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Coronation Global Equity Select Fund - News
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Coronation Global Equity Select comment - Mar 18
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Tuesday, 12 June 2018
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Fund Manager Comment
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Our previous quarterly report highlighted the almost ominously low levels of volatility as evidenced in the length of the bull market (without a technical pull back), the fact that calendar 2017 showed no negative monthly returns (a market first), and the very low levels of implied volatility when buying options. The first quarter of 2018 however shattered this level of complacency. While the year started with a very strong January, a combination of the re-assessment of interest rate levels over the next few years, aggravated by some inflationary pressures, as well as a renewed focus on the privacy debate pertaining to the new technology giants (on the back of some data manipulation claims against Facebook) led the equity market into a new era of volatility. Both February and March produced negative returns, and moving into April the market flirted with the 10% retracement level that would constitute a technical correction. The more recent market jitters have been in response to the increasing probability of a US/China trade war.
The quarterly return for the MSCI All Country World Index (ACWI) was negative 1.0%. Surprisingly, emerging markets outperformed developed markets, producing a return of 1.4%. The rolling 12- month return for the ACWI remains impressive at 14.9%, surpassed by an emerging markets return of 24.9%. The ACWI's five-year annualised return is also reasonable (9.2% p.a.), this time exceeding that of emerging markets (5.0% p.a.). Sectors that outperformed over the last quarter include information technology (ironically, given the recent pressure on Facebook and some of the other industry giants) and consumer discretionary. Materials and energy predictably performed poorly given the change in interest rate outlook, but it also adversely affected consumer staples, which sold off with the increase in longer term bonds (having erroneously been considered as bond proxies during the search for yield a few years ago). The US marginally outperformed the developed markets grouping, but continued currency weakness resulted in US dollar returns being very similar across different markets.
The fund had a disappointing start to the year, underperforming its benchmark by nearly 5.3% for the quarter. This has affected our longer-term numbers, with the fund lagging its benchmark since inception and over the three-year period.
Our biggest positive contributors included Amazon (continued rerating on the back of sound execution and speculation about entering other categories), Advance Auto Parts (turnaround strategy gaining early traction after oversold share price), Hammerson (an unexpected bid for the company being rebuffed by the Board), and Airbus (a recent portfolio introduction continuing to execute well). The largest detractor was the prior quarter's top performer - L Brands. This after a poor trading statement resulted in its share price retreating to previous lows. Other losers included Altice (cable operator with poor results in its home market, France), Tata Motors (victim of market volatility and poor short-term sales numbers), and Intu Properties (fears that proposed Hammerson deal would fall through). Some of our consumer staple holdings were also marked down in line with the comments above.
We have significantly increased our portfolio exposure to tobacco stocks over the last 12 months. Currently close to 10% of the fund is invested in stocks such as British American Tobacco, Philip Morris International, Japan Tobacco and Imperial Brands. While each company potentially offers a slightly different angle in terms of future returns, the overarching investment thesis is that the development of next generation products (while disruptive to the incumbent players in what has been a very stable industry) could prove to present the market with a new growth vector. Heat-not-burn and vapour products have found favour with both existing smokers, as well as ex-smokers, and allow the industry to benefit from premium pricing. The recently announced Food and Drug Administration's review of the industry in America has increased uncertainty in the shorter term, allowing us to pay what we would consider to be attractive prices for these stocks. In the longer run, we anticipate the larger players to consolidate the new technologies, leading to improving margins compared to the combustible market (assuming no adverse tax developments). Some of these companies are now trading at valuation multiples not far off those levels when they were facing potentially crippling financial legal claims, and we think these positions will serve the fund well over the medium to longer term.
While the fund's short-term performance has been a disappointment, we take encouragement from the fact that the portfolio is showing very attractive potential upside based on our assessment of fair value for our individual holdings.
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