Coronation Fund Managers is a classic dividend play for investors. It pays out almost all its earnings.
CEO Anton Pillay says the business does not need capital. It has a very different strategy from rivals Ninety One and Allan Gray. It does not distribute third-party products as it doesn’t own a linked product service provider or “platform”.
Coronation has 341 staff, well below its main competitors, which each have more than 1,000 staff. But people are still the largest component of Coronation’s fixed expenses, increasing by 8% to R260m, or 52% of the total.
Coronation has offices overseas, but primarily to retain key members of the investment staff who have chosen to move to the UK, notably former chief investment officer Louis Stassen and the head of the emerging-markets (EM) equity team, Gavin Joubert. They aren’t too shabby either, just a stone’s throw from Piccadilly Circus. The group also has offices in Dublin.
Pillay says that despite trends which have worked against it, such as the negligible growth in the South African savings market, and the growth of low-cost index funds, assets under management (AUM) increased by 5% to R631bn. It has R194bn, or 31%, of its AUM invested in international strategies, but this is primarily for South African clients. “Genuine” global clients account for R50bn of AUM.
The only product to have got significant traction in the institutional market internationally is its global EM fund. Its developed-market global equity funds have had “challenges”, the industry term for indifferent performance. The global EM product has been volatile, but it cannot be accused of being a closet index tracker. It has given a 4.8% annualised return since July 2008, which doesn’t sound exciting, but it is almost double the abysmal 2.6% return from the MSCI global EM index.
Over the six months from October 1 2023 to March 31 2024, net client ouflows for Coronation overall totalled 4.4% of the total book, with 1.7% accounted for by local retail (unit trusts), 1.9% by local institutional — segregated mandates and pooled products — and 0.8% by global institutional clients.
In the year to September 2023, there were total outflows of almost 10% of opening assets, indicating that the company is in the mature cash cow phase of its life cycle. For the past 18 months, the weighted average fixed fee on the AUM has been 0.53%. There is still some gravy from performance fees, which was a further four basis points — or R216m in revenue — a 39% increase from the six months to March 2023.
It is quite unusual internationally for a large player to be such a strong performer
Coronation’s average fee of 57 basis points compares favourably with Ninety One’s 45 basis point average fee. But it would have been even higher in the halcyon days of financial 2021, when performance fees added a further 16 basis points to Coronation’s revenue. Pillay points out that there is still the “matter” of the dispute with the South African Revenue Service (Sars) on the taxing of its international operations. He says the matter was heard at the Constitutional Court on February 13 and it is awaiting the outcome.
Coronation has loaded a R148m obligation payable onto the balance sheet in the event that it loses the case, though this doesn’t take account of potential penalties. If it wins the case, Pillay says shareholders will be rewarded either through a special dividend or share buybacks, or possibly both.
Asset management was considered an exciting industry by many investors as it is capital-light and annuity-based. The client base of a top-performing fund manager such as Coronation is stable. It is quite unusual internationally for a large player to be such a strong performer. According to the interim results for March 31, 2024, 95% of its funds with at least a 10-year track record, on an asset-weighted basis, have outperformed their benchmarks since inception.
Its flagship South African global balanced product has had annualised alpha (outperformance) of 1.9% since inception in September 2023 — 15.1% against 13.2% for its proprietary balanced benchmark.
The houseview equity strategy, which has been around since October 1993, has had annualised alpha, against the JSE, of 2.4% with a 15.6% return. The house started its standalone bond product a little later, in August 1997, and this has had alpha of 1% — respectable enough in the fixed income industry, with an annualised 11.4% return.
Coronation has attracted talent as it is an independent manager, rather than a division of a bank or a life office. It is known for a generous remuneration structure, with relatively low fixed pay and a high upside. It prides itself on a no-frills approach with fund managers and executives usually flying economy. It is now 29% employee-owned, so they are incentivised to keep costs low. Its total operating expenses increased by 5% to R1.07bn, excluding the Sars tax liability.
Coronation is a simple business with one main aim — to increase the long-term wealth of its clients. There is certainly key man risk if there was a walkout. But the investment team has been stable since a mini walkout in 2005. And the senior staff are well rewarded, so they have little incentive to move on.
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