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The Coronation Fund Managers Personal Investments Quarterly
Winter 2015
Notes from my inbox
3
Power crisis
5
Announcing simpler and lower fees
7
Reiterating the case for emerging markets
13
The Banks Amendment Bill
16
Nedbank19
Present pain for future gain?
24
Bond outlook
27
July 2015
Market review
International outlook
Global developed market equities
Chinese financials and the China A-share market
If it sounds too good to be true…
Flagship fund range
Long-term investment track record
31
33
37
39
43
46
50
Coronation Asset Management (Pty) Limited is an authorised financial services provider.
7th Floor, MontClare Place, Cnr Campground & Main Roads, Claremont 7708. PO Box 44684, Claremont 7735
Client service: 0800 22 11 77 E-mail: [email protected] Website: www.coronation.co.za
All information and opinions provided are of a general nature and are not intended to address the circumstances of any particular individual or entity. As a result
thereof, there may be limitations as to the appropriateness of any information given. It is therefore recommended that the client first obtain the appropriate legal,
tax, investment or other professional advice and formulate an appropriate investment strategy that would suit the risk profile of the client prior to acting upon
information. Coronation Management Company (RF) (Pty) Ltd is not acting and does not purport to act in any way as an advisor or in a fiduciary capacity. Coronation
Management Company (RF) (Pty) Ltd endeavours to provide accurate and timely information but we make no representation or warranty, express or implied, with
respect to the correctness, accuracy or completeness of the information and opinions. Coronation Management Company (RF) (Pty) Ltd does not undertake to
update, modify or amend the information on a frequent basis or to advise any person if such information subsequently becomes inaccurate. Any representation or
opinion is provided for information purposes only. Unit trusts should be considered a medium- to long-term investment. The value of units may go down as well
as up, and is therefore not guaranteed. Past performance is not necessarily an indication of future performance. Unit trusts are allowed to engage in scrip lending
and borrowing. Performance is calculated by Coronation Management Company (RF) (Pty) Ltd for a lump sum investment with income distributions reinvested. All
underlying price and distribution data is sourced from Morningstar. Performance figures are quoted after the deduction of all costs (including manager fees and
trading costs) incurred within the fund. Note that individual investor performance may differ as a result of the actual investment date, the date of reinvestment of
distributions and dividend withholding tax, where applicable. Where foreign securities are included in a fund it may be exposed to macroeconomic, settlement,
political, tax, reporting or illiquidity risk factors that may be different to similar investments in the South African markets. Fluctuations or movements in exchange
rates may cause the value of underlying investments to go up or down. The Coronation Money Market fund is not a bank deposit account. The fund has a constant
price, and the total return is made up of interest received and any gain or loss made on any particular instrument, in most cases the return will merely have the
effect of increasing or decreasing the daily yield, but in the case of abnormal losses it can have the effect of reducing the capital value of the portfolio. Excessive
withdrawals could place the fund under liquidity pressures, in such circumstances a process of ring-fencing of redemption instructions and managed pay-outs over
time may be followed. A fund of funds invests in collective investment schemes that levy their own fees and charges, which could result in a higher fee structure
for this fund. A feeder fund invests in a single fund of a collective investment scheme, which levies its own charges and could result in a higher fee structure for
the feeder fund. Coronation Management Company (RF) (Pty) Ltd is a Collective Investment Schemes Manager approved by the Financial Services Board in terms
of the Collective Investment Schemes Control Act. Unit trusts are traded at ruling prices set on every trading day. Fund valuations take place at approximately
15h00 each business day, except at month end when the valuation is performed at approximately 17h00 (JSE market close). Forward pricing is used. Instructions
must reach the Management Company before 14h00 (12h00 for the Money Market Fund) to ensure same day value. Additional information such as fund prices,
brochures, application forms and a schedule of fund fees and charges is available on our website, www.coronation.com. Coronation Fund Managers Ltd is a Full
member of the Association for Savings & Investment SA (ASISA). Coronation Asset Management (Pty) Ltd is an authorised financial services provider (FSP 548).
2
Coronation Fund Managers
Notes from my inbox
An exciting new chapter.
by pieter koekemoer
We are introducing pioneering changes to our fund range
and fee structures in this issue. These changes will lead to
lower fees on many of our funds, simpler and more consistent
charging structures and better benchmarks across our fund
range, as well as broader mandates for our domestic general
equity funds.
Our new fee approach contains some groundbreaking
aspects, including discounts for investors in our equity funds
if we fail to beat market indices over the long term. In our
absolute funds, we offer competitive fixed fees that are
discounted when we fail to preserve capital.
We believe these changes will enhance outcomes for our
investors, and confirm our commitment to put clients first.
We require investor permission to complete the process of
broadening mandates in the case of our Equity and Global
Capital Plus funds, and affected investors will receive ballot
packs soon. We request your support in these processes.
You can read more on page 7.
Also in this edition: Louis Stassen covers the positioning
of the Global Equity Select Fund, our recently launched
global equity fund that aims to provide you with a focused
portfolio of the best shares from around the world. This
fund complements our existing Global Opportunities Equity
Pieter Koekemoer is head
of the personal investments
business. His key responsibility
is to ensure exceptional client
service through a combination
of appropriate product, relevant
market information and
strong investment performance.
Fund, which invests in funds managed by like-minded
independent managers from around the world, and builds
on the competitive track records we have established in our
global multi-asset and emerging markets funds.
The second quarter was unfortunately shorter on investment
returns than on market-moving newsflow. The ongoing
Greek debt tragedy, China’s stock market travails and the
imminent start to the first US interest rate hiking cycle in nine
years dominated international headlines.
While the Greek difficulties make some of the eurozone’s
structural flaws painfully obvious, it is important to remember
that the country’s output is tiny, making up less than 0.4% of
the world economy. This crisis is more likely to be the source
of high drama and negative short-term sentiment than
fundamental long-term value destruction for South African
investors.
Recent events in the Chinese markets have been
extraordinary, with daily trading volumes in the mainland
markets peaking at eight to ten times the level of just a
year ago. The extreme bubble in A-shares and the Chinese
government’s panicky response to the inevitable correction
shows that the lack of sophistication in the mainland markets
justifies MSCI’s decision to delay inclusion of these shares in
its emerging markets indices. Gavin Joubert and Kyle Wales
corospondent / July 2015
3
provide a fascinating insight into our thinking on China
on page 39, while Tony Gibson details some of the larger
international factors at play in his regular global overview
(page 33).
On the local front, Sarah-Jane Alexander (page 5) looks
at the implications of Eskom’s generation constraints for
business, while Christine Fourie (page 16) warns bank debt
investors to make sure they understand the increased risk
profile of lending to banks; the environment has changed a
lot since the financial crisis and the collapse of African Bank.
Finally, Godwill Chahwahwa (page 19) reminds us that not
all banking crises end in disaster in his explanation of the
investment case for Nedbank, which has recovered strongly
after requiring a recapitalisation just more than a decade
ago.
4
Coronation Fund Managers
Market movements
Qtr 2
2015
%
YTD
2015
%
All Share Index R
(0.2)
5.6
All Share Index $
(0.5)
(0.6)
All Bond R
(1.4)
1.6
All Bond $
(1.7)
(4.5)
Cash R
1.6
3.1
Resources Index R
(4.9)
(5.0)
Financial Index R
(2.3)
8.6
Industrial Index R
1.7
7.4
MSCI World $
0.5
3.0
MSCI EM $
0.8
3.1
S&P 500 $
0.3
1.2
Nasdaq $
2.0
4.5
MSCI Pacific $
1.2
9.0
Dow Jones EURO Stoxx 50 $
(2.3)
2.2
Power crisis
SARAH-JANE ALEXANDER
joined the Coronation investment
team in 2008 as an equity analyst.
Her current responsibilities include
co-managing the Coronation
Industrial Fund as well as
researching food producers and
hospital stocks among others.
The impact of load shedding
on SA business.
by sARAH-JANE ALEXANDER
The term load shedding first entered the South African
lexicon in 2007 when a booming economy drove power
usage to high levels, straining an underinvested grid. The
slowdown triggered by the global financial crisis provided
relief by reducing demand. This created a critical window for
Eskom to undertake much-needed maintenance.
The approaching Fifa World Cup focused the eyes of the
world on South Africa and Africa, increasing pressure to
keep things running smoothly. Eskom did exactly this by
sustaining high levels of energy availability to a powerhungry economy. Maximising short-term output came at
Eskom’s management of the severe grid strain has focused on
buffering industrial users, with residential users experiencing
the bulk of the power cuts. Reduced power at home and
congested intersections are a small price to pay to protect
jobs and keep the economy running.
But it’s not clear this is enough. Unplanned outages are
costly and growing. They place a larger burden on those
with energy-intensive processes, companies reliant on
continuous manufacturing and those with thin margins and
limited pricing power. These businesses, often small and
medium enterprises, cannot justify installing expensive
generator technology.
the sacrifice of much-needed maintenance, resulting in
growing levels of unplanned outages as well as higher levels
of planned maintenance to catch up. Energy availability was
insufficient by late last year and load shedding has again
become a regular feature of life.
DECLINING AVAILABLE GENERATION CAPACITY
95
% generation capacity available
90
85
Large energy-intensive users have historically received more
consistent power in exchange for agreements to reduce
overall consumption. Here too, we are hearing increasing
accounts of load curtailment, often at short notice. This
can have a devastating effect. Stop-start manufacturing
results in inefficient, costly production, with high levels of
wastage. Hulamin, the aluminium product producer, recently
surprised the market with an early profit warning, driven by
lost manufacturing volumes at its rolling mills caused by
load shedding.
80
75
70
65
Source: Eskom annual reports and weekly updates
2015
2014
2013
2012
2011
2009
2010
2008
2007
2006
2005
2004
2003
2002
2001
2000
60
Rising unplanned outages contrast with Eskom’s nearterm forecast of a reduction in these outages as a result of
higher planned maintenance through the summer months.
Compounding the threat to grid reliability (and user
insecurity) are the low levels of investment in transmission
infrastructure. This is the result of a failure to invest by both
corospondent / July 2015
5
Eskom and municipalities, many of which are struggling to
balance their budgets. Consequently, individual areas are
increasingly susceptible to longer periods without power.
Rising power costs and uncertain availability are not factors
conducive to incentivising foreign investments. However, as
domestic investors, our primary focus is on understanding
the impact on domestic businesses.
PLANNED AND UNPLANNED OUTAGES SUPPRESS PRODUCTION
Electricity production (gigawatt per hour)
215 000
210 000
205 000
200 000
195 000
2015f
2014
2013
2012
2011
2010
2009
2008
2007
2006
190 000
Source: Eskom annual reports and weekly updates
Limited generation capacity and increasing generation
costs have constrained Eskom’s revenues, leaving the power
producer in an extremely stretched financial position. It
barely generates enough operating profit to cover interest
payments. The initial government response to a concerning
situation was slow. Some subsequent action has been taken
by injecting fresh leadership in the form of a capable Brian
Molefe. We expect substantial electricity rate increases
at a multiple of inflation to continue for several years.
This is essential to rectify the financial strain as well as to
compensate for the years of underinvestment.
Previous hopes that Medupi and Kusile would ramp up
production, providing additional capacity and bringing
relief to the grid, are fading. The power now comes barely
in time to relieve generation capacity approaching the end
of its life. Constraints therefore remain in place until late
2017, adding to our concerns about a highly challenged
domestic economy.
The significant weakening we have seen in the South African
rand usually provides a welcome relief to domestic producers
by improving their cost competitiveness. However, the
rampant increase in utility rates, unscheduled power outages
and the expensive, volatile labour environment mean these
businesses are barely standing still. Uncertainty and a lack
of confidence have meant limited investment by business.
As their production facilities and technology age, economics
deteriorate. Pressure from rising costs has forced capacity
closures, resulting in the loss of critical expertise. Even if the
economy were to surprise to the upside at this point, the
ability to leverage this is constrained.
The weaker rand is not therefore creating an exciting
investment opportunity in domestic producers. The limited
recovery of heavy industrial producers and manufacturers
is evident in the tough volumes experienced by domestic
logistics providers such as Super Group, Bidvest and
Imperial.
More resilience has been illustrated by companies with
pricing power, higher margins or where power is a small
portion of costs. An example is the hospital sector, where
labour and pharmaceuticals are the dominant expenses;
the costs of generator power can therefore be absorbed
in margins. Consumer-facing businesses have fared well,
supported by real wage growth, government grants and
employment stickiness. Retailers have lost trading hours but
purchases have likely been deferred rather than cancelled.
On the fast-moving consumer goods (FMCG) manufacturing
side, companies have been less exposed as brand strength
provides pricing power.
On a more positive note, we see the likelihood of a
complete blackout as remote. Eskom’s National Control
Centre monitors output and demand and is able to respond
swiftly to grid strain. Pump storage facilities and open cycle
gas turbines offer an additional power source, improving the
margin of safety.
6
Coronation Fund Managers
As always, we approach investing from the bottom up. We
evaluate companies on their individual attributes, not on
the state of their industry or the larger economy. However,
we expect the weaker rand will bring less upside earnings
surprise to our domestic producers than in previous cycles.
Announcing simpler
and lower fees
Pieter Koekemoer is head
of the personal investments
business.
Coronation commits to putting
clients first.
by pieter koekemoer
Since launching our first two unit trust funds in 1996, we have
also have lower maximum fee caps. The changes will make
gradually expanded our fund range to a comprehensive
our fee structures simpler and more consistent across our
offering that now covers core investor needs across both
fund range. We are replacing performance-related fees with
domestic and international markets. Our focus has always
fixed fees where we believe it will be in clients’ interests,
been on adding value for our investors and avoiding
while retaining performance fees for the funds where this
unnecessary complexity. Given that markets evolve and client
will lead to fairer outcomes, as explained later in this article.
preferences change over time, we continuously assess our
fund range to ensure that we are still meeting your needs.
As a result of the changes, our flagship multi-asset funds will
We have recently concluded a detailed fund review and
charge fixed fees, while our equity-biased funds will have
believe we can make changes that will further enhance your
appropriate performance-related fees, which will be better
outcomes and make our funds even easier to understand.
aligned with the value we add to your investment.
Consequently, we are reducing the fees on a large number
Fixed fees are simple to understand and compare – ideal for
of our funds, as well as adopting a simpler and more
consistent pricing methodology across the range. We have
also reviewed the benchmarks we use for evaluating the
performance of our funds to ensure that they are appropriate
and consistently applied. Finally, we intend changing the
mandates applicable to our local general equity funds and
our lower-risk global multi-asset fund.
We believe these changes will benefit you. Lower fees
mean higher returns and simpler fee structures will make it
easier to pick the right fund for your needs. The changes to
benchmarks will give you clearer information about what to
expect from your fund. Our local general equity funds will
have a larger investment universe, with a view to producing
our flagship lower-risk and multi-asset funds. We are satisfied
that our fixed fees are set at levels that won’t impede our
ability to deliver market-beating performance over time.
We are removing performance-related fees in the case of
our Capital Plus, Global Capital Plus, Global Managed and
Global Opportunities Equity funds. We are also reducing the
fixed fees applicable to our Balanced Defensive and Global
Strategic USD Income funds.
In addition, we will continue to discount fees on our incomeand-growth funds if capital is not preserved over appropriate
time periods. Both Balanced Defensive and Capital Plus are
aimed at investors requiring their investment to grow in line
better returns, without materially changing risk budgets.
with inflation while they are drawing a regular income. These
Key fee changes
over time, but also preserving capital over the shorter term.
investors have the dual objectives of not only growing capital
Accordingly, we will discount fees applicable to these funds
We are changing the fees applicable to all our international
if we do not manage to preserve capital over 12 months
funds, and six of our local funds. Most affected funds will see
(Balanced Defensive) and 24 months (Capital Plus). Full fixed
meaningful reductions in through-the-cycle fees and will
fee changes are detailed in Table 2 on page 11.
corospondent / July 2015
7
We believe our new performance fee structure represents
a pioneering approach to protecting your interests; it will
Detailed descriptions of the new performance fee structures
are set out in Table 1 on page 10.
enhance our value proposition relative to passive (index-
You pay the lower fee, regardless of market
conditions
tracking) alternatives.
All funds charging performance fees will use exactly the
same fee methodology. Base fees are set significantly below
typical fixed-fee rates, and we will only charge performance
fees when we deliver significant outperformance. Fees are
capped to ensure that there are no fee surprises in good
performance periods.
We are also adding a unique additional client protection
mechanism designed to show our commitment to delivering
superior results over the long term. Funds will be credited
with a discount if we underperform appropriate benchmarks
over a five-year period until outperformance resumes.
This provides investors in our equity-biased funds with
the comfort that if a fund underperforms the index over a
meaningful period, fees will be comparable to passive funds.
The impact of the fee changes on the affected funds can be
illustrated by comparing the difference in the possible fee
ranges between the new and old fee structures:
Fund
New fee range
Old fee range
Balanced Defensive
0.75% – 1.40%
0.00% – 1.50%
Capital Plus
0.75% – 1.40%
0.75% – 2.25%
Top 20
0.50% – 3.00%
0.50% – 3.00%
Local funds
Equity
0.75% – 2.60%
1.10% – 3.00%
Market Plus
0.75% – 2.40%
0.75% – 3.00%
Optimum Growth
0.85% – 2.40%
1.00% – 3.00%
Global Strategic USD Income
0.80% (flat fee)
0.50% – 0.95%
Global Capital Plus
0.85% – 1.50%
0.75% – 2.85%
Global Managed
1.50% (flat fee)
1.35% – 3.00%
Global Opportunities Equity
1.35% (flat fee)
1.35% – 3.00%
Global Equity Select
0.90% – 2.50%
1.25% – 2.90%
Global Emerging Markets
1.10% – 2.50%
1.35% – 3.00%
International funds
Fee ranges shown above are for the retail classes of the rand-denominated local funds and USDdenominated versions of the international funds. Rand-denominated feeder funds are 0.05% to
0.1% more expensive than their USD equivalents. VAT is excluded. More information is available
on our website.
8
Coronation Fund Managers
All fee changes will be effective from 1 October 2015. To
ensure you are not inadvertently negatively impacted, we
will apply the lower of the new or existing fee structures on a
daily basis for the first 12 months after implementation. Only
new fee structures will apply from 1 October 2016.
Better benchmarks
A benchmark is not only your yardstick for measuring
performance, but also signals what assets you can expect in
a fund over time.
We believe our benchmarks should be straightforward and
replicable. This means that we prefer using formal market
indices, especially for funds charging performance-related
fees. If you wanted to construct a portfolio that would simply
deliver the benchmark, it should be easy for you to do. You
can choose from many passive products offered in the market
that merely track the indices we use for our benchmarks. We
are confident in our ability to outperform these indices over
the long term.
We also believe that benchmarks should be credible
(provided by an independent third party following a
transparent construction process) and investable (reflect the
actual opportunity set from which we select securities).
Consequently, we have decided on the following core
benchmarks that will be applied across all funds:
BENCHMARK CHANGES
Domestic Equity
New: FTSE/JSE Capped All Share Index
(CAPI)
Old: FTSE/JSE SWIX & FTSE/JSE Top 40
Global Equity
New: MSCI All Country World Index
(ACWI)
Old: MSCI World Index
Local Bonds
All Bond Index (ALBI)
Unchanged
Global Bonds
New: Barclays Global Bond Aggregate
(BGBA)
Old: World Government Bond Index
(WGBI)
The CAPI represents the performance of all companies listed
on the JSE. Individual shares are capped at a 10% weighting
regardless of actual market capitalisation, which is consistent with
the investment restrictions applicable to regulated funds. This
prevents the risk of a single share becoming too significant in the
overall benchmark. We believe that it is a better benchmark than
the SWIX, which distorts the importance of dual-listed shares. The
CAPI better reflects the actual investable universe. Over the past
decade, it returned 17.6% p.a. compared to the JSE’s All Share
Index (17.3%), Top 40 Index (16.9%) and SWIX (18.1%). (Note that
the capping of individual shares in CAPI takes place quarterly. We
have requested the index compiler to increase the frequency of
capping.)
The ACWI measures the performance of some 2 500 shares
selected from 23 developed and 23 emerging markets around the
world. It covers an estimated 85% of global investable equities. The
index is weighted to developed markets, but includes a weighting
of approximately 12% to 13% in emerging markets – unlike the
MSCI World Index, which basically excludes emerging market
shares.
The index represents the 20 main bonds issued by the South
African government and parastatals, and covers the full maturity
spread available in the market, from one year and longer. These
‘vanilla’ bonds pay a fixed coupon rate semiannually.
The BGBA index consists of investment-grade bonds issued by
governments, parastatals and corporations in 24 developed and
emerging debt markets across the world. The index is biased
towards the US, Europe and Japan.
The impact of benchmark changes on funds charging
international equities, plus a further 5% in Africa (outside of
performance-related fees are set out in the final table on
SA). At the same time, we will introduce the new SA Equity
page 12. We will also use the above indices for Balanced
Fund for investors who still prefer a diversified fund that only
Plus, Global Managed and Global Opportunities Equity,
holds local shares.
while retaining the current asset class weights used in the
benchmarks applicable to these funds.
Top 20 will continue to invest only in SA equities. However,
we are proposing to lift the current mandate constraint that
Mandate changes
only allows it to invest in the largest 50 JSE shares by market
capitalisation. While the fund will continue to be biased
Coronation Equity and Top 20 Funds
towards large companies, we believe it should be allowed to
select its holdings from the entire local market. This change
Top 20 holds a maximum of 20 shares representing our
is subject to investor approval, and investors in Top 20 will
best local equity ideas. This concentration makes it an ideal
receive a ballot letter soon.
building block fund in a portfolio where the investor wants
to blend different equity managers. The Equity Fund is
Coronation Global Capital Plus Fund (houseview currency
more diversified, as it will typically hold 50 to 60 shares. It is
class and feeder fund)
especially suited to investors who only want to be invested in
one equity fund. Both funds are currently mandated to invest
Coronation Global Capital Plus is a global moderate-risk
only in locally listed shares.
fund that aims to achieve reasonable growth over time while
also aiming for capital preservation over the shorter term.
In the case of the Equity Fund, we will expand its investment
Because it can invest across global markets, it is important
opportunities so that 25% of the fund can be invested in
for investors to select the currency in which they want to
corospondent / July 2015
9
measure capital preservation. We therefore offer both
currency-hedged classes (denominated in US dollar, pound
sterling and euro) for investors who are most concerned
with capital preservation in a specific currency, as well as a
houseview currency class for investors who are more focused
on optimising returns over time.
its objectives. Accordingly, we are proposing a change in
this benchmark to reflect only US dollar cash returns. The
fund will continue to target a long-term rate of return of at
least 3% p.a. more than cash. This change is also subject to
investor approval, and affected investors will receive a ballot
letter soon.
The houseview currency class is denominated in US dollars,
but currently uses a composite benchmark representing
the returns of a cash portfolio invested 50% in US dollars
and 50% in euros. Because currency movements can create
the anomalous outcome where a cash-related benchmark
can show negative returns, this approach makes it difficult
to evaluate the fund’s ability to preserve capital in line with
Conclusion
We believe that all these changes will meaningfully enhance
outcomes for our long-term investors and will make it
significantly easier to understand our fees. If you have
any questions, please do not hesitate to contact us on
0800 22 11 77 or [email protected].
Table 1: Funds with performance fees
Fees from 1 October 2015
Fund
Top 20
Base fee
(excl. VAT)
1.00%
Performance fee description
New
max.
fee
20% of performance above benchmark
(net of fees), capped at 2.00%.
3.00%
Equity
1.10%
20% of performance above benchmark
(net of fees), capped at 1.50%.
2.60%
Market Plus
1.25%
20% of performance above benchmark
(net of fees) plus 2%, capped at 1.15%.
2.40%
Optimum Growth
1.00%
20% of performance above benchmark
(net of fees), capped at 1.40%.
2.40%
Global Equity Select
(USD and feeder fund)
1.25%
20% of performance above benchmark
(net of fees), capped at 1.25%.
2.50%
Global Emerging Markets
(USD fund)
1.25%
20% of performance above benchmark
(net of fees), capped at 1.25%.
2.50%
Global Emerging Markets
Flexible (rand-denominated
fund)
1.25%
20% of performance above benchmark
(net of fees), capped at 1.25%.
2.50%
Long-term
underperformance
discount
0.50%
All of these funds are
focused on delivering
long-term investment
growth. Should we fail to
beat the respective fund
benchmarks (net of fees)
over any five-year period,
the base fee will be
discounted. The size of
the discount is reflected in
the next column and varies
depending on the level of
the base fee charged, the
level of risk in the fund’s
mandate, and the cost and
complexities of different
investment strategies.
Note: Fees apply to retail-class investors and exclude VAT. Performance is measured in all cases over a rolling 24-month period and fees are accrued daily. 10
Coronation Fund Managers
Discount
value
0.35%
0.50%
0.15%
0.35%
0.15%
0.15%
Table 2: Funds with fixed fees
Fees from 1 October 2015
Fund
Fee (excl. VAT)
Explanation of fee change
Money Market
0.25%
Fee unchanged.
Jibar Plus
0.45%
Fee unchanged.
Bond
0.75%
Fee unchanged.
Strategic Income
0.85%
Fee unchanged.
Balanced Defensive
1.40%
The fee is reduced by 0.10%. We will continue to discount the fee by
0.65% if the fund’s performance over any 12-month period is negative.
An additional discount over 24 months has been removed.
Capital Plus
1.40%
The performance fee of up to 1.00% is removed. The base fee is
increased by 0.15%. We will discount the fee by 0.65% if performance
over any 24-month period is negative (previously 12 months).
Balanced Plus
1.25%
Fee unchanged.
Property Equity
1.25%
Fee unchanged.
Financial
1.25%
Fee unchanged.
Resources
1.00%
Fee unchanged.
Industrial
1.00%
Fee unchanged.
Smaller Companies
1.00%
Fee unchanged.
Global Strategic USD Income
(USD and feeder funds)
0.80%
The fee is reduced by 0.15%. A previous discount for a negative
performance is removed.
Global Capital Plus (Houseview,
USD-hedged, GBP-hedged,
euro-hedged and feeder funds)
1.50%
A performance fee of up to 1.50% is removed and the base fee increased
by 0.15%. We will discount the fee by 0.65% if the fund’s performance
over any 24-month period is negative (previously 12 months).
Global Managed (USD and
feeder funds)
1.50%
A performance fee of up to 1.65% is removed and the base fee is
increased by 0.15%.
Global Opportunities Equity
(USD and feeder funds)
1.35%
The base fee is unchanged, but its performance fee of up to 1.65%
is removed. Note that this fund’s total expense ratio (TER) will reflect
additional fees charged by third-party managers, as it is a fund of funds.
Local funds
Income funds
Income and growth funds
Long-term growth funds
International funds
Note: All fees listed above apply to retail-class investors in the rand- and USD-denominated funds for local and international funds respectively and exclude VAT. corospondent / July 2015
11
Table 3: Long-term growth funds with performance fees – Benchmark and performance fee changes
Fund
Benchmark change
Performance fee change
Top 20
The Capped All Share Index (CAPI)
replaces the Top 40 Index to reflect
the proposed change in its investable
universe. The fund will, subject to
investor approval, be able to select
up to 20 shares from across the entire
JSE, not just the list of the largest 50
listed companies.
Most of the performance fee metrics remain unchanged for Top 20. The
existing base fee, performance measurement period, participation rate
(the percentage of the performance above the benchmark charged as a
performance fee), performance fee cap, maximum fee and minimum fee
will remain unchanged. The discount period is changing from 24 months
to 60 months to reflect the recommended investment term.
Equity
A composite of CAPI (87.5%) and
ACWI (12.5%). The fund’s previous
benchmark was the SWIX. The CAPI
better reflects the local investable
universe of the fund by dealing more
appropriately with dual-listed shares.
It also better reflects the investment
restrictions applicable to regulated
funds. The fund’s investment universe
will change to include up to 25%
in international shares. The global
equity allocation of 12.5% reflects
the mid-point between zero and
a maximum 25% global equity
allocation.
The performance fee cap is reduced by 0.40% to 1.50%, the
participation rate increases from 15% to 20% and investors will now
receive a discount of 0.35% if the fund underperforms its benchmark
over any 60-month period.
A composite benchmark of CAPI
(52.5%), ACWI (14.5%), ALBI (22.5%),
BGBA (3.5%), Short-Term Fixed
Interest Index (STeFi) (5%) and USD
Libor (2%).
The performance fee cap reduces by 0.60%, the performance
measurement period increases from 12 to 24 months, and the
basis for discounting changes from a negative performance over
any 60-month period to a benchmark underperformance over any
60-month period. The performance fee hurdle rate of 2% above
benchmark and base fee remains unchanged.
Local funds
Market Plus
Other aspects of the fee methodology, including the base fee and
performance measurement period, remain the same for the Equity
Fund.
While the asset-class weightings in
the benchmark remain the same, we
will replace the SWIX with CAPI and
the World Government Bond Index
(WGBI) with the BGBA.
Optimum Growth
A composite benchmark of CAPI
(35%), ACWI (35%), ALBI (15%) and
BGBA (15%). In the past, the fund
used an absolute benchmark of CPI
+ 5%, but it will in future use a 50:50
local/international and 70:30 equity/
bonds benchmark to better reflect its
position as an equity-biased fund that
can flexibly allocate to both domestic
and international assets.
The performance fee methodology will be aligned with the approach
used in all our other funds, by calculating performance fees daily with
reference to fund performance over the preceding 24-month period,
rather than accruing fees based on the current financial year to date’s
fund performance. Note the change from an inflation-linked benchmark
to a composite market index benchmark.
MSCI ACWI
The performance fee cap reduces by 0.40%, the performance
measurement period increases from 12 to 24 months and investors
will now receive a discount of 0.35% if the fund underperforms its
benchmark over any 60-month period.
In addition, the participation rate will increase from 15% to 20%,
the performance fee cap will reduce by 0.60% to 1.40% and we
are introducing a long-term discount if the fund underperforms its
benchmark over any 60-month period. The base fee will remain
unchanged.
International funds
Global Equity Select
(USD and feeder fund)
This benchmark remains unchanged.
The base fee and performance participation rate remain unchanged.
Global Emerging
Markets (USD fund)
and Global Emerging
Markets Flexible
(rand fund)
MSCI Emerging Markets Index
This benchmark remains unchanged.
The base fee reduces by 0.10% and the performance fee cap reduces
by 0.40%, the performance measurement period increases from 12 to
24 months and investors will now receive a discount of 0.15% if the fund
underperforms its benchmark over any 60-month period.
The performance participation rate remains unchanged.
Note: All fees listed above apply to retail-class investors in the rand- and USD-denominated funds for local and international funds respectively and exclude VAT.
Proposed benchmark changes are subject to investor approval.
12
Coronation Fund Managers
Reiterating the case
for emerging markets
Even amid volatility, the right kind of
allocation can support long-term returns.
Gus Robertson is an
institutional fund manager for
international clients. He joined
Coronation in 2014 after working
for leading asset managers in
the UK and the Netherlands
for 15 years.
by Gus Robertson
Readers who follow the financial media may be inclined to
believe that emerging markets (EMs) have had their moment
in the limelight and that the investment story has soured.
Chinese economic growth is slowing, commodity prices have
been under pressure and the strength of the dollar is creating
difficulty for monetary authorities in a number of other
countries. So what? While these are indeed reflective of the
current environment, there is a bigger picture investment
story for EMs that serves as a reminder for keeping your
allocation. This bigger picture has a number of pillars that
stand strong irrespective of where we might be in the
economic cycle, and we discuss some of these in this article.
To start, the chart below gives a bird’s-eye view of some
high-level metrics that compare EMs to developed
markets in terms of their respective share of the world. It
suggests that EMs are underrepresented when it comes
to the development of their equity markets and is a useful
backdrop for thinking about long-term portfolio allocations.
EMERGING ECONOMIES AS % OF WORLD TOTAL
Population
Land mass
Foreign exchange reserves
Energy consumption
GDP at PPP
Exports
The most obvious reason for including EMs is the
diversification of opportunities that they bring to your
investment portfolio. Not only do EMs provide something
different to what is on offer in developed markets, but
they offer a wide range of macroeconomic opportunities
from which a portfolio can gain exposure and ultimately
benefit. Consider the differences between Mexico and
the Philippines, which have a similar-sized population
and historical Spanish influence in common. Mexico
shares an almost 2 000-mile border with the US and thus
has its economic fortunes inextricably linked to the most
successful economy in the world, while the Philippines
is an archipelago of over 7 000 islands with a young and
vibrant economy that is rapidly shifting from agriculture to
manufacturing services.
Another stark contrast exists between Russia, one of
the world’s leading oil and gas exporters, and Turkey, its
regional neighbour that suffers violent swings in its trade
and current account balance as a result of oil price changes
affecting its cost of imports. While the term emerging
markets has become known as a hold-all for everything
with a reasonably developed capital market outside of the
G8, the constituents of this grouping are anything but a
homogenous group of economies.
GDP at market rates
Equity market cap (full market)
Emerging markets
90
Developed markets
Note: Market capitalisation and forex data as at April 2015; energy and exports as at 2013;
GDP as at 2014
100
80
70
60
50
40
30
20
0
10
Equity market cap (float adjusted)
Not only is the overall macro shape of these EM economies
a varying landscape, but their corporate landscapes are also
very different. In our home base of South Africa, we have a
relatively well-developed equity market that offers liquidity
across a number of sectors. However, in comparison to the
Sources: BofA Merrill Lynch Global Equity Strategy, BP, CIA World Factbook,
IMF World Economic Outlook, MSCI
corospondent / July 2015
13
likes of Taiwan and Korea, we have a virtually non-existent IT
Growth in ATMs
hardware sector, while our financial and consumer services
Number of ATMs
(per 100 000 people)*
sectors offer better growth and higher profitability than
Compound growth rate
(last ten years)**
US
173
1.0%
Mexico
48
5.9%
Germany
116
1.7%
Turkey
73
11.5%
higher and our stock market is less dominated by state-
Australia
164
1.7%
owned entities.
South Africa
62
12.0%
Japan
128
0.4%
China
47
25.4%
India
13
24.4%
both these countries. If we look at ourselves in comparison
to Russia, we don’t have the same breadth of opportunities
in oil and gas, but our corporate governance standards are
The point is that each emerging market has its own
domestic equity nuances, strengths and weaknesses, but
understanding these nuances and taking the best from
each makes for a comprehensive offering in terms of both
breadth (range of opportunities) and depth (liquidity on
* Most recent data point
** Or shorter, since 2003 and onwards
Source: World Bank
offer).
If there was ever a common thread that can tie EMs together,
then perhaps it’s the higher rate of economic growth
potential (both at the overall macro level and within many
industries) in comparison to developed markets.
At an overall level the relationship between economic
growth and equity returns has been proven to be somewhat
tenuous, and we would not advocate investing based on
growth alone. But there is an element of EM growth potential
that is of particular interest to us – and that is consumption.
A large part of what makes EMs appealing is the existence of
an as yet vast untapped consumption potential that in more
developed countries has already been exploited. In support
of this fact we can point to a number of different metrics
that tell more or less the same story: car ownership per unit
of population, number of hospital beds, density of mobile
telecommunication towers, tertiary education statistics,
protein consumption statistics, and the list goes on.
One metric that offers a raw yet neat summary of this overall
picture is the number of ATMs per unit of population. It
tells the story of cash moving around an economy as well as
providing an indication of the degree to which the physical,
financial and communications infrastructure of a particular
economy has been developed.
14
Coronation Fund Managers
Using this metric, the table gives a glimpse of the extent
to which economic development differs between selected
economies as well as the differences in the rate of change.
Regardless of where we are in the cycle, the EMs (Mexico,
Turkey, South Africa, China and India) are seeing much higher
multi-year growth, and while the differential between the
emerging and developed countries might slow or accelerate
with the economic cycle, there is a strong trend in support of
consumption-oriented companies in EMs over a longer-term
horizon. This will support both local EM companies as well as
the developed market multinationals that choose to invest
in EM countries. But from a financial investor’s perspective,
it can be more directly captured through an investment in a
dedicated EM portfolio.
As is the case with the diversification argument discussed
earlier, the local EM companies offer an element of difference
that is becoming more and more scarce in today’s globalised
economy.
When considering the merits of an EM allocation, it is also
important to consider the shape of the investment. Simply
allocating to the asset class and buying a market or index
instrument prevents you from exploiting inefficiencies in an
asset class which, perhaps more than any other, is riddled
with inefficiencies. This is best achieved via an active
portfolio of thoroughly researched bottom-up investments,
an approach that we strongly support at Coronation.
Our investment approach has not only proven to provide
desirable long-term returns, but we have found that when
other market participants don’t have the appetite for the
risk, we are able to find exceptionally attractive valuations
on offer in businesses with interesting and exciting longterm prospects.
Another reason for advocating an active allocation in EMs
is that buying the index is a flawed portfolio construction
methodology if you believe in fundamentals and valuationbased investing. What you get in an index instrument is
essentially everything that is listed, barring the really small
cap stocks, and a portfolio that favours large cap companies
on account of their size. In the case of emerging markets,
this would heavily weight you in cyclical industries (risky,
capital-intensive businesses) as well as state-owned entities
(where shareholder returns are not prioritised), and just like
any such index, you’d systematically own more overpriced
stocks, sectors and countries and less of their underpriced
counterparts. The importance of researching and selecting a
portfolio of the best opportunities within emerging markets
is even greater when the overall backdrop is challenging. You
want to be confident that the investments in your portfolio
are able to weather the storm and, in many cases, come out
stronger on the other side.
There will be times when it feels easy to hold an allocation to
EMs and times when it feels more difficult or uncomfortable.
Holding the right kind of allocation will give you a better
chance of achieving desirable long-term returns for your
portfolios in a world where returns are scarce.
corospondent / July 2015
15
The Banks
Amendment Bill
Christine Fourie is a member
of the fixed interest team, who
is responsible for fixed interest
structuring, technical pricing and
inflation-linked bonds. Christine,
a qualified actuary, joined
Coronation in 2007.
New legislation will have far-reaching
consequences for investors.
by Christine Fourie
The global financial crisis resulted in closer scrutiny of
substantial change to the risk profile faced by debt investors.
financial stability by the Financial Stability Board (FSB), an
Debt investors could end up claiming money from entities
international body. As part of this process, the FSB published
to which they previously had no desire to be exposed, or
a framework called Key Attributes of Effective Resolution
could end up with exposure to non-performing pools of
Regimes for Financial Institutions in October 2011. This
assets, at the absolute discretion of the regulator. This was
framework was updated in October 2014 and proposed
clearly shown with the precedent set by the African Bank
many new mechanisms for regulators to ensure the orderly
initial restructuring proposal. Subordinated debt holders
resolution of bank failures. As a member jurisdiction of
would have had a claim on a pool of non-performing assets,
the FSB, South Africa agreed to abide by these principles.
implying an extremely poor recovery.
However, South African banks operate under the Banks
Act, which did not adequately allow for these resolution
The only protections offered are that the process followed
mechanisms, and hence required amendment.
should be procedurally fair and that a creditor may not be
worse off in the event of a restructuring versus a liquidation
To address these shortcomings, the Banks Amendment Bill
– a principle that is highly subjective and not easily tested.
2014 was gazetted in December last year and industry was
given an opportunity to comment. The process was fast-
The Banks Act also did not allow for taxpayer support to be
tracked to make the necessary amendments to legislation
repaid before creditors’ claims, clearly not something which
to deal with the failure of African Bank. The legislation has
considered the public interest. Consequently, clauses in the
since been passed.
Banks Amendment Bill allow for this eventuality.
Changes in the regulatory landscape
The Banks Act did not allow the curator to make many
decisions on behalf of corporate shareholders, who could
When a bank fails, the FSB principles allow for the
possibly stall an orderly resolution by voting against various
establishment of a ‘good bank’ and ‘bad bank’, where the
restructuring requirements for a failed bank. The Banks
‘good bank’ is solvent and the ‘bad bank’ contains non-
Amendment Bill addressed this, but in the process removed
performing assets. This means that a curator would have
rights to which equity investors in bank holding companies
the power to dispose of assets and liabilities at the curator’s
had been accustomed.
discretion. Under the Banks Act, the curator had the power
16
to dispose of assets, but had to do so with the proviso
An additional facet of the FSB framework is the requirement
that the bank would then be able to meet its obligations
for banks to issue ‘loss-absorbing’ subordinated debt.
– clearly hard to do if the institution is insolvent. This issue
These instruments represent claims on a bank that are
was addressed in the Banks Amendment Bill. The change
fulfilled second to claims of depositors and senior debt
has fundamentally altered how debt investors would be
holders. In the event that a bank gets into trouble, these
treated in the event of a bank failure and hence represents a
instrument holders’ claims can be written off or exchanged
Coronation Fund Managers
for shares in the bank, at the discretion of the SA Reserve
As a result of this opposition from subordinated debt holders
Bank (SARB). These instruments are designed to allow the
and in order to avoid a lengthy constitutional court case,
bank to be restored to financial health either by converting
which would have undermined the effective restructuring
the subordinated debt holders’ claims into equity or by
of African Bank, the initial proposal was changed. A
extinguishing the claim altogether.
compromise was reached whereby subordinated debt
would be transferred (at 37.5% of face value) to the good
Expediting successful and effective resolutions
bank and hold a subordinated claim against the good bank.
As a result, subordinated debt holders will retain a partial,
It should also be noted that the successful resolution of any
subordinated claim on the performing assets. This, despite
bank failure is highly dependent on ensuring the proposed
the fact that senior debt was transferred to the good bank
interventions happen quickly. This is to ensure that:
at 90% of face value. In theory, subordinated debt holders
should not receive a recovery prior to all payments being
Key staff can be retained, as uncertainty is minimised.
made to senior debt holders. Clearly, this has been a good
outcome for subordinated debt investors.
Customers face no disruption and can continue to make
payments on their loans.
Implications
Job losses can be minimised.
The proposed changes have removed many of the safeguards
Any loss of franchise value due to declining business
change has materially altered the risk profile of lending
volumes can be minimised.
Confidence is maintained in the financial system and
other financial institutions remain unaffected.
It is therefore critical for everyone involved to ensure that
the resolution proceeds as smoothly and quickly as possible.
However, sometimes parties may hold up the process as they
try to defend their differing interests. The Banks Amendment
Bill addresses these issues and makes allowance for a fast
resolution while ensuring that the process cannot be held up
by parties with conflicting interests.
The African Bank case study
In the case of African Bank, a ‘good bank’ is in the process
of being established, while the failed entity of African
Bank would fill the role of the ‘bad bank’. In addition, the
curator proposed that subordinated debt holders’ claims
that protected bank creditors’ interests in the past. This
to banks. Under the new regulations, the only protections
offered are ‘procedural fairness’ along with the ‘no creditor
worse off’ principle. A more comprehensive framework is
needed that evaluates the potential for recovery of creditor
losses from hastily or poorly implemented resolutions.
In addition, the introduction of new loss-absorbing
subordinated debt allows the SARB to invoke write-down or
conversion clauses if a bank is ever in financial difficulty. This
means that these instruments may be completely written
off or converted to equity, without the bank ever needing
to move into curatorship. This too increases the risk profile
materially for investors in these instruments.
The effect of the change in risk profile of lending to banks
can clearly be seen when examining bank funding spreads.
Following the failure of African Bank and the finalisation
of these amendments, the borrowing costs for banks have
increased significantly.
remain in the bad bank, which means they faced very low
Coronation’s view is that part of this increase was a necessary
recovery levels. These debt holders felt aggrieved by the
adjustment, as credit spreads had fallen to very low levels
process and put forward a constitutional argument as
prior to the African Bank failure.
to why the Banks Amendment Bill should not be passed.
This intervention could have significantly slowed down the
The new legislation was an additional reason for spreads
curatorship process.
to increase. In the case of senior debt, the safeguards and
corospondent / July 2015
17
possible restitutions have been removed and the investor is
levels where we believe they now compensate holders of
demanding compensation for the risk of a lower recovery
these instruments for the risk they imply.
in the event of a bank failure. In the case of loss-absorbing
instruments, the risk profile represents a mix of equity and
debt and so returns should offer a hybrid of these return
characteristics. It follows then that interest rates on both
of these bank instrument types have therefore had to
increase as investors need to be compensated for a
materially different risk profile. We felt that the first issues
of loss-absorbing subordinated instruments were severely
18
Conclusion
Bank failures can be extremely costly to all types of investors
and to society as a whole. Decisive action from the regulator
can mitigate the systemic impact, but often parties in the
resolution have conflicting interests and act in a way that
may be to the detriment of other stakeholders. The Banks
Amendment Bill provides protective measures against this
underpricing the risks inherent in the instruments. Earlier
behaviour, but transfers significant discretion to the hands of
subordinated loss-absorbing instruments were issued
the regulator. It has also resulted in a significant increase in
with spreads of as low as 2.25%. The spreads on these
the compensation demanded by investors to provide banks
instruments have subsequently increased by over 50% to
with funding.
Coronation Fund Managers
Nedbank
Godwill Chahwahwa is
an investment analyst within
the SA equity investment team
and manages the Coronation
Preference Share Fund. He also comanages the Coronation Financial
unit trust fund and a segregated
financial and industrial mandate.
Godwill joined Coronation in 2003.
Quality franchise at a discount.
by Godwill Chahwahwa
NEDBANK EARNINGS, DIVIDENDS AND NET ASSET VALUE
Shareholders and depositors provide capital and funding to
cent
banks with the confidence that the bank’s balance sheet will
2 400
be judiciously managed and that adequate capital is held to
2 100
protect against unforeseen losses. Back in 2003, Nedbank
1 800
repairing Nedbank’s reputation as a highly rated and respected
South African bank.
15.7%
DPS
14.9%
19.3%
18.5%
24.0%
TNAV
10.6%
11.5%
11.2%
14.1%
12 500
11 000
600
5 000
300
3 500
0
2 000
Headline earnings per share (LHS)
2014
6 500
2013
8 000
900
2012
9 500
1 200
2011
1 500
2010
investor confidence as he delivered his Five Point Plan, aimed at
10 years
2009
he took to the podium at the results presentation to restore
5 years
16.0%
2008
management team was appointed under Tom Boardman and
3 years
15.5%
2007
rights issue underwritten by its parent, Old Mutual. A new
14 000
1 year
13.0%
2006
reported a 98% decline in earnings, accompanied by a R5bn
HEPS
2005
failed to deliver on this mandate to shareholders when it
cent
COMPOUND ANNUAL GROWTH RATE
2004
As in our own business, trust is at the cornerstone of banking.
Dividend per share (LHS)
Tangible net asset value per share (RHS)
Sources: Company reports, Coronation analysis
Fast forward some 10 years, and if one reviews the group’s
growth in earnings, dividend and tangible net asset value since
2004, it becomes clear that the Nedbank of today not only
learnt from the mistakes of the past, but has gone a long way
in strengthening its franchise and competing effectively on a
sustainable basis.
Over the last 10 years, the group has grown earnings, dividends
and tangible net asset value at a compound average growth
rate of 15.7%, 24.0% and 14.1% respectively.
However, when one assesses the rating at which this business
is trading today, relative to its aforementioned track record,
there is a clear disconnect. Since 2006, Nedbank has traded
at an average discount of 24% to the South African equity
market. More recently, this discount has widened further to
35%, as is evident from the following chart. Relative to the
other three banks (Standard Bank, FirstRand and Barclays
Africa Group), Nedbank is currently at its deepest discount
since the global financial crisis of 2008.
corospondent / July 2015
19
The quality of management is therefore a key differentiator
NEDBANK PRICE EARNINGS RATIO VERSUS JSE AND ITS PEERS
1.15
1.40
NED PE vs Alsi PE
1.05
0.95
NED PE vs peer avg. PE
Current
0.65
0.84
Mean
0.76
0.99
Std Dev
0.14
0.12
1.30
1.20
0.85
1.10
0.75
1.00
0.65
0.90
0.55
Oct 14
May 15
Mar 14
Jan 13
Aug 13
Jun 12
Apr 11
Nov 11
Feb 10
Sep 10
Jan 09
Dec 08
Oct 07
May 08
0.70
Mar 07
0.35
Jan 06
0.80
Aug 06
0.45
Nedbank PE vs. JSE All Share Index (Alsi) PE (LHS)
Nedbank PE vs. peer average PE (RHS)
in banking over the long term. Nedbank achieved its
impressive operational turnaround under the stewardship of
Tom Boardman from 2004 to 2010, followed by Mike Brown
from 2010 to date. Importantly, Brown was chief financial
officer under Boardman and intimately involved over the
entire period. In addition, when there have been any key
staff departures in its divisions, Nedbank was able to replace
candidates with internal appointments, thereby demonstrating
depth and ensuring a retention of institutional memory – a
critical ingredient in banking. A long-term track record is the
product of a strong team consistently applying innovative and
judicious business practices over the long run. As investors,
Source: INET BFA
we believe good management teams create lasting value for
When we determine the appropriate rating for banks, we
shareholders, something to which we are prepared to attach a
consider a number of factors. In general, we believe that
higher rating when valuing businesses.
banking companies should trade at a discount to the overall
market mainly because of the capital intensity and high level
Prudent provisioning
of financial gearing that the model requires. In addition, banks
operate in a highly regulated environment.
Provisioning for doubtful debt is an area of judgement
exercised by a bank’s management team. While each bank
This may raise the barriers to entry for competitors, but it can
will run complex models to determine the appropriate
also be a headwind in some instances, for example, where
level of specific provisions (provisions covering loans with
regulations come in the form of price caps.
evidence of impairment), it is still left to management to review
NEDBANK GENERAL PROVISIONS
basis points
1.20
120
88%
0.80
76%
0.60
45%
89% 86%
81%
59%
59%
40
2014
2013
2012
2011
2010
0
2009
20
0.00
Nedbank relative to peer average (RHS)
Sources: Company reports, Coronation analysis
Coronation Fund Managers
60
0.20
Nedbank’s general provisions (LHS)
20
88% 92% 91% 93% 100
75%
80
0.40
2000
losses and erosion of capital.
140
132%
2008
operational mistake is amplified and can result in meaningful
1.00 100%
2001
In a highly leveraged institution such as a bank, any small
%
110%
2007
Strong management team
45% relative to its peers, as shown in the following chart.
2006
capital base.
general provisions as a percentage of its advances book – only
2005
provisioning of its debtors’ book, as well as the strength of its
its recapitalisation in 2014, Nedbank had the lowest level of
2005
conclusion: the quality of its management team, the prudent
additional overlays or general provisions. In the aftermath of
2004
its current steep discount. Three other factors also support this
operating environment warrants higher levels of prudence via
2003
track record, we believe the bank deserves a better rating than
these and apply discretion as to whether or not the current
2002
Taking all factors into account for Nedbank, and given its strong
Since then, Nedbank has built up a level of general provisions
Having established that Nedbank has a strong franchise, and
that is now in line with the average of its peers. The operating
that it is conservatively run and well capitalised, we now need
environment for banks in South Africa remains challenging,
to assess its current earnings base and its ability to continue to
as the effects of Eskom’s load shedding on small businesses
maintain its growth rate. When one looks at the rates of return
and rising interest rates on consumers will still play out.
on equity (ROE) generated per division in the following table, it
All this may well present a challenge to the lending books
becomes clear that there are two divisions within the group that
of banks. Approaching this uncertain environment with a
are not yet delivering to their potential. Any normalisation of
conservative lending book will stand Nedbank in good stead
earnings in these divisions will be important in driving structural
and is yet another example of a well-run franchise deserving
growth in the group’s earnings.
of a narrower discount rating.
Nedbank divisions
Strong capital position
Division
% of group earnings
Headline earnings (R million)
2014
% change
Return on equity %
2013
2014
2013
Since Nedbank’s recapitalisation in 2004, regulations relating
Nedbank Capital
22%
2 128
23%
1 726
30.9%
29.4%
Nedbank Corporate
26%
2 599
16%
2 245
24.5%
26.4%
shortcomings exposed by the global financial crisis of 2008.
Business Banking
11%
1 094
18%
929
20.1%
19.4%
Basel III regulations have been promulgated and these have
Nedbank Retail
30%
2 937
16%
2 539
13.3%
11.6%
Nedbank Wealth
11%
1 042
16%
900
36.8%
36.2%
4%
357
106%
173
10.1%
8.7%
103%
10 157
19%
8 512
19.7%
18.7%
15.8%
15.6%
to capital have been tightened significantly in response to the
raised both the quality and the quantity of capital required
Rest of Africa division
from banks globally. While many banks outside SA are still
Centre
(3%)
(277)
(275%)
158
Group
100%
9 880
14%
8 670
building capital to comply with these rules, Nedbank already
holds more core equity capital today than it will be required
to hold under the new Basel III rules. Given this strong capital
base, Nedbank is not constrained when it comes to driving loan
growth organically or taking advantage of any value-accretive
acquisitions it may want to pursue. In addition, from an investor’s
perspective, a higher capital base offers more margin of safety
for the bank to weather tougher times in future, adding to the
resilience of the franchise.
Nedbank Retail is the largest division in the group,
contributing almost a third of Nedbank’s earnings.
However, it currently generates an ROE of only 13.3%,
well below its own potential and only barely exceeding
the cost of capital. A normalisation of returns from this
division will be material to the group’s earnings power.
Nedbank’s Rest of Africa division contributes only 4%
of group earnings currently, but importantly, is growing
BASEL III CAPITAL REQUIREMENT
14
Line Clusters
very strongly. The recent acquisition of 20% in Ecobank
%
will be transformational for Nedbank’s African strategy
12
and underlying earnings potential.
10
8
6
The retail bank environment in SA is highly competitive,
4
with strong franchises in the big four banks, but also with
2
new entrants such as Capitec, which is growing customer
0
2013
2014
Min. CET1*
2015
Pillar2A
2016
2017
2018
Capital conservation buffer
Min. D-SIB** (1% est)
* Minimum common equity tier 1
** Minimum Domestic Systemically Important Banks requirement
Source: Coronation analysis
2019
Nedbank 2014
Countercyclical buffer
numbers strongly. To interrogate Nedbank’s position in the
retail market, we commissioned an independent marketrepresentative survey of bank customers, segmenting the
results by income. The results demonstrated that while
Nedbank’s overall market share of core transactional
customers was in the mid-teens in percentage terms, it had
corospondent / July 2015
21
a disproportionately large share of the middle- to high-
established strong networks of banks across the continent
income segments, and is underrepresented in the lower-
while FirstRand has set aside capital to acquire banks, as
income segment – a legacy of the pre-2003 retail strategy,
well as building its own network.
which focused exclusively on the higher-income segment.
Nedbank currently has the smallest exposure to Africa
Since 2003 and under the current management team, the
outside SA relative to its own profitability, but has adopted
retail business has been repositioned to be more relevant
what we believe is an innovative strategy to enter new
and to capture market share across all consumer segments.
African markets. This involves a partnership with Ecobank
This has been driven by strong product innovation
in West Africa, a bank with an extensive African footprint,
communicated to the market via the clever ‘Ke Yona’
complementing Nedbank’s subsidiaries in southern Africa.
marketing campaign.
We believe this to be a prudent strategy, as Nedbank had
In addition, Nedbank continues to grow its distribution reach
a board seat at Ecobank for three years prior to exercising
by rolling out more ATMs and branches while simultaneously
its right to acquire 20% by virtue of a convertible loan
taking costs out of the business by downsizing larger legacy
granted to Ecobank. This gave Nedbank ample time to
branches and rationalising computer systems. This will no
assess the strategic fit between the businesses before
doubt be a long journey, but ultimately a bank with a low
taking the decision to acquire an equity stake in Ecobank.
operating cost model and extensive reach should build a
The convertible loan also allowed Nedbank to fix a very
strong competitive advantage, allowing it to grow market
attractive price for acquiring the stake in Ecobank. It is very
share and earn superior returns.
rare to acquire a sizeable stake in a fast-growing bank such
as Ecobank at book value.
In a very competitive space, Nedbank is pursuing what
we believe is the right strategy to unlock the potential in
Finally, Ecobank comes with a strong team and therefore
this part of its business. This is an opportunity to grow the
puts very little operational demands on the Nedbank team.
current earnings base.
The Ecobank relationship is more than just an equity
Prudent African expansion strategy
stake. Nedbank is able to channel its own SA customers
to Ecobank in markets where Nedbank does not have
22
Representing less than 5% of current group earnings,
a presence and similarly, provide services to Ecobank
it is easy to dismiss the importance of the Rest of Africa
customers in SA, thereby adding to the strength and
division to the fortunes of the overall group. This would
growth of its domestic franchise. Ecobank has a presence
be a mistake in our view. Each of the big four banks in
in 36 countries across the African continent covering large
SA has targeted the rest of Africa as a long-term growth
and fast-growing markets such as Nigeria and Angola, and
opportunity. Standard Bank and Barclays Africa Group have
is therefore a bank well positioned for long-term growth.
Coronation Fund Managers
The contribution from the rest of Africa to Nedbank’s
current earnings base, but will also be able to grow its
current earnings base does not tell the full story and neither
earnings by leveraging those divisions currently punching
does the current valuation reflect this potential.
below their weight.
Quality franchise at a discount to intrinsic value
In deriving our intrinsic value for Nedbank, we captured
these growth opportunities into our assessment of normal
The last 10 years have been transformational for Nedbank.
earnings before applying a multiple commensurate with a
The franchise has been strengthened to compete effectively
franchise of this quality. The result is an intrinsic value in
and has been positioned conservatively to protect
excess of the current share price with an adequate margin
shareholder value in an uncertain operating environment.
of safety. This enables us to have Nedbank as a meaningful
The business today not only has the ability to defend the
holding across our portfolios.
corospondent / July 2015
23
Present pain for
future gain?
Marie Antelme is an
economist in the fixed interest
team. Marie has 13 years’
experience as a market economist
and joined Coronation in 2014
after working for UBS AG, First
South Securities and Credit
Suisse First Boston.
Higher interest rates may secure
the long-term benefits of stable,
competitive prices.
by Marie Antelme
The South African Reserve Bank’s (SARB) Monetary Policy
Committee (MPC) left the repo rate unchanged in May, but
its communiqué ended by warning that “…the deteriorating
inflation outlook suggests that this unchanged stance
cannot be maintained indefinitely.” Importantly, two out of
six members voted for a 25 basis points (bps) hike at the
time.
WEAKENING CONSUMER AND BUSINESS CONFIDENCE
%
index points
25
100
20
90
15
80
70
10
60
5
50
0
40
-5
30
-10
The SARB has been warning markets that it is going to
continue its policy of interest rate normalisation by raising
interest rates for some months. The precise timing of the
next hike is uncertain, but the MPC statements have become
increasingly hawkish, emphasising that the reprieve gained
from falling oil prices, which allowed a window for rates to
remain unchanged, is over.
The prospect of higher interest rates has, understandably,
been met with dismay by consumers and other economic
participants.
Part of the problem is that economic growth has been
weak and moving sideways for a long time, averaging only
2.2% since the beginning of 2011. When coupled with load
shedding, weak credit growth, the weak currency, rising utility
and transport costs and a range of political and legislative
changes, business and consumers have been left feeling
battered. This is reflected in weak confidence levels among
both groups, with consumer confidence plunging to 15-year
lows in the second quarter of 2015.
24
Coronation Fund Managers
20
-15
10
-20
0
Q1 1997
Q1 2000
Real GDP (LHS)
Q1 2003
Q1 2006
Q1 2009
Q1 2012
Q1 2015
BER Consumer Confidence Index (RHS)
BER Business Confidence Index (RHS)
Sources: Bureau for Economic Research (BER), SARB
Against this fragile economic backdrop, and faced with
rising inflation, which is mostly being driven by a range of
so-called cost-push factors, many people are asking why
the SARB would raise interest rates and not recognise that
higher funding costs will further injure an economy already
in pain.
What we forget is that in the long term, price stability is
an absolutely necessary precondition for growth. This is
because too much inflation erodes savings; stimulates
capital flight as people invest in non-inflationary assets such
as real estate, foreign assets and precious metals; makes
economic planning very difficult; and in extreme forms can
provoke social and political unrest.
Price stability contributes to growth and investment in a
number of ways:
SA’S SAVING AND INVESTMENT RATES ARE COMPARATIVELY LOW
Savings as % of GDP
50
Improves transparency by making the central bank’s
intentions explicit in a way that should help the private
sector to plan.
Promotes central bank discipline and accountability.
China
45
40
Malaysia
35
Venezuela
Philippines
India
Ecuador Chile
Colombia
Hungary
Argentina
South Africa
Croatia
Brazil
30
25
20
15
10
Lower inflation reduces risk premiums in interest rates,
i.e. the compensation creditors demand for the risks
associated with holding nominal assets.
This in turn reduces real interest rates and increases
incentives to invest.
Price stability prevents an arbitrary redistribution of
wealth and income as a result of unexpected inflation or
deflation, consequently contributing to financial stability.
The SARB’s mandate is to achieve and maintain price
stability in the interest of balanced and sustainable growth.
The inflation-targeting framework, adopted in 2000,
provides both the tools through which inflation targeting is
implemented, and the yardstick by which its success can be
measured. The central bank’s responsibility for maintaining
a stable financial system is linked unequivocally to its
responsibility for achieving price stability.
Targeting inflation sounds like a simple and easy thing, but it
isn’t. When a central bank targets inflation, it is actually trying
to manage a broad range of prices that may ultimately reflect
in the general price level. We call this inflation when prices
are rising, and deflation when price changes are negative.
If left unchecked, this general price level could undermine
financial stability. It includes not only cyclical price changes,
but also changes in relative prices, including wages, supply
shocks such as fuel and electricity prices, a sharp rise in the
price of one asset class, or a ‘bubble’ that could not only
affect price levels, but also financial stability.
In the long run, the central bank also needs to be cognisant
of the link between interest rates and savings (investment)
in an economy. High-saving economies tend to have
sustainably lower interest rates, and low-saving economies
have higher interest rates, on average. In turn, economies
with higher savings rates tend to have higher investment
rates too. South Africa has neither.
Thailand
Indonesia
5
0
0
5
10
15
20
25
30
35
40
45
Gross fixed capital formation as % of GDP
Sources: IMF, SARB
There are a number of preconditions for successful inflation
targeting. The target itself is important because it needs to be
set in coordination with other economic (fiscal) policies. The
target also needs to be realistic, but sufficiently challenging
so that achieving it can have a meaningfully positive impact
on long-term price-setting behaviour. It also needs to be set
in such a way that the people in the economy understand
the integrity of the underlying process. Importantly, the
central bank needs to have sufficient independence to
implement monetary policy that might be unpopular in
the short term, in order to meet its mandate. And because
the process requires anticipation of future inflation and
implementation of policy to manage a largely unknown
outcome, the central bank needs a reliable, credible method
of forecasting inflation and a rigorous system for checking
and communicating forecast risk.
An inflation-targeting framework can only be a success if the
public is convinced that the central bank is serious about
containing inflation. The target, the bank and the process
need to be credible.
In a number of ways, the SARB is well positioned to target
inflation:
The SARB’s price-stability mandate is well understood in
South Africa, and the CPI target of between 3% and 6%
on a consistent basis has long been established.
The SARB’s independence is constitutional, allowing
it to make monetary policy decisions without fear or
prejudice.
corospondent / July 2015
25
The forecasting model of the central bank is published
and updated, so that the economically minded can
better investigate, test and understand the assumptions
made and appreciate the interconnectedness of various
indicators.
The central bank publishes several regular updates
on monetary policy, the most regular of which is the
communiqué released after each meeting.
History shows that since the adoption of inflation targeting,
inflation has, on average, fallen within the target range,
interest rates have been less volatile than in the period
before inflation targeting and GDP output has been more
stable, and a little higher.
Wage growth, measured by payroll data, consistently
exceeds a combination of inflation and productivity –
reinforcing not only high prices, but also persistently
undermining domestic competitiveness.
At the moment, the SARB faces a very difficult economic
environment. Inflation pressure is already rising, and is likely
over time to be exacerbated by more electricity price hikes,
normalising fuel prices (which will be aggravated by a weak
currency), some pressure from local food inflation and a
wage-driven persistence in other administrated costs. In
the short to medium term, CPI is expected to rise above the
upper 6% target limit, and is at risk of staying above this level
for a considerable period in 2016. By 2017 – and depending
on what the electricity tariff and currency have done –
However, a more critical analysis of the data shows that
inflation targeting in South Africa has not been a resounding
success:
Average CPI since the adoption of the 3-6% target range
has averaged 5.75%.
this is likely to remain somewhere between 4.5% and 6%.
Consequently, inflation looks set to continue on the high,
bumpy path that it has followed since the financial crisis.
The latest Bureau for Economic Research (BER) poll shows
that South Africans are expecting long-term inflation to
remain stuck very close to the 6% target limit, demonstrating
that the SARB’s targeting efforts have not been enough to
GDP growth has averaged only 3.2%.
materially lower forward-looking inflation expectations.
Inflation expectations fell well below target from
2004 to 2007, but despite very weak growth, are now at
6.2% on a forward-looking basis – and have been above
6% almost consistently since 2011.
This takes us back to the long-term benefits of stable,
competitive prices. The central bank is not insensitive to
the source of price pressures and has publicised quite
clearly how the MPC thinks about supply-side shocks and
Interestingly, this coincides with a period of low real
interest rates.
decision is never easy to make, and while the central bank
is clearly cognisant of the economic context in which it
%
14
6
12
5
4
10
challenges facing the economy are manifold, and mostly
out of the realm of monetary policy. A painful, unpopular
SA INFLATION IS HIGH AND REAL INTEREST RATES ARE VERY LOW
%
what appropriate responses might be1. Similarly, the growth
3
8
2
6
1
operates, the mandate, and the ultimate benefits of price
stability, are in fact part of the economic package needed to
support faster, more sustainable growth.
0
4
-1
2
-2
0
2000
2002
2004
2006
2008
BER inflation expectations, one year forward
2010
2012
2014
-3
CPI, % y/y
Real repo rate (RHS)
Sources: Bureau for Economic Research (BER), Statistics SA, SARB
1
26
Challenges of Inflation Targeting in Emerging Market Economies: The South African Case, Brian Kahn (2009)
Coronation Fund Managers
Bond outlook
A number of domestic risks
may threaten relatively sanguine
bond valuations.
Nishan Maharaj is head
of fixed interest research at
Coronation and has more than
12 years’ investment experience.
He manages a portion of the fixed
interest assets across all strategies.
by Nishan Maharaj
Volatility in fixed interest markets subsided slightly in the
second quarter of the year as the euphoria around the
falling oil price quickly dissipated in lieu of older, more
familiar drivers of valuation. The yield on the SA benchmark
bond widened from 7.8% to 8.3% during the quarter, while
the rand remained relatively stable, albeit touching a high
of R12.60/$ in early June. Bond and currency weakness in
the month of June was driven primarily by concerns about
Eskom’s drag on local economic sustainability, expectations
around monetary policy normalisation – both locally and in
the US, and the possibility of a ‘Grexit’ (Greece exiting from
the eurozone).
of the private sector (it is mainly held by euro area peers,
European institutions and the IMF), limiting its negative
impact on the rest of Euroland. In addition, unlike in 2010/11,
one can be extraordinarily confident that the European
Central Bank will do whatever it takes (which includes being
the lender of last resort) to keep the eurozone intact and that
the current quantitative easing (QE) programme, initiated
earlier this year, will serve as a support mechanism for
peripheral debt and liquidity. Therefore, while there might be
some market turbulence in the short term, a 2008-type crisis
is not anticipated and cheapening valuations can be viewed
as an opportunity to re-engage with assets.
In the second half of this year, fixed income assets will take
their lead from the path and extent of monetary policy
normalisation in the US, as well as the SARB’s response to a
higher global risk-free rate and a deteriorating local inflation
outlook. News flow towards the end of the quarter regarding
the possibility of a disorderly Greek exit from the EU and its
implications warrants further focus, given the uncertainty it
has created in global markets.
In October last year, US monetary policy took its first step
towards normalisation as QE came to an end. But since
then, the point of lift-off and magnitude of the impending
hiking cycle has been a riddle wrapped in a mystery inside
an enigma. US economic data, both in the labour and
manufacturing sectors, have continued to point to an
economy that is firmly on track to recovery.
Key to fixed income investors is firstly whether a Greek exit
will cause a correction in the market’s risk sentiment, and
then whether this correction could extend into broad-based
contagion. In the near term, given the uncertainty around
the US Federal Reserve’s (Fed) hiking cycle, the elevated
valuations of both equity and bond markets, and market
expectations of a resolution to the crisis, it is very likely that
a Greek exit will trigger a sell-off in risky assets, including
equities and emerging market fixed income. However, the
likelihood of this having a contagion effect over the medium
to longer term is minimal. The Greek economy has contracted
by 26% since 2010 and ownership of Greek debt lies outside
In its most recent communications, the US Federal Open
Market Committee (FOMC) has indicated its willingness
to move away from its zero interest rate policy towards a
terminal rate that is more appropriate to current economic
conditions. However, Fed chair Janet Yellen reiterated at
the FOMC’s June meeting that “economic conditions are
currently anticipated to evolve in a manner that will warrant
only gradual increases in the target Federal funds rate”.
In addition, members of the FOMC see rates between
0.5% and 0.75% (implying a maximum of two hikes of 25
basis points each) by end 2015 and 1.25% to 1.5% by end
2016. Fixed income investors can take solace in the fact that
corospondent / July 2015
27
although US interest rates are going up, the magnitude of
the increase will be far from aggressive and markets are
relatively well priced for this outcome.
The US hiking cycle will impact on SA fixed income through
two channels. The first being the impact on the local currency.
And, if we experience a period of protracted dollar strength
as short-term rates rise in the US, the subsequent feedthrough to inflation. Furthermore, the rise in the global yield
benchmark will affect local bond yields.
The experience with previous Fed hiking cycles can shed
some light on the expected impact of rising US short rates
on the dollar. In the last seven US hiking cycles, the dollar
index has only been stronger at the end of the cycle in two of
those periods, namely 1983-84 (the savings and loans crisis
in the US) and 1999-2000 (the emerging market crisis). Both
were periods of extreme global distress, and flight-to-quality
flows enhanced the attractiveness of the dollar.
The yield differential between the US and South African 10year government bonds provides an indication of both the
creditworthiness of, and the pricing of rate expectations by,
the riskier asset (in this case the SA bond) relative to the global
benchmark. Although SA’s credit rating has been adjusted
lower by various agencies in the recent past, it still remains
above investment grade, with substantial negativity baked
into the current rating. This provides some confidence in the
stability of SA’s credit rating for at least the next two years.
The current spread differential therefore remains stretched
relative to its history, suggesting a significant buffer relative
to US yields. This implies that if the US long bond was to
move higher in reaction to the rise in US short-term rates, the
degree to which SA yields will react may be much reduced.
YIELD DIFFERENTIAL BETWEEN US AND SA
basis points
8.15
7.15
index points
4.15
3.15
US versus SA 10-year bond spread
Mean
05/01/15
05/01/14
05/01/13
05/01/12
05/01/11
05/01/10
05/01/09
05/01/08
05/01/07
05/01/06
05/01/05
05/01/04
05/01/03
05/01/02
2.15
+/-1 Standard deviation
Source: Bloomberg
dollar strength during a Fed hiking cycle and the current
%
160
20
140
18
16
120
14
100
12
80
10
60
8
6
40
yield buffer between SA and US bonds, the impact on local
fixed interest over the medium to longer term should not be
as pronounced as in the past. This does not imply that there
will be no volatility around the point of lift-off, but that this
volatility should not permeate past a shorter-term horizon.
4
20
USD Index (LHS)
US Fed Funds Rate (RHS)
US hiking cycles
Mar-15
Mar-14
Mar-13
Mar-12
Mar-11
Mar-10
Mar-09
Mar-08
Mar-07
Mar-06
Mar-05
Mar-04
Mar-03
Mar-02
Mar-01
Mar-00
Mar-99
Mar-98
Mar-97
Mar-96
Mar-95
Mar-94
Mar-93
Mar-92
Mar-91
Mar-90
Mar-89
Mar-88
Mar-87
Mar-86
Mar-85
Mar-84
Mar-83
Mar-82
Mar-81
Mar-80
Mar-79
Mar-78
Mar-77
Mar-76
Mar-75
Mar-74
Mar-73
2
Mar-72
Mar-71
5.15
Therefore, given the historical precedent with regard to
US FED FUNDS RATE AND US DOLLAR INDEX
0
6.15
05/01/01
In the absence of these developments, the dollar would
not have had such a strong underpin. Therefore, one can
conclude that the recent surge in the dollar is unlikely to be
sustained as the cycle matures. Its influence as a weakening
force on our local currency should dissipate in the period
following the first hike in the US. This does not imply that the
rand will not weaken further if local fundamentals continue
to deteriorate. However, the pace of the deterioration, and
the consequent effect on inflation, will be less influenced by
a stronger dollar than in the lead-up to the start of the US
hiking cycle.
0
More important for the SA fixed interest markets will be how
local monetary policy responds to the deteriorating inflation
outlook. In the first half of this year, inflation touched a low
point of 3.8%. Since then, due primarily to base effects and
Source: Bloomberg
28
Coronation Fund Managers
an increase in food prices, inflation is on track to substantially
breach the top end of the target band (6%) from the fourth
quarter of 2015 to at least the end of the first half of 2016.
Further risks to this outlook emanate from increases in
administered prices, such as a possible VAT increase in 2016,
an increase in Eskom tariff hikes and continuing aboveinflation wage settlements. Balancing this is a deterioration in
growth dynamics, with the SARB revising potential growth to
2% (from 3%), and load shedding, which continues to weigh
on business sentiment and investment. Overall, however,
the risks to inflation have increased to such an extent that
the SARB should resume its hiking cycle this year, moving
gradually towards a repo rate of 7% over the next one to
two years, in order to maintain its credibility and de-anchor
inflation expectations from the top end of the band. This
eventuality has been well priced into current markets and
although there might again be short-term volatility around
the first rate hike, there should not be a step change in
valuations once the cycle commences.
by current market pricing) and a modified duration of 8.6%
In addition, the Forward Rate Agreement (FRA) curve currently
prices in just over 150bps of hikes by the SARB over the next
two years, which suggests that there is currently a risk premium
buffer built into market expectations. The steepness of the
bond curve provides a decent buffer for holders of longerend bonds in an environment of rising shorter-term rates.
In the unlikely event of a more aggressive rate hiking cycle
by the SARB, these bonds (currently trading at 9%) should
provide holders with adequate protection. Inflation-linked
bonds (ILBs) have provided good protection for investors in
previous episodes of above-target inflation. However, current
valuations do not make them overly attractive.
average of around 2%, making 10-year ILB real yields of
(if the market sells off 100bps, the instrument will lose 8.6%
of its capital value). A nominal bond of equivalent modified
duration is the R2032, which trades at a yield of 8.8%. Over
one year, with an expected inflation average of 6.5%, the 10year ILB will provide a total return of 8.04%, while the R2032
(same risk bond in the nominal space) will provide a return
of 8.8%. Inflation in SA has averaged 5.8% since 2000 (when
inflation targeting started in SA), 6% over the last 10 years and
5.3% over the last five years. Clearly, the inflation average
has not been anywhere near the current implied breakeven
inflation level over any meaningful period. Breakeven levels
over the medium to longer term therefore look expensive.
Finally, considering that we are close to the precipice of a
global normalisation in real rates, coupled with the SARB
being dead set on defending its credibility, the current level
of real rates are bound to head back towards their long-term
1.65% look pretty expensive.
So we are faced with ILB valuations which over the shorter
term (one year), on a risk-adjusted basis, do not beat
nominal bonds. And over the longer term, the valuations are
expensive relative to actual inflation outcomes and are at risk
of re-pricing back to higher normal levels. Accordingly, our
preference remains for longer-end nominal bonds over ILBs.
SA REAL CASH RATE
%
7.3
6.3
5.3
4.3
3.3
2.3
1.3
0.3
Oct 14
Mar 15
Jul 13
May 14
Feb 13
Dec 13
Apr 12
Sep 12
Jan 11
Jun 11
Nov 11
Oct 09
Mar 10
Aug 10
Jul 08
Dec 08
May 09
Apr 07
Feb 08
Sep 07
Jan 06
Jun 06
Nov 06
Oct 04
Mar 05
Aug 05
Dec 03
Jul 03
Mean
The current 10-year ILB trades at a yield of 1.65%, with an
implied breakeven inflation rate of 6.5% (this is the expected
average level of inflation over the life of the bond, as suggested
May 04
Apr 02
Feb 03
Sep 02
Jan 01
-1.8
Jun 01
-0.8
Nov 01
When deciding whether to allocate assets to either ILBs or
nominal bonds, there are three key metrics to consider.
These include the difference in total return between nominal
and inflation-linked government bonds over the period, the
current breakeven inflation levels implied by the market,
and the outright value of real rates relative to history and
expectations.
Real cash rate
The real cash rate is approximately equivalent to the SARB’s overnight cash rate minus inflation.
Source: Bloomberg
corospondent / July 2015
29
30
The yield on 10-year bonds is now at the same level as the
The start of the rate hiking cycles in the US and South Africa
2014 average (8.25%) and slightly above the average since
is not expected to materially disturb current valuations, but
the start of inflation targeting (8.15% since 2000), suggesting
might add to the volatility premium required to hold fixed
bonds are closer to their mean fair value. However, there
income type assets. However, we believe that any move
are risks in the form of inflation and structural bottlenecks in
above 9% in longer-dated nominal government bonds
the local economy that are starting to threaten the relatively
offers a good point to start the re-engagement with long-
sanguine environment depicted by the local bond market.
duration positions.
Coronation Fund Managers
Market review
Quinton Ivan is head
of SA equity research and
co-manages the institutional
core equity portfolios as
well as the Presidio hedge
fund. He is also responsible
for analysing a number of
retail, pharmaceutical and
construction stocks.
Conditions are likely to remain
choppy as investors succumb to
bouts of euphoria and despair.
by Quinton Ivan
Concerns over a possible Greek exit from the eurozone and
the continued slowdown in China manifested in a decline
in investor risk appetite. Locally, the JSE All Share Index
declined by 0.2% for the quarter ended June, a minor
reversal of the strong performance shown in the first quarter
of 2015. Industrials returned 1.7% and financials declined
by 2.3%, both continuing to outperform resources, which
fell by 4.9%. The longer-term performance of the resource
sector is particularly dismal, with declines over one, three
and five years, and it only marginally outperformed cash over
a 10-year period.
Market summary
Index
Qtr 2
2015
1
year
3
years
5
years
10
years
All Share
Resources
(0.2%)
4.8%
19.0%
18.0%
17.1%
(4.9%)
(28.8%)
(3.2%)
(0.3%)
Financials
8.0%
(2.3%)
20.9%
24.5%
22.9%
16.9%
Industrials
1.7%
14.0%
28.1%
27.1%
22.6%
SA listed property
(6.2%)
27.0%
18.6%
20.5%
20.3%
All Bond
(1.4%)
8.2%
6.6%
9.1%
8.2%
Cash
1.6%
6.3%
5.7%
5.8%
7.5%
Source: Deutsche Bank
There remains a clear dichotomy within the global economy.
The US is in recovery mode, as is shown by good economic
growth and falling unemployment. The focus is very much
on the quantum and timing of interest rate hikes by the US
Federal Reserve. We expect rates to be hiked gradually, and
anticipate the first one in September this year. In contrast,
Europe is fighting deflation with bouts of quantitative easing
and is attempting to manage the ongoing fiscal concerns
around Greece. The slowdown in China continues and
growth appears unlikely to recover soon. This has prompted
the People’s Bank of China to cut rates as well as lower the
reserve ratio that banks are required to hold, in order to
inject liquidity into the economy and support growth.
These developments have seen continued US dollar strength
and weakness across key commodities. China, as a significant
consumer of commodities, remains crucial to commodity
demand, commodity prices and the fortunes of resource
shares. Given the stark underperformance of resource shares,
it is clear that they have fallen out of favour with market
participants. This presents an opportunity to the valuationdriven investor with a long-term time horizon. However, as
a command-driven economy that is rebalancing from being
traditionally infrastructure-led to more consumer-driven, China
is not only a key call for resources, but also an imponderable.
We believe valuations of resources, based on our assessment
of their long-term value, are attractive enough to warrant a
healthy weighting in our equity and balanced portfolios.
However, lack of conviction around the Chinese economy
means that this is not a portfolio-defining position. This
talks to the importance of risk management in the portfolioconstruction process – we will never bet the portfolio on a
single view, especially one that can never be forecast with
certainty. Our preferred holdings remain Anglo American,
Mondi, Sasol and Exxaro. We continue to favour platinum
over gold producers and our preference remains for the lowcost platinum producers Impala Platinum and Northam. We
also have a reasonable weighting in platinum and palladium
exchange-traded funds.
The South African economy is hamstrung by slow global
demand for our exports and the disruptive impact of load
corospondent / July 2015
31
shedding as Eskom battles to clear its maintenance backlog.
Although inflation remains within the target range at present,
there are significant upside risks to the inflation outlook.
These are rising unit labour costs, rising food inflation in
light of rand weakness and poor crop yields (impacted by
drought), and the potential for additional electricity tariffs.
These risks were acknowledged in the hawkish tone taken
by the South African Reserve Bank at the last Monetary
Policy Committee meeting and increase the likelihood of
an interest rate hike at the July meeting. The JSE, on the
other hand, does not appear to discount many of these
risks, with most domestic equities being fairly valued. We
continue to favour the quality global businesses that happen
to be domiciled in South Africa, such as Naspers, British
American Tobacco, Steinhoff, MTN and Richemont. These
companies have robust business models, are diversified
across numerous geographies and currencies and remain
attractive based on our assessment of their intrinsic value,
especially when compared to pure domestic businesses.
have maintained our weighting. Life insurers returned -5.9%
for the quarter. Our preference remains for MMI Holdings
and Old Mutual, both of which trade on attractive dividend
yields and below our assessment of their intrinsic value.
In terms of asset allocation, equities remain our preferred
asset class for producing inflation-beating returns. We prefer
global to domestic equities on the basis of valuation, and
remain at the maximum 25% offshore limit in our global
balanced funds.
The bond market returned -1.4% for the quarter, underperforming cash, which yielded 1.6%. Inflation-linked bonds
outperformed nominal bonds, with a return of 1.6% for the
quarter. We believe yields on global bonds are too low and
do not offer value. Domestic bonds, following the recent selloff on the back of waning risk appetite and concerns over
rising inflation, offer relatively better value. We continue to
maintain a good exposure to local corporate inflation-linked
The JSE continues to exhibit traits of a two-speed market;
investors are prepared to pay very high multiples for stable,
defensive businesses with good earnings visibility while
ignoring cyclical businesses with a higher heartbeat, such
as resources and construction shares. During such periods
of dislocation, it is important to remain disciplined. We
continue to hold reasonable positions in the food retailers
Spar, Shoprite Holdings and Pick n Pay as well as in selected
consumer-facing businesses (Woolworths, The Foschini
Group and Clicks). These businesses possess pricing
power, are well managed and trade below our assessment
of fair value.
Banks returned -2.8% for the quarter, underperforming the
broader financial index. The current earnings of the large
commercial banks approximate our assessment of their
normal earnings power. Net interest margins should benefit
once interest rates are hiked. Although this will be offset by
rising credit loss ratios, banks have used the current benign
environment to bolster general provisions, which should
buffer some of this impact. Valuations remain reasonable
on both a price-to-earnings and price-to-book basis and we
32
Coronation Fund Managers
bonds. Following the demise of African Bank, spreads on
corporate bond issuances have widened and one is able to
fund corporates, with good credit risk, at attractive yields. We
continue to add to our existing corporate bond exposure.
Listed property returned -6.2% for the quarter. We expect
domestic properties to grow distributions ahead of inflation
over the medium term. This real growth, combined with a
fair initial yield, offers an attractive holding period return. We
continue to hold the higher-quality property names, which
we believe will produce better returns than bonds and cash
over the long term.
In conclusion, financial markets are likely to remain choppy,
with investor sentiment ebbing and flowing between bouts
of euphoria and despair. We have no special insights into
how the macroeconomic concerns of the day will unfold. As
valuation-driven, bottom-up investors, we remain anchored
by our philosophy of investing for the long term. History has
shown that this is the best way of producing superior returns
for our clients.
International outlook
Normalising interest rates should bolster
confidence, aiding the recovery and
allowing us to once and for all leave
the Great Recession behind.
by Tony Gibson
Inconclusive macroeconomic data remained centre stage
during the past quarter and led to a somewhat subdued
stock market performance. Coinciding with 2015’s economic
outlook remaining clouded, the first-quarter earnings
season also came to an end in the equity markets. While the
absolute results were generally underwhelming, the numbers
beat analysts’ much-reduced expectations, largely thanks to
the energy sector’s surprising resilience. While investors did
not seem too impressed by the generally positive earnings
publications in the first quarter, as has become the trend in
recent years, markets exhibited acute sensitivity with regard
to future profit guidance. The past three months have, for the
most part, been relatively uneventful. That said, this changed
significantly during the last week of June as negotiations in
Greece reached a climax. At the time of writing, it is virtually
impossible to predict the short-term outcome given the
current fluid situation.
Tony Gibson is a founder
member of Coronation and
a former CIO. He was
responsible for establishing
Coronation’s international
business in the mid-1990s,
and has managed the Coronation
Global Opportunities Equity
Fund since inception.
price rose by a marginal 0.6%. For the year to date, the dollar
has strengthened by 7.8%, while the gold price is flat.
One feature of the past quarter has been particularly weak
platinum group metal prices, which have been continuing
their constant downtrend since 2014. History now shows that
ample inventories during the local platinum miners’ strike
ensured that the price did not blow out. Also, falling demand
from Asia and Europe has hampered the price since last year,
as industrial and investment demand for platinum declined.
The gold price, often a barometer of just how worried
investors are, has remained range-bound for all of the second
quarter, as the price consolidated between $1 170/oz and
$1 230/oz. The price continues to lack any sort of direction,
remaining tightly range-bound. Since the start of the second
quarter, gold has seen a decline in safe-haven demand,
while opportunistic buying has also been lacklustre despite
a weaker dollar. The price has been a little more volatile
lately, but confined to the narrow range mentioned above,
showing muted reactions to various geopolitical tensions
such as the Greek bailout and tensions in Syria.
The other news event towards the quarter-end came out of
China, when the People’s Bank of China cut the one-year
benchmark lending rate and deposit rate by 25 base points
(bps) to 4.85% and 2% respectively. These cuts were more
than likely triggered by the recent equity market sell-off in
China. The timing – the cuts followed a one-day 7.4% plunge
in the local share market – confirmed the first such combined
move from the central bank since late 2008 during the global
financial crisis. This highlights the government’s concern
about a stock market crash and rising systemic financial
risks. This move should help to stabilise market sentiment
and support property sales and economic growth in the first
half of 2015. It would seem that the Chinese government is
following a strategy of leveraging the equity market to boost
economic growth. Although this tactic helped in the first
quarter of 2015 – through a boost from the financial services
sector – it is now showing signs of increasing volatility. This
may pose risks to growth in the future.
The dollar has been the key driver of recent commodity
moves, including the gold price. For the past quarter, the
dollar index has weakened by close to 1%, while the gold
Oil prices continue to have a profound effect on most
aspects of economic activity. In our opinion, the recent
sharp downward adjustment in oil prices was not signalling
corospondent / July 2015
33
a precipitous drop in global demand. Instead, it was a
tale from the supply side. For years, new supply has been
coming on board faster than demand has been growing,
thanks to fracking and fuel conservation, finally resulting in a
normalisation of oil prices. The average price of oil over the
last 30 years has been about $40/barrel, not $100. Therefore,
is $100/barrel really appropriate given the tectonic shift in
energy thanks to a US shale oil boom? We do not believe so.
Overall, the global economy has been buffeted this year
by the after-effects of the plunge in oil prices, quantitative
easing (QE) in Europe and Japan, a sharp jump in the
dollar, and record cold winter weather in parts of the US.
The net effects of these factors have resulted in global
growth remaining relatively sluggish this year, supporting
an expectation that the underlying growth trends in the
major regions of the world will continue to edge lower. That
said, the improvement in the eurozone’s latest Purchasing
Managers Index (PMI) report suggests there’s a good chance
of the euro area enjoying reasonable economic growth
in 2015. Strengthening economic indicators (industrial
production, private sector lending and domestic demand)
and the European Commission upgrading its 2015 growth
forecast from 1.3% to 1.5% have reduced the risk of serious
deflation in the coming months. However, inflation is still
short of the European Central Bank’s 2% target, dampening
any idea that the ECB will taper QE before its expected
maturity (September 2016). During May, the ECB reached
its €60bn QE monthly target. It also announced that it is
preparing to undertake pre-emptive bond purchases in
June, to avert lower liquidity in the summer market.
Even though a US rate hike in June was a long shot, the
markets were nonetheless relieved when the latest Federal
Open Market Committee minutes, released in May, clearly
showed that it was off the table. That said, the economic
data on which the Fed has been depending to guide the
way forward have actually taken a turn for the better. Jobs,
housing, auto sales, manufacturing – all are on track. Every
three houses built in the US create one new job, which
will further help an employment market that is already at
its best level in 15 years. US auto sales were way ahead
of expectations in May, rising to a seasonally adjusted
annualised rate of 17.79 million new-car sales. At this point,
the negative GDP number in the first quarter seems to us an
aberration rather than a trend that is gathering momentum.
34
Coronation Fund Managers
After all, the trend in recent years should have conditioned
investors to expect weak first-quarter economic growth, only
for the economy to accelerate in subsequent quarters.
While US growth prospects have softened during the first
half of this year, the likelihood that the Fed will begin to raise
rates later this year has diminished only slightly. This is partly
because the demand side of the economy (most importantly
consumer spending) appears to be getting back on track
after the winter lull, as illustrated by retail sales and auto
purchases, which picked up again recently. Housing activity
has rebounded as well. Thus, the inexorable approach of
Fed lift-off; ongoing but recently diminished uncertainty
about whether and how Greece will come to terms with the
EU, ECB and IMF; and likely overplayed fears of a property
bubble burst in China, all play on investors’ minds. These
factors clearly have the potential to raise volatility in the
markets. We do not, however, believe that this uncertainty
will cause the global economy to materially deviate from our
current expectation of a steady growth path.
One clear consequence of low interest rates in developed
economies – coupled with CEO confidence in the future
of global markets – is that mergers and acquisitions (M&A)
activity has skyrocketed. This is due to solid global growth
and cheap, abundant money – both of which have acted
as a catalyst for these activities. For the first five months of
2015, US mergers and acquisitions (involving companies
with a market capitalisation of more than $10bn) have more
than doubled from the same period last year, reaching a
record level. US M&A activity in May alone also set a new
monthly record, exceeding the previous high-water mark
established in May 2007. Interestingly, US acquisitions into
Europe, Middle East and Africa in the year to date are also
the highest on record. And while the US is the most active
cross-border acquirer, it is not the only one. Global crossborder M&A volume is up 49% year-on-year to reach the
second highest level ever.
As always, stepping back and gathering a longer-term
perspective on international investment markets is helpful.
As a starting point, investors should not lose sight of the
following facts, among many others:
2015 is the ninth year without a rate hike by the US
Federal Reserve Bank.
52% of all global government bonds yield less than 1%.
But, four countries are now operating close to estimates
of full employment. Those are the US, UK, Japan and
Germany. In each case, wage inflation appears to have
picked up.
Our concern is twofold. On the one hand, many investors
around the world have grown accustomed to, and reliant
on, the current status quo. That is, after nine years of
generational-low interest rates, they have come to regard
this as embedded for the longer term. However, on the
other hand, we believe that this benign period may see
changes unfold. Overall, neither investment markets nor
the Fed believes that inflation will be a problem. But we
think there is an increased risk that the amount of inflation
in the pipeline may be underestimated. What is well known
is that we are presently seeing the growth rate of the global
economy slowing somewhat from last year’s already belowtrend pace. This year’s disappointment, centred primarily on
the US economy, is now largely behind us, and growth in
most major regions of the world (with Asia ex-Japan being a
notable exception) is seen as picking up significantly in the
period ahead. Anchoring this statement is our belief that we
expect the US economy to rise to a modestly above-trend
pace of 3.8% in 2016.
Allied to this is the fact that the US economy is moving
closer and closer to full capacity. Once we hit full capacity,
inflation will rise from the current extremely low levels. We
are already seeing this in wages. Consider the natural rate
of unemployment as a concept. This refers to the level of
unemployment at which we will begin to see inflation. In
other words, inflation will be low until we hit this point, but
once we move below this rate, inflation will begin to trend
higher. We would argue that the US labour market has
reached this level. Statistics show us that:
We have reached the inflection point where there are
more job openings than hires.
It takes a longer time today to fill a vacant job than
in 2006.
The number of people who voluntarily quit their job to
take another job is at pre-crisis levels.
The number of unemployed people per job opening is at
2006 levels.
Consumers’ wage expectations have moved significantly
higher over the past 12 months and wages have started
to take off after moving sideways for five years.
The Employment Cost Index began to trend higher a
year ago. This is due to the fact that the US labour market
reached full capacity, and as a result, prices started
going up.
The risks appear to be rising that the markets’ benign inflation
outlook is wrong and that higher labour costs may begin to spill
over to services inflation in the US economy. The US Fed will,
in our opinion, begin with a prolonged period of interest hikes
in September this year. The impetus for this will come from
US consumer spending, which is showing signs of recovering
from its winter lull, and the considerable forward momentum
in the US labour market. The risk is therefore that the Fed
is pressed into more aggressive tightening than currently
anticipated, due to a significant intensification of inflation
pressures in the US. In our opinion, there is little downside
to the Fed acting sooner rather than later. In fact, we think
embarking on a normalisation of the policy rate would actually
bolster confidence in the economy and the markets and allow
us to once and for all leave the Great Recession behind.
Such an event would clearly have the most negative impact
on emerging markets, as capital outflows could drive
asset prices lower and leave currencies weaker against the
dollar. Few emerging economies would be immune to such
spillovers, although China, India and Russia have historically
shown markedly less sensitivity to developments in US
financial markets. While most central banks in emerging
markets are expected to start raising rates long after the
Fed, another tantrum following the US rates lift-off could
force them to act sooner.
It was not long ago that emerging markets were generally
seen as the growing powerhouses of the world economy, as
they drove a boom in global output and trade. Even after
the 2008 financial crisis, many emerging economies which
had relatively resilient banking systems and large foreign
exchange reserves, rode out the turbulence and rapidly
resumed growing. This has recently all changed as a decline
in import demand from developed economies exposed
corospondent / July 2015
35
faultlines in emerging economies. The result is that emerging
markets have actually subtracted from world trade growth in
the first half of 2015 – for the first time since 2009.
In reality, weaknesses within the emerging world have been
evident for some time. Few countries have built the kind
of diverse, highly productive economies that will propel
them into the ranks of wealthier states. For many years,
weak improvements in productivity were masked by low
interest rates, QE in the US and high commodity prices.
These supports are now disappearing. The growth model of
countries such as Brazil has been exposed. Chronic deficits,
high inflation and an overvalued exchange rate have left the
country with no alternative but tighter monetary policy –
culminating in a probable recession.
36
Coronation Fund Managers
The loss of a favourable external environment has exposed
the past failure to reform. For emerging economies, the years
of easy growth from cheap money and inflated commodity
earnings are over. On the one hand, a resurgent US economy
will lead to higher interest rates and hence competition for
global capital, while on the other hand, a sudden weakening
in US economic growth will lead to a further decline in allimportant commodity revenues. Either way, difficult times lie
ahead for emerging economies.
These are the macro issues. One positive outcome for global
equity investors is that an increasing number of high-quality
emerging market equities are on offer at very attractive
prices.
Global developed
market equities
Targeting superior opportunities
in an expansive universe.
Louis Stassen is a founder
member and former CIO of
Coronation. He heads the global
developed market unit and
is co-manager of the Coronation
Global Equity Select Fund,
Global Capital Plus and Global
Managed funds.
by Louis Stassen
Our recently launched Global Equity Select Fund is the
result of many years of preparation. At Coronation, we are
conservative in launching new funds and pride ourselves in
not springing surprises on our clients. This launch is therefore
the culmination of well-signalled plans to supplement
our international offering with a direct developed market
equity fund.
The launch of the Global Equity Select Fund provides
investors with a new avenue to access global opportunities.
In developing the mandate, we listened to the needs of
our clients and have created a strategy biased towards
developed markets, but still flexible enough to include
some exposure to the exceptional growth potential offered
by emerging markets. In the Global Equity Select Fund we
target attractively valued shares to maximise long-term
growth for investors, aiming to outperform the global market
indices through active stock picking.
We have been building the dedicated developed market
investment team for the past four years. Our team of five
analysts are experienced and entrepreneurial, and work
very closely with Coronation’s large emerging markets
investment team. The two teams have overlapping research
responsibilities to ensure more robust debate and shared
sector knowledge.
We know that we are taking on a daunting challenge, with
the majority of global equity managers struggling to beat
passive funds. However, we believe that the tried and tested
approach that we have used in South Africa for the last
22 years, and our successful long-term investment track
record in emerging and African frontier equity markets, as
well as in managing global multi-asset mandates, is portable
to developed markets as well.
A key tenet of our philosophy is our long-term horizon. We
evaluate companies over periods of at least four to five
years, which allows us the opportunity to ignore short-term
noise and invest in assets that are trading at a discount to
our assessment of their real long-term value. This gives us
an edge in generating alpha in a world where quarterly US
earnings reports fuel short-term reactions.
As with all Coronation funds, we use our own financial
modelling and valuations to determine the real long-term
value of a company. We believe interaction with management
teams is crucial, and it is an integral part of our analysis of a
company. Consequently, we conduct multiple research trips
each year to meet with managers and assess their businesses.
The information gathered directly from management teams
feeds into our proprietary research, which drives all our
investment decisions. In general, we favour US-domiciled
companies, as in our experience, American management
teams are entrepreneurial and often more shareholderfriendly than their counterparts elsewhere in the world.
The only difference between our (dedicated developed
markets team) approach and that of the South African
investment team is the size of our universe. Given the
magnitude of potential investments available to us, we have
the luxury of focusing primarily on good-quality or aboveaverage businesses that offer risk-adjusted upside. Our
research currently covers around 100 superior developed
market companies, and an additional 165 emerging
market companies. We like to say we try to avoid errors of
corospondent / July 2015
37
commission, and not of omission – meaning that we would
A case in point is one of our largest equity positions, Porsche.
rather focus on understanding the companies we hold
The German group is the holding company of Volkswagen,
in our portfolio and getting that right, instead of chasing
which we estimate generates about half of its earnings from
every opportunity out there. We have strict liquidity filters
emerging markets. To reflect the changing opportunity set,
in place and the Global Equity Select Fund may only invest
we chose the MSCI ACWI for its larger exposure to emerging
in assets with a minimum daily trading volume of $7.5
markets (12% to 13%), compared to the MSCI World Index,
million. Consequently, clients should be reassured that the
which only has 1% to 1.5%.
fund is scalable and may deliver sustainable alpha over its
benchmark (the MSCI All Country World Index) as it grows.
Global equities currently offer compelling value to SA
investors. Large parts of the domestic market have run long
While biased towards developed market equities, emerging
and hard, and valuations appear overstretched. In contrast,
market exposure is an important part of the fund’s strategy.
we continue to find value in a number of selected global
Thanks to a strong demographic tailwind, these markets
equities.
offer higher growth and return prospects over the long term.
There are many quality companies operating in emerging
Moreover, the standard arguments for diversifying abroad
markets, and we continue to be pleasantly surprised by
have only deepened in recent times. Local currency risks have
the calibre and strength of emerging market management
increased ahead of the expected normalisation of interest
teams. Accordingly, the fund is able to have significant
rates in the US and a number of troubling developments
emerging market exposure. However, it will always be biased
have heightened South African sovereign risk. Lastly, the
towards developed markets and we have therefore capped
lack of investment alternatives on the JSE continues to be
emerging market exposure at 30%.
a constraint for investors who seek exposure to the best
opportunities in the world.
In selecting the most appropriate performance benchmark,
we considered the substantial exposure that many leading
We look forward to assisting clients in creating long-term
developed market companies have to emerging markets.
wealth through the Global Equity Select Fund.
The Global Equity Select Fund complements our global risk-managed balanced products: Global Capital Plus, a low-risk fund
which aims to preserve capital over any 12–month rolling period, as well as Global Managed, a medium-risk fund aimed at
maximising returns across traditional asset classes. The equity holdings of Global Managed, Global Capital Plus and the Global
Equity Select Fund will look similar, albeit with different weightings.
The institutional Global Equity product was launched in November 2014, the UCITs fund (for investors with externalised rands)
in February this year, and the rand-denominated feeder fund in May.
38
Coronation Fund Managers
Chinese financials
and the China
A-share market
gavin joubert is head of
Coronation’s emerging markets
team and has more than 16 years’
experience as an investment
analyst and portfolio manager.
He has managed a range
of South African equity and
balanced funds and currently
co-manages Coronation’s
emerging market fund.
Not a pretty picture.
by Gavin joubert and kyle wales
kyle wales is a member
of the emerging markets team,
responsible for analysing financial
stocks. He joined Coronation
in 2008 and is a Chartered
Accountant (SA) and CFA
charter holder.
In a year that has been very tough for emerging markets,
or mid-cap Hong Kong-listed companies (typically in out-
China stands out for the stellar returns its stock market has
of-favour sectors like automobiles and gaming), which have
generated, with the A-share (local) market having almost
generally not benefited from rallies in Hong Kong and in
doubled over the past year at its peak in mid-June. In
Chinese A-shares.
addition to this, Hong Kong-listed Chinese shares (or
H-shares), which have a weighting of around 25% in the MSCI
To understand the performance of Hong Kong-listed stocks
Emerging Markets Index, had returned almost 30% in dollar
in general, and these financials in particular, one first has to
terms at its peak. Both markets, however, have subsequently
look at what’s happening to mainland-listed Chinese stocks
given back some of these returns. Seven of the 12 largest
(A-shares). Mainland China recently found itself in the middle
companies in the index are now Hong Kong-listed Chinese
of a stock market frenzy despite a significant deceleration
companies and five of the seven are financials (three state-
in China’s economy and slowing company earnings growth
owned banks and two insurers), which have still appreciated
almost across the board. The start of the China A-share rally
by between 30% and 60% over the past year. The Coronation
coincided almost exactly with state-controlled newspaper
Global Emerging Markets Fund doesn’t have exposure to
articles encouraging investment into Chinese equities
any of the five companies (Bank of China, China Construction
(August/September 2014). In China, the population places
Bank, ICBC, China Life Insurance and Ping An Insurance) and
an extraordinary amount of faith in the state, and indeed
this has naturally detracted from its relative returns. The fund
vicious daily moves in the China A-share markets are being
does have investments in China, but most of its exposure
driven by ‘signs’ from Beijing that Chinese retail investors
is to US-listed Chinese ADRs (mainly internet companies)
are continually looking out for. The rally continued as a link
corospondent / July 2015
39
between Shanghai and Hong Kong was opened in late 2014
In contrast to most stock exchanges around the world,
(the so-called Southbound and Northbound connects),
institutional investors do not dominate the Chinese market.
enabling mainlanders for the first time to buy Hong Kong
Instead, retail investors account for the bulk of the shares
shares, and vice versa, in many cases.
traded on Chinese exchanges, representing up to 80% of
volume traded. These retail investors are in many cases
The Hong Kong rally then really took off in April 2015
using borrowed money to bet that the upward trend will
following the announcement that Chinese funds (in addition
continue; margin borrowing (borrowing using shares as
to individuals) would be able to buy Hong Kong-listed shares.
collateral) already equates to almost 10% of the free float on
The large caps (the aforementioned seven companies) were
the major beneficiaries of this development. Their gains were
partly driven by actual flows, but most likely even more so by
momentum money (from China mainland retail investors and
indeed from investors all over the world) following this news.
In addition, index weightings for these stocks increased as
they rose in value, and larger weightings resulted in automatic
buying. The Chinese A-shares now trade at a big premium
(35-40% today versus 5% on average over the past five years)
the Shanghai Stock Exchange, and this does not take into
account other types of consumer loans, including mortgages,
that are being drawn down in order to make bets on the
stock market. On a recent research trip to China, various
car manufacturers confirmed that Chinese consumers are
delaying purchases of their first cars (or delaying upgrades
to newer models) as they prefer to keep their money in the
stock market, believing that they will be able to afford even
better cars with their winnings at a later stage.
to the H-shares and this is starting to put upward pressure on
The following graphs illustrate the number of new brokerage
the H-shares. The table below shows the turnover in Hong
accounts opened by Chinese retail investors, and the growth
Kong and in the two China A-share markets (Shanghai and
in the total value of the Shanghai Stock Exchange over the
Shenzhen) in April 2015, and how it compared to the prior
past year (from $2.5 trillion to $6 trillion).
year. It is quite clear that there was an explosion in volumes
in April in all of these markets. This contributed to the China
A-share market appreciating by 20% in April alone, and the
Hong Kong listed H-shares by 17%.
NEW BROKERAGE ACCOUNTS IN CHINA (WEEKLY)
5
million
4
Average daily market turnover
3
April 2015
April 2014
Year-on-year
change
2
Hong Kong (HK$m)
198 140
64 943
205%
1
Shanghai (RMBm)
828 997
80 362
932%
Shenzhen (RMBm)
250 197
30 724
714%
In April, the volume traded on the China A-share markets
was approximately 900% higher than the year before – and
also bigger than the total volume traded in the US equity
markets. With regard to the China A-shares, these markets
are now showing all the classic signs of a bubble and the
median forward PE ratio on the Shanghai Stock Exchange is
currently 30 times earnings.
40
Coronation Fund Managers
27
5-
27
-0
-0
20
15
4-
27
20
15
3-
27
-0
20
15
2-
27
-0
20
15
1-
27
-1
-0
20
15
2-
27
20
14
1-
27
-1
14
20
20
-1
0-
27
Sources: FT, Bloomberg
14
9-
27
20
14
-0
27
8-0
7-
14
20
-0
-0
14
20
14
20
Sources: Bloomberg, BofA Merrill Lynch Global Research
6-
27
0
TOTAL MARKET CAPITALISATION OF THE SHANGHAI
STOCK EXCHANGE
savers to buy higher yielding wealth management and trust
7
products ahead of placing their money in a bank). Banks,
6
however, are still involved in sourcing the loans that underpin
5
many of these products and while they do not ‘guarantee’
4
the returns on the products (they are therefore within their
3
rights to hold them off-balance sheet and hold no capital
2
against them), there are valid concerns that the regulators
20
14
-0
627
20
14
-0
727
20
14
-0
827
20
14
-0
927
20
14
-1
027
20
14
-1
127
20
14
-1
227
20
15
-0
127
20
15
-0
227
20
15
-0
327
20
15
-0
427
20
15
-0
527
$ trillion
cap) and deposit rates are capped at 2.25% (this incentivises
may force banks to make investors ‘whole’ should anything
Sources: FT, Bloomberg
In summary, the relevance of these developments to the
Hong Kong-listed Chinese financials is that:
go wrong.
CHINESE DEBT TO GDP, AND RELATIVE TO THE US
250%
200%
The Hong Kong-listed financials (banks and insurers) have
150%
been beneficiaries of the aforementioned dynamics, in
100%
23%
particular the Southbound and Northbound connects.
50%
83%
They have benefited from the actual flows, but as
0%
42%
China 2000
Household
of the flows and index-buying as weightings increased.
89%
125%
67%
72%
8%
importantly, from the (momentum) buying in anticipation
55%
20%
China 2007
77%
38%
China 2Q14
Non-financial corporates
United States 2Q14
Government
Source: McKinsey
In the case of the insurers, they are direct beneficiaries
of a rising China A-share market: every 10% increase in
Apart from this sort of ‘tail risk’, the earnings picture going
the China A-share market results in an estimated gain
forward also doesn’t look too rosy for the banks: loan
of 3-4% in their book values. So a doubling in Chinese
growth is in the single digits, there is margin squeeze from
A-shares clearly has a materially positive impact. Sharply
declining interest rates and the eventual deregulation of the
rising equity markets also tend to increase demand
deposit rate will increase price competition for deposits.
for equity-linked ‘insurance’ products. Therefore any
Additionally, there is a threat of disruption from non-
reversal in China A-shares will, of course, have a similarly
traditional competitors like Tencent, Alibaba and Baidu,
negative impact.
which are all eager to open online banks that will compete
against the bureaucratic Chinese state banks.
As mentioned, we have not owned the Chinese banks and
insurers, and continue not to own them. In the case of the
Then lastly, and most importantly, there is the issue of bad
insurers, among other factors, their gearing to the China
debts, taken together with the fact that all of the large
A-share market worries us. In the case of the banks, there
Chinese banks are state-owned (and as such not entirely in
are a number of other concerning factors. Our negative view
control of what is lent, and to whom). The argument is often
on the Chinese banks has been premised on the increase in
made that ‘Chinese state banks are trading at six to seven
the Chinese debt load since 2008 (debt to GDP has almost
times earnings and cheap’. They may well be, but we have
doubled since then). Much of this has happened through a
not been able to get conviction that this is the case because
murky ‘shadow banking’ sector as the loan-to-deposit ratios
we have not been able to get conviction as to how big the
of Chinese banks are capped at 75% (this prevents them from
bad debts in the system may be. If we have no idea of this,
granting additional ‘on-balance’ sheet loans once they hit this
then we have no idea what the right earnings number is.
corospondent / July 2015
41
Consequently, we do not know whether the Chinese banks
are actually trading on six times earnings, 16 times earnings
New non-performing loans as a percentage
of total loans
or 60 times earnings. What we do know is that there has
been an explosion of credit in the system (and outside of the
China Construction Bank
(11)
(3)
14
11
10
30
45
48
82
19
2
31
2
27
30
38
50
93
113
system) in the past several years and that non-performing
Asia Commercial Bank
(26)
(40)
(9)
(3)
10
13
21
57
loans (NPLs) continue to pick up. The geared nature of banks
Bank of China
3
1
7
5
14
17
29
55
73
means a small change in bad debts can have an outsized
Sector
3
(8)
11
9
23
33
45
62
96
impact on earnings and indeed the equity base. We are
Source: Deutsche Bank
aware of the argument that debt-to-GDP ratios (as shown
in the previous graph) ignore the asset side of the equation
(and in this regard China has very healthy reserves), but that
doesn’t give us any more comfort on the potential size of the
bad debts in the system. The following table shows the NPL
formation rate (new non-performing loans as a percentage
of total loans) over the past few quarters for the big four
Chinese state-owned banks, as well as the industry as a
whole. It isn’t a pretty picture.
42
2H10 1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14
ICBC
Coronation Fund Managers
There is quite likely to be a time when the fund will own Chinese
financials and indeed select China A-shares, and by June the
Chinese market had already started reversing from its highs.
This process has accelerated into the start of the third quarter
despite numerous attempts by the Chinese government to
prop up the market. However, despite being down by more
than one third since peaking, given the aforementioned
points, it is our view that the risk/reward is still not attractive
enough in these areas right now.
If it sounds too
good to be true…
Profit umbrellas, moats and
sustainable competitive advantages.
Gregory Longe is
an investment analyst in
Coronation’s Global Frontiers unit.
Gregory is a Chartered Accountant
(SA) and joined Coronation in
2013 after completing his articles
at Ernst & Young.
by Gregory Longe
How good is too good? Winning R1 000 in a raffle is good,
winning R1 million in an email is probably a scam. Large
profits in a business are a good thing, most often a very good
thing. Some of the best companies in the world are able to
achieve a level of profitability that makes running a business
look easy.
Great businesses like Coca-Cola, McDonalds or the fashion
giant Inditex just always seem to make more money than their
industry peers. These special companies usually possess a
competitive advantage, such as strong brands, an innovative
culture or economies of scale. They are the R1 000 raffle
businesses where healthy profits are a good thing. But what
about very profitable businesses with no real competitive
advantage? How do we spot businesses with profits that are
just too good to be true?
We would typically say that these businesses benefit from a
profit umbrella, where the industry has two main dynamics
at play.
It’s a bumper year, every year: The dominant firm
allows prices and profits to grow so large that industry
minnows also experience bumper years. This shelters
the minnows from the intense competition one would
normally expect in a free market. This protection allows
the minnows to survive.
Everyone wants a share of the spoils: The incumbent’s
greed serves to leave the door wide open for new
entrants to enter the industry. Seeing how well the
incumbents are doing, the newbies move in quickly and
start businesses, hoping to share in the spoils. Since
the level of industry profitability is so high, the newbies,
(just like the minnows) are sheltered while they begin to
establish themselves. Over time the newbies grow up
into credible competitors and drive down prices.
Why do profit umbrellas matter?
While only looking at operating margins or any one number
to value a business is overly simplistic, we feel that from our
experience of analysing thousands of businesses across
the globe, we can quite quickly get a sense of what level of
profitability a company should achieve. Many companies in
similar industries often achieve similar operating margins. In
the short run any number of factors can influence operating
margins, but in the long term it is usually only the special
businesses, such as Coca-Cola, McDonalds or Inditex, which
will achieve above-average margins.
Profit umbrellas are dangerous to investors, as they almost
always disappear over time. We certainly don’t claim to have
any special insight into when a specific profit umbrella will
disappear, we only know that in our experience it will generally
cease to exist. Using unsustainably high profit umbrella margins
(as if they are normal) in calculating a company’s valuation, will
result in overestimating a business’s worth. Think of a farmer
who bases his future plans on expectations that every year will
deliver a bumper crop. He will inevitably end up with an inflated
and unrealistic view of his future income.
Moats and sustainable competitive advantages
Warren Buffett and Charlie Munger have long talked about their
investments as “economic castles protected by unbreachable
corospondent / July 2015
43
moats” – the castle being the business and the moat the
competitive advantage protecting the business. The larger the
competitive advantage, the larger the moat and the greater
protection afforded to the business. Large moats usually
correspond to businesses with higher levels of profitability
than their peers. Small moats and high levels of profitability
often point to profit umbrellas. In order to assess the size of a
business’s moat and what level of margins are sustainable, we
look at a number of factors. These include:
Long-term historic performance.
Local and global peer margins.
Barriers to entry and ease of replicating the business.
Strength of brands, products or services and pricing power.
Favourable pricing of key inputs.
Government incentives or protection.
An analysis of these factors helps us to differentiate between
profit umbrellas and large moats. For example, a company
with a large distribution network and strong brands will have
a large moat, while a company benefiting from import tariff
protection is sheltered by a profit umbrella. We believe that
the following case study illustrates a profit umbrella in our
African investment universe.
Kenya’s high margin levels could easily be justified if the
market was rife with high-risk loans that frequently went bad.
However, the reality is that many of the loans to individuals
are effectively guaranteed by their employers, and domestic
corporate loans are not particularly risky. The expense from
writing off bad loans has been fairly benign, averaging 1% of
loans since 2010. The combination of high bank profitability
and low loan write-offs has translated into returns on equity
that have averaged 27% for these banks over the last five
years. This is a very attractive return in most industries and,
in our opinion, the result of a profit umbrella.
After a number of years of watching Kenyan banking, we are
beginning to see this profit umbrella come under attack on
multiple fronts:
The central bank has introduced a reference rate that
aims to increase transparency on loan pricing across the
industry. This has put pressure on banks’ ability to charge
high interest rates on loans.
Parliament has proposed a bill capping the interest rates
that banks can charge on loans.
Disruptive competitors, such as the telecommunication
group Safaricom, have entered the market and have
started to attract deposits, forcing banks to increase the
interest rates they pay to depositors.
Profit umbrellas in Kenyan banking
We do not currently own any of the three largest banks in
We consider a bank’s profit margin as the difference between
the interest rate it earns on its loans and the interest rate it
pays on its deposits. This gap is normally large when a bank
expects that it will have a large number of loans that won’t
be repaid. The bank needs to charge higher interest rates to
the customers who will repay their debt to make up for those
customers who won’t.
these banks, our models use a lower normal level of margins,
Kenya – primarily due to these concerns. In our valuations of
as we think current margins are too high and unsustainable.
This has an impact on our valuations of these banks, and at
current share prices the margin of safety is too small to justify
a position for these banks in our African funds. Instead we
have chosen to invest in a smaller Kenyan bank. Our bank
already charges lower interest rates on loans and pays a
higher interest rate on deposits than its peers. Its margin of
Margins for the three largest banks in Kenya (Equity Bank,
Kenya Commercial Bank and Co-operative Bank) have
averaged around 12% since 2010. This is a very healthy level
of profitability compared to other markets such as Nigeria
(around 9% average) or South Africa (around 3% average).
Coronation Fund Managers
around 6% is far lower than the industry average (12%), while
its return on equity (ROE) is still healthy at 16%.
It may seem counterintuitive to invest in the less profitable
bank. However, we believe that on a long-term view, one
BANKING MARGINS IN KENYA (%)
that corresponds with our long-term investment horizon,
the profit umbrella will disappear. When this happens, we
%
14
believe sector profitability, ROE ratios and share prices will
move somewhat lower. The largest banks will have to join
12
our bank and compete on a more sustainable level.
10
This is not reflected in current share prices and we would
8
far rather buy a company that can grow its business with an
6
appropriate level of profitability than a business with superhigh profit levels that are likely to disappear over time.
4
2
In summary, if a company’s profit margins sound too good to
be true, look out for the profit umbrella. When the umbrella
0
Sector average
Sources: Bloomberg, company financials
Coronation's preferred bank in Kenya
disappears (and over time they generally all do), earnings
will move lower and share prices will decline. This will result
in capital loss, which goes against the first rule of investing:
never lose money.
45
Coronation Fund Managers
corospondent / July 2015
45
DOMESTIC Flagship Fund Range
Coronation offers a range of domestic and international funds to cater for the majority of investor needs.
These funds share the common Coronation DNA of a disciplined, long-term focused and valuation-based
investment philosophy and our commitment to provide investment excellence.
INVESTOR NEED
Income only
INCOME and GROWTH
LONG-TERM CAPITAL GROWTH
Strategic Income
Cash†
Balanced Defensive
Capital Plus
Balanced Plus
Top 20
FUND
FUND DESCRIPTION
Conservative asset
allocation across the
yielding asset classes.
Ideal for investors
looking for an
intelligent alternative
to cash or bank
deposits over periods
from 12 to 36 months.
A lower risk
alternative to Capital
Plus for investors
requiring a growing
regular income. The
fund holds less growth
assets and more
income assets than
Capital Plus and has
a risk budget that is
in line with the typical
income-and-growth
portfolio.
Focused on providing
a growing regular
income. The fund
has a higher risk
budget than the
typical income-andgrowth fund, making
it ideal for investors
in retirement seeking
to draw an income
from their capital over
an extended period
of time.
Best investment
view across all asset
classes. Ideal for preretirement savers as
it is managed in line
with the investment
restrictions that apply
to pension funds. If you
are not saving within
a retirement vehicle,
consider Market Plus,
the unconstrained
version of this mandate.
A concentrated
portfolio of 15-20
shares selected from
the 50 largest JSE-listed
companies, compared
to the average equity
fund holding 40-60
shares. The fund
requires a longer
investment time horizon
and is an ideal building
block for investors who
wish to blend their
equity exposure across
a number of funds.
Investors who prefer
to own just one equity
fund may consider
the more broadly
diversified Coronation
Equity fund.
93% / 7%
66.1% / 33.9%
47.2% / 52.8%
26.1% / 73.9%
0.3% / 99.7%
Jul 2001
Mar 2007
Jul 2001
Apr 1996
Oct 2000
ANNUAL RETURN
(Since launch)
10.8%
†
8.0%
11.1%
†
6.5%
14.0%
†
6.1%
16.4%
†
14.4%
21.3%
†
16.0%
QUARTILE RANK
(Since launch)
1st
1st
1st
1st
1st
9.3%
7.2%
–
–
12.6%
†
6.2%
15.9%
†
15.0%
19.2%
†
16.8%
1st
–
1st
1st
1st
9.2%
5.5%
12.7%
†
5.5%
12.5%
†
5.5%
16.5%
†
16.3%
18.8%
†
18.0%
1st
1st
2nd
1st
1st
6.8%
7.6%
12.5%
†
12.7%
Income vs
growth assets1
LAUNCH DATE
ANNUAL RETURN
(Last 10 years)
†
QUARTILE RANK
(Last 10 years)
ANNUAL RETURN
(Last 5 years)
†
QUARTILE RANK
(Last 5 years)
STANDARD DEVIATION
(Last 5 years)
FUND HIGHLIGHTS
Inflation†
1.6%
0.1%
†
Outperformed
cash by on average
3.6% p.a. over the
past 5 years and
2.8% p.a. since launch
(after fees). Note that
outperformance is
expected to be less
in periods of stable or
rising interest rates.
3.7%
1.3%
†
Outperformed
inflation by 4.6% p.a.
(after fees) since
launch, while
producing positive
returns over 12 months
100% of the time.
A top performing
conservative fund
in South Africa over
5 years.
Inflation†
5.0%
1.3%
†
Outperformed
inflation by 7.9% p.a.
(after fees) since
launch, while
producing positive
returns over 12 months
more than 90% of
the time.
1. Income versus growth assets as at 30 June 2015. Growth assets defined as equities, listed property and commodities.
Composite benchmark†
(equities, bonds and cash)
FTSE/JSE Top 40 Index†
†
No. 1 balanced
fund in South
Africa since launch,
outperforming its
average competitor
by 2.1% p.a.
Outperformed
inflation by on
average 9.6% p.a.
over all rolling 5-year
periods since launch.
The fund added on
average 5.2% p.a. to
the return of the market.
This means R100 000
invested in Top 20 at
launch grew to more
than R1.7 million by
end June 2015 –
nearly double the
current value of a similar
investment in the
FTSE/JSE Top 40 Index.
Income
Figures are quoted from Morningstar as at 30 June 2015 for a lump sum investment and are calculated on a NAV-NAV basis with income distributions reinvested.
46
Coronation Fund Managers
Growth
Risk versus return
5-year annualised return and risk (standard deviation) quoted as at 30 June 2015. Figures quoted in ZAR after all income reinvested and all
costs deducted.
Long-term growth (equity only)
Top 20
18.8%
12.5%
16.5%
Balanced Plus
6.8%
Return
Long-term growth (multi-asset)
Capital Plus
12.5%
5.0%
Income and growth (multi-asset)
Balanced Defensive
12.7%
3.7%
9.2%
Strategic Income
1.6%
Income (multi-asset)
Risk
Source: Morningstar
Growth of R100 000 invested in our domestic flagship funds on 1 July 2001
Value of R100 000 invested in Coronation’s domestic flagship funds since inception of Capital Plus on 1 July 2001 as at 30 June 2015. All income reinvested for funds;
FTSE/JSE All Share Index is on a total return basis. Balanced Defensive is excluded as it was only launched on 2 February 2007.
R’000s
1 500
1 300
R1 300 393
Top 20
Balanced Plus
Capital Plus
1 100
Strategic Income
All Share Index
900
Inflation
R834 414
700
R625 483
500
All Share Index: R863 914
R418 625
300
Inflation: R228 564
Jun15
Mar15
Dec 14
Jun 14
Sep 14
Mar 14
Dec 13
Jun 13
Sep 13
Mar 13
Dec 12
Jun 12
Sep 12
Mar 12
Dec 11
Jun 11
Sep 11
Mar 11
Dec 10
Jun 10
Sep 10
Mar 10
Dec 09
Jun 09
Sep 09
Mar 09
Dec 08
Jun 08
Sep 08
Mar 08
Dec 07
Jun 07
Sep 07
Mar 07
Dec 06
Jun 06
Sep 06
Mar 06
Dec 05
Jun 05
Sep 05
Mar 05
Dec 04
Jun 04
Sep 04
Mar 04
Dec 03
Jun 03
Sep 03
Mar 03
Dec 02
Jun 02
Sep 02
Mar 02
Dec 01
Jun 01
Sep 01
100
Source: Morningstar
corospondent / July 2015
47
International flagship fund Range
INVESTOR NEED
deposit
alternative
FUND1
Income vs
Growth assets2
LAUNCH DATE
ANNUAL RETURN3
(Since launch)
LONG-TERM CAPITAL
GROWTH
(MULTI-ASSET)
Global Strategic
USD Income [ZAR]
Feeder
Global Strategic
USD Income
Global Capital Plus
[ZAR] Feeder
Global Capital Plus
[foreign currency] 4
Global Managed
[ZAR] Feeder
Global Managed [USD]
An intelligent
alternative to dollardenominated bank
deposits over periods
of 12 months or
longer.
A low-risk global
balanced fund reflecting
our best long-term
global investment view
moderated for investors
with smaller risk
budgets. We offer both
hedged and houseview
currency classes of this
fund. In the case of the
former, the fund aims to
preserve capital in the
class currency over any
12-month period.
97.8% / 2.2%
Aug 2013
Dec 2011
110% of 3-month Libor†
FUND DESCRIPTION
Capital
Preservation
Global Opportunities
Equity [ZAR] Feeder
Global Opportunities
Equity [USD]
Global Emerging
Markets Flexible [ZAR]
Global Emerging
Markets [USD]
A global balanced
fund reflecting our
best long-term global
investment view for
investors seeking to
evaluate outcomes in
hard currency terms.
Will invest in different
asset classes and
geographies, with a bias
towards growth assets
in general and equities
in particular.
A diversified portfolio of
the best global equity
managers (typically
6-10) who share our
investment philosophy.
An ideal fund for
investors who prefer
to own just one global
equity fund. Investors
who want to blend their
international equity
exposure may consider
Coronation Global
Equity Select, which
has more concentrated
exposure to our best
global investment views.
Our top stock picks
from companies
providing exposure
to emerging markets.
The US dollar fund
remains fully invested
in equities at all times,
while the rand fund
will reduce equity
exposure when we
struggle to find value.
60.8% / 39.2%
35.8% / 64.2%
0.5% / 99.5%
2.7% / 97.3%
Sep 2008
Sep 2009
Oct 2009
March 2010
Aug 1997
May 2008
Dec 2007
July 2008
Global cash (50% USD and
50% EUR)†
1.9%
0.3%
6.5%
(0.2%)
†
†
Composite (equities and
bonds)†
8.5%
7.0%
†
MSCI World Index†
7.1%
5.6%
†
MSCI Emerging Markets
Index†
2.1%
(0.6%)
†
QUARTILE RANK
(Since launch)
1st
1st
1st
1st
2nd
ANNUAL RETURN
(Last 5 years)
–
–
5.0%
(0.3%)
10.2%
8.7%
11.6%
13.7%
5.4%
4.0%
QUARTILE RANK
(Last 5 years)
–
1st
1st
2nd
3rd
The houseview currency
class of the fund has
outperformed its
composite cash bench­
mark by 4.9% p.a.
since launch.
No 1 global multiasset high equity fund
in South Africa since
launch in October 2009.
Both the rand and dollar
versions of the fund
have outperformed the
global equity market
with less risk since their
respective launch dates.
Outperformed the
global equity market at
less than market risk.
FUND HIGHLIGHTS
Outperformed
US dollar cash by
3.1% (after fees)
since launch in
January 2012.
1. Rand and dollar-denominated fund names are included for
reference.
2. Income versus growth assets as at 30 June 2015. Growth assets
defined as equities, listed property and commodities.
3. Returns quoted in USD for the oldest fund.
4. Available in USD Hedged, GBP Hedged, EUR Hedged or
Houseview currency classes.
Figures are quoted from Morningstar as at 30 June 2015 for a lump
sum investment and are calculated on a NAV-NAV basis
with income distributions reinvested.
Collective Investment Schemes in Securities (unit trusts) are generally
medium- to long-term investments. The value of participatory
interests (units) may go down as well as up and past performance
is not necessarily an indication of future performance. Participatory
interests are traded at ruling prices and can engage in scrip
lending and borrowing. Fluctuations or movements in exchange
rates may cause the value of underlying investments to go up or
down. A schedule of fees and charges is available on request from
the management company. Pricing is calculated on a net asset
value basis, less permissible deductions. Forward pricing is used.
Commission and incentives may be paid and, if so, are included in the
overall costs. Coronation is a member of the Association for Savings
and Investment SA (ASISA).
48
LONG-TERM CAPITAL GROWTH
(EQUITY ONLY)
Coronation Fund Managers
Both the rand and
dollar versions
of the fund have
outperformed the
MSCI Emerging
Markets Index by
more than 2.5% p.a.
since their respective
launch dates.
Income
Growth
HAVE YOU CONSIDERED
EXTERNALISING RANDS?
IT’S EASIER THAN YOU
MIGHT THINK.
1 Obtain approval from SARS by completing
The SARB allows each resident
South African taxpayer to
externalise funds of up to
R11 million per calendar year
(R10 million foreign capital
allowance and a R1 million single
discretionary allowance) for
direct offshore investment in
foreign currency denominated
assets. If you want to invest more
than R1 million, the process is as
easy as:
2 Pick the mandate that is appropriate to your
the appropriate form available via eFiling or
your local tax office. Approvals are valid for
12 months and relatively easy to obtain if
you are a taxpayer in good standing.
needs from the range of funds listed here.
You may find that the ‘Choosing a Fund’
section or ‘Compare Funds’ tool on our
website helpful, or you may want to consult
your financial advisor if you need advice.
3 Complete the relevant application forms
and do a swift transfer to our US dollar
subscription account. Your banker or a foreign
exchange currency provider can assist with
the forex transaction, while you can phone
us on 0800 86 96 42, or read the FAQ on our
website, at any time if you are uncertain.
Expected risk versus return
Expected return and risk positioning for both rand- and dollar-denominated funds after all income reinvested and all costs deducted.
GEM Flexible [ZAR]
GEM [USD]
Long-term growth (equity only)
Global Opportunities Equity [ZAR] Feeder
Global Opportunities Equity [USD]
Global Managed [ZAR] Feeder
Global Managed [USD]
Return
Long-term growth (multi-asset)
Global Capital Plus [ZAR] Feeder
Global Capital Plus [USD]
Preservation (multi-asset)
Global Strategic USD Income [ZAR] Feeder
Global Strategic USD Income
Cash deposit alternative (multi-asset)
Risk
Source: Morningstar
Growth of R100 000 invested in Global Opportunities Equity [ZAR] Feeder on 1 August 1997
Value of R100 000 invested in Global Opportunities Equity [ZAR] Feeder on 1 August 1997 as at 30 June 2015. All income reinvested for funds; MSCI World Index is on
a total return basis. Global Capital Plus [ZAR] Feeder, Global Emerging Markets Flexible [ZAR], Global Managed [ZAR] Feeder and Global Strategic USD Income [ZAR] Feeder,
which were launched between 2007 and 2012, have not been included.
R’000s
1 000
900
Global Opportunities Equity [ZAR] Feeder
800
MSCI World Index
R901 474
700
600
500
400
300
200
MSCI World Index: R699 012
Jun15
Jul 14
Jul 13
Jul 12
Jul 11
Jul 10
Jul 09
Jul 08
Jul 07
Jul 06
Jul 05
Jul 04
Jul 03
Jul 02
Jul 01
Jul 00
Jul 99
Jul 98
Jul 97
100
Source: Morningstar
corospondent / July 2015
49
LONG-TERM investment track record
Coronation houseview Equity* returns vs equity benchmark
5-year annualised returns
equity Benchmark
Alpha
1998
coronation houseview equity
8.15%
6.49%
1.66%
1999
14.23%
10.91%
3.33%
2000
10.93%
7.52%
3.41%
2001
10.95%
9.38%
1.57%
2002
9.46%
7.14%
2.32%
2003
18.02%
13.49%
4.53%
2004
14.12%
9.35%
4.78%
2005
23.35%
18.63%
4.72%
2006
28.38%
23.07%
5.31%
2007
33.79%
29.52%
4.28%
2008
23.36%
19.28%
4.09%
2009
22.23%
19.77%
2.45%
2010
18.55%
15.12%
3.42%
2011
11.58%
8.65%
2.93%
2012
13.39%
10.61%
2.79%
2013
24.37%
20.60%
3.77%
2014
19.39%
17.78%
1.61%
4 years 6 months to 30 June 2015
17.61%
16.67%
0.94%
1 year
6.62%
10.20%
(3.57%)
3 years
22.97%
20.64%
2.33%
5 years
21.21%
19.87%
1.35%
10 years
21.13%
18.02%
2.10%
Since inception in October 1993 annualised
18.98%
15.92%
3.06%
Annualised to 30 june 2015
Average outperformance per 5-year return
3.22%
Number of 5-year periods outperformed
18.00
Number of 5-year periods underperformed
–
Cumulative performance
Annualised returns to 30 JUNE 2015
R’000s
%
5 100
25
4 600
20
4 100
3 600
15
3 100
2 600
10
2 100
1 600
5
1 100
600
0
Coronation Houseview Equity
Jun 15
Sep 13
Sep 14
Sep 12
Sep 10
Sep 11
Sep 09
Sep 07
Sep 08
Sep 06
Sep 05
Sep 03
Sep 04
Sep 02
Sep 01
Sep 00
Sep 99
Sep 98
Sep 97
Sep 96
Sep 94
Sep 95
Sep 93
100
Equity benchmark
1 year
3 years
Coronation Houseview Equity
5 years
10 years
Since inception
annualised
Equity benchmark
An investment of R100 000 in Coronation Houseview Equity on 1 October 1993
would have grown to R4 382 768 by 30 June 2015. By comparison, the
returns generated by the Equity Benchmark over the same period would have
grown a similar investment to R2 484 981.
* Coronation Houseview Equity, which is an institutional portfolio, has been used to illustrate Coronation’s investment track record since inception
of the business in 1993.
50
Coronation Fund Managers
Coronation Balanced Plus FUND vs Inflation and average competitor†
Coronation Balanced Plus
inflation
56 months to 31 December 2000
5-year annualised returns
16.00%
7.90%
Real return
8.10%
2001
14.38%
7.41%
6.97%
2002
10.73%
8.04%
2.69%
2003
14.68%
7.33%
7.35%
2004
13.82%
6.68%
7.14%
2005
20.53%
5.85%
14.68%
2006
22.43%
5.54%
16.89%
2007
25.35%
5.17%
20.18%
2008
19.28%
6.41%
12.87%
2009
17.60%
6.82%
10.77%
2010
13.97%
6.71%
7.26%
2011
9.49%
6.94%
2.55%
2012
10.81%
6.36%
4.45%
2013
17.98%
5.39%
12.58%
2014
15.57%
5.19%
10.38%
4 years 6 months to 30 June 2015
14.98%
5.85%
9.13%
Alpha
Coronation Balanced Plus
average
competitor
1 year
8.16%
7.32%
0.84%
3 years
18.29%
14.32%
3.97%
Annualised to 30 june 2015
5 years
16.52%
12.97%
3.54%
10 years
15.86%
12.28%
3.59%
Since inception in April 1996 annualised
16.39%
13.73%
2.66%
Average 5-year real return
9.62%
Number of 5-year periods where the real return is >10%
7.00
Number of 5-year periods where the real return is between 5% – 10%
6.00
Number of 5-year periods where the real return is between 0% – 5%
3.00
Cumulative performance
Annualised returns to 30 June 2015
R’000s
%
Coronation Balanced Plus
SA MA High Equity Mean
Apr 15
Apr 13
Apr 14
Apr 12
0
Apr 10
2
100
Apr 11
300
Apr 09
4
Apr 08
6
500
Apr 06
700
Apr 07
8
Apr 05
10
900
Apr 04
1 100
Apr 03
12
Apr 02
14
1 300
Apr 01
1 500
Apr 00
16
Apr 99
18
1 700
Apr 97
1 900
Apr 98
20
Apr 96
2 100
CPI
1 year
3 years
Coronation Balanced Plus
5 years
10 years
Since inception
annualised
Average competitor
An investment of R100 000 in Coronation Balanced Plus fund on 30 April 1996
would have grown to R1 832 482 by 30 June 2015. By comparison, the Mean
return of the South African Multi Asset High Equity sector over the same period
would have grown a similar a similar investment to R1 177 337.
†
Average competitor return is the mean of the South African Multi-Asset High Equity sector.
corospondent / July 2015
51
WOULD YOU
TRUST A NEEDLE
TO GET YOU
THROUGH THE
KAROO?
You’re on the dusty, open road. A tattered sign outside
a petrol station reads: 240kms till next fill-up point.
You glance down at your petrol gauge. You don’t stop.
You keep going and think about that little reassuring
needle, comforted in the knowledge that the things we
trust most, never stop working to earn it.
NET#WORK BBDO 8017054/FG/E
To find out how Coronation can earn your trust, speak to
your financial advisor or visit www.coronation.com
Coronation Asset Management (Pty) Ltd is an authorised financial services provider. Trust is Earned TM.