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The Coro Top 20 Fund: Report back on a perennial favourite

22 Nov 11          

Neville Chester 

Coronation Top 20 Fund (A)
Inception:01 Oct 2000
South African Equity
Fund Size:R 22,193.2m
Price Performance
12 months:6.91%
24 months:32.52%
More Details...

The Coronation Top 20 Fund has been a perennial favourite with Equinox investors; the R8.7 billion fund features amongst the top ten performing unit trusts on the Equinox platform* over rolling three and five year periods. Over a rolling 12 month period the Coronation Top 20 Fund leads the performance rankings in its own sector, but equities in general have faced headwinds. Liz Still, Research Editor of PSG Online spoke to Neville Chester.

Please remind investors of the objective and mandate of the fund.

To significantly outperform the FTSE/JSE Top 40 Index over the medium to long term, by investing in a maximum of 20 shares out of the top 50 shares on the JSE.

So the fund is not permitted to invest offshore?


What is the fundís benchmark?

FTSE/JSE Top 40 Index

We understand that the fund typically hold no more than 20 large cap stocks. How do you choose these shares? What is your share selection philosophy? Where do you place the emphasis in your stock selection process? 

The fund leverages off the Coronation research team, investing in the top ideas in the large market capitalisation universe.  We are very much a bottom-up house, focusing on undervalued businesses that the market has mispriced. 

The mandate allows you to have up to 25% in cash. What is the maximum level of cash in the portfolio, say over the last three years?

The fund is generally used as an equity building block for investors, so we tend to run it fully invested, the maximum amount of cash held in the fund has probably been 3% to 4%.

How much time do you typically allow for your valuation driven stock picks to Ďcome to fruitioní?

As long as our conviction is still in place due to fundamental research we are comfortable holding shares for as long as it takes for the value to be recognised.  Our investment horizon is typically five years.

Please could you comment on your fundís recent performance.  

Amidst recent market turmoil the fund has done well and managed to outperform the JSE Top 40 Index over one year by 2.6% with a return of 6.14%.

Which investment choice has contributed to the fundís recent performance?

Aspen has been one of the stocks that has contributed to our alpha over the past year. Earlier this year, we introduced it into the portfolio as we felt that concerns over regulations and acquisitions were overdone. Aspen has a remarkable long-term track record.

Over a 10-year period, it has managed to grow its headline earnings per share by 28% compound annually. Its 10- year average cashflow conversion (i.e. how much of its earnings it converts into cash) is 97%.

It has grown from a South African based company to a geographically diversified entity, with a presence in sub-Saharan Africa, Latin America and Asia Pacific. 50% of revenues are now derived from offshore. Its latest acquisition, Sigma in Australia, was completed at an attractive valuation and puts them in a good position in this competitive market. Aspen expects to double Sigmaís operating profit in less than two years through a combination of increased revenues, improved manufacturing efficiencies and better procurement. We continue to believe that Aspenís valuation looks attractive in the context of its future growth profile.

We note that British American Tobacco, ranked 4th in your portfolio in March 2011, has dropped to 9th position by top ten ranking. Please comment.

The share has performed extremely well and we have reduced our overall holding.

Besides Woolies, ranked 19th, your fund has a dearth of retailers.  Please comment.

We think the listed retailers within our investment universe are generally fully valued.

The really interesting components of the portfolio are those shares that fall between position 11 and 20. South Africa's second-biggest hospital group by value, Netcare, for example, is ranked 44th by market cap, and yet is ranked 15th in your portfolio. Shares in the company are down nearly 13% so far this year. Why do you like Netcare?

Netcare has a significant hospital business in the UK which we believe the market is not valuing appropriately due to the amount of gearing in that business. Netcare was a Top 50 company at the time we invested in the share.

Another interesting one is the sideways trending forestry and paper company Mondi Plc. One of your major fund manager competitors has finally reduced exposure to Sappi. Why do you like Mondi?

Mondi is not Sappi.  It is primarily a packaging business with significant vertical integration into the pulp market.  It is well positioned on the cost curve and busy reaping the profits from having invested in a number of eastern European markets the last few years. 

*The Equinox platform lists just over 500 of the industryís 953 unit trust funds. While we acknowledge that this is half of the funds available, we do have the majority of the established funds as well as the leading boutique funds. According to statistics provided by the industry body, ASISA,  (Association for Savings and Investment South Africa) the market capitalisation of the domestically registered unit trust industry is R960 billion. The funds on our platform have a combined market cap of R770 billion; 74% of the industry.

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