2017, to date, it is the top manager.

Yet this has not prevented outflows — most recently, just after the March half-year, from Investment Solutions (IS).

Coronation had been one of the anchor tenants of the popular IS Performer portfolio.

The IS withdrawal makes up the bulk of the R30bn lost in the half-year. But it was a refusal to cut fees, rather than performance, that led to the divorce.

Over the six months to March, the decline in assets that started in September 2015 continued, with a further 4% fall to R576bn.

Coronation CEO Anton Pillay says the key institutional balanced and equity portfolios had been closed to new business for five years.

They reopened in March, and this could turn the tide.

And Pillay concedes that there has been a rebalancing of portfolios away from Coronation. He says the house has held a disproportionately large market share. He points to increased competition, including from the rise of black-owned fund managers. And there continue to be net outflows from retirement funds, as retrenchments and withdrawals take their toll. The institutional book fell from R374bn to R350bn.

The retail (unit trust) book was stronger, remaining stable at R226bn. Pillay says there were net retail outflows of R4bn, but this was in the context of a significant slowdown in core unit trust sales, industry wide, from R50bn to R4bn.

Magda Wierzycka: Growing headcount. Picture: SUPPLIED
Magda Wierzycka: Growing headcount. Picture: SUPPLIED

Coronation has revised most of its performance fees in favour of the client, which has contributed to a fall in the net fee margin from 0.79% in 2014 to 0.61%.

Pillay says Coronation does not intend to diversify into other financial services (unlike, say, Allan Gray) such as a linked product platform. Most noninvestment activities, such as portfolio administration, are already subcontracted. This variable cost model helped protect the bottom line.

Fixed costs were up 7% to R300m — professional fees and marketing were cut, but IT and employee costs were increased. But variable costs were down 15% to R633m. Coronation’s pay is skewed more heavily towards bonuses than that of its competitors, giving it another lever to pull.

Coronation is a high-dividend stock. It promises to pay at least 75% of its cash earnings to shareholders, but in this period it paid out more than 99%.

It might be considered an ex-growth company — a placid cow ready for milking. But it has scope to grow internationally. Pillay says the team remains centralised in Cape Town, where experts on SA, emerging markets, frontier markets and developed markets can interact.

There were inflows of R3bn to its global funds as the Coronation Global Emerging Markets fund, in particular, caught the eye of a number of international asset consultants. Global Managed, run by Coronation lifer Louis Stassen, also has some appeal.

The Global Frontiers and Global Equity Select funds will be marketed more widely once they have a five-year track record.

Quite a chunk of the Coronation asset base was built up by Magda Wierzycka. Her current business, Sygnia, doesn’t compete directly with Coronation, but its revenues also suffer in a flat market. Profit after tax fell 2% to R34.3m.

Sygnia is a young business, with none of Coronation’s cobwebs. The company’s 12% increase in revenue in the six months to March to R147m looks good, but it is increasing spending by 20% to grow its business — it has grown its payroll from 121 to 179. This was after the acquisition of the Gallet Group, an employee benefits administrator that was resurrected as the Sygnia Umbrella Retirement Fund (Surf).

And, of course, Surf just had to open an office in Durban.

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