Coronation favours resources for value in long term

CAPE Town-based Coronation Fund Managers has bulked up on resources stocks even though the short-term outlook for demand for most minerals is cloudy, its senior portfolio manager, Neville Chester, said yesterday.

The listed asset manager’s Top 20 Fund, which invests in local markets, has produced returns in the top quartile of its class in the three, five and 10-year range since its launch in 2000. With global markets seesawing due to sluggish growth, interest rates at record lows and uncertainty over Europe’s debt crisis, it is becoming difficult for fund managers to produce real returns from their investments.

Mr Chester said at a function in Durban last week that 35,3% of its Top 20 Fund comprised resources stocks (no gold), 37,8% of the portfolio was in industrials and 26,8% in financial stocks.

Coronation had negligible resource exposure prior to the financial crisis in 2008. “We are starting to find value in commodity stocks,” Mr Chester said. This was even though growth in China was now forecast to increase slower, at 7,5% a year, versus forecasts in 2002 of growth reaching at least 10% a year until 2020. Most global demand for resources comes from China.

Mr Chester said resource prices may fall further in the next year or two, but Coronation’s strategy was to invest for the long term in assets that appeared undervalued, and based on the quality of the share’s underlying businesses.

The companies that had been invested in — including Sasol, Anglo American, Mondi and BHP Billiton — offered brownfield and greenfield expansion opportunities, had the potential to add value to earnings, were diversified businesses and were at the bottom of their cost curves, said Mr Chester. He expected that slowing demand for minerals such as iron ore would push higher cost producers, found mainly in Asia, out of business, eventually reducing supply to the market.

Mr Chester said Anglo American had made some errors recently, such as buying companies at the top of the cycle, but it was the world’s biggest platinum producer, the largest diamond miner and marketer, had good South American base metal assets, good coal assets in SA, Australia and Colombia, and it had good organic growth prospects. He said Coronation valued Anglo American at $53,50 a share, and with the share price at about $33, there was a potential upside of 33%.

PSG Asset Management said in its electronic newsletter that valuations of local platinum companies seemed compelling and shareholder equity-to-share prices of each of the domestic-listed platinum companies were at 15-year lows.

Mr Chester said Coronation had avoided global bonds, which are returning record low yields, while returns from listed property stocks in SA, which had been supported by the strongly performing retail sector, continued to surprise on the upside. The Top 20 fund had been overweight in SA’s big four banks, but the banks were beginning to look expensive relative to peers in emerging markets, except for Investec, which had “underperformed massively”. However, he said Investec could be expected to grow earnings mainly through the unwinding of its bad debt provisions.