Be bold… at the right time

Finweek English Edition - - CORONATION -

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.

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