Coro Top 20: Successful, scalable and street smart

FUND FOCUS

Neville Chester 

Coronation Top 20 Fund
Price:	R82.53
Inception:	01 Oct 2000
Domestic Equity Large cap
Fund Size:	R 9,701.5m
Price Performance
12 months:	12.37%
24 months:	37.79%
More Details...

Comment:
'Indexation is inherently flawed as quite often the reason why some shares are so large in an index is because they are overvalued, so by following an indexation approach, you are buying overvalued shares.': Coro Top 20 philosophy

The Coronation Top 20 fund is currently (24/11) the leading fund over all categories for the last 12 months with a performance of 55.63%. Unlike other funds in the Domestic Large Company sector it is not an index fund; it is actively managed. Liz Still spoke to fund managers Gavin Joubert and Hugo Nelson.

Equinox: Please could you start by telling us a little about your investment experience.

Gavin: I've been in the industry for nine years, the last seven of which have been at Coronation Fund Managers. I started off as an investment analyst, then starting managing the Coronation Industrial Fund in 2000, the Top 20 Fund at the end of 2002 and then at the end of 2003 started managing absolute return portfolios and took over as co-head of the division with Edwin Schultz in September 2004, responsible for co-managing all of the absolute return portfolio's.

Hugo: (pictured below) I've been in the industry since 1998 and at Coronation Fund Managers for the last six years. In that time I've done a little bit of everything from analyzing industrial counters to looking at energy and precious metals. I've also managed pension fund products and co-managed the Resource's Sector Fund for the last several years.

Equinox: Your fund has quite an interesting mandate, you are required to invest in between ten and twenty companies, of the largest companies, but it is not an index fund. However some of your current investments (Mittal Steel and Woolies) are outside the top 30 and others (Metropolitan Holdings) are outside the top 40 as measured by market cap. Please clarify your mandate.

Coro Top 20: The universe is the ALSI 40 plus the next 10 largest market cap shares. The benchmark is the ALSI 40.

Equinox:  We were very surprised to see that according to MSCI Barra report, the risk of your fund as measured by the Beta which measures the sensitivity of the portfolio's return and therefore reflects the exposure of the portfolio to market risk, is less than 1. What is the normal beta-range of the fund?

Coro Top 20: We don't measure the Beta of the fund: to us it is not a particularly relevant measure and as such our time is rather spent on carefully valuing the stocks and deciding which ones to include in the portfolio. But we do know that, in declining markets, the Top20 Fund typically holds up far better than the ALSI40, which would be indicative of a Beta of less than 1.

Equinox: How do you go about selecting your shares?

Coro Top 20: Valuation is the key as the fund is aggressive by mandate we need a big margin of safety whenever we buy a share. The sources of the miss-priced opportunity could vary. The market may not be appreciating the power of a particular brand or an opportunity for growth. It may be fixating on accounting earnings and missing cash generation, etc.

Equinox: The end of September assets under management of your fund were R909.1 million. Do you think it might be necessary to close the fund at some stage or do you think the mandate which allows you to invest in very liquid companies, is scalable?

Coro Top 20: We believe the fund to be incredibly scalable given the liquidity of our universe.

Equinox: There are interesting gaps and 'down grades' in your share selection. Please comment on some of the more obvious ones. Anglo American Plc, for example is the biggest company measured by market cap, and yet you have a 2.22% weighting in the company. Billiton, ranked number two as measured by market cap, does not even feature in your list. Also conspicuous by its absence is MTN Group, ranked seventh by market cap and absent from your portfolio. Please comment.

Coro Top 20: The fund does not hug the benchmark and seeks to hold in size the best high conviction ideas we have. We see little attraction in holding BHP Billiton or Anglo American in size given current levels of earnings and valuation multiples, which are both high. These are cyclical businesses and while we don't purport to be able to predict the future we feel that the easy money has been made. We have chosen to be heavily exposed to Sasol and Impala instead and this has worked very well for us. We want to own the 15 or 20 cheapest large cap shares in the market, irrespective of their weighting in the ALSI40 Index. In fact, our view is that indexation is inherently flawed as quite often the reason why some shares are so large in an index is because they are overvalued, so by following an indexation approach, you are buying overvalued shares.

Equinox: Your biggest investment is in Sasol, with a portfolio weighting of 11.71 %. Why do you like Sasol and what factors do you think will affect the price of the company over the next six months or so?

Coro Top 20: Near term pricing may very well be affected by the short term gyrations in the oil price but long term growth is a function of proprietary technology which Sasol is monetizing for the benefit of it's shareholders by rolling out their Gas to Liquids and Coal to liquids technology around the globe. The current PE on normal earnings is reasonable (being in the low teens) and the business possesses 35 years of reserve life given current production.

Equinox: Naspers is an interesting choice for your second-biggest investment, with a weighting of 9.79 % as at end of September. In terms of market cap, it weighs in at 18th position on the JSE. It has, however had a recent price dip, hitting a low of less than R94 before recovering to about R109. Why do you like the company and why did the price dip recently?

Coro Top 20:  We believe that Naspers own some of the best assets in this country, in particular the SA and African Pay-TV business (Multichoice (DSTV)/MNetSS) and the print business (Media24) and that the market is not pricing these assets appropriately. At today's share price (R 108), the market is valuing Naspers on a Price/Free Cash Flow multiple of around 11 (on our estimate of normalised free cash flow) which we believe is too cheap given the quality of these assets. There was no particular reason why the share price declined recently other than a general decline in the market. These short-term share price declines in undervalued shares are usually good buying opportunities.

Equinox: What is the reasoning behind your 8.97% exposure to Telkom SA, especially considering that you do not have MTN Group?

Coro Top 20: Both are valuation issues, in other words we believe Telkom is undervalued and MTN is overvalued. We have however sold some Telkom over recent months, as it started to approach our fair value. As a result the position is now around 6% of the fund.

Equinox: Do you think your portfolio will feel the absence of gold shares Goldfields and Anglogold in the months to come?

Coro Top 20: Not holding gold in the last 2 months has hurt not holding it for the last 2 years has benefited the fund tremendously. Current gold share valuations are stratospheric thus hold no attraction for us.

Equinox: And why do you like Metropolitan Holdings? We note that it has a very low PE, relative to its peer group. Do you think there may be a take-over in the offing?

Coro Top 20: There may or may not be a take-over looming but our key motivation for owning the share is the compelling NAV valuation underpin

Equinox: Which shares have contributed most to your fund's performance over the last six months or so?

Coro Top 20: Telkom, Sasol, Impala and Venfin have all contributed handsomely.

Equinox: Many fund managers are starting to say that the JSE is looking expensive, while others say the Chinese story, the relatively benign international investing temperature and good domestic prospects favour continued out performance of the JSE. What is your view?

Coro Top 20: The JSE does not look expensive in Price to Earnings multiple terms. The absolute level of earnings is high in certain sectors and that is more the concern. We don't believe the market to be over valued at the moment. But, it certainly is not as cheap as it was some 2 years ago.