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Investing: A multi-decade endeavour

Jun 06 2018 15:11
Coronation Asset Management

At Coronation, the defining feature of our investment philosophy is our commitment to long-term investing. We care about the next decade and beyond.

Whatever the sentiment of the day, all our actions are aimed at ensuring that we analyse, debate and ultimately value businesses based on their long-term fundamentals. We do not chase share prices or constantly react to the most immediate news flow. By working hard to retain this long-term focus, we are able to examine how a business performs through multi-year cycles. This is what we believe gives us a distinct advantage over our average competitor, and what has allowed us to earn the trust of our clients over the past quarter of a century.

However, investing with a long-term horizon is a challenging task. It requires portfolio actions that may cause short-term pain, such as buying dramatically undervalued assets that are falling, while selling overvalued assets that are rising.

This is best illustrated with actual examples of how the long-term investor’s behaviour differs from the market consensus. In 2001, when most investors wanted to get out of domestic assets at any cost after the rand had already weakened dramatically, we were building positions in domestic equities while selling inflated rand-hedge shares. In 2006/7, amid the commodity and construction shares euphoria (Anglo American traded at more than R500 a share at the time), we were selling overvalued commodity and construction shares. More recently, in 2015, our clients became meaningful shareholders in Anglo American when it traded at less than R60 a share because sentiment towards commodity shares was very negative. Sentiment subsequently improved, leading to the Anglo share price recovering to R270 at the time of writing. In the period between 2010 and 2012 most investors were rushing into rand-denominated and domestic assets, we were adding to the cheap global stocks that happen to be listed on the JSE, while reducing our holdings in inflated domestic shares.

More recently, investors were again disillusioned with domestic equities after more than two years of zero returns, while we were building positions in selected shares. Then, despite 2017 being a very tough year for South Africa, equities rallied strongly throughout the year, when investors least expected it.

As is clear from these examples, the pendulum swings from greed to fear all the time. Through a disciplined application of a consistent investment philosophy, in our case responding to long-term valuation signals, we have been able to deliver compelling results when the cycle eventually turned. Importantly, we had no insights into when these cycles would turn. What has worked in our favour, time and time again, has quite simply been an unwavering commitment to the long term and testing ourselves to ensure that we have the necessary conviction in our underlying views.

Let the power of compounding work for you

The nature of investing is such that if you are willing to wait out those periods during which markets/assets fall or flatline, you have an opportunity to achieve significant wealth creation in the long run.

The following graph shows the compelling results that are available to those investors who are prepared to put money in the equity market for very long periods of time (regardless of the sentiment of the day).

Couple that with an active return (returns over and above the market) that you can achieve by investing with a fund manager who has a demonstrable long-term track record, and the power of compounding can do extraordinary things for you.

In a world where the news cycle has become more amplified and ever-shorter, we remain focused on achieving our clients’ objectives: to generate real wealth-generating returns over multiple decades in the pursuit of a dignified and comfortable retirement.

Coronation will be participating in the Allan Gray Investment Summit in Johannesburg and Cape Town in July 2018. www.investmentsummit.co.za

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