Be bold… at the right time
SENIOR PORTFOLIO MANAGER, CORONATION FUND MANAGERS baseball player who has lots of time to pick the deliveries he wants to hit without fear of going out if he doesn’t take a swing at every single ball.
I currently head up the absolute return unit of Coronation’s investment offering. All of the absolute return funds are invested in a range of different assets, and all have dual mandates. On the one hand, we endeavour to avoid negative returns over any rolling 12-month period, while on the other we aim to achieve certain targeted returns ahead of inf lation. The more conservative mandates aim for inf lation plus 3.5%, while the most aggressive ones target inf lation plus 6.5%.
In our unit trust fund range, the absolute team manages t he l owrisk Balanced Defensive f und and the medium-risk Capital Plus fund. Likewise, our institutional offering provides for low-risk medical aid funds to higher-risk global absolute portfolios with the aforementioned stretched targets.
Maintaining positive returns over rolling 12-month periods is a key aspect of managing these funds, which forces us to be extremely careful when considering ‘ bold’ judgment calls. As a valuation-driven investment house, our level of conviction is invariably driven by our understanding of the disparity between an asset’s market price and our perception of its value. I can cite several examples over the years where we had the conviction to be bold based on our valuation-driven approach.
Back in the mid-2000s up to mid2008, commodity shares were t he darling of the markets, driven by the massive Chinese expansion. These stocks eventually factored in an implausibly rosy future and we could not bring ourselves to own them any longer at such expensive levels. Our performance lagged while these hot stocks kept climbing ever higher, but when the collapse came, our returns did not go negative. It was bold to avoid this large sector to the extent that we did, but to us it was clear that we needed to protect our clients against a potentially massive downside.
A more recent example followed the collapse of Lehman Brothers and the start of the global f inancial crisis. In response, banks dramatically curtailed their lending activities and the rate of interest at which corporates could borrow soared. We identif ied t his opportunity as a real fat pitch and established large positions in corporate debt.
For example, the Balanced Defensive fund held only 3.5% in corporate debt at the end of September 2008, just before the start of the global f inancial crisis. One year l ater, i n response to the mouth-watering investment opportunity, this position had been built to 21.1% of the portfolio, and by September 2011 corporate debt comprised 39% of t he f und. ( The holdings included all corporate debt including inf lation-linked and f loatingrate debt.) These actions demonstrate how we were prepared to be bold once we had identified a great opportunity.