Coronation: Long term performance is everything

The financial crisis that sent many fund managers into a tail-spin was the perfect tool to demonstrate how active managers can add value, according to Coronation CEO Hugo Nelson. He explains how while the rest of the world was in the depths of despair, his firm was about to enter a golden era. By Antony Ireland

3 Jul 2011

For some fund houses, the financial crisis spelled the end. For others, it made them. Coronation Fund Managers, currently South Africa’s third largest asset manager with R231bn ($33bn) assets under management (AUM), was ticking along with a steady reputation in equities before the global market crash in 2008 accelerated the firm’s fortunes, and it has not looked back since.


“The crisis has been a tremendous blessing for us,” says CEO Hugo Nelson, who joined the firm in 1999 when its AUM was just R30bn. “When the crisis hit, we were performing in line with other value-based fund managers, but the big mistake a lot of them made was they didn’t take on risk in the aftermath of the crisis, which we did. Three years on and the crisis has been phenomenal for our brand building – we performed in line with our commitment to investors that active fund managers seek to deliver active return regardless of what is going on in the market, and on the back of that we have seen massive growth in AUM.”


Formed in 1993, Coronation has always maintained a focus entirely on fund management as opposed to building out one-stop-shop investment banking services. “We are a pure fund manager and our whole model is based on delivering performance to clients. If we don’t do that we have no other leg to stand on – all the money we manage is effectively on a day’s notice,” says Nelson. “What we are most proud of is our track record of performance delivery, and that is something we really hope to sustain.”


This approach means that Coronation does not ‘window dress’ flagship funds, instead focusing on providing maximum returns for all investors regardless of their size or type of product. According to Nelson, the firm has managed to provide an annualised return of 3.5% alpha above benchmark for institutional clients since inception. “If the mandate is the same, every client must get the same outcome,” he says.


Prior to 2008, Coronation had been known as a long-only equities player – something of a misnomer as the firm had actually operated for many years as a balanced fund house, but with more success in the equities space. But having lagged many of its competitors quite badly in the first part of 2008 by missing out on the final stages of the extended bull-run in commodities, things changed gears for the firm when the emerging markets bore the brunt of the crisis that summer.


“By the beginning of 2008 we had sold out of virtually every commodity share, and by the time we got to June we were basically out of everything, in clean slate portfolios. As the crisis hit and asset prices tumbled, we had our best alpha generation for months,” says Nelson, explaining that simply by not being exposed, the firm outperformed the markets by 10% in July alone. “That was the beginning of a tremendous two years of significant outperformance in our funds.”


Coronation’s Top 20 Fund, for example, which is the firm’s most aggressive equities product, was 18% behind its benchmark (FTSE/JSE Africa Top 40) in March 2008, but is now 7% ahead of the benchmark since inception, illustrating the extent to which the firm has excelled post-crisis.


But there is more to Coronation’s recent success than simply being out of the markets at the right time. Crucially, the firm was willing to take on assets at the nadir of the crisis, which led to substantial gains far quicker than even the firm had anticipated. “Our investment process is long term, but when you get massive periods of market vol atility you have accelerated portfolio action,” says Nelson, explaining that Coronation’s exposure changed drastically through 2008 and into 2009.


“We went from low equity/low resources, to neutral equity and zero bonds by December 2008, and by March 2009 we were at maximum equity weightings when the S&P 500 hit about 700. Our view was that financial or debt-induced recessions would last at least five years and deleveraging would last for a very long time. The whole reason we owned so much equity was valuation, but, totally unexpected to us, there was a massive bounce for the best part of a year,” he says.


This led to a period of sustained organic growth which has seen the firm’s share of the South African institutional market rise from around 9% to 12%, and its retail market share grow from 6% to 9% (of their addressable markets). “The big problem with being an active manager in a sustained bull market is that clients start questioning why they employ you when everything is rising,” says Nelson.


“Outcome differentiation comes when you are not in a bull market and more importantly when you have big periods of inflection. This has reinforced our brand position and our value proposition as an active manager.”


Gateway to Africa


Today, 60% of Coronation’s assets are managed in JSE equities-related strategies with the remaining 40% in “fixed income, foreign and other”. More interesting is the geography of the firm’s exposure and client base; more than 90% of its money is managed on behalf of South African clients and 60% of its assets are invested in the Johannesburg Stock Exchange (JSE). The firm remains big in the institutional space, with 75% of its assets managed on behalf of domestic pension funds and 25% from retail clients, although the retail portion is growing more quickly.


“We are essentially a South African business, despite other initiatives – in part because these developments are in the early stage of their life cycles,” says Nelson. Indeed, the firm has diversified its geographical exposures in the past four years and is also looking to grow its foreign investor base.


In 2007, the firm began formulating its global emerging markets (GEMs) product offering – establishing a dollar-denominated institutional fund in Dublin as well as the only retail GEMs fund available to local investors in rand. However, in 2009, the firm launched an Africa offering that Nelson believes will outgrow the GEMs unit in the short term.


Coronation had been required to research sub- Saharan Africa in response to the growing number of JSE-listed companies expanding their businesses into the region, but before long the firm identified an opportunity to create a dedicated product set, and eventually launched a pan-Africa fund (the Ucits-compliant Coronation Africa Fund) and the Coronation Africa Frontiers fund, which does not invest in the more liquid market of South Africa. Performance has been excellent in both funds, with the Frontier Fund outperforming the All Africa Index (excluding JSE) by 30% since inception.


These product launches were influenced in part by the opportunity for South African pension funds to exceed their overseas investment allowance of 25% by a further 5% if that extra allocation is invested in Africa. “Consultants get hold of that and can prove that there is a diversification benefit for a pension fund’s profile by taking advantage of the rule,” says Nelson.


Although Coronation’s business remains South Africa-centric, the firm is now well placed to act as a gateway into Africa for international investors. “We are seeking to garner clients from outside Africa for the Africa funds as well as the GEMs product. We will take more flows on the Africa side earlier and faster, but we will end up shutting the Africa funds long before GEMs is taking decent flows,” says Nelson, who expects the Africa funds to close at a capacity of around $1bn but the potentially much larger GEMs product to only hit its stride in the next three to five years.


“The Africa story is contiguous to our existing business, coherent and natural. The GEMs story is a bit of a leap,” says Nelson. “Sitting in Cape Town managing GEMs money as opposed to New York or London, suggests no obvious reason why we would be a good GEMs manager if you don’t know us. We see Africa as an easier conversation to have at this point.”


Indeed, Nelson cites global credibility as one of the biggest challenges Coronation faces as a South African fund manager, but the firm is on to such a good thing on its home turf that there is no chance it would ever partner with a global brand in order to grow its business, as is often the way in emerging markets.


“We’re not interested in a partnership that involves us representing an international firm in the domestic market, which erodes the value proposition for the counterparty,” Nelson explains. “We look to have products that perform very well and engage at a consultant level. If there are hoops to jump through for business development we are open to that, but we are unlikely to buy a business or partner with a firm for anything other than straightforward distribution.”