Coronation’s R105bn ‘Reg 28 fund’ now at the max offshore allocation

Coronation’s flagship Balanced Plus fund has aggressively shifted the weighting of its assets under management to the offshore limit – 45% – over the last 12-18 months.

The fund is the second-largest unit trust by size in the country, with R105 billion in funds under management, and is typically one of the cornerstones of any Regulation 28-compliant retirement investment.

Read: It’s official: Retirement funds can move 45% offshore [Jul 2022]

The limits under the Pension Funds Act allow investors to hold up to 75% of their retirement savings in shares, a maximum of 45% in property, and 45% in international assets (The Standard on Living Annuities published by the Association for Savings and Investment South Africa also suggests these limits).

In investment literature, Coronation says it will “implement this [offshore limit] when valuations support it”.

The offshore limit on retirement investments was increased in last year’s Budget Speech.

Previously, the limit was a 30% allocation to foreign assets with a further 10% allocation to the rest of Africa.

This ring-fenced allocation for Africa – which was barely ever used to its limit (due to forex risk as well as liquidity and concentration concerns) – was removed, and an overall foreign limit of 45% was introduced from March 2022.

Read: Treasury listens to industry on Regulation 28 [Nov 2021]

The Coronation Balanced Fund saw the percentage of offshore assets more than double in the last 18 months, shifting from a total of 23.1% in December 2021 to 48.2% in May 2023. The change has been noticeable from the end of February 2022, and the portion of foreign assets has steadily and rapidly increased to current levels.

An analysis of fund fact sheets over the last 18 months shows that when the change was announced, foreign equities were 22.6% of the fund. At the end of May this year, that number is now 40%.

Other foreign assets (bonds, cash, property) were 0.7% at the time of the change, while 15 months later, these comprise 8.2% of the fund (primarily foreign bonds, at 6.7%). Overall, the shift has been from 2.33% foreign assets to 48.2%.

Source: Coronation Fund Managers

* The fund held a negative portion of foreign cash assets at the end of September, October, November, December and January, likely as a result of hedging instruments.

At various points, the fund also accumulated a negligible amount of foreign preference shares and other securities as well as a small amount of foreign commodities. At the end of May, it no longer held either of these types of assets.

Of course, the depreciation of the rand over the period (whether 18 months or the 15 months from when the change was announced) is part of the story.

The currency worsened from the R15.38 to the US dollar level at the end of February to R19.69 at the end of May, a decline of 28%. This depreciation, then, accounts for about a quarter of the increase of the weighting of foreign assets within the portfolio.

Read/listen: Coronation offering value, but expect volatility

Any investment decision between a local company and a foreign listed one will always centre on relative valuations. In September last year, Coronation highlighted that “the fund started the year with very low exposure to global equities given valuation concerns”.

‘Healthy exposure’

“We have added steadily to the Fund’s holdings in response to market weakness, with easing Regulation 28 restrictions enabling a larger allocation than previously. The fund now has a healthy exposure to global equity where we believe the asset class presents significant stock picking opportunities.”

In September, it added some colour to a specific sector that offers limited diversification locally – energy.

“We have used the increased offshore capacity created by recent changes to Regulation 28 to diversify our energy holdings across a broader basket that includes cheaply priced global names. This will reduce company-specific risk while retaining exposure to a market we believe will remain tight.”

Regarding its bond positioning (the 6.7% of the fund in foreign bonds is at the highest level in years), it says: “Bond yields are closer to normal levels, but still offer inadequate compensation for heavily indebted sovereign balance sheets. The Fund has no exposure to developed market sovereign bonds.

This is consistent with its positioning for many years. Unlike the narrow credit spreads in South Africa, global credit bonds offer more attractive pricing. We have built up a basket of credit names trading on high single-digit hard currency yields.

As of end-May, it had 14% in domestic bonds, down from 19.4% one-and-a-half years prior.

It adds: “Whilst high real yields support a position in SA government bonds, the fund is underweight given the better risk-adjusted returns offered by growth assets (both global and local equities).”

In March, portfolio managers Karl Leinberger and Sarah-Jane Alexander wrote: “While headwinds exist in both global and domestic markets, we believe growth assets (enhanced by good stock picking) should deliver good returns over the medium term. A diversified portfolio of global equity (and some global credit) should provide attractive risk-return benefits, supplementing a basket of cheaply priced local equities.”

Local flavour

Beyond strictly foreign shares, a selection of global stocks that happen to be listed in South Africa are the majority of the Balanced Plus fund’s top 10 holdings.

These six shares – Prosus, Anglo American, Glencore, AB InBev, Richemont and Naspers – account for a further 11.5% of assets in the fund (part of the 31.7% of domestic equities that make up the fund). Even if one excludes a chunk of Anglo American, the number is still around 10%.

June fund data will be available imminently and it will be clearer whether foreign assets have moderated from the 48% level. It has been above the 45% limit due to currency weakness. At these levels, it is unable to make any further/new offshore investments until it gets the weighting to below the 45% limit (it has a number of quarters to do this and would practically have to sell foreign assets if this situation persists).

Coronation’s move from a 23% weighting of foreign assets in the Balanced Plus fund to 48% at the end of May stands in some contrast to Allan Gray, where the shift has been more moderate. Allan Gray’s Balanced Fund, the largest unit trust in the country with R174 billion under management, moved from a 28.3% weighting to offshore assets in March last year (including 2.7% in African investments) to 40% at the end of May (including 4.5% in Africa).

Other balanced funds are also at the limit, while yet more are far from it. These approaches have produced (and will continue to produce) divergent investment outcomes. A story for another day …

Read: Coronation’s profits slump 97% as Sars tax case bites