Manager Research

We have received a number of queries from clients in recent weeks regarding Coronation. These questions stem from a combination of a falling share price, negative press (mainly around their remuneration structure), and their relatively poor recent investment performance on certain flagship funds. This note provides some background to these concerns and whether we regard them as material to the end investor’s outcome.

Share Price

A key point to remember when discussing the performance of the Coronation share price is the starting point. The consensus view is that the share was very expensive before the recent correction, and this view was backed up by all the valuation metrics. In addition to the fact that the share price was due a correction, it has been impacted by 3 main factors:

1.  Assets under Management (AUM): Coronation earns two types of fees – base fees (that are paid regardless of investment performance) and performance fees.  Their base fee income is driven by AUM.  At the peak, the share price was effectively pricing in the significant historic AUM growth rates continuing into the future.  Coronation’s assets grew from R100bn to R600bn very quickly and that level of growth was unlikely to be sustainable for 2 main reasons: 

• Performance moves in cycles and Coronation were always going to have a period of short term underperformance. Their short term performance has been poor on certain flagship funds and new flows into their funds have declined while they have also suffered some outflows.


• Market share capped out: Coronation closed their institutional book to new clients due to their growth in AUM. They also reached a point where they had a very significant retail market share. A very significant proportion of advisers and clients added Coronation funds to their portfolios. Eventually a point is reached where the general need to diversify to other asset managers means other managers’ funds are added to portfolios instead of Coronation.

2.  Performance fees: The other fees earned are performance fees.  Coronation has had close to 7 years of exceptional performance on their funds and this has resulted in the business earning performance fees.  The market appeared to be pricing in a continuation of the performance fees at the peak of the performance cycle into the future.  With the recent underperformance on certain flagship funds, performance fees should be expected to be lower which would impact on revenue.  

Their fees on certain of their funds would also be lower given they are currently charging the lower of the old and new fee structures (see our detailed note on the fee changes here).

3.  Falling market: The JSE is down 7% year to date and Financial shares have performed poorly.  That negative momentum for JSE and Financials hasn’t helped Coronation’s share price. 

Negative Press

A few individuals are also raising concerns in the public domain regarding the level of the bonuses paid to individual Coronation staff, and the lack of information around how those bonuses are determined.  In essence, staff were paid significant bonuses following a year in which the Coronation share price effectively halved.  Coronation have been very clear that staff share 30% of profit (through bonuses and long term incentives), so the quantum of the total bonus paid is clearly defined and very public. However, the concerns revolve around the lack of detailed disclosure around how bonuses are earned, for example information on the performance metrics that individuals need to meet in order to qualify for a bonus.   

The quantum of the bonus pool has not changed since 1993 (30% of profits), but the bonus structure and methodology has been altered to move a more significant portion of each staff member’s bonus to a long term incentive structure.  This was done to ensure that while staff were still well remunerated, there was an incentive for them to remain with the business over the long term.  We are comfortable with Coronation’s remuneration structure.

Fundamentals

We are not concerned about the fundamentals of their business. As part of our ongoing research process, we have spent time with the entire senior investment team in the past six months testing the business and shareholder structures, the team and their decision making process, the application of the investment philosophy and how that translates into the holdings in their portfolios. We feel comfortable with the way both the business and the portfolios are being run.

They have a very high quality, experienced senior investment team; they have a very solid investment process which is constantly tested; their longer term track record is outstanding and they run their business very well (and remunerate their key staff well). There have been no material business changes, no changes to the remuneration structure, no key staff changes, no change to their investment philosophy or process, and no new products since Coronation Global Equity was launched.  In our view, the business is stable and nothing has changed fundamentally on the inside where it matters.  

But their poor relative performance on a number of their flagship funds, the noise that comes with being a listed business and the fact that they were starting from a point of virtual perfection means that people are starting to ask questions.

All investment managers go through performance cycles. After many years of great investment performance and business growth, Coronation are facing a period of underperformance which is always a test for a business and for the core team. As part of our research process, we will monitor any changes, but Coronation’s staff turnover has been exceptionally low for the last 7 years and the core senior team remain committed to the business.

Performance

All fund managers operate within a performance cycle where they have periods of outperformance and underperformance. Coronation have had a long and very material outperformance cycle with the majority of their funds being top quartile performers in their categories over both the short and long term. Over the last year, a number of the flagship funds have fallen out of the top quartile as would be expected in a normal performance cycle. The performance may still be reasonable on certain funds but clients now have very high expectations of performance from Coronation (even over the short term). The Coronation Top 20 fund stands out as the fund has underperformed materially over the last year.

Apart from the normal performance cycle, the short term performance has also suffered due to a few specific holdings in the portfolios. The key drivers of the relative underperformance include:

• Offshore exposure being significantly overweight emerging markets (which has lagged developed markets by a large margin over the last year or so)


• Exposure to Porsche in the Offshore holdings (which was caught up in the VW scandal)


• Exposure to resource shares that have struggled – in particular Glencore, but also Anglos, Exxaro and Implats.


• Exposure to MTN, the share price fell heavily on the back of the fine proposed by the Nigerian authorities.


• No exposure to SABMiller which has a material benchmark weight in the FTSE/JSE Alla Share Index and is also held widely by a number of Coronation’s competitors. The InBev deal resulted in a significant increase in the share price.

In our opinion, while the short term performance has been disappointing, we do not believe anything material has changed within Coronation and we are still very comfortable with using a broad range of Coronation’s funds as part of a diversified client portfolio.