In the news: Coronation Global Equity Select

After three years of underperformance, the Coronation Global Equity Select fund turned a corner in 2024. It returned 21.1% in USD, easily beating its MSCI Acwi benchmark, which gained 17.5%.

This performance was all the more notable because the fund is heavily underweight the US – a position that actually increased over the 12 months.

‘Prior to the US election, I would have said the fund was not particularly well positioned for a Republican sweep,’ portfolio manager Neil Padoa (pictured above) told Citywire South Africa. ‘Yet the fund’s performance in the last quarter was strong, driven by a broad range of opportunities coming through.’

Just 45% of the fund is invested in the US, compared with the benchmark weight of 67%.

For the prior three years, this was a drag on performance, but Padoa remained committed to the fund’s valuation discipline.

‘If you look at the market from a top-down perspective, it’s hard to make a rational argument that the market as a whole is particularly cheap,’ he said. ‘If you look at metrics like [price-to-earnings] ratios, or the rate of return relative to the rate of earnings growth, you can see that roughly half of recent market returns have been driven by rerating.’

This is most clearly prevalent in mega-cap technology stocks and, in Padoa’s view, ‘is not something that can continue in perpetuity’. The fund therefore owns very few recognisable large-cap names.

CONVICTION

‘We do own Amazon and Meta, but feel there are a lot of very attractively priced businesses outside of the mega caps,’ Padoa said. ‘In some cases, it’s also much easier to get conviction in those names.’

He cited Nvidia as an example of a stock he and his team find hard to value.

‘It’s a phenomenal business at the forefront of possibly the biggest technological change in our lifetime, but it is extremely hard to underwrite its earnings stream in five or 10 years given the range of potential outcomes,’ Padoa said.

‘If you look at the economics, Nvidia has had exceptional revenue growth, margins have doubled, and it’s capitalised on essentially a monopoly position in GPUs [graphics processing units].’

He also said it is difficult to assume Nvidia’s record profitability will be sustained given how its largest clients – Microsoft, Amazon, Alphabet and Meta – are putting significant resources into developing their own chips.

‘Those companies account for 40% to 50% of Nvidia’s revenue, are the biggest companies in the world and have a vested interest in bringing costs down. It’s a reasonable assumption this could pressure Nvidia’s margins. We’re comparing that to other stocks we own that are also geared to themes like data centre demand and AI computing, where future earnings are clearer and valuation is more attractive.’

UNDERPERFORMANCE

Padoa added that this underweight position in the US and mega-cap technology was the most obvious reason for the fund’s underperformance between 2020 and 2023. There were two additional reasons as well.

‘A few years ago, we thought Chinese stocks were very cheap, but the macro environment proved worse than we expected and regulatory intervention was also more impactful,’ he said.

The fund’s exposure to China had therefore materially impacted performance. That position has since been reduced.

The second area was stock-specific.

‘A number of stocks we owned meaningful positions in moved against us in 2023 and even the first quarter of 2024. These were names like Delivery Hero and Auto1 that we had bought early and where the underlying fundamentals were improving yet stock prices had declined.

‘We looked wrong in the short term, but last year almost all of those positions started to come through quite strongly.’

Digital automotive platform Auto1 is now the fund’s largest holding, followed by online sports betting and gambling operator Flutter Entertainment. This illustrates how different the fund looks from the benchmark.

STOCK SELECTION

Stock selection is notably expressed through the fund’s 35% weighting to Europe.

‘We are overweight Europe, but the stocks we own look completely different to the European index,’ Padoa said. ‘We own no pharma businesses, luxury companies or mining companies.’

There are 42 stocks in the portfolio, which is at the lower end of the 40 to 60 counters the fund typically holds.

‘Rather than being structured like a pyramid, with a few large bets that dominate the portfolio and a long tail of small positions, our portfolio has more of a fat middle. The 20th biggest position isn’t that much smaller than 10th.’

Although Coronation looks to ensure the fund is well diversified by sector and geography, Padoa said there are sometimes themes that are strongly reflected. At the moment, the largest of those he calls ‘long-duration growth’.

‘These are companies with strong competitive positions and attractive unit economics, that are well below normal profitability levels and at an earlier stage of their growth cycle,’ Padoa said. ‘Auto1 would fit into that, as would Wise.

‘Wise is basically the lowest-cost money transfer platform in the world. It can do it cheaper than anyone else because it has put in years of work to build the infrastructure. It has a tiny market share in a massive market and is well placed to continue growing for a very long time.’

^{This article was originally published on Citywire: https://citywire.com/za/news/coronation-global-equity-select-s-2024-rebound/a2458036}

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