Coronation Global Managed Fund

PERFORMANCE AND FUND POSITIONING

Both equity and fixed income markets had strong third quarters (Q3), with global bonds (as measured by the Bloomberg Barclays Global Aggregate Bond Index) actually outperforming the robust equity market, returning 6.9% compared to 6.6% for the MSCI All Country World Index. Key factors in the quarter included a 50 basis points (bps) rate cut by the US Federal Reserve in September, Chinese stimulus, and a broadening of equity performance beyond the largest stocks. While the Magnificent 7 group of large capitalisation technology shares accounted for the majority of S&P 500 Index returns in the first half of 2024, we saw a reversal of this trend in the Q3. Following the unprecedented levels of market narrowness that we wrote about in prior commentaries, returns broadened out significantly in Q3, with 65% of stocks outperforming the Index, and the rest of the S&P 500 Index’s gain of 8% trouncing the advance of the Magnificent 7, which returned only 2% in the quarter per Morgan Stanley analysis.  The Fund had a good quarter, increasing by 9.9%.

The Fund’s fixed income return of 5.6% was solid, particularly considering the shorter duration of 3.8 years versus 6.6 years on the index. US rates fell substantially over the course of Q3. After reaching a YTD peak of c. 4.7% in Q2, the US 10-year Treasury yield reached recent lows of c. 3.6% during September. Across the rest of the Developed Market bond markets, a similar picture materialised, although outright yield declines were the largest in the US. Global inflation-linked bond markets also had strong performances over Q3, with real yields on US TIPS making their way to c. 1.5% by quarter-end (c. 2% for longer-dated) - lower than seen over the rest of 2024, but still elevated in the context of the post-GFC period.

Most of the portfolio’s heavy lifting was driven by our overweight position in equities, combined with good stock selection. Performance was broad-based with notable contributions from many stocks which were previously discussed such as Auto1, Entain, Rolls Royce and our food delivery holdings Delivery Hero and Just Eat Takeaway.

We discussed our position in Smartsheet in our March 2024 commentary. After an indiscriminate sell-off pertaining to Smartsheet's conservative FY25 guidance, we took the opportunity to add to our position when the stock fell to $38 in March. Smartsheet's subsequent June and September results were strong while peers delivered lacklustre growth, validating our belief in its undervalued status relative to the software peer group. Historically we've observed that mid-cap software companies, with an enterprise-grade product, high revenue growth, and strong FCF conversion, often become attractive targets for private equity players. We benefited from this in previous holdings Coupa and New Relic, which were both taken private. While not a primary driver of our investment in Smartsheet, the possibility of being acquired was always considered potential upside optionality. On 24 September, Vista and Blackstone partnered to acquire Smartsheet at $56.40, a 41% premium to the three-month average closing price, and we subsequently exited our position.

A detractor during the quarter was Ryanair, Europe’s largest airline for short haul travel. In July, the share price came under pressure when the company released Q1 results which showed that airfares were down approximately 15%. However, this does not change our view on the long-term earnings power of the business and gave us an opportunity to add to our position. We believe industry dynamics are favourable: The industry has consolidated meaningfully over the years and continues to do so. Secondly, demand remains strong while industry supply is under pressure due to delays in the deliveries of new planes, as well as engine issues at some of Ryanair’s competitors, resulting in many aircraft being grounded – both of these issues will take years to resolve. Ryanair is well positioned with extremely low operating costs and aircraft orders that locked in favourable prices, giving them lower aircraft ownership costs than peers. In addition, Ryanair has a very strong balance sheet. The company has about 8% of its market cap in net cash and owns essentially all their aircraft - vastly different to many peers that have large lease liabilities. This not only puts the company in a very strong competitive position, but it also allows Ryanair to return a meaningful amount of cash to shareholders - the combination of dividends and buybacks puts Ryanair on a yield of approximately 10% this year.

At quarter-end, the portfolio was positioned as follows:

• 64% equity
• 7% in real assets (listed infrastructure and property)
• 5% in high yield fixed income
• 9% in inflation-linked assets
• 14% in investment-grade fixed income instruments

The remaining 1% was invested in various other assets.

OUTLOOK

The team continues to find many compelling bottom-up stock ideas, often in lesser-known names, some of which are mentioned above. The fixed income portion of the portfolio is relatively conservatively positioned, yet still yields over 4%. We thus remain very optimistic about the outlook for our portfolio of companies and the positioning of the portfolio.

Thank you for your support and interest in the Fund.

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