Manager Research

We recently concluded our review of Coronation’s global range of funds. While we have not made any changes to existing ratings, we provide an update on our rating views below.  

Table 1: Coronation Global Fund Ratings

Coronation’s global fund range is positively rated with Tier 1 and Tier 2 ratings across their capabilities.

Coronation remains an investment centric business with strong support for the long-term philosophies which their investment teams purport to follow. We continue to see support for teams enduring poor performance cycles and resourcing added as required. In saying this, Coronation (along with many other South African asset managers) continues to face headwinds from both emigration and key-man risk. Coronation have proved adept at managing key-man risk where they have maintained several ex CIO’s within their employ (Charles de Kock & Tony Gibson to name a couple). To further mitigate against emigration risk they have established an office in London where members of their global teams can relocate to. This has already allowed them to retain key employees such as Gavin Joubert (Head GEM), Louis Stassen (ex-CIO) and Iokovos Mekios (Deputy-Head GEM) within the business.

In addition to the overarching business comments we note updates within each investment unit:

Global Emerging Markets

Both the Global Emerging Markets and Global Optimum Growth Funds have recently endured a period of relative underperformance to both their benchmarks and peers. Throughout the review we spent a material amount of time testing whether this underperformance was due to inadequate control of portfolio risk. Our conclusion is that the willingness to build high conviction portfolios (with tracking error above 7% and active share close to 95%) is a key edge for Coronation’s emerging markets team. They tend to end up with high country (Brazil 2015, China 2021 and Russia 2014/2022) and sector (consumer discretionary 2021) concentrations, which are based upon bottom up normalised-earnings-based valuations, which can result in significant underperformance in the short-term. This team has shown an ability to hold these positions through the negative performance cycle and then add material alpha as their investment case comes through. This results in a highly cyclical alpha profile for the fund with a positive long-term trend. This ability to build high conviction portfolios where the team displays genuinely insightful views gives us comfort in allocating positive ratings to the funds which they manage.

Despite these positives we retain our concerns regarding the key-man risk in Gavin Joubert. These concerns are not enough to reduce our rating for the funds but we would not have the same level of confidence if he was to reduce his involvement significantly.

Global Developed Markets

The funds managed by Coronation’s developed markets team (Global Equity Select, Global Managed, Global Capital Plus) have also endured a tough recent performance period. When we tested risk controls (in line with the emerging markets team) we found similar attributes with high conviction positioning resulting in high tracking error and active share for the equity carveout of the funds. Despite this consistency in approach, we get to a lower level of confidence for the developed markets equity capability due to two related factors.

These both relate to the change in lead portfolio manager from Louis Stassen to Neil Padoa in 2020. This marked a material change from Stassen, who started the developed markets team over a decade ago, to Padoa who previously fulfilled the head of research role within the team. While we think that Neil is an astute investor who always provides us with insightful views, we do not yet have the same level of confidence when it comes to his portfolio construction ability. Where we have over a decade of evidence for the emerging markets team to see them sticking to their views and ultimately adding alpha, we do not yet have this for the developed markets team. In addition, there is a subtle difference in investment philosophies between Louis and Neil which has resulted in a slightly higher quality/growth bias to the developed markets equity portfolios in recent years. This in and of itself is not an issue, we just do not have confidence regarding the degree of value-add which can be delivered by Coronation given the change in portfolio style. We would ultimately like to see Neil gain more experience in his role before gaining full comfort.

In prior reviews we raised a concern regarding the research breadth and depth of the developed markets team. We have observed a material improvement regarding this over the years as they built out their research capability in the global environment. This improvement means that we no longer count this as a concern for investors to note when allocating to these funds.

In line with their local teams, the Coronation Developed Markets team have shown strong asset allocation abilities over the past few years. We would count the asset allocation competency as a positive for this team. Despite this, the funds are retained at Tier 2 Ratings given the concerns noted above.

Fixed Income

The Global Strategic USD Income Fund is retained at a Tier 2 rating. While we have seen evidence of good decision making in the fund and the team has become more experienced covering global markets, we retain our concerns regarding the researchdepth and breadth (especially covering global credit markets). In addition to this we continue to monitor the risk management process within the fund. By this we mean that we retain a minor concern that the return target comes ahead of the risk target in how they allocate capital. The fund is marketed as a highly liquid, USD cash-plus offering. The esoteric positions taken (Russia, South Africa offshore debt for example) do not fit into that mindset. These concerns gives us pause regarding upgrading the fund to Tier 1 at this stage.