CORONATION BOND FUND
Fund Information as at 28 February 2017
WHAT IS THE FUND’S OBJECTIVE?
WHO SHOULD CONSIDER INVESTING IN THE FUND?
The fund seeks to maximise returns from a diverse range of primarily South
African bonds. It aims to outperform the All Bond Index.
WHAT DOES THE FUND INVEST IN?
The Bond Fund can invest in fixed income instruments, issued by
governments, parastatals and private companies, as well as cash. Exposure
to foreign assets is limited to 10%. The fund is mandated to make use of
derivative instruments for efficient portfolio management purposes.
IMPORTANT PORTFOLIO CHARACTERISTICS AND RISKS
Investors who seek the benefits of an actively managed bond fund. The fund
is particularly suited to those who require exposure to bonds as part of a
diversified portfolio.
WHAT COSTS CAN I EXPECT TO PAY?
An annual fee of 0.75% (excl. VAT) is payable.
Other costs that are incurred in the fund include trading, custody and audit
charges. All performance information is disclosed after deducting all fees
and other portfolio costs.
We do not charge fees to access or withdraw from the fund.
More detail is available on www.coronation.com
WHO ARE THE FUND MANAGERS?
The fund is strategically managed to secure an attractive return by investing
primarily in a range of government and corporate bonds. It will hold various
tactical positions to benefit from the best opportunities as they emerge.
Investments are meticulously researched and subjected to a strict risk
management process. Only quality instruments of reputable institutions will
be considered. All factors that could affect these investments are carefully
monitored, including inflation as well as currency and interest rates.
The risk of losing money over periods of more than a year is low, while it is
slightly higher for periods of less than a year. The primary risk exposures are
to changes in interest rates and corporate credit events.
HOW LONG SHOULD INVESTORS REMAIN INVESTED?
The recommended term is 12 months and longer.
Client Service: 0800 22 11 77
Email: [email protected]
MARK LE ROUX
NISHAN MAHARAJ
BCom
BSc (Hons)
GENERAL FUND INFORMATION
Launch Date
1 August 1997
Fund Class
R
Benchmark
BEASSA ALBI Index
Fund Category
South African – Interest Bearing –
Variable Term
Regulation 28
Does not comply
Income Distribution
March and September
Investment minimum
R5 000 or R500/m debit order
Bloomberg Code
CORSPBD
ISIN Code
ZAE000019790
JSE Code
CNSB
Website: www.coronation.com
Minimum Disclosure Document
Page 1/4
CORONATION BOND FUND
CLASS R as at 28 February 2017
Fund category
Launch date
South African - Interest Bearing - Variable Term
01 August 1997
Fund size
R 1.36 billion
NAV
1482.98 cents
Benchmark
Portfolio manager/s
BEASSA ALBI Index
Total Expense Ratio
Transaction Costs
0.88%
0.00%
Mark le Roux and Nishan Maharaj
PERFORMANCE AND RISK STATISTICS
PORTFOLIO DETAIL
GROWTH OF A R100,000 INVESTMENT
MATURITY PROFILE
Portfolio R862 428
Benchmark R826 046
As at 28 Feb 2017
900K
63.97%
800K
700K
600K
0 to 3 Months
3 to 6 Months
6 to 9 Months
9 to 12 Months
1 to 3 Years
3 to 7 Years
7 to 12 Years
Over 12 Years
500K
400K
300K
3.02%
0.22%
100K
0.10%
0.21%
0.30%
8.49%
23.68%
0K
Jul-97
Jan-98
Jul-98
Jan-99
Jul-99
Jan-00
Jul-00
Jan-01
Jul-01
Jan-02
Jul-02
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Jan-17
200K
Portfolio
Benchmark
PERFORMANCE FOR VARIOUS PERIODS
MATURITY PROFILE DETAIL
Fund
Since Launch (unannualised)
Since Launch (annualised)
Latest 15 years (annualised)
Latest 10 years (annualised)
Latest 5 years (annualised)
Latest 3 years (annualised)
Latest 1 year
Year to date
Benchmark
762.4%
11.6%
10.3%
8.5%
8.2%
8.8%
14.7%
2.1%
726.0%
11.4%
10.0%
8.0%
7.3%
7.9%
13.5%
2.1%
28 Feb 2017
Sector
Active Return
0 to 3 Months
3 to 6 Months
6 to 9 Months
9 to 12 Months
1 to 3 Years
3 to 7 Years
7 to 12 Years
Over 12 Years
36.4%
0.2%
0.3%
0.6%
0.9%
0.9%
1.3%
0.0%
3.0%
0.2%
0.1%
0.2%
0.3%
8.5%
23.7%
64.0%
Fund
Modified Duration
Yield
7.6
9.8%
RISK STATISTICS SINCE LAUNCH
INCOME DISTRIBUTIONS
Fund
Benchmark
Declaration
Payment
Annualised Deviation
Sharpe Ratio
Maximum Gain
Maximum Drawdown
Positive Months
7.6%
0.29
26.3%
(19.0)%
71.5%
8.6%
0.23
26.4%
(22.3)%
71.1%
30 Sep 2016
31 Mar 2016
30 Sep 2015
31 Mar 2015
03 Oct 2016
01 Apr 2016
01 Oct 2015
01 Apr 2015
Fund
Date Range
Highest annual return
34.9%
Sep 1998 - Aug 1999
Lowest annual return
(7.0%)
Sep 1997 - Aug 1998
Amount
Interest
59.02
48.68
47.64
45.41
59.02
48.68
47.64
45.41
MONTHLY PERFORMANCE RETURNS
Fund 2017
Fund 2016
Fund 2015
Jan
Feb
1.52%
4.09%
6.15%
0.57%
(0.35)%
(2.73)%
Issue date: 2017/03/06
Client Service:
0800 22 11 77
Mar
2.74%
(0.68)%
Apr
1.81%
(0.37)%
May
(0.69)%
(0.74)%
Jun
3.66%
(0.10)%
Jul
2.24%
1.23%
Aug
(0.69)%
0.09%
Sep
2.50%
(0.20)%
Oct
0.59%
1.44%
Nov
(1.97)%
(0.62)%
Dec
1.70%
(5.30)%
YTD
2.10%
16.60%
(2.20)%
Please refer to page 4 of the Comprehensive Fact Sheet for important additional infomation, including change in cost disclosures.
Email:
[email protected]
Website:
www.coronation.com
Minimum Disclosure Document
Page 2/4
CORONATION BOND FUND
Quarterly Portfolio Manager Commentary
Please note that the commentary is for the retail class of the fund.
The political earthquakes of 2016 have caused shock waves that will continue to
reverberate across financial markets for much of the new year. Brexit and the
election of Donald Trump as the new US president reflected a deep disdain and
discontentment with the status quo among voters, who expressed their
unhappiness with current regimes and policies. It was a stark reminder that eight
years since the great financial crises, growth in many countries remained
undesirably low, while income inequality has seen a market increase. Locally,
although the shock of Nenegate was behind us, the political landscape remained
volatile.
Despite the volatile local and global backdrop, SA bonds managed to perform
much better in 2016. This was primarily due to bonds starting the year at quite
elevated yields. After starting at 9.71%, the local 10-year benchmark bond traded
in a range of 9.83 to 8.40%, settling at 8.92% at year-end. The All Bond Index
(ALBI) delivered a total return of 15.5% for 2016, far ahead of cash at 7.05% (ShortTerm Fixed Interest Composite Index) and inflation-linked bonds at 6.05%. As
one would expect, with 60% of the ALBI weighted towards the 12-year and longer
range of the local bond curve, these bonds delivered the biggest contribution to
overall performance with 17.5% compared to 10.1% for bonds over 1 to 3 years;
13.4% (3 to 7 years) and 15.4% (7 to 12 years). Key to note here was that despite
the substantial capital appreciation of bonds from their low starting point at the
start of the year, the bulk of returns still came from the yield they provided. The
ALBI’s return of 15.5% was composed of a 5.85% capital return (return due to an
appreciation in bond prices) and a 9.65% interest return (return due to yield
earned from the underlying bonds).
Over the medium to longer term, domestic inflation will continue to direct local
bond yields, as will the pricing of country-specific risks and developments in the
global yield environment. The performance of local bonds will therefore depend
on whether current yields provide a sufficient margin of safety against adverse
developments in any of these or other unforeseen events.
The outlook for local inflation has improved, primarily due to the deceleration in
food inflation. This is illustrated in our following base case scenario, which
includes an assumption of average food inflation of 3.4% for 2017 and 4% for
2018. Even if we shock our inflation forecasts (as illustrated by the grey line below)
by including a move in oil to $65 per barrel and a rand slump (to R15.5/$ in the
first quarter of 2017), it is still difficult to see a sustained breach of the top end of
the Reserve Bank’s inflation band. In fact, inflation over 2017/2018 under our
stressed scenario only averages 5.75%, compared to 5.45% under our base
scenario.
FORECAST
The bottom line is that it is very hard, without a sustained shock to food inflation,
to see the consumer price index (CPI) persistently above target over 2017/2018,
with the risk very much skewed to the downside (indicated by the orange line in
the graph). This is due to the abundant rainfall over much of SA during October
to December 2016, as well as early indications that planning could increase by
15% in 2017 (measured even before the rainy period), providing a favourable
environment for local bonds. Following on from this, it is very likely that we have
seen the end of the interest rate hiking cycle in SA, with real policy rates expected
to drift up to above 2% as inflation comes down next year. This will limit the SA
Reserve Bank’s ability to increase policy rates further and, if anything, shift
expectations towards the start of a cutting cycle in late 2017 or 2018.
The local risk premium can be represented by two key measures: the SA credit
default swap (CDS) spread, which measures the sovereign’s riskiness as an issuer,
and the spread between SA’s 10-year bond yield and the US 10-year bond yield.
SA’s current credit default swap (CDS) spread sits at a level of 209bps, which
already prices it below investment grade. Our local budget deficit, although still
Client Service: 0800 22 11 77
Email: [email protected]
wide, is projected to contract meaningfully over the next three years (by
approximately 1.5%), which should reduce financing needs and costs. In addition,
the weaker rand and the stable mining and manufacturing environment should
also continue to promote a strong trade recovery, which should reduce our
current account deficit back towards -3%. The reduction in budget and current
account deficits indicates that our twin deficit problem will become more
manageable over time. Our expectations of a favourable inflation outlook further
implies an increase in household disposable income, thereby suggesting
stronger local consumption and a more stable underpin for growth. These
improvements, although by themselves not sufficient to avoid a downgrade to
below investment grade, do suggest that the risks are definitely tilting towards a
more positive outcome on the rating front, implying our CDS spread is somewhat
too aggressively priced.
The spread between the SA 10-year government bond and the US 10-year
government bond is representative of two factors, namely, the inflation
differential between the two countries and the SA specific risk premium: (SA 10year bond yield - US 10-year bond yield) = (SA inflation expectations - US inflation
expectations) + SA risk premium
Currently, the spread sits at 645bps, well above the long-term average of 525bps.
But more important is its implication for SA’s risk premium. The implied
breakeven inflation rate for the US 10-year bond is 2%, in line with the US Federal
Reserve’s (Fed) target. Our expectation of average SA inflation over the next two
years is 5.5%. Using these values and the formula above, the implied SA risk
premium is 295bps, compared to current market pricing of 209bps. This suggests
that the implied risk premium between the SA 10-year and the US 10-year bonds
provides a decent buffer in terms of risk premium expectations, making local
bonds particularly attractive on this basis.
One could argue that the elevated SA-specific risk premium is due to the volatile
local political landscape. However, the major local events of 2016 such as the
reappointment of Pravin Gordhan as finance minister, the public prosecutor’s
report on state capture, the ruling of the constitutional court against President
Zuma, and the results of the local government elections suggest that political
volatility is starting to near its end and the perceived risk premium is too high.
Global bond yields pushed higher after the shock result of the US election in
November last year. However, to call this the start of a global bond bear market
seems extreme. The prospects for European Union (EU) inflation and growth have
improved, but the need for monetary policy accommodation will remain for some
time as indicated by the extension of the EU quantitative easing programme.
Even after the end of the programme, it will be a long time before base rates
move materially above the zero level again, keeping bond yields anchored.
German bond yields rose by 40bps from their lows last year but remain at 0.2% −
hardly a level that strikes fear into the heart of a SA government bondholder, who
earns 9%! The Fed has a target on core inflation of 2% and on keeping
unemployment below 6.5%. As history has shown, it is not likely that the Fed will
allow inflation to spiral out of control, causing an inflation-driven yield sell-off. In
addition, with steadily decreasing levels of productivity and effective floor in the
unemployment rate due to gains in technology, US real rates will be required to
remain relatively low when compared to history, around the 1% to 1.5% level. This
puts the medium-term nominal rate on a US 10-year bond at around 3% to 3.5%
(assuming the 2% inflation target is met and maintained). We have long argued
that yields below 2% for the US long bond were too expensive and fair value was
somewhere around 2.5% to 3.5% over the medium term. As such, we do not
believe that this is the start of a multi-decade sell-off in US bonds but merely a
move towards levels that are more reflective of the underlying fundamentals and
risks.
The combination of a more favourable inflation outlook in SA (with risks to the
downside), flat local policy rates, a SA risk premium that prices in a good deal of
conservatism and a global bond environment that should remain relatively stable,
suggests a more encouraging environment for SA government bonds. SA’s 10year and 20-year government bonds trade close to 9% and 9.6% respectively,
which when taken against an inflation expectation of 5.5 to 6%, suggest a range
of real returns of 2.8% to 3.9%. This is a very attractive level both from a historical
and absolute perspective, enhancing the attractiveness of SA government bonds.
The main risk to this outlook remains a resurgence in local political volatility that
negatively influences the country’s ability to implement policy effectively. While
political uncertainty has forced a more tempered approach over the previous year
as well as the very near term, we maintain a more positive and constructive view
on medium to longer-term outcomes.
Portfolio managers
Mark le Roux and Nishan Maharaj
as at 31 December 2016
Website: www.coronation.com
Minimum Disclosure Document
Page 3/4
CORONATION BOND FUND
Important Information
IMPORTANT INFORMATION THAT SHOULD BE CONSIDERED BEFORE INVESTING IN THE CORONATION BOND FUND
Unit trusts should be considered medium- to long-term investments. The value of units may go down as well as up, and is therefore not guaranteed. Past performance is not
necessarily an indication of future performance. The fund is mandated to invest up to 10% of its portfolio into foreign securities and may as a result be exposed to macroeconomic,
settlement, political, tax, reporting or illiquidity risk factors that may be different to similar investments in the South African markets. Fluctuations or movements in exchange rates
may cause the value of underlying investments to go up or down. Coronation Management Company (RF) (Pty) Ltd is a Collective Investment Schemes Manager approved by the
Financial Services Board in terms of the Collective Investment Schemes Control Act. The Management Company reserves the right to close the fund to new investors if we deem it
necessary to limit further inflows in order for it to be managed in accordance with its mandate. Unit trusts are allowed to engage in scrip lending and borrowing. Standard Chartered
has been appointed as trustees for the fund (www.sc.com/za; 011-2176600). Coronation is a full member of the Association for Savings & Investment SA (ASISA).
HOW ARE UNITS PRICED AND AT WHICH PRICE WILL MY TRANSACTION BE EXECUTED?
Unit trusts are traded at ruling prices set on every trading day. Fund valuations take place at approximately 15h00 each business day, except at month end when the valuation is
performed at approximately 17h00 (JSE market close) and forward pricing is used. Instructions must reach the Management Company before 14h00 (12h00 for the Money Market
Fund) to ensure same day value. The payment of withdrawals may be delayed in extraordinary circumstances, when the manager with the consent of the fund trustees deem this to
be in the interest of all fund investors. These circumstances may include periods when significant underlying markets suspend trading which will prevent accurate valuation of the
instruments held in the fund. When the suspension of trading relates to only certain assets held by the fund, these assets may be side-pocketed. This process allows normal liquidity
on the assets that can be valued, but will delay liquidity on the affected portion of the fund. If the fund is faced with excessive withdrawals, the affected withdrawals may be ringfenced, which is the separation and delayed sale of the assets reflecting the interest of the liquidity seeking investors. It ensures that the sale of a large number of units will not force
Coronation to sell the underlying investments in a manner that may have a negative impact on remaining investors of the fund.
HOW WAS THE PERFORMANCE INFORMATION INCLUDED IN THIS FACT SHEET CALCULATED?
Performance is calculated by Coronation as at the last day of the month for a lump sum investment using Class A NAV prices with income distributions reinvested. All underlying
price and distribution data is sourced from Morningstar. Performance figures are quoted after the deduction of all costs (including manager fees and trading costs) incurred within
the fund. Note that individual investor performance may differ as a result of the actual investment date, the date of reinvestment of distributions and dividend withholding tax,
where applicable. Annualised performance figures represent the geometric average return earned by the fund over the given time period. Unannualised performance represents
the total return earned by the fund over the given time period, expressed as a percentage.
WHAT IS THE TOTAL EXPENSE RATIO (TER) AND TRANSACTION COSTS (TC)?
TER is calculated as a percentage of the average net asset value of the portfolio incurred as charges, levies and fees in the management of the portfolio for a rolling 36-month
period to the last quarter end (December, March, June and September) The TER charged by any underlying fund held as part of a fund’s portfolio is included in the TER figure, but
trading and implementation costs incurred in managing the fund are excluded. A higher TER does not necessarily imply a poor return, nor does a low TER imply a good return. The
current TER may not necessarily be an accurate indication of future TER's.
Transaction costs are a necessary cost in managing a fund and impacts the fund’s return. They should not be considered in isolation as returns may be impacted by many other
factors over time including market returns, the type of fund, the investment decisions of the investment manager and the TER.
ADVICE AND PLATFORM COSTS
Coronation does not provide financial advice. If you appoint an advisor, advice fees are contracted directly between you and the advisor. We will facilitate the collection of advice
fees only upon receiving your instruction, up to a maximum of an initial fee of 3.00% and an ongoing fee of 1.00% per annum (where an initial advice fee of more than 1.50% is
selected, the maximum annual advice fee that we will collect is 0.50%). Advice fees are usually collected through the redemption of units. You may cancel the instruction to facilitate
the payment of advice fees at any time. Advisors will only share in Coronation fees subject to prior approval by and/or disclosure to the investor. A portion of Coronation’s annual
management fee may be paid to administration platforms such as Linked Investment Service Providers (LISPs) as a payment for administration and distribution services.
WHERE CAN I FIND ADDITIONAL INFORMATION?
Additional information such as fund prices, brochures, application forms and a schedule of fund fees and charges is available on our website, www.coronation.com
IMPORTANT INFORMATION REGARDING TERMS OF USE
This document is for information purposes only and does not constitute or form part of any offer to issue or sell, or any solicitation of any offer to subscribe for or purchase any
particular investment. Opinions expressed in this document may be changed without notice at any time after publication. We therefore disclaim any liability for any loss, liability,
damage (whether direct or consequential) or expense of any nature whatsoever which may be suffered as a result of or which may be attributable, directly or indirectly, to the use
of or reliance upon the information.
Client Service: 0800 22 11 77
Email: [email protected]
Website: www.coronation.com
Minimum Disclosure Document
Page 4/4