Coronation’s patchy milestone year
With its returns geared primarily to the JSE, the fund manager hasn’t had a great 2018, but there is cause for celebration
Coronation Fund Managers is different from the soon-to-be-listed Investec Asset Management (IAM) in several ways.
It is true that both derive a large proportion of their income from the SA pension fund and unit trust markets. But about 60% of IAM’s profit is sourced from overseas.
It is building up large sales teams in New York and Hong Kong to increase this.
Coronation always had a more tight-fisted approach to international expansion.
It had a leading position in the global fund of hedge funds market 20 years ago but was not prepared to commit the resources to sustain this. About 45% of Coronation’s profit is from international products, but this includes global products sold into the local market — Coronation’s fund management activities are all run from Cape Town.
Perhaps it is not too surprising then that senior Coronation portfolio manager Duane Cable defected to Investec, where he will have far wider career opportunities.
Coronation’s returns remain primarily geared to the JSE, which didn’t provide much tailwind, growing by an anaemic 3.3% in the year to September. Coronation has only one genuine hit outside SA, its Global Emerging Markets Fund, which has had annual outperformance (alpha) of 3.4% since inception in July 2008.
Its African Frontiers Fund has done even better — it celebrated its 10th anniversary in October with 8.8% annualised alpha. Coronation now manages R61bn, or just over 10% of its total, for non-SA clients. Yet even this business is not growing, with net outflows of R4.2bn.
Coronation CEO Anton Pillay blames this primarily on the move to index funds, which account for up to 45% of mutual fund flows in some categories in North America and Europe. Pillay says Coronation will soon be fishing in some bigger ponds — it is ready to launch its Global Equity and Global Managed (multi-asset) funds internationally now that they have five-year track records.
It was a patchy year for Coronation domestically, where a heavy bet on MTN, an aggressive weighting in Naspers and exposure to UK property shares such as Intu hit performance. But its fixed income shop remains competitive and its Strategic Income Fund remains in the top quartile.
Coronation continues to suffer from high net withdrawals from pension funds, but Pillay says the net outflows of R22.6bn were about half the R43.7bn experienced in the previous year, and there were no significant mandate terminations.
Pillay says he is comfortable with Coronation’s share of the unit trust market at about 14%, excluding multimanagers.
It is also experiencing lower outflows in retail. They fell from R6.9bn to R4.2bn.
Absolute return funds such as Coronation Balanced Defensive have suffered as their sector has often produced subcash returns even though it takes on extra risk through equity and bonds. Pillay says that all Coronation’s funds are in the first quartile over 10 years, but over five years the flagship Top 20 SA equity fund is now below average and the medium equity Capital Plus Fund in the bottom quartile.
Coronation has always adopted a variable cost model, leaving activities not directly related to asset management to its partners.
During the year there was a traumatic parting with Maitland, which was responsible for both its asset administration and unit trust record-keeping.
Asset administration has been moved to JPMorgan in Edinburgh and it has helped set up Intembeko, a new black-owned unit trust administrator.
Coronation splashed out almost R100m on marketing to celebrate its 25th anniversary, a 26% increase. It has much to celebrate as it became the first really successful independent unit trust manager after it launched its mutual funds in 1996.
In spite of being listed and widely held, it has preserved its owner-managed culture.
Thanks to reduced variable costs its operating expenses were flat at R1.93bn.
Coronation’s overseas ambitions are so muted that it doesn’t need to keep the cash it generates. In the year to September 30 it paid a dividend of 420c on headline earnings of 420c.
Coronation is certainly a share to consider if you expect a recovery in the JSE, but for all its potential, it will appeal more to dividend seekers than to growth investors.
Anthony Sedgwick, a portfolio manager at Abax Investments, says the share is fairly valued at a market cap of about 2.7% of assets under management. He believes that the business has weathered the volatile equity and currency environment very well. "I’m impressed by the way it has managed the transition to its new outsourced partners without adding to costs."
He says that he does not expect that there will be much growth, with little national employment growth and continued retrenchments in sectors such as mining, but Coronation has the balance sheet to weather this.