CORONATION BALANCED DEFENSIVE FUND
Raging Bull Award for the Best Domestic Asset Allocation Prudential Fund – the top-performing fund on a risk-adjusted basis over five years to December 31, 2012
Investors in the fund that won the award as the top-performing prudential fund had their cake and got to eat it too over the past five years, the fund’s manager says.
The Coronation Balanced Defensive Fund is a low-risk fund, but, despite keeping its investments in riskier assets to below 40 percent of the fund, the fund returned the best returns for the lowest risk among its many peers in the asset allocation prudential sub-categories.
Charles de Kock, one of the managers of the fund, says investors benefited both from being in a low-risk fund and earning strong returns. Typically, investors in funds with lower volatility expect to sacrifice some of the returns they could earn if they took greater risks by investing in funds with a higher exposure to more risky assets, such as equities.
The Balanced Defensive Fund returned 11.75 percent a year over the five years to December 2012 (according to ProfileData) – which was the highest return among all the funds in the prudential low equity, medium equity, high equity and variable equity sub-categories over that period.
The average returns of these sub-categories ranged from 7.43 percent a year to 8.41 percent a year, according to ProfileData.
In addition, the Balanced Defensive Fund achieved the highest PlexCrown rating among its peers, with five PlexCrowns for its risk-adjusted returns over the five years to the end of December last year.
An asset allocation call that worked in the fund’s favour was a high exposure to domestic bonds. The South African bond market delivered excellent returns on the back of the demand from foreign investors seeking higher yields than those on offer in their markets, De Kock says.
At the end of last year, the fund was 44.9-percent invested in corporate bonds.
The Balanced Defensive Fund’s investments in fixed-income instruments are managed by Mark le Roux, Coronation’s head of fixed interest.
De Kock says the fixed-interest component of the portfolio benefited from a substantial investment in inflation-linked bonds, and at one point these made up 20 percent of the fund’s portfolio. The fund’s exposure to inflation-linked bonds has now been reduced in favour of exposure to corporate bonds and floating-rate instruments.
De Kock says over the past five years Coronation found corporate bonds to be more attractive than government bonds.
Another asset allocation call that has worked in the fund’s favour has been a drift over the past five years away from local equities and towards foreign equities, because shares in foreign markets that were sold down after the financial crisis still appear to offer better value than domestic shares, De Kock says.
For the past year, the fund has had only 10 percent invested in the JSE, because Coronation is of the view that many local shares are expensive, he says.
The allocation to foreign equities has moved up gradually as the percentage of their assets that domestic unit trusts are permitted to invest offshore has increased over the past five years, from 15 percent to 25 percent.
At the end of last year, the fund had 18 percent of its investments in foreign equities and the maximum exposure of 25 percent to foreign investments.
Currently, the Balanced Defensive Fund does not hold any global government bonds, and only a small percentage of the fund is in selected corporate bonds, De Kock says.
The fund’s foreign equity exposure is via Coronation’s three offshore funds, the Global Opportunities Equity Fund, the Global Emerging Markets Fund and the Global Capital Plus Fund.
The Global Opportunities Fund is a fund of funds that invests in about 10 equity funds managed by different offshore managers that have similar investment philosophies to Coronation’s. These funds cover markets in the United States, Europe and the Far East.
The Global Emerging Markets Fund, which won a Raging Bull Award last year, focuses on the shares of companies based in emerging markets or on shares that derive a significant portion of their revenue from emerging economies.
The Global Capital Plus Fund is a global asset allocation fund that is managed to achieve a targeted return.
De Kock says many offshore companies have attractive balance sheets, because they have trimmed their costs and preserved cash following the financial crisis. Their sales may not be that strong, but these companies pay decent dividends, he says. They are no longer dirt cheap, but they are still fairly priced.
More recently, the global fund managers that Coronation uses have been switching out of consumer staples and into more cyclical stocks, because these are expected to deliver better returns in the year ahead, De Kock says.
The emerging market exposure is in a host of countries, with shares chosen on the basis of stock-specific criteria. The top three countries to which the fund is exposed are China, Brazil and Russia, but the mix of emerging markets to which the fund is exposed has changed over the past five years, De Kock says.
In local equities, the Balanced Defensive Fund is exposed to defensive stocks that are not affected by economic downturns, he says, citing the likes of Vodacom and MTN, while retailers such as Mr Price and Shoprite have been sold, because these shares became expensive on the back of demand by foreign investors. These shares have been replaced with more cyclical stocks, such as the diversified miners Anglos and Billiton, and other defensive shares, such as British American Tobacco, De Kock says.
At the end of December last year, the fund had 4.7 percent in domestic real estate shares.
De Kock says real estate shares have enjoyed a fantastic past five years, and in hindsight the fund could have done better if it had had a higher exposure to them.
The extent of the fall in yields was a surprise, De Kock says. Coronation is now reducing its exposure to listed property, because interest rates are extremely low and are likely to move higher. Although it is difficult to say when this might occur, Coronation prefers to get out early, De Kock says.
Looking ahead, De Kock says it is too much to expect another year of returns as high as those achieved in 2012, because the good performance by equities and the spectacular returns of the bond and property markets are unlikely to be repeated.
The best bet is offshore equities, and so the fund will maintain its high exposure to these securities, De Kock says.