Know Your Money with Bronwyn Waner and Craig Finch
Know Your Money with Bronwyn Waner and Craig Finch
125. Valuation-Driven Decisions, How Coronation Shapes Portfolios
Venture into the world of professional investing with Amika Gordhan, investment specialist at Coronation Fund Managers, as she pulls back the curtain on what makes this 30-year-old South African investment powerhouse tick.
Amika reveals Coronation's distinctive philosophy centered on two core principles: an uncompromisingly long-term perspective and disciplined valuation-driven approach. Unlike managers fixated on quick wins, Coronation evaluates investments over five-year horizons or longer, allowing them to see beyond temporary market noise and focus on intrinsic business value. With remarkable frankness, Amika explains how the price paid for assets today determines future returns—the foundation of their investment strategy.
We explore how Coronation's team of 52 investment professionals conducts hands-on research, meeting with company management and competitors rather than relying on external analysts. This proprietary approach gives them unique insights into both traditional South African companies and multinational businesses listed on the JSE. Amika shares fascinating examples of their portfolio construction, including how they balance exposure between domestic operations and international powerhouses like Naspers, Anheuser-Busch, and Richemont.
The conversation demystifies complex concepts like bond investments, building block funds versus flagship funds, and the crucial importance of diversification in managing investment risk. You'll gain valuable perspective on how professional fund managers remove emotion from investing decisions while maintaining the discipline to sell when assets reach fair value—even when it might be tempting to hold longer.
Whether you're an experienced investor or just beginning your financial journey, this episode offers rare insights into the methodical, research-driven approach that has made Coronation one of South Africa's most respected fund managers. Subscribe now and gain the knowledge to evaluate your own investment choices with greater confidence!
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Hello everybody, welcome to Know your Money. I'm Bronwyn Wehner.
Speaker 2:And I'm Craig Finch, and we are from Growth Financial Planning. We hope you enjoy our podcast. Hello everybody, we've got a full table today. Amika Gordon, thank you so much for joining us. You're the investment specialist who looks after growth financial planning from Coronation. Now maybe people don't know who Coronation are, so we thought we'd have you in the studio give a background about Coronation. People may have seen your adverts at the airports because as you walk in to get your baggage, it's all Coronation, coronation. And yeah, you've formed a very important part of our practice. In our model portfolios, we have around 20% of our assets are in Coronation, be it the local funds and the offshore funds. So, amika, off to you.
Speaker 3:Thank you, please tell us a bit more about yourself first and then Cora will carry on through that.
Speaker 3:Thanks, craig. Thanks for the invitation to participate. Yeah, so I am an investment specialist at Coronation and what that means is I distribute Coronation investment portfolios to the retail market, and the retail market, for us, is made up of financial advisors like yourselves. I have a panel of financial advisors mostly that I chat to on an ongoing basis about our funds, with the intention, obviously, of financial advisors accessing those funds for their investment portfolios, for their clients. I've been at Coro for almost 12 years, so I am officially part of the furniture and, yeah, I'm very passionate about what I do. I love engaging with financial advisors and it's a wonderful feeling knowing that we are influencing retirement outcomes for end investors and also helping them achieve their financial goals over time.
Speaker 2:So 12 years sorry to interrupt is quite a long time to be a young lady like yourself, to be one company. That's quite a good reason to tell us why, coro, why did you decide to stay so long?
Speaker 3:So it's a wonderful company to work for. I think in the industry in which we operate, there's a strong brand. There's a lot of brand loyalty. We've got a fantastic database of very loyal clients like yourselves. So when I say clients, I mean financial advisors. It's a great business. We've had huge success. We are a large manager in the industry. I work with an incredible team. You know in as much as we get along and we, you know we're there for each other. There's lots of support. We have smart minds the smartest in the industry. There's lots of learning, lots of growing. That happens and, yeah, it's just been a very pleasant 12 years, almost 12 years and it's gone by incredibly fast. So I think it's just. There's a wonderful culture, which I'll talk a little bit more a little later, and you can't put a price tag on, you know, being completely satisfied with the environment in which you operate in and working with good people.
Speaker 2:And those people, those fund managers, that we meet every year and we keep in touch with and they keep in touch with us. They seem to be constant. We've been incredibly lucky that you haven't had major changes with your top as you say minds in the industry.
Speaker 3:Absolutely so. If you look at the broader investment team, it's quite a large team. In fact it's one of the largest teams in the country in terms of investment teams. There's about 52 investment professionals and the senior members of the investment team have been at Coronation for a very long time, so we actually have one of the most stable investment teams in the country, which I think, again, is really really valuable because it's familiar faces that you've come to know, you've come to trust and they're supported by, you know, a very deep sort of broader team that has been around for a long, long time.
Speaker 2:So 52 professionals and then flagship funds. Funds are about five. Is that right?
Speaker 3:Yeah, so we have a very broad range of funds, which includes building block funds like a property fund or bond fund or an industrials fund, together with what we term flagship funds. So these are our preferred portfolios that meet different investor needs, and there's five of them on the domestic range and we have six of them on the offshore range. And those flagship funds and part of the reason why they're called flagship is because they cater for the bulk of financial planning needs that any investor would need.
Speaker 1:Okay, and then, in terms of building blocks, you were explaining that property. Can you just explain a little bit more what a building block?
Speaker 3:is Sure. So when we refer to building blocks, we mean individual asset classes that are managed in a particular portfolio. So property as one asset class, we would run a standalone property fund Bonds as a separate asset class, that is, a separately managed portfolio with only bonds.
Speaker 1:And a fund manager specifically looking at properties or bonds.
Speaker 3:Yes, and the reason why we call them building blocks is the more popular funds in the industry are what we call multi-asset funds, so it's a combination of equity property bonds local- offshore, and that's what your flagships are right. Well, not all of them. So, the multi-asset funds you think of them as solutions that include all of these building blocks, and these building blocks that's why they're referred to as building blocks, because they are the components of a multi-asset portfolio.
Speaker 2:So give us an example of one of those.
Speaker 3:So that would be the Coronation Balance Plus Fund, which is our preferred pre-retirement savings vehicle for wealth creation and to grow your capital over long periods of time until you ultimately get to retirement.
Speaker 2:And then in that fund there are these building blocks.
Speaker 3:Yes, there's fixed income, which is made up of bonds and cash like instruments. There's a bit of property, there's the SA equity and then there's the offshore assets.
Speaker 1:And when did Coronation start? And what is their philosophy? Sure, I'll unpack that.
Speaker 3:So Coronation started in 1993. So we've been managing money now for just over three decades, making us one of the longer serving investment managers in the country. To understand the first is that we are unashamedly long-term managers, and what we mean by that is when we are building our portfolios and we're constructing them and we're deciding on which businesses we want to include or which assets we want to include, we focus on the long-term prospects of those businesses. So for us, long-term is five years or longer. So we don't concern ourselves too much with short-term news flow, short-term profits of a company. We want to assess a business. For example, if we were looking to buy a particular stock like a Mr Price or Standard Bank, we would forecast the earnings of that business for five years or a little bit longer and try and get an assessment of what that business is worth today based on what we think it can deliver over the long term.
Speaker 3:So this long-term focus is really important and it's really ingrained in everything that we do so, yes, it's a big part of our investment process and philosophy, but it's also how we assess our own performance. So when we look at the performance of our portfolios, we assess ourselves over five years or longer, because we think that's a more meaningful time period to measure how a fund manager has performed. If it's shorter term, you're not quite sure. Over one year or two years, you might just get lucky. You don't know if it's because of skill or luck that you've done well, maybe you just got a call right. But over a period of 5, 10, 15, 20 years, you can ascertain whether a fund manager has real skill.
Speaker 1:Does that mean whatever you invest in needs to have been around for more than five years, or would you invest in a brand new business that doesn't have a track record?
Speaker 3:No, it doesn't mean that. So it means that it doesn't need to have been around for five years or longer. It means that we need to be sort of certain around the profitability of a business over a period of five years or longer. So when we buy a business, the intention is to hold that business for a long period of time.
Speaker 2:So what I was trying to say is that your manager actually goes and buys Mr Price for our viewers, right? So the manager will build a portfolio around shares that they've actually physically held on the. Yeah, so that's part of your research process right.
Speaker 3:And a very important part of the way we manage money is that we do our own research. So we call it proprietary research, which means we don't rely on, you know, sell side analysts for making determinations about what we want to put into our portfolio. We kick the tires ourselves, we do the research ourselves. We visit the companies, we speak to CEOs, we talk to competitors, we speak look at the financials. But it's so much more than just looking at the financials. We do so much more than just looking at the finances.
Speaker 3:we do surveys, so there's a lot of work that goes into trying to determine what a business is worth, what price we're paying for it and what how much value it's going to add to the portfolio. But that assessment of value is over long periods of time. We're not in the game of trying to make a quick buck over a 12-month period, and I think that's what that long-term focus is not in the game of trying to make a quick buck over a 12-month period and I think that's what that long-term focus is about. At the end of the day, we believe that investing is a multi-decade journey, whether you're 20-something and contributing towards your retirement fund, even if you're in retirement, the reality is you could live for 20 to 30 years. So if you have such a long time horizon for your investing, you need to match that with a manager that is focused on delivering good returns over long periods of time, and that's what we're the most passionate about.
Speaker 2:And that's what we look at in our models as well to make sure you, as a fund manager, are going to be around for the future and look after our clients' money, because for us the most important thing is our clients' money's got to be safe and we've entrusted our money with you, so we also, from a model perspective, would not use any new manager that's just coming to the marketplace. You've got to have a track record before we place our clients' money with you.
Speaker 3:And I think that's really important, because how else do you assess a manager unless you look at that track record? And Coronation's been around for just over 30 years and we've got an excellent track record of delivering superior returns ahead of benchmarks over that 30-year period. And I think what's important for us is to just make sure that when end investors are looking at portfolio performance, that they too understand that you invested in a manager who's trying to deliver good outcomes over long periods of time, not focus too much on short-term performance.
Speaker 2:So short-term, you could have volatility within the.
Speaker 3:Absolutely In a short space of time. Anything can happen. You know unforeseen events, geopolitical events, pandemics, breaking, out. And you know these are left of center events that come out of nowhere and they could completely derail your performance in the short term. But the longer your time horizon is, the more time you spend in the market, the less meaningful these short-term events become. Do you have any questions?
Speaker 1:Warren.
Speaker 4:I did want to ask one. So you said you have many different portfolios and you talked about local stocks. So, mr Price, companies like that, and did you mention 40% was international.
Speaker 3:No, I didn't mention that. So we have the domestic flagship range, but within that we have these multi-asset portfolios that I talked about, which are regulated by legislation in terms of how much offshore exposure they can have, and that limit for these portfolios is 45%. So there are local funds which can have a certain exposure to offshore assets as well. The offshore funds are usually dollar denominated, usually fully invested in only offshore assets, but the local funds can invest in offshore assets as well.
Speaker 4:Okay, so that's where I got the 40% from.
Speaker 3:Yeah, okay, 45%. Yes, it's now 45% Okay.
Speaker 2:And do you have exposure to Africa as well in some of the funds?
Speaker 3:We do. We have an Africa and Frontiers part of the business where portfolio managers manage exposure in those markets as well.
Speaker 1:And I suppose the one question we asked was the philosophy around coronation and the one answer was the long term. Is there any other sort of yeah?
Speaker 3:so the other sort of key pillar when it comes to our investment philosophy is that we say we're valuation driven. Now what that means is we care about the price that we pay for an asset that we're including in our portfolio. So when it comes to investments, the price you pay for it determines the future return. And most people would have heard the adage that you're supposed to buy low and sell high, and that is effectively what we're trying to do. We're trying to buy assets and sell high, and that is effectively what we're trying to do. We're trying to buy assets that are cheap relative to what we believe they are worth, right, and then we are more likely to make good money out of that investment.
Speaker 3:So strong valuation discipline means that you will buy assets only when they become cheap relative to what they're worth. But it also means you've got to sell it when it reaches that assessment of what you believe it's worth, because there is that tendency to hold on for a little bit longer and some greed can set in there. We have to have a strong sell discipline to exit a position once it's reached what we believe is fair value for that business. So it's two sides. It's one side. It's about the discipline around buying assets at good prices, but also making sure that you exit at appropriate prices as well, so that you're not exposed.
Speaker 2:And some assets you might. When you say assets, some share you might keep for a while because of the dividends and the return on that right.
Speaker 3:Yeah, so that sell discipline is all about what the price of that share is relative to what we believe it's worth. So we have what's called a fair value for every single stock that makes its way into our portfolio, and that's what we believe it's worth, based on our proprietary research.
Speaker 1:So, to put numbers, you're going to buy it at 10, but you believe that 50 is the fair value. So when it reaches 50, even if you can see the next day it might be 60, you're going to sell it 50 because that was your fair value.
Speaker 3:These numbers are also not static. They change all the time as information changes. Fair values change all the time. It's never a case of new businesses that are maybe selling off. The share prices have fallen and you have the opportunity to make good money.
Speaker 2:But there's a good chance you could go back to an older share that you sold. We've done it a few times. You buy it again.
Speaker 3:If you look at certain stocks in the portfolio, a good example would be something like Woolworths in one of our flagship equity funds. We've bought and sold that share a few times over a 10-year period because share prices move up and down over time. Sometimes an event can trigger a share price to fall and we think that the market overreacts to that information and it's actually a good opportunity to buy back into that stock. So it's not a case of to buy back into that stock. So it's not a case of once we sell we never go back. The market always creates opportunities to get in and out of shares at different points in the cycle.
Speaker 2:Are there enough shares in our market to do this?
Speaker 3:We think so, so we haven't felt constrained by not being able to participate.
Speaker 2:Because the market, the JIC, has less counter than there were.
Speaker 3:They are. So you have this phenomenon of shrinking equity markets, but that's also not unique to South Africa, necessarily. But also remember you get new listings and unbundlings, so it's not all one-way traffic. As a large manager managing assets in South Africa, we haven't gotten to that point where we feel like there isn't enough choice in the South African equity market to be able to construct good, robust portfolio.
Speaker 2:Do you think you would ever go to private equity if it called for it? Do you think that would ever happen?
Speaker 3:I'm not sure you know the thing is.
Speaker 2:It's difficult to exit out of that environment.
Speaker 3:It's not liquid number one. You don't get, you know, daily pricing on private equity. It's a very different type of investment vehicle to invest in relative to a unit trust, which is, you know, listed daily traded instruments. But we haven't really encountered a scenario where we haven't been able to put together a portfolio because we don't have enough choice.
Speaker 1:Anything else Warren.
Speaker 4:No, I understood most of it though.
Speaker 1:Well done.
Speaker 4:Surprisingly, I did understand most of it.
Speaker 2:Can I just listed property at the moment? Is that, is it making sort of just listed property at the moment? Is that, is it making sort of a when there's lots of volatility around that, and are you still involved as a manager in a listed property scenario?
Speaker 3:So, like I said, we do run a listed property portfolio but in the context of our broader portfolios where we do the asset allocation and we decide which asset classes we want to own. We do have some property in our portfolios where we do the asset allocation and we decide which asset classes we want to own. We do have some property in our portfolios. But I think, broadly speaking, the listed property space is under pressure. We are operating in a low growth, low economic growth environment which means landlords don't have a lot of power to pass on inflation adjustments to their tenants. So there's been a bit of a power shift away from landlords towards tenants. You've also got this overhang after COVID. So massive flexibility with work from home which is changing a little bit, but it's still very much there where a lot of offices are not full and I think a lot of the pressure is in the office space because there's lots of vacancies and people are not occupying spaces. So there are segments where property is under real pressure.
Speaker 3:But then you know you've got good retail distribution which are thriving and back to pre-COVID level. So there's selective opportunities in the property space where we have some exposure. Again, it boils down to doing your research, understanding the landscape and picking who you think would be the winners. But broadly speaking, in the context of multi-asset portfolios, we have smaller weightings to property Because you've got to weigh up an allocation to property against other available asset classes and at the moment, on the growth side, if we're looking for capital growth, we prefer SA equity and so you know you have to offset. So we classify property as a growth asset together with equity, and so if we go higher in property you've got to go lower in equity and we think there's a better opportunity in SA equity than in SA property.
Speaker 2:So when you say SA equity, are you saying SA as they call it Inc. Or are you saying SA that have got offshore exposure?
Speaker 3:So we have both, but by and large our portfolios are more heavily weighted towards what we call multinational businesses.
Speaker 1:Can you give some name examples, just so the clients can understand.
Speaker 3:So these are businesses like Naspers, Anheuser-Busch, Richemont on the luxury side. So these are businesses that, by sheer chance, have a listing on the JSC, but they're not South African businesses. They get the bulk, if not all, of their revenue from outside of South Africa.
Speaker 2:They sell their goods around the world, around the world.
Speaker 3:So they're not South African businesses.
Speaker 4:How do they get a JSC listing if they're not a South African company?
Speaker 3:So you don't have to be a South African, you can have dual listings.
Speaker 4:So you can be listed in another exchange.
Speaker 3:You can be listed on different exchanges. Yeah, and then you get the pure domestic businesses, which is what you're referring to as SA Inc. So these are businesses that are 100%, completely reliant on the SA economy to sell and examples of those that are in your portfolio.
Speaker 1:So that would be like a Pepco.
Speaker 3:Another example Woolworths, although Woolworths has the Australian. So businesses that primarily or, you know, for the most case, rely on the SA economies A business like we Buy Cars, psg Consult Outsurance great example of a South African business. So in some instances there is a little bit of offshore exposure in some of the SA businesses, but the primary business remains in SA and our portfolios today are mixed but it differs according to which portfolio you're looking at, but the bulk, roughly call it- 60-40 or 2,000 is in favor of multinationals as opposed to SA Inc.
Speaker 1:You know, often we have clients that come and say they want to invest in a stock and you know they think Woolworths is going to do great and I think it's all good and well. You can definitely go and do that, but you guys have spent, like you explained now, all that time researching, checking the numbers, analysing it, that stock's in your investment anyway. So I think it's really important just for our listeners to understand that you are in those things when you're in SA Equity. Yes, in those things when you're in SA Equity. It's just you have got a team of 52 people behind you analyzing hours worth and picking the one that is right, not the one that the news is telling you is right today?
Speaker 3:Absolutely, and I think that's where that long-term focus versus following the news of the day becomes really important, because when we buy something, it's because we believe there's value and it's going to make money for our portfolios, not because there's hype around it or it's going to shoot.
Speaker 2:There's no emotion in the and we try to remove the emotion Because you can buy and sell and it doesn't matter that you really loved all this Absolutely and tomorrow you really don't like it anymore. It doesn't mean to say Absolutely.
Speaker 3:And that's what fund managers get paid to do. We get paid to remove the emotion from the investing process and focus on the fundamentals of the businesses, and we're never married to any stock. I think it becomes a very dangerous sort of environment where you get too attached to a particular stock and you don't want to exit.
Speaker 3:And I think that's why. And that's that sale, the sale discipline, yes, and I think that's why it's the sell discipline. And also, sometimes we get it wrong. Right, and asset managers are not robots, they're human. Every fund manager gets calls wrong for various reasons. Either it's an outright mistake or you are too early in terms of initiating your position and it sort of costs you in the short term, which often happens when you have a valuation-driven philosophy, because you could recognize value in a particular stock or in a particular sector, but the market doesn't come around to your way of thinking and it may take a couple of months, if not a little bit longer, and in that period where you own that particular stock or sector exposure, you can underperform in the short term.
Speaker 2:Did you have sign-off?
Speaker 3:We did have sign-off exposure. So here's an example of outright fraud, which made it very difficult for fund managers who had exposure.
Speaker 2:But you were very small exposure. It was small exposure within the portfolio.
Speaker 3:And I think we're very careful within our portfolios to never hang our hats on one stock or one idea. We've got diversity in our portfolios and the reason for that is because you never want to get wiped out by making a big call on a sector or a stock and then it doesn't work out for you.
Speaker 3:So you know, first rule of investing is to make sure you have good diversification. That is something that we implement quite strictly within our portfolios. Is to make sure that there are many ideas in the portfolio Because, like I said, you will get some wrong and you will get some right.
Speaker 4:Can I ask one question? I've always been very curious about government bonds. Do you have those in any of your portfolios?
Speaker 1:We do?
Speaker 4:What's the mechanism by which you acquire government bonds?
Speaker 3:So they're listed on an exchange. So, they're listed on an exchange and you buy them Right, and you effectively purchase them and you buy them yeah.
Speaker 2:Okay okay, right, and with the government bonds, sorry, sorry. No, no, it's good.
Speaker 4:I always hear the word bonds, and people like me don't really know what they are. I learned about them recently. Do you get paid the dividends on the bonds then?
Speaker 3:so your coupon, so how a bond works is yeah, I think, explain the bond how it works my understanding is like yeah, you buy x amounts of it and over a 10-year period.
Speaker 4:Let's say it's a 10-year bond and you get 10 a year or something.
Speaker 3:Yes, so so there's different terms for bonds. So you can buy a five-year bond, a three-year bond, a seven-year bond, et cetera, and it extends all the way up to 20 or 30 years, and that's the period via which you would be lending the government money. So the longer you lend any institution money for, typically the higher the interest rate would be, because if your time period is very long, if you lend your money for 30 years, it's locked up for 30 years. So as an investor, you want to be rewarded for putting your money away for a long period of time, and so you demand a higher yield or higher interest rate for that duration of term of the bond, so you have different terms.
Speaker 2:So, warren, so there's one. The government bonds is a kind of is one of the bonds. But companies can also raise a bond. So let's say Mercedes are increasing their plant down the Eastern Cape and they need to borrow 4 billion rand kind of thing. They'll go to the market, they'll go to Coronation, et cetera, and say we need to borrow money. So then they'll say, if you lend us money over an eight-year period, for example, we'll pay you prime plus 2%, and let's say it becomes 11%. So you buy into that bond.
Speaker 2:So now that the investor knows that Coronation have lent Mercedes-Benz money and it's a good company they're going to pay them back over an eight-year period or seven-year period. So that's where you go into the bond. Then suddenly the interest rates change. Let's say the interest rates move to 15% in South Africa and you go hold on, I've got my money running at 11%, I want 15%, so I'm going to sell that bond. So you sell the bond to me and I go no, no, no, it's not 100,000 anymore, warren, it's 70,000. So people do buy and sell the bonds as well. But it's a promise over a period of time to pay you back the money you lent them over a period of time to pay you back the money you lent them.
Speaker 4:So the interest plus the capital, the initial.
Speaker 3:You get your capital back at the end of the term. But in the interim you get those interest payments, usually twice a year, and I think with government bonds the interest that you get, the yield that you get, is also dependent on the risk you're taking by lending to the government. Right so we talk about yields on bonds. That assesses almost the creditworthiness of the government. Right so we talk about yields on bonds. That assesses almost the creditworthiness of the government.
Speaker 3:Like if you go to a bank and you ask for a loan, they're going to do a credit check on you and they're going to say okay, you're not so creditworthy, there's a high risk that you're not going to be able to pay. They're going to penalize you with a higher interest rate. It's a similar thing with bonds.
Speaker 2:So in the Greek crisis a few years ago, the Greeks were going through a hard time. Their financial system was busy collapsing. So your Greek bond the government bond in Greece was way up. But then you had the greater risk. You're getting great returns, but a great risk that they would default you're getting great returns but a great risk that they would default. So Coronation will make sure that the SA government bonds are absolutely stable, consistent. If they buy bonds in the open market other kind of bonds, they'll make sure that they are solid.
Speaker 4:They've done their research. Yeah, completely their own. I didn't realise that bonds were listed as such. I thought it was basically like the big banks would buy the bonds from the governments.
Speaker 3:So they do.
Speaker 4:They do as well, they do as well.
Speaker 3:But, institutions like Coronation also so.
Speaker 2:Coronation's got cash on their books and they've got to find a way of deploying that cash, and part of that would be a bond yeah, besides buying shares and Mr Price or whoever Interesting. Thank you Awesome, mr Price, or whoever.
Speaker 4:Interesting. Thank you.
Speaker 1:Awesome. Thank you so much, Amika. Thank you so much. It's a pleasure.
Speaker 2:Good insight, thank you.
Speaker 1:Thank you.
Speaker 2:Thank you for listening. If you have enjoyed this podcast and would like to subscribe, please visit our website wwwgrowthfpcoza. The information we have provided in this podcast is our personal opinion. For more detailed information, please discuss your financial situation with a financial planner.