Coronation Global Emerging Markets Fund

The Fund returned 0.3% for the three-month period to 30 June 2023. This was behind the 0.9% return of the benchmark MSCI Emerging Markets (Net) Total Return Index. Over the past one-year period the Fund has returned 13.3%, which is 11.5% ahead of the benchmark’s return of 1.7%. The positive shorter-term returns have helped to reduce the underperformance caused by a difficult 15-month period (from end March 2021 to end June 2022), which resulted in the Fund underperforming materially in the shorter term, to the extent that longer-term relative returns have also been negatively affected. Since inception, the Fund has outperformed the benchmark by 0.4% p.a.

The biggest contributor to relative return/alpha in the quarter was Brazilian digital bank Nubank. The stock returned 65% in the quarter, contributing 0.8% alpha. The driver of this share price return was a strong increase in profitability – Q1 2023 profits amounted to $142m compared to a $30m loss in the corresponding period last year. All operating metrics were very strong – with customer growth up 33% year on year (y/y) and 57% of customers using them as their primary banking relationship. Revenue per customer was up 31% y/y, with the cost to service them being flat. Volumes going through their credit cards were also up by almost 50%. All this translated into 90% revenue growth and hence the profit growth referred to above.

Nubank has now reached 46% of the adult population in Brazil within a period of nine years, but still has growth potential in Mexico and Colombia where they only have a share of 2% - 3% of the adult population. Even within Brazil, there is plenty of room to grow, given that while penetration of the adult population by Nubank is high, the number of Nubank products per client is still low. While Nubank is going from strength to strength, we have reduced the position significantly due to valuation: Nubank was over a 2% position at the start of the year and is now down to an 80bps position.

Other material positive contributors were Delivery Hero (24% return, 0.5% alpha contribution) and another Brazilian financial services group XP Inc (90% return, 0.5% alpha). The zero weight in Alibaba added 0.4% alpha and Indian food delivery platform Zomato returned 50% in the quarter and contributed 0.4% alpha. We also realised 29bps from the sale of one of the smaller Russian holdings (TCS), with the proceeds paid out in USD during the quarter. This is now the second Russian holding that we have managed to sell, with X5 Retail being the first earlier in the year, realising 34bps. We are currently working towards potentially realising value from the Fund’s 2 largest Russian positions, Magnit and Yandex. While still not certain, it is possible that favourable outcomes with regards to these 2 stocks could result in as much as 3% of return coming back.

The biggest detractor in the Fund was JD.com which, with a -17% return, had a -0.8% impact on alpha. This was followed by Naspers/Prosus: its -6% return cost -0.5% alpha (although this was fully cancelled out by not owning Tencent, which performed poorly in the quarter). At the time of writing, Naspers and Prosus had recently announced a scheme to end the cross-shareholding arrangement between the two companies that resulted from the various schemes they have undertaken to eliminate the massive discount at which they trade to Tencent and other underlying assets that make up their NAV. If approved by shareholders of the two firms, the end result will be Naspers owning 43% of Prosus, and Prosus no longer having any stake in Naspers. A key longer-term driver of the Prosus share price will be the continued sale of Tencent shares by the company (which owns 27% of Tencent) with the proceeds used to buy back its own (Prosus) shares. This (unlimited) share buyback has been going for just over a year, during which time Prosus has bought back a significant 15% of its shares in issue.

Uruguay-based payment processor dLocal cost the Fund -0.4% in the quarter. After coming through relatively unscathed from a short-seller report by Muddy Waters late last year, dLocal once again came under the spotlight in Argentina, one of its largest markets. The country’s highly complex foreign exchange regime results in transactions taking place in the parallel market and navigating this with the Central Bank of Argentina has become problematic for all players. News emerged that the company was being investigated in Argentina for violating these regulations. We took the view that the potential downside in Argentina and other problematic jurisdictions where they operate (like Nigeria) had started to change the risk/return profile of the investment and we sold out entirely.

Other noteworthy detractors were SEA Ltd, Li Ning and Xiabuxiabu Catering. Each of these holdings cost around 0.4% alpha in the Fund. It is fair to say that the Chinese reopening has not lived up to expectations, with most of the bounce in share prices subsequent to the reopening having fallen away. MSCI China rallied 60% between late October and mid-January but has given up more than half the gains since then, leaving China as one of the big underperformers within the emerging markets universe. Investors remain concerned about low growth and the impact of the property market slowdown on the broader economy as well as banking system. While we share some of these concerns, the valuation levels of several Chinese stocks like JD.com are extremely attractive in our view. Three members of our team spent time in China during June, meeting with existing holdings and potential new ideas identified during the quarter, and they came back very positively inclined.

FUND POSITIONING

There were a number of new buys in the quarter: three in Brazil, two in China and one each in Singapore and South Korea. The largest new buy was Petro Rio (PRIO, 1.4% of Fund), the largest (by output) of the independent junior oil Exploration and Production (E&P) players in Brazil. Brazilian clothing retailer Lojas Renner (Renner) is a new 0.9% position. We owned Renner and other Brazilian clothing retailers several years ago but largely sold out of them in 2015/2016. The industry structure has materially changed since then, with greater consolidation among the physical retailers and far greater competition from ecommerce operators, including Fund holding MercadoLibre and super low cost online-only retailers like Shein. Despite having appreciated by around a third from the levels at which we started buying Renner this quarter (around R$15), the share still offers attractive upside, trading at 16x forward earnings, with a 3% dividend yield.

Another noteworthy buy was a 1.1% position in Southeast Asian internet group Grab Holdings. Grab is a super app offering ride hailing, food delivery, and digital financial services across much of South-east Asia, with its largest markets being Singapore, Indonesia, Thailand, Malaysia, Vietnam, and the Philippines. Grab generally has the #1 market share in mobility (in the 70% to 90% range) in its markets. It is also profitable, with low double-digit EBITDA margins as a percentage of Gross Merchandise Value. The company has a rock-solid balance sheet, with $5bn in cash, which equates to around 40% of its market capitalisation.

Other new buys in the quarter were Chinese food delivery and super app Meituan Dianping (1.3%), Brazilian payment processor Stone Co (0.8%), Korean motor manufacturer Kia Motors (0.6%) and Chinese white goods appliance manufacturer Midea (0.6%). We have owned 3 of these 4 stocks previously (all but Kia) and it was largely share price declines in these 3 (and resultant more attractive valuations) that resulted in us building positions in them again. There were also several sales in the quarter (aside from dLocal mentioned earlier). These included Anta Sports in China (0.8%), AB InBev (0.7%), MediaTek in Taiwan (0.7%), Bank Central Asia in Indonesia (0.5%), PB Fintech in India (0.5%) and Brazilian education group YDUQS (0.3%). For the last three of these, the sales were due to strong share price performance that resulted in limited upside to our assessment of fair value.

OUTLOOK

We remain very excited about the prospects for the Fund – most noticeably the weighted average upside for the Fund is still in the region of 75%, with a 22% IRR. This is well above the historical average for the Fund.

Disclaimer
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