Notes from my inbox

THE GLOBAL ENERGY TRANSITION

According to the International Energy Agency, fossil fuels made up close to 80% of the world’s energy supply in 2020, while wind and solar accounted for less than 3%. To achieve the Paris Agreement’s target of limiting global warming to less than 2°C, it is estimated that an investment of US$190 trillion is required over the next three decades, equal to roughly 40% of global private wealth, or 1.7 years of global GDP. Even if adequate capital to achieve net zero targets by 2050 is not deployed, the energy landscape will change meaningfully from here, as Danie Pretorius explains.

As with so many topics today, this transition has become politicised. Whether it is vested interests focused on protecting their turf or activists simplifying a nuanced and complex economic reality into a good versus evil moral binary, this has become a controversial subject.

As your fund manager, we have two key responsibilities when engaging with the energy transition. One is to interpret the investment implications of a major long-term shift in energy supply and distribution and to identify the most attractive resultant risk-adjusted opportunities in which to deploy the long-term capital that you have entrusted to us. As Danie reports, we currently see an investment in a major provider of developed market electricity transmission and distribution infrastructure as one of these opportunities. It also means forming views on the second-order effects of the transition. As Nicholas Hops writes, the global adoption rate of battery electric vehicles (BEVs) is accelerating faster than expected, especially due to the emergence of China as a BEV powerhouse, presenting major challenges for South Africa’s platinum group miners. In her economic stock take of 2023, Marie Antelme touches on the loadshedding-induced surge in alternative energy investments by local businesses and households this year, which has the twin effect of making our economy more resilient and accelerating the domestic energy transition.

The other main responsibility we have is to act as responsible stewards of your capital. A key aspect of this is thinking long and hard about achieving the correct balance between environmental sustainability and the impact of the energy transition on our fragile society when making investment decisions and interacting with investee companies. We remain committed to implementing and refining our long-standing integration / engagement / collaboration approach to dealing with ESG risks in managing our portfolios. You can read more about our approach in making these difficult decisions in our annual Stewardship Report.

CASH, BONDS AND INCOME FUNDS

The past decade of domestic economic malaise saw a material increase in demand for managed income funds. While overall unit trust assets grew by a factor of 2.7 times over this period, assets invested in ASISA’s Multi-Asset Income category saw an increase of nearly four times to R340 billion. The classic income fund objective of pursuing an annual return of 1% to 2% ahead of cash over the medium term, while protecting capital invested over the shorter term, proved very attractive in a challenging environment, especially to conservative investors. The Coronation Strategic Income Fund, one of the pioneers in this market segment, has achieved this return objective over most historical periods, and we remain confident that it will continue to be able to meet its return objective at an acceptable level of risk. You can read more about the Fund here.

However, we remain concerned about the mismatch between income investor expectations and reality. In our recent investor survey, investors investing for immediate income, on average, expected a return of 12% p.a., compared to the Fund’s current net yield of 9.5% and the probability that policy interest rates will start to decline during 2024. Over the longer term, these expectations are more consistent with the expected returns available through deploying a larger risk budget that includes equity exposure and more international diversification, available via funds such as the Coronation Balanced Defensive or Coronation Capital Plus funds.

We have also recently obtained regulatory approval for the launch of two new income funds: the Coronation Active Income Plus Fund and the Coronation SA Income Fund. Coronation Active Income Plus will deploy a larger risk budget than Coronation Strategic Income, targeting an annual return of 2% to 3% ahead of cash over time, but at the expense of deploying a larger risk budget. One way to understand the difference in positioning between the two funds is to think of Coronation Strategic Income as an alternative to a two-year bank fixed deposit and of Coronation Active Income Plus as a three-year-plus bank fixed deposit. Coronation SA Income is a specialist fund aimed at investors looking for a more conservative domestic-only fixed income building block. More detail will be made available shortly via our website.

Finally, we include a primer to help you understand the differences between and risks inherent in the money and bond markets, prepared in collaboration with consumer education website Smart About Money; while Nishan Maharaj’s Bond Outlook provides a deep dive into the local and global bond markets, and the choices that lie ahead for the SA economy.

As always, please do not hesitate to contact us via clientservice@coronation.com if you are not completely satisfied with any aspect of the service we deliver to you.

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