Ben Temkin
25 November 2009
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Johannesburg — IN THE report on the results for the year ended September 30, the directors of Coronation Fund Managers ( Coronat ) emphasised how the performance of their funds had been driven on the criterion of absolute return.
Wikipedia's definition is: "The absolute return or simply return is a measure of the gain or loss on an investment portfolio expressed as a percentage of invested capital. The adjective 'absolute' is used to stress the distinction with the relative return measures often used by long-only equity funds."
The Private Investor portfolio's aim is to achieve a return of earnings on invested capital in excess of the rate of inflation. In the case of NewGold, the asset (gold bullion) is expected to increase in rand terms more rapidly than the rate of inflation. If the counters meet this criterion, over time, the portfolio will produce a real return, an absolute gain. If, however, the criterion is not met, this will be an absolute loss.
Bottom-line earnings per share should, again over time, correlate with the market prices of the shares. In the case of NewGold, its market price should correlate with the cost of production of gold.
In assessing the performance of each of the counters in the portfolio, Jean and I therefore rely on the intrinsic investment fundamentals of each of the counters. We ask a number of questions, for example: have their last reported bottom-line earnings met the core criterion return? Is it highly probable that the return will be sustained?
If these answers, and a host of other questions on investment fundamentals, are positive, we stick to the counters, on the basis that the portfolio will, over the long term, produce absolute returns.
There is no specific relative comparative benchmark for the portfolio. Its index -- based on its actual realisable value, including transaction costs -- does, however, tell how the market has assessed the value of the earnings streams of the companies, and also the market's assessment of the value of NewGold at the point in time.
At Monday's close, the Private Investor portfolio's index was 88,27. This means that, had the portfolio been sold then, we would have lost almost R12000 on the investment of R100000 in August 2007.
This is an ephemeral paper loss and thank goodness for NewGold's analgesic.
In August 1999, Coronat launched its Global Absolute Fund. In Coronat's report on the 2009 results, the directors wrote the fund had achieved an active return of 18,8% a year.
This return was a snapshot on paper. I have no doubt there were periods -- for example, year on year -- during which the return must have been negative.
Jean's and my equity offshore portfolio was in the intensive care unit when global markets collapsed. It's still in pain, but even at the market's bottom, its absolute return had been positive from inception. The portfolio will not have maintained its earnings yield this year, and at least one of the counters will not declare a dividend this year. Over the long term, however, we're confident the portfolio can continue to give us a positive absolute return.
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