Crown may have wobbled but it’s still the king

Listed fund managers — and there are more than a handful on the JSE these days — should typically track the performance of the JSE. Any outperformance might come from a well timed weighting in offshore shares or from inspired stock selections that result in better-than-market performance from some of the flagship funds under management.

Coronation Fund Managers is the undisputed fund management king on the JSE, perhaps ranking as the default share for investors wanting to delve into the asset management sector. The company describes itself in these terms: “Coronation is a cyclical business with a revenue stream that is highly geared to both the returns of the market and the level of outperformance that it generates in the funds it manages on behalf of its clients.”

But Coronation has in recent years not tracked the JSE at all, and shareholders — with all their dividends reinvested — would have comfortably beaten the All Share Index over the past decade. But lately Coronation’s crown seemed to wobble a bit, and the share price is actually down 13,7% over the past year.

There are the usual lingering concerns. Coronation has huge fund inflows that it needs to invest in a market where well priced opportunities are not always in abundance. General market sentiment also looks a little brittle with whisperings of a pending correction becoming all the more audible. There’s also talk of increased competition. There’s been some frothy sentiment around the listing of Anchor, where incredible share price gains appear to be premised on the company scoring business from its larger rivals. There’s also talk of the listing of Sygnia, and persistent speculation around Investec spinning off its highly profitable Investec Asset Management. Certain smaller boutique asset managers appear to be attracting the attention of investors with sterling performances from funds that are still small enough to manoeuvre nimbly around the market.

But one of the big smacks to sentiment for Coronation arguably came from its well documented exposure to African Bank (Abil), which slipped unceremoniously into curatorship last year.

A few people picked up the warning signs and cautioned that Abil was looking dangerously overexposed to the unsecured lending market. Yet many institutional investors held the shares, and sometimes the (subsequently high-yielding) debt instruments too. And why not? For years Abil had been a steady dividend payer with a captive niche not contested fiercely by the big banks.

In all honesty Coronation cannot be faulted for sticking with Abil, which many market pundits — practically up until the curatorship was confirmed — were backing for a turnaround. What can be questioned is why it took such a big punt on Abil. Before the bank’s collapse it was the largest shareholder with a stake of 22%. Much of that was wiped out — hence the underperformance in certain funds.

Coronation has since apologised to its investors, saying Abil had been a “sobering lesson”. But the money was gone. “Equity holders, preference share holders and subordinated debt holders will lose all their capital,” Coronation said.

Investors now probably need to look past the Abil debacle. Coronation remains a powerhouse fund manager with a robust brand, and its portfolio managers are an established and experienced bunch. Still, it is impossible to be persistently immune to the vagaries of the market, which means the recent trading statement warning that diluted headline earnings would be 5% to 15% lower should come as no big surprise. Keenly awaited interim results were about to be released at the time of writing.

Considering Coronation’s brand strength, asset management skills and sheer bulk, it would be more surprising if earnings and the share price did not recover in the medium term. We think this makes Coronation worth accumulating at current levels. It’s also worth remembering that Coronation is committed to paying generous dividends, with a distribution policy that aims to distribute at least 75% of after-tax cash profit.