Crown may have wob­bled but it’s still the king

Financial Mail - Investors Monthly - - Analysis - Shaun Har­ris

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.

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