The fund declined -0.4% for the third quarter of 2019 (Q3-19). Since inception, it has averaged an annualised return of 16.4% relative to its benchmark’s return of 13.8%, while it has moderately underperformed its benchmark over the past five- and 10-year periods.

Despite the surprisingly positive GDP growth reported during the second quarter of 2019 (Q2-19) (+3.4% quarter-on-quarter), the domestic economic environment remained extremely challenging. The Purchasing Managers Index (PMI) declined to 41.6 in September – the second consecutive month of sharp declines and reaching the lowest levels seen since the global financial crisis in 2009. This data served to reinforce how dire the underlying economic situation really is. Investor and consumer sentiment continue to remain very weak and government urgently needs to deliver on muchneeded structural reform in order to restore consumer and corporate confidence and kickstart the economy. During September, the South African Reserve Bank (SARB) held the policy rate unchanged at 6.5%, but the SARB's statement was more dovish than in July when it did actually cut rates. We believe that, given the weak domestic economy, contained inflation and favourable global rate expectations, the SARB has room to further cut rates in coming months. Against this challenging economic backdrop, the rand weakened against most developed market currencies and depreciated almost 7% against the US dollar during the quarter.

Performance attributions over the past three years have been boosted by our holdings in Cartrack, Netcare and Spar. Richemont – while consistently being one of the largest positions in the fund – contributed meaningfully to absolute fund performance over the past three years. However, its underweight position contributed to relative underperformance. Our holding in Mediclinic has also detracted from performance as the ill-fated Al Noor acquisition coupled with changes in the Swiss regulatory environment have weighed negatively on earnings and, consequently, the share price.

During the previous quarter, we highlighted the exceptional value we were seeing in many domestic stocks. It was therefore pleasing that in July, global food and beverage conglomerate PepsiCo announced a takeover bid for Pioneer Foods, at a more than 50% premium to the Pioneer share price at the time. Our combined holding in Pioneer and Zeder (whose largest asset is its stake in Pioneer) was one of the largest overweight positions in the fund, and the subsequent repricing of both stocks contributed meaningfully to performance during the quarter. We used the rerating in Pioneer to sell out of our position and redeploy the proceeds into other more attractive investment opportunities. The fund continues to retain exposure to Zeder as we feel the PepsiCo offer price for Pioneer is not yet fully reflected in the Zeder share price. We also believe some of the remaining assets – Zaad and Kaap Agri in particular – are attractive businesses and, with Zeder still trading at a circa 30% discount to its reported underlying intrinsic value, we continue to believe the stock is attractive.

In line with this theme of cheap domestic stocks becoming takeover targets by foreign multinationals, the Competition Tribunal finally approved the proposed buyout of Clover by Milco SA (a consortium led by Israel-based Central Bottling Company), thereby clearing the path for Clover to be delisted. As the Clover share price converged on the proposed Milco offer price, the fund sold out of its Clover position.

Trencor recently announced that it will be unbundling its Textainer stake to its shareholders in the coming months. Coronation has been actively pushing for this unbundling over the last few years and are extremely pleased that it is finally proceeding. The share price reacted positively - up 37% for the quarter – and this contributed meaningfully to quarterly performance.

Another material corporate action that took place during the quarter was the much-anticipated listing and part unbundling of Prosus from Naspers. Prosus is the corporate entity that will house Naspers’ global internet portfolio, including its stake in Tencent and its interests in online classifieds, food delivery and online payments. Post the unbundling, Naspers has retained a stake of 74% in Prosus. We are encouraged by the recent steps Naspers management have taken in an attempt to narrow the discount at which the stock trades at relative to its underlying intrinsic value and believe the listing of Prosus is another positive development in this regard and a way to further unlock value for shareholders. A foreign listing of Prosus will assist Naspers in pursuing its ambitions to become a leading global consumer internet business by giving it access to a wider pool of investors and capital. Furthermore, going forward, the two-tier corporate structure provides Naspers with more financial flexibility and the ability to more efficiently manage the discount to its intrinsic value by using capital allocation tools like share buybacks. In this corporate action, the fund elected to take the full allotment of Prosus shares, given the value unlock opportunity we expected.

The largest addition to the fund during the quarter was the purchase of Remgro. Remgro is the Rupert family-controlled investment vehicle that owns stakes in a number of good listed businesses, including FirstRand, Rand Merchant Investment Holdings, Mediclinic, Distell and RCL Foods, together with a number of other high-quality industrial, media and telecoms businesses. Remgro management are very shareholder friendly and we like the fact that the balance sheet is conservatively positioned, with Remgro currently sitting in a net cash position; well poised to capitalise on attractive investment opportunities in this tough economic environment. Furthermore, the discount at which it trades at relative to underlying investment portfolio has recently widened to circa 25% - a 10-year high. We believe this to be attractive entry point for this portfolio of investments.

Other trading activity during the quarter was primarily limited to opportunistically adding to existing positions at attractive prices. Examples include Aspen, Spar and Pick ‘n Pay. We also established a position in Altron.

Notwithstanding the challenging economic environment, given current valuation levels and portfolio positioning, we remain very excited about future return opportunities.

The fund had a good quarter and returned 7.9%. Since inception, it has averaged an annualised return of 16.7% relative to its benchmark return of 14.1%, while it has moderately underperformed its benchmark over the past five- and 10-year periods.

Stocks exposed to the domestic economy came under significant pressure during the quarter as the realities of operating in a ‘nogrowth’ economic environment filtered through into corporate earnings. The quarter kicked off with a string of profit warnings from the domestic retailers, and the likes of Mr Price (-23%), Massmart (- 22%), Truworths (-18.5%) and Dischem (-16%) all ended the quarter materially lower. Fortunately, the fund had no exposure to any of these stocks during the quarter. Eskom remained in the headlines as it hit Stage 4 load shedding in the middle of March. Years of mismanagement, corruption and underinvestment are finally coming home to roost. Although, for now, we appear to have received a temporary reprieve from the worst of load shedding, it has become clear that we are only now starting to understand the true extent of the problems that the power utility faces and that its numerous issues could indeed take years to rectify.

Unfortunately, if persistent load shedding becomes the norm over the next few years, the impact on consumer sentiment, business confidence and GDP growth will be devastating. We therefore continue to remain cautious on stocks that are heavily exposed to the domestic economy and our preferred exposures are through high-quality domestic defensive stocks that should weather the challenging environment better than their weaker economicallysensitive peers. Against this challenging economic backdrop, the South African Reserve Bank left rates unchanged at its 28 March meeting and cut its 2019 GDP forecast from 1.9% to 1.3%, while the much-anticipated ratings review by Moody’s was deferred and South Africa maintained its investment-grade rating.

Performance attributions over the past three years have been boosted by our holdings in Pick n Pay, Netcare, Mondi and Spar. During the quarter, low weightings in domestic stocks such as Vodacom, Mr Price, Truworths and Bidvest contributed to outperformance.

After a challenging 2018, a number of the fund’s high-conviction ideas contributed meaningfully to returns during the first quarter. Firstly, Naspers benefited from a strong recovery in the Tencent share price, as sentiment towards China shifted positively on the back of a reduction in trade war fears and a resumption in the licensing approval process of online games by the Chinese authorities. Naspers also surprised the market in March by announcing the offshore listing and part unbundling of its offshore internet portfolio (i.e. Tencent, Mail.ru, OLX, Food Delivery, et al.), in an effort to reduce the discount at which it trades at relative to its underlying intrinsic value. While this is certainly no ‘silver bullet’ that will immediately remove the entire discount, we nevertheless view it as a very positive step in the evolution of the group into a global consumer internet powerhouse and will allow it access to a wider investor base. While Naspers remains one of the fund’s highestconviction ideas, its continued outperformance over time has led to it occupying a disproportionate size in the fund’s benchmark, currently circa 40%. In order to manage single-stock risk in the overall portfolio, the fund now finds itself significantly underweight Naspers. Therefore, perversely, if Naspers continues to do well (which we certainly hope and believe it will), there is a high probability that the fund will underperform its benchmark. While we continue to strive to find great investment ideas, we remain mindful of our commitment to construct diversified anti-fragile portfolios - the performance of which is not dependent on the outcome of a single investment idea. In this way, we aim to deliver high-quality risk-adjusted returns.

As previously communicated, Naspers completed the listing and unbundling of Multichoice (its video entertainment business) during the quarter. We believe Multichoice is a good-quality business and although the South African operations are fairly mature, it should still grow earnings strongly as management turns around the lossmaking ‘rest-of-Africa’ operations. We also believe that given several structural differences (lack of broadband, high cost of data, demand for local content, best-in-class sports offering, etc.) versus many developed markets, the competitive threat from the global over-the-top competitors (the likes of Netflix, Amazon Prime, et al.) is overblown. Multichoice is currently trading on circa 7 times our assessment of normal earnings. We used the period of heightened share-price volatility post the unbundling to add to our position.

During the quarter we received an offer from a consortium of investors (led by Israel’s Central Bottling Company (CBC)) for our stake in Clover (+30% for the quarter). The offer price was close to our assessment of Clover’s intrinsic value and we decided to support the offer. The British American Tobacco (BTI) share price (+27% for the quarter) recovered strongly during the quarter on the back of good results which allayed market fears around US volume declines, its debt levels and the outlook for its next-generation products. It also appears that the regulatory headwinds faced by the US business are abating and sentiment is finally starting to turn positive on the stock. Even after this short-term price rally, BTI is still trading on only 9.5 times one-year forward earnings and a 7% dividend yield. We still believe this to be very attractive for a stock of this quality and it remains the second biggest position in the fund.
Aspen reported interim results in March that were below market expectations, and the share sold off aggressively as the market became concerned about its high debt levels and the risk of a covenant breach, should it not be successful in concluding the sale of its infant milk business. The poor organic growth performance and working capital management added to investor concerns. The Aspen business is currently in a transitory phase as management repositions the portfolio to capitalise on future growth opportunities, and we continue to believe that the debt load is manageable. Aspen is currently trading on 6 times our assessment of normal earnings and we have added to our position on the back of the weakness in the share price.

Notwithstanding the economic challenges that South Africa faces, markets have had a positive start to the year. The National Elections are scheduled in early May 2019 and we expect little improvement in the economy before then. Decisive policy action will, however, be required post the election to ensure the economic challenges are effectively addressed. We continue to believe that the portfolio is filled with stocks that remain very attractively priced, and we are optimistic about future return opportunities