CAPE TOWN - The Coronation Top 20 Fund is South Africa's top-performing general equity unit trust over the last ten years. Over that time it has generated an annualised return of almost 24%.

To illustrate that another way – any investor who put money into the fund when it was launched in 2001 would have seen that investment grow by over sixteen times to date.

So it's worth asking what makes this fund so successful.

The below table using data from Morningstar provides some clues:

Coronation Top 20 Fund portfolio at 31 March 2014

Source: Morningstar

Notes:

*The fund held Exxaro in a prior period, but sold out of the counter in early 2011, before buying again during 2013

**The fund held SABMiller in a prior period, but sold out of it in 2012, before buying again in 2013.

For anyone looking for an earth-shattering, exciting exposition on what Coronation has been doing that is so exceptional, what follows may be a disappointment. Because the first reason that this fund is so brilliant is because its approach is so simple.

Its success has been based on selecting a concentrated portfolio of high quality stocks, and holding them for very long periods of time. This is clearly reflected in the above table.

Nine of the 20 stocks it currently holds have been in its portfolio for at least four years. A further three have been there for three years or longer.

This is investing at its most basic – selecting great businesses and sticking with them. To this approach, the fund managers add the important willingness to invest significantly differently to the benchmark by identifying opportunities through rigorous fundamental research.

“While we do like to buy great businesses and hold onto them for a long time, share prices do change and when shares become expensive relative to our assessment of fair value we do sell them,” says co-portfolio manager Neville Chester. “In addition, while you might see the same name in our portfolio over a long period, the size position could vary significantly over that time.”

The success of the fund is really a compelling lesson for anyone – that when it comes to investing, it's easy to get carried away with fancy strategies and clever valuation methods, but really there is no substitute for getting the basics right.

This doesn't mean that what the fund managers do is straightforward. Successful investing may be simple, but it's not easy.

“The process and philosophy sound simple but in practice it is more difficult,” Chester explains. “Holding one's line when the market is reacting very differently can be quite challenging, and everyone wants to 'get rich quick' whereas we like to 'get rich slow'.”

The holdings

So how does this translate into the way the fund identifies the companies in which it invests?

“Our investment horizon of at least five years gives us a very different perspective on company valuations,” Chester says. “We like businesses that have a unique proposition which allows them to grow top line and successfully defend against competitors while maintaining margins. They usually have a unique product or valuable brand which allows this. On top of that excellent management and strong cash generation are also a definite plus.”

An interesting example of this is Impala Platinum. The fund has held the counter for an extended time, despite its poor performance since 2010. Chester says that they have kept it in the portfolio because they continue to believe in the business.

“South Africa is the world’s largest supplier of platinum by a big margin,” he explains. “And ultimately the South African producers will impact the price paid for platinum, mainly by closing down unprofitable mines which should tighten supply and result in a higher platinum price which will allow the low cost mines to make decent returns.

“As one of the major platinum miners in South Africa, we think Impala is well positioned to benefit from the long term demand for platinum group metals from the clean environment legislation,” he adds. “Their local mines are currently being invested in to ensure access to good ore bodies, which will put them firmly in the bottom half of the cost curve and hence support margins.”

A more recent move made by the fund has been to sell its stake in BHP Billiton, while buying into Glencore Xstrata. Both are global diversified mining companies, so what makes one more compelling than the other?

“The key difference between these two stocks is Billiton's significant exposure to iron ore and Glencore's trading business,” Chester explains. “Iron ore is the commodity we are most concerned about in that we think it still trades above its long term normal price, and given the increase in supply coming, this is price is likely to normalise at these lower levels.

“As good a business as Billiton is, we don't think the valuation offers enough upside in these circumstances,” he adds. “Glencore's trading business is unique in the diversified mining space in that it is a business that is far less dependent on absolute levels of commodity prices and more reliant on volumes of trade. This is a very attractive asset in a market where commodity prices can be volatile for some time. In addition, as the only 'owner managed' diversified miner they have a refreshing approach to capital management that has driven the value creation here over time.”