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Coronation Balanced Defensive Fund  |  South African-Multi Asset-Low Equity
Reg Compliant
2.4079    -0.0003    (-0.012%)
NAV price (ZAR) Thu 9 Jan 2025 (change prev day)


Coronation Balanced Defensive comment - Sep 14 - Fund Manager Comment29 Oct 2014
We have been warning investors for some time to prepare themselves for lower returns from the financial markets. Our caution was based purely on valuation concerns and not on an ability to forecast either market sentiment or some major macro-economic event. Bonds have already corrected from extremely overvalued levels following last year's now-famous speech by then Fed chairman Ben Bernanke, who warned that the central bank may reduce or taper its bond-buying programme. Listed property, which tracked the trends in bond yields, also corrected in the first half of last year. Equities however continued to surprise us by pushing ever higher. The long-awaited decline in stock prices finally arrived over the past quarter, with the JSE All Share Index losing 2.1%. This modest correction still leaves the market at an elevated valuation level and more weakness would not surprise us.

Commodity prices have been weak, reflecting concerns about Chinese economic growth. As a consequence, the resources sector was hit hardest during the correction, falling by 7.1% over the quarter, with platinum stocks doing particularly poorly. The South African economy continued to struggle, with many companies reporting disappointing results. The collapse of African Bank was the most dramatic evidence of the tough conditions in the lower LSM categories. Unemployment, strikes and general over-indebtedness brought the unsecured credit provider to its knees. Your fund, in keeping with its low-risk mandate, had zero exposure to African Bank's equities and debt instruments.

The fund's exposure to growth assets declined a little to 33.5%, well below the maximum target of 40%, reflecting our caution on the valuation of equities in particular. Within domestic equities, we added to Richemont, Old Mutual, MMI Holdings, Impala and Distell. We took some profit in FirstRand, AVI, BHP Billiton, The Foschini Group as well as SABMiller, when its price spiked on rumours of a potential transaction with the Dutch brewer Heineken. In the listed property space we bought the Investec Property Fund and sold Hyprop. On the global front we added to our holding in the Coronation Global Capital Plus fund. It is our view that bonds have become more attractive relative to equities. The lower maize and oil prices should contribute to somewhat lower inflation numbers for the remainder of the year and less pressure on the Reserve Bank to hike interest rates much further. We added modestly to SA government bonds towards the end of the quarter.

In light of the correction in stock prices the fund showed a return of only 1.2% for the quarter, but the one-year return is still a reasonably healthy 10.3%. The fund's longer term three- and fiveyear returns of 14.2% and 12.8% per annum respectively, remain well above the target of cash plus 3%. Portfolio managers Charles de Kock and Henk Groenewald Client
Coronation Balanced Defensive comment - Jun 14 - Fund Manager Comment22 Aug 2014
Equity markets continued to be supportive of fund returns in the second quarter of the year. During the period, the local market and many international stock markets reached new highs. Over the last 12 months both local and global equities (as measured by the MSCI World Index) returned over 30% in rand terms - a truly exceptional performance. Even more surprising is the fact that the return from local equities comes after a decade of already above-normal returns and despite weak economic news, the longest strike in the history of South Africa, and a sovereign credit rating downgrade. Our caution to investors continues to be that returns achieved over the last 10 years are unlikely to be repeated going forward.

We reduced our holdings in SABMiller, BHP Billiton and AVI as share prices moved closer to our assessment of fair value. We initiated a holding in Old Mutual, as we believe the risks that the company faced during the financial crisis have dissipated, and the strong cash generation underpins the dividend yield.

Despite the recent conclusion of the five-month long strike, the platinum mining companies still face the difficult task of normalising production and right sizing their cost bases. We have used the weakness in share prices to add to our position in Impala Platinum and added to our holdings of platinumgroup metal (PGM) ETFs as we believe the strike will lead to reducing abundant stockpiles.

Contrary to strong equity markets, income assets delivered low returns. Cash, government bonds and property stocks all underperformed inflation over the past 12 months. Preference shares and inflation-linked bonds performed better with returns of 8.5% and 12% respectively for the year. We slowly started to build a position in government bonds as we no longer believe that a holding of zero is the correct position given their poor performance over the last year.

Given strong global equity markets and a generally weakening exchange rate, international assets contributed strongly to performance over the past 12 months. Our offshore holdings contributed 31% and 41% to the total fund return over the past quarter and year respectively. We maintain our relatively full offshore position, but have hedged a small proportion of our US dollar exposure into rands.

The fund delivered a return of 3.6% for the quarter and 14.1% for the last year. More importantly, long-term performance remains good; the fund delivered 14.6% and 13.8% per annum over the last 3 and 5 years respectively, still comfortably ahead of our cash + 3% benchmark. The fund continues to be one of the top performers in its category over all meaningful time periods.

Looking forward, we continue to think that the investment environment will be tough. Cash still yields negative real returns, and we do not foresee strong real returns from bonds. Global and domestic equities offer the best opportunity to generate real returns, but even these are reducing given their recent strong gains. Our focus continues to be on managing risk within the portfolio and as such have reduced our exposure to risk assets over the past quarter from 35% to 32%.

Portfolio managers Charles de Kock and Henk Groenewald
Coronation Balanced Defensive comment - Dec 13 - Fund Manager Comment16 Jan 2014
At the end of 2013 we reflect on yet another year of better than expected returns. Over the past 12 months, the major driver of the high returns was a combination of good performance by global equities and a very weak South African rand. The weak currency also supported domestic rand-hedged equities - an area to which the fund was well exposed.

We maintained our exposure to global assets close to the 25% maximum that is allowed. At the same time, we were wary of the impact that higher bond yields would have on bonds and listed property. We therefore kept our property exposure quite modest, with most of the exposure taken through rand-hedged Intu and Capital Shopping Centres. We also avoided long duration bond holdings, thereby limiting the negative impact of rising bond yields on the portfolio. Exposure to domestic equities was kept low due to concerns around valuation. With the benefit of hindsight, our holdings of domestic stocks were too low as many shares continued to perform very well. We are, however, mindful of the risk in this fund and believed that the steamy valuations did not justify a fuller weighting. Exposure to risk assets was therefore materially below the 40% maximum allowed.

Our asset allocation decisions, by and large, contributed favourably to the total return. The table below shows the total returns of the major asset classes (in rands) for calendar 2013.

MSCI World Equity +56.97%

MSCI GEM Equity +20.45%

JSE All Share +21.43% JSE Listed Property +8.39%

All Bond Index +0.64%

SA Cash +5.03%

Global Bonds +18.32% (negative in USD)

ZAR/USD -18.89% (depreciation of rand)

Our high exposure to global equities over the past year was based on attractive valuations in US dollar terms. The weak rand merely provided the cherry on top and turned the very good 27.37% US dollar return for the MSCI World Index into a spectacular 56.97%.

After many strong years for bonds and especially listed property, the rise in yields finally took its toll and reduced returns in these asset classes to the low numbers reflected above. Our limited exposure to listed property and very low duration in bond portfolios reflected our fears of rising bond yields as the normalisation of interest rates loomed.

The fund returned 3.6% in the final quarter of 2013, 15.7% for the 2013 calendar year, 14.1% per annum over past the 3 years, 13.6% per annum over the past 5 years and 11.7% since inception. Over all periods, the returns are comfortably ahead of the fund's cash +3% target. In addition, the fund has met its aim of not losing money over any rolling 12-month period and remains one of the top performers in the low equity prudential category.

Looking forward to 2014

We have warned of lower expected returns for some time and once again the past year has been a very rewarding one for investors. Strong global stock markets combined with a weak rand to produce very high returns in global assets in 2013. Over the next year, returns of the same magnitude must not be taken for granted and could in fact be materially lower.

Domestic equities have surprised us positively over past year and valuation now looks very full with limited upside for most stocks according to our own well-researched view. We have kept exposure to domestic equities to below 10% for most of the year and believe that one should be patient and wait for a buying opportunity to add to stocks when they offer better value.

Bond yields have moved higher and on one or two occasions during the year we bought some longer-dated bonds when it reached levels that we felt more comfortable with. Likewise, we are prepared to add to property if yields approach higher levels.

On the topic of the rand, we all know how tough a call this is. The fund has derived huge benefits in both asset allocation as well as stock selection from the weak rand and it is tempting to lock some of it in. It is, however, clear that the twin deficits are formidable negative fundamentals to overcome and policymakers seem reluctant to take the tough decisions needed, especially in an election year. We are consequently likely to maintain a full global equity exposure.
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