Coronation Financial comment - Sep 03 - Fund Manager Comment30 Oct 2003
The environment in which South African financials operate continued to improve over the past quarter. The stronger currency (7% appreciation against the US dollar) and falling inflation has led to three interest rate cuts totaling 350 bps.
This, and the possibility of one or two further interest rate cuts in the coming six months should translate into stronger demand for bank loans, a decline in the rate of insolvencies and a much improved equity market.
Yet, this improving environment is not reflected in share prices. The Financial index was down 2.3% for the quarter (more on this later).
The Coronation Financial Fund was up 2.3% due to:
- Its 18% exposure to the Coronation Global Financial Fund (a return of 15 % in US dollars this quarter -more detail contained in the fund's quarterly review).
- A 17% gain in the share price of African Bank (the funds third largest holding at the beginning of the quarter).
- Strong performance by some of the funds smaller holdings (Aplitec+30%; Glenrand-MIB +28%).
The only negative performer of significance was Nedcor which declined by 23%. Fortunately, however, the fund manager's research led them to timeously reduce the funds holding from 6% at 30 June, to 2% before the largest price falls.
The funds low exposure to the large life insurers was vindicated by their poor results, whilst the smaller life assurors (where the fund does have larger holdings) reported good results.
Investors may have forgotten that the Bank index has outperformed the All Share index going all the way back to 1960! This is due to banks having consistently grown their dividends and NAV per share at a higher rate. Hence, the fact that bank valuations are so low is completely irrational, and investors are being provided with a great investment opportunity.
Now, while there is no certainty that financial shares will indeed deliver a 13% (or 18%) growth rate in the future -a 20-year track record does provide a great deal of comfort.
The wise investor would do well to ignore share price movements over the short-term (as they are unpredictable) and concentrate on the dividend cash flow and the underlying capital growth. Warren Buffettsays: "I use my intellect to control my emotions when other investors use their emotions to control their intellect".
Coronation Financial - Clever bets avoid lemons - Media Comment30 Oct 2003
The fund maintains its sector dominance, particularly in the short term. Star fund manager Kokkie Kooyman is playing equity bull, switching out of cash completely during August. He says equity markets have hit bottom and there's lots of room for upside. That applies particularly to financial stocks, which have yet to benefit from the positive sentiment that has helped industrials and midcaps over the past six months.
The bullish view on financials is widely held, on both the sell and buy sides, though bank earnings are likely to come under pressure with the declining interest rates. Assistant fund manager Neville Chester says next year will be tough on margins, but volume growth should far outpace the margin pressure.
"Our view is to favour banks over insurers," says Chester. Banks will be particularly aided by the emerging black consumer market, which is expected to be eager to borrow . Insurers, however, are faced with increasing costs while their clients bemoan the general lack of investment performance in portfolios.
The fund has made clever bets, avoiding the worst performers, with Nedcor the lowest weighting of the "big four" banks. Standard (12,1%) dominates, followed by microlender African Bank (10,2%), which has been one of the best performers and reflects the belief in an emerging black middle class.
Absa remains a value play, making up 9,7% of the portfolio. The fund went heavily into Absa seven months after the Unifer debacle cost Absa R1bn in bad debt write-offs. Chester says the market overdid the punishment on the Absa share price - and the fund has been riding it up since.
Kooyman sees emerging markets in a 1992-1998 phase, with valuations rapidly increasing. The domestic fund is 18,8% invested into the global fund, so rand strength has held back performance. Kooyman has slightly increased exposure to the foreign fund, on the assumption that the rand has reached its peak.
(Financial Mail - 24 October 2003)
Coronation Financial comment - Jun 03 - Fund Manager Comment24 Jul 2003
In last quarter's commentary we noted that "Patience is required". This patience has been rewarded in the past three months. We also quoted Warren Buffett as saying: "you are not right or wrong because of what the market does..." Therefore, it is extremely frustrating when one hears of "investors" and "advisors" basing their decisions on what the market is doing. In essence, this means that they have no confidence in their own ability to read the fundamental facts.
The fundamentals in the financial sector remain compelling:
- Inflation has peaked and interest rates have started coming down. This means that assets re-price and that there is a revival in economic activity.
- Banks benefit tremendously from increased liquidity and economic growth.
- South African equities (and SA bank shares in particular) are trading at a huge discount due to fears of being forced to destroy shareholder value in the name of Black Economic Empowerment.
- When comparing valuations globally it is evident that the market is far too negative and that all the risks are already priced in (even more so when one compares equities to bonds)
The portfolio actions that took place in the past quarter were as follows:
At the beginning of the quarter we believed that bank shares would be the greatest beneficiary from the current environment, that the rand would remain stable and that the life insurance industry would find it difficult to attract profitable new business for some time.
This stance has been vindicated and the fund manager's do not see any compelling reason to alter the view. As a result, the portfolio showed very little change during the quarter. The fund manager's switched Old Mutual and Nedcor into New Africa Capital as the fund manager's see the stock as offering much better value and being more geared to the SA market.
In addition, the fund manager's sold Remgro and increased the funds holding in Alexander Forbes as the fund manager's believe that both the SA and UK businesses of Alexander Forbes will outgrow that of Remgro, while maintaining the rand hedge element.
The 15% holding in the Coronation Global Fund grew to 18% despite the strengthening rand. This was due to the fact that this fund (listed in Dublin) performed very well (up 20% in US dollars for the quarter)
The fund manager's remain of the view that the SA interest rate cycle and hence the SA market has turned, and that due to current low valuations, the investor prepared to invest for the longer-term could be handsomely rewarded.
Coronation Financial market comment - Mar 03 - Fund Manager Comment13 May 2003
The first quarter of 2003 was very disappointing. While the fund manager's were negative on insurance and financial services shares, the fund manager's expected banks to be good investments. This proved to be the case as bank shares outperformed the other categories, but still recorded a return of -11.4%. Despite the negative return, the fund was one of the top performing financial unit trust funds for the period (also ranking highly in the total unit trust rankings).
Investors need to exercise patience in light of falling inflation, declining credit extension, a resilient rand, and a healthy fiscal position. These are all factors which should lead the SARB to cut interest rates in the second half of the year. Furthermore, household and corporate debt has declined significantly (implying significant potential for future lending growth), bad debts are declining, bank margins have stabilised and the stronger rand means that operational expense growth will be curbed.
Warren Buffett says: "You are not right or wrong because of what the market does. You are only wrong when your interpretation of the facts were wrong." Hence, as long as inflation figures keep trending down, the fund manager's will continue to hold their view that bank shares will outperform. The attractive valuations (Dec 2003 dividend yield of over 5%) and prospects of real earnings growth exceeding 9%, strengthens our resolve.
Why should I remain invested now? SA's fundamental picture is improving. Yet, investors are reacting emotionally to market movements. While one cannot forecast how long this irrational negativity will continue, as long as valuations and operating conditions are satisfactory, do not try and time the market. Consider the following:
- The earnings yield averages 19.8%, far exceeding the rate you will receive on a deposit.
- Compared to international banks, this valuation is extremely attractive expressed in pe's: our banks are on a forward price earnings ratio of 6 vs 11 in the UK/US.
- Besides, where are the potential growth rates the highest - understanding that interest rates in the US are 1.75% and 17% in SA.
Warren Buffett also says that "forecasts only tell you something about the forecaster but nothing about the future." Investors continue to be concerned that foreign investors are still selling our shares, and that local institutions are overweight (which is disputable). The facts are that if a company keeps growing its net asset value, eventually the patient investor will be rewarded. The short-term risk is that a protracted war will make the market more negative and further depress valuations.
Activity over the quarter:
Our top selections proved to be very defensive and we were underweight the large decliners:
o Abil, the top performer amongst financial shares (ignoring small caps like PSG Investment Bank, BJM, etc) was our largest holding. This is despite a 12% price decline in the last 10 days of the quarter, largely due to profit-taking irrespective of the company's improving prospects.
o The other large holdings that produced relative outperformance were Absa, Aflife, Capital Alliance and Standard Bank.
o We were underweight Investec (-33%), Alexander Forbes (-26%) and Old Mutual (-20%).
o The Coronation Global Financial Fund, making up about 15% of the fund, also performed well under the circumstances, ending the quarter at -7.9% in US$ terms. However, the strength of the rand (+8.2%) eroded this good performance.
Investment philosophy:
Over the quarter, the fund manager's did not attempt to trade the excessive market movements, electing to remain with those investments most favourable to the investor: ie, companies with strong franchises, cash generative, low dependence on equity markets for income generation and low valuations.
Looking ahead the fund manager's do not foresee an end to the international bear market in 2003 due to still high valuations and poor growth prospects offshore. However, the fund manager's remain convinced that the improving circumstances in South Africa and attractive valuations will translate into positive returns. Therefore, the fund will remain overweight banks, believing that they will be the biggest beneficiaries of a falling interest rate environment, and underweight the large South African life assurers as equity markets and new business flows remain under pressure. The fund manager's will look to increase the funds exposure to Investec once the operating environment improves. The fund manager's investment in the Coronation Global Financial Fund remains mainly exposed to Indian, Thai and Indonesian banks - all in countries with 4% - 6% GDP growth and low valuations.
In conclusion, despite the fact that the economic backdrop is gradually improving, foreign investors are largely ignoring the South African market. Once demand returns, the shares could quickly rerate. In the meantime investors are assured of a good and growing dividend yield.
Coronation Financial comment - Dec 02 - Fund Manager Comment10 Feb 2003
The last quarter of the year provided some spectacular volatility, resulting in the fund manager's normally aggressive trading being unable to add value during the quarter.
The fund returned 2.3%, compared to the financial index return of 2.5%, and the ALSI return of -2.0%. The reason for the fund's underperformance was the impact of the strong rand on its 17% exposure to the Coronation Global Financial fund. While this fund showed a return of 7.6% in US dollars, it was more than negated by the 18.6% appreciation of the rand. Put differently, excluding the global fund exposure, the local fund would have been up by 5.3%.
The pleasing performance of the SA portion of the fund was as a result of the high weighting in small life assurers/underweight large assurers, and an overweight position in SA banks/underweight Investec and Remgro.
Coronation Financial market comment - Dec 02 - General Market Analysis10 Feb 2003
What to expect for 2003? - The strength of the rand will be extremely positive in 2003 as investors begin to look forward to lower inflation and thereafter lower interest rates.
In Summary:
- the SARB will most probably start cutting interest rates from about June 2003. Lower interest rates have historically always caused financial shares to rerate - as the risk discount for bad debts (negative) is replaced with a (positive) premium for growth
- economic growth will be stimulated by lower interest rates and another stimulatory budget (although expected to be less stimulatory this year than in the past)
- foreign capital will be attracted (or/and SA capital will be kept in SA) due to our high relative interest rates and stronger relative growth; which in turn should ensure a fairly stable rand,
- finally, and most importantly, the low ratings and high dividend yields of financials make this a very attractive and low-risk sector,
The 15% exposure to the offshore fund should boost the fund this year
- the fund manager's do not expect the rand to strengthen much further, with the likely outcome of a 10% depreciation to 9.30 US$ by December 2003.
- The offshore portfolio is invested largely in stocks that either: have a high dividend yield (exceeding 5%); were severely derated for various reasons in 2002 with P/NAV's < 0.5; are forecast to grow NAV strongly this year and are on low valuations in countries with GDP growth rates forecast to exceed 5%.
The above is reflected in the fact that the average dividend yield of this fund is 4.9%, the PE is 6.5, while the ROE is14.0% (with inflation below 3%) on a P/NAV of 1.0; hence we again expect a positive return in US$ which is likely to be higher when translated into rands.
What would make Coronation change their positive stance on SA financials?
- A sudden large fall in the rand (back to eg, R10.50 by June 2003)
- inflation staying high due to higher oil prices, continued high wage settlements or high administered price increases
- strong growth in the US or rising interest rates in the US (drawing capital away from SA again)
Conclusion
The fund manager's feel that after many false starts, 2003 may finally be the year when South African financial (and industrial) shares do well. After all, this has been an underperforming sector since July 1998 when PEs exceeded 20. The average bank sector PE is now 7.
Should the positives not materialise this year, at least investors in financials will be protected by the low valuations of the shares and the 4.1% historic (5.0% forward) dividend yield of the fund.