September/October 2008 has seen one of the most severe global stock market declines since 1987 and indeed since the 1929 crash that preceded The Great Depression. Capital Plus has fared reasonably well over this unprecedented period due to relatively low equity exposure and as importantly, careful stock selection with very low resources exposure - the area within equities that has been hardest hit. Importantly, we also believe that the fund is well positioned to weather further turmoil whilst at the same time participate in any recovery in the equity markets.

Over the one-year period to September 2008 the SA All Share equity index has now declined by 18%, with resources leading this decline - down 24%. Over the past quarter alone, the resources index declined by 38% (and the All Share declined by 21%). Capital Plus actually generated a positive return over this period (+3.2%) but is marginally negative over a one-year period (-2.8%). We are disappointed at being negative over the one year period, and in retrospect we should have lowered equity exposure late last year. At the same time, the sheer magnitude and timing of the global financial crisis and decline in equity values is an extremely unusual event, and the timing by nature unpredictable. Importantly, over 5 years the fund has generated a 17.1% per annum compounded return, with 50% maximum SA equity exposure at any point.

The last few months finally saw a significant decline in commodities and commodity shares. The fund held very little commodity stocks over the past year or so, as we viewed commodity prices to be well above normal levels, partly driven by financial speculation. The period January to June saw the frenzy for commodities reach extreme levels. The oil price rose from US$80 to US$147 in the space of a few months (it is now back to US$80) and Anglo American reached a peak of R550 in July (it is now R240). Such behaviour was starting to show similarities to the TMT bubble and we faced criticism for having low commodity exposure and high industrial and financial exposure (where the outlook was grim, unlike commodities where the outlook was fantastic). Money flowed out of unit trusts where the fund manager refused to buy commodity shares, preferring to hold more boring industrial and financial shares. At the same time the money flowed into unit trusts with high commodities exposure (and therefore had very good short-term performance). Those investors have not done well and are most likely the same investors who are today selling all of their resource shares and unit trusts with high resource exposure. We would again urge all investors to focus on longterm (5 and 10 year) track records and not one-year performance numbers.

Today, after the huge decline in commodities, we are for the first time in many years finding some decent value in commodity shares. The pendulum has just about swung the full circle, moving from greed (Jan-June) to fear (Sep-Oct). As a result we have started adding to the fund's resource exposure and bought Anglo American for the first time in many years. There is very good value in equities today (in our view) and the valuation differential between industrials and financials on the one hand, and resources on the other, has narrowed considerably. Our preference is still for the former as we have higher conviction in the earnings streams of Naspers, Tiger Brands and SABMiller over the next 5 years than we do in the case of Anglo American, Billiton or Impala. We believe domestic industrial and financial shares are in fact at their cheapest in 6 years. The graph below shows the forward P/E (based on Coronation's in-house earnings estimates) of all local financial and industrial shares (a basket of 100 shares that we analyse in detail) as well as the upside to fair value from current share price levels for those same shares. The forward P/E is now just about at a 6-year low (P/E of below 8) and the upside to fair value (70%) is at a multi-year high. Besides the local industrial and financial shares we believe that the two large global industrials, Richemont and SABMiller, offer exceptional value and the fund has positions in both shares.

Although we are finding incredible value in SA equities today, we have maintained the SA equity exposure of Capital Plus at below 40% (even though the fund has the mandate to go to as high as 50%). The global outlook is just so uncertain that we feel a somewhat prudent approach is warranted. The fund also has 10% invested in international equities which we feel are extremely attractive given the indiscriminate selling. We also increased the fund's overall international exposure to 20% (from 15%) as soon as legislation permitted, and the balance of the 20% international exposure (being 10%) is invested in cash.

We feel that SA government bonds have gone from being very attractive (with yields above 10.5%) when we were buyers, to being overvalued (yields around 9%). We have therefore sold most of the fund's long duration bond exposure. On the other hand we feel that there is still selected value in SA listed property shares and 5% of the fund is invested in this area.

While the outlook is as uncertain as it has ever been, we feel that there is some great value within equities, both in SA and globally, and now is not the time to be sitting 100% in cash. Importantly, we have as always been very careful about the fund's stock selection and position sizes and have also kept equity exposure at what we believe are sensible levels at below 40%. We therefore believe that the fund is well positioned to weather further turmoil while at the same time participate in any recovery in the equity markets.

Edwin Schultz and Gavin Joubert
Portfolio Managers

The turmoil in both global and SA equity markets continued over the past few months. The oil price reached new highs which led to concerns of rising global inflation and subsequent rising interest rates and slower economic growth. This, all on top of the subprime mess of course. Global equities (MSCI World Index) had their worst first half in 25 years, the Dow Jones (US) index had its worst June since 1930 and the share price of General Motors fell to the level that it was trading in 1953. Even Warren Buffet was not immune, with the share price of Berkshire Hathaway falling by 20% over the past 6 months, its worst start to the year in the past 20 years.

Against this backdrop and the continued poor performance of SA industrial and financial equities, the Coronation Capital Plus Fund had another poor quarter. The fund is now -4.3% for the past 12 month period, which we are very disappointed with. The longer-term performance track record is more in line with the type of returns that we would expect, with the 3-year return being 13.0% per annum, the 5-year return 17.0% per annum and the return since inception 7 years ago being 15.5% - with maximum SA equity exposure at any point of 50%.

Given our view that there is exceptional value in selected areas in the equity market (as much potential upside as we have seen since 2003), we have maintained the SA equity exposure of the fund at around 45%, which is close to its maximum limit. The fund also has international equity exposure of 11%, resulting in 56% equity exposure at the portfolio level. We have slowly added to the fund's listed property exposure, which is now at 6% and as we believe preference shares to be very attractive at the moment, 3.5% of the fund is invested in this asset class. The balance of the portfolio (34%) is invested in cash and bonds, with NCDs in particular yielding an attractive 13%.

There were no significant changes to the fund's core large equity holdings (Naspers, Tiger Brands, Richemont, Remgro, SABMiller, Standard Bank and Woolworths). We did however add three new small positions over the past few months: Anglogold Ashanti, Mondi and Truworths. The South African gold miners have continued to decline despite a continually increasing rand gold price. As a result, for the first time in several years, it is our view that the valuations of these companies are starting to look attractive, with 10 P/Es on sensible long-term assumptions for the gold price and the ZAR/USD exchange rate - the two key inputs to the valuation of a gold company. Anglogold Ashanti (0.75% of fund) was particularly hard hit following the recent rights issue, which provided us with the opportunity to accumulate the shares at attractive levels. The paper and packaging sector is in our view a below average business, but Mondi's 40% share price decline puts it on a 7 P/E with a strong rand hedge element and an impressive management team in what is a difficult industry. We have invested in the PLC units (which trade at a 7% discount to the LTD units) and with continued buying post month-end, Mondi is now a 0.50% position in the fund. Truworths (0.60% of fund) is a company that we have respected for many years, but always felt was too expensive. The severe de-rating of retail shares has provided the opportunity to buy this world-class retailer well below what we believe it is worth. The next year or two will no doubt be very tough for the clothing retailers, but it is our view that this and more is now priced into the share.

The extent of short-termism, fear and panic selling is perhaps best illustrated by comparing Standard Bank (one of the fund's top 10 holdings) to a government bond. Standard Bank currently has a dividend yield of 5.7%. The yield on the R157 (long-term government bond) is 10.5%. Dividends are tax free whereas interest is taxable. Therefore the after-tax return on the R157 is 6.3% and 5.7% on Standard Bank. In other words, Standard Bank is effectively being priced never to grow its earnings again (as is the case with bonds, which obviously don't grow). For a company that has grown earnings at over 20% per annum compounded over the past 25 years, we find this very hard to believe and this anomaly provides a great opportunity for any investor who has a time horizon of a few years as opposed to a few months.

In his book 'One up on Wall Street', former Fidelity fund manager Peter Lynch lists the qualities that he believes make a successful investor. These qualities include patience, a tolerance for pain, persistence, detachment and the ability to ignore general panic. As managers of the fund all of these qualities are being tested at the moment and we have no doubt that the same is true for investors in the fund and general participants in the markets. As difficult as equity markets are at the moment and as disappointing as the fund's performance over the past year has been, it is our view that there is exceptional value in all of the fund's large holdings, with upside from current share prices to what we believe the businesses are worth typically being in the 50% -100% range, - not seen since 2003. We don't believe it is possible to predict either the economy or the stock market (and whilst people today may be forgetting that it's impossible to consistently predict what the economy or the stock market will do and therefore still try to do so, history is on our side in this argument). One's time as an investor is better spent on buying businesses that are trading well below their long-term worth and this is what we have continued to do.

The consensus economic outlook in both South Africa and globally for the next year or two is terrible and it appears that the equity markets are directly (inversely) correlated with the oil price at the moment. We have no idea when the oil price will fall, when the economic outlook will improve, or when equity markets will recover. However, whilst we are cognisant of the potential economic risks ahead (particularly the impact of oil), and in our view have taken this into account at the overall portfolio level, the one thing we do know is that valuations are currently extremely attractive and that valuation is the only variable on which one can lay one's hat. We also know from history and past experience that investors are quite often most pessimistic at exactly the wrong time.

"the argument is made that there are just too many question marks about the near term future; wouldn't it be better to wait until things clear up a bit and maintain cash reserves until current uncertainties are resolved? Before reaching for that crutch, face up to two very unpleasant facts: the future is never clear and you pay a very high price in the stock market for a cheery consensus. Uncertainty actually is the friend of the buyer of long-term values."
Warren Buffet, Forbes interview, 6 August 1979.

Edwin Schultz & Gavin Joubert
Portfolio Managers

The fund had a very disappointing start to the year, with January in particular being the fund's worst month since inception almost 7 years ago. Over the past few months several of the fund's top holdings have declined by 20% - 30% or more and this has inevitably had a negative impact on performance. The fund's return over the past one year period is just 1.2%, which we are disappointed with.

While we were more cautiously positioned going into the equity market sell-off, having reduced equity exposure and put significant hedging in place, it was not enough to off-set the declines in share prices. While our belief has been that our equity selections are defensive, and should decline by less than the market in a falling market, they have not behaved in this manner in the short term. Hedging partly helped, but was not sufficient to off-set share price declines. A portion of our hedging is on the all share index, which has proved ineffective in an environment of rising resource shares. We continue to believe that commodity prices and valuations are too high and are therefore keeping this hedging in place for now.

We are clearly not happy with the fund's performance, but at the same time we believe that the fund's large holdings are now substantially undervalued rather than merely undervalued as they were a few months ago. As a result, we are very optimistic about the prospects for the fund going forward. It is inevitable that all funds go through shorter-term periods of poor performance, but importantly, the long-term performance numbers of the fund remain very compelling. Since inception the fund has generated an annualised return of 16.9% with volatility of just 7.8% and returns of just under 20% per annum over the past 5 years.

Over the past few months we have seen the global credit crisis, the start of a US recession, a global bear market, Polokwane, Eskom and a crumbling South African consumer. These factors have naturally had an impact on the fund, but even more importantly was the rare situation where several of the fund's largest holdings were impacted by stock-specific (unpredictable) events detailed below, and all have declined by 20% - 30%.

- Naspers: the announcement of a large acquisition (Tradus) where the market took the view that they were overpaying for the asset and that equity might be issued to fund the transaction.
- Tiger Brands: the bread fixing scandal followed shortly thereafter by allegations of price fixing within Adcock Ingram.
- Woolworths: impacted by a slowing economy and producing very poor results below the market's expectation.
- Netcare: threat of regulatory intervention by Government.
- JSE: concerns over volumes declining due to a bear market.

Over the past few months we have carefully assessed our 5 year earnings estimates and valuations for the 5 companies mentioned above (and indeed all of the fund's holdings). The net result is that while there have been some reductions in earnings and fair values, these reductions are marginal and bear no correlation to the 20% - 30% share price declines in these stocks. As a result, our confidence that these companies are undervalued has increased - there have been large share price declines with very little change in what we believe these businesses are worth. Our synthesised view on each of these holdings and the current concerns are as follows:

- Naspers: we have done a considerable amount of research on Tradus (which can simplistically be described as the ebay of Eastern Europe) and hold the view that the potential for this asset is significant and that the price paid is quite likely to turn out to be far more attractive than the view taken by the market. Equity was not issued.
- Tiger Brands: while the allegations of price fixing are naturally disappointing and raises concerns about this being a wider practice within the Tigers group, we back the board under Lex Van Vught to fully investigate this issue and take appropriate corrective action. At the same time, it is rare that one is able to buy a stake in a company with the collection of great brands that Tigers owns on such an attractive valuation (8.5 forward PE multiple and dividend yield of almost 6%). One typically only gets such an opportunity when a company stumbles and investors are too focused on the short-term. It is our view that today is one such opportunity. As a result we have added significantly to the fund's position in Tigers over the past few months.
- Woolworths: The biggest (shorter-term) issue with Woolworths (which is what the market is focusing on) was that the company did not anticipate the severity of the slowdown and as such was still investing heavily. As a result, the significant cost growth had a negative impact on profits. Over the shorterterm we are comfortable that management are taking the necessary steps to control costs and over the longer-term we believe that Woolworths will continue to grow their business (the SA consumer will pick herself up again at some point: everything moves in cycles) and take market share in foods whilst also improving the returns of the clothing business. We hold the view that the Woolworths brand is a great asset and at the current valuation (forward PE of 8.3 and dividend yield of 7.5%) the market is woefully undervaluing this asset.
- Netcare: We are not sure what form regulatory intervention will take (most likely pricing caps) but what we can do is calculate a range of valuations under different scenarios. A worse case scenario would still give a fair value of R12 a share (some 40% above the current share price of R8.50). We also believe that the degearing of the debt in the UK business over time will add significantly to earnings growth.
- JSE: Stock exchanges are arguably the biggest beneficiaries of market volatility. During these periods (as we are currently experiencing) volumes explode and a large part of the resultant revenue for the exchanges flows straight through to the bottom line (as a result of a cost base that is largely fixed). The volumes on the JSE are up over 70% year to date (Jan- Mar). This would translate into roughly a 150% increase in net profit for the JSE, yet the share price is down 25% over this same period. So the company continues to grow its intrinsic value while the share price continues to decline, creating a great opportunity as the gap between current share price and intrinsic value increases.

Given our increased confidence in the fund's holdings and resultant additional buying, the equity exposure of the fund has increased from just over 40% in December to near maximum equity exposure of 50%. The fund is also at its full international exposure given our view that global equity markets are attractive and that the rand will depreciate over time. As bonds approach the 9.5% level we have been slowly buying; 5% of the fund is now invested in bonds. Property stocks are becoming more interesting as they decline, but at this point the fund still has relatively modest exposure of 5%.

Given the large declines in the fund's holdings and the marginal reduction in our fair values for those businesses, we are more confident (not less) that the fund will be able to meet its return objective of inflation +4% over the longer-term and achieve this with low volatility.

Edwin Schultz and Gavin Joubert
Portfolio Managers

The past quarter proved to be a tough one for equity markets, with the FTSE/JSE All Share Index declining by 3%. Within the quarter, markets experienced significant volatility, including a drawdown close to 8% during December. The fund did well to protect capital, declining by only 0.25% over the quarter. The return for 2007 now stands at 9.5%. This return is ahead of inflation, which is currently running close to 8%, but below the outperformance target of inflation + 4%. Given current market conditions our first priority is one of capital protection and returns over the longer term remain well above the outperformance target, with the annualised return for the past 5 years at 18.6%.

Positioning within the fund remains more cautious, with equity exposure currently around 40%. We still have significant hedging in place over the equity component of the portfolio, which will protect the fund in the event of further market declines.

While equity exposure remained largely unchanged over the quarter, we did do some buying into share price weakness, and some re-positioning within the fund.

The Sasol position was reduced significantly to the current level of 0.8%. Sasol has long been a high conviction position in the fund, and was the top contributor to equity performance over the past quarter, and also a significant contributor over longer periods. A core part of our philosophy is selling shares when they reach, or exceed, our estimation of fair value as in this case. While our fair value assumes a long-term oil price of $60, the current oil price close to $100 must be at least partly reflected in expectations and hence the current share price, which presents downside risk in the share. We believe the positive resolution around the windfall tax issue to be discounted in the current share price, leaving no margin of safety for regulatory or other risks.

Purchases over the quarter were all additions to existing positions. Tiger Brands has been increased to a significant 3.2% of the fund. We believe this to be an ideal absolute return stock, with strong brands and pricing power that will benefit revenue in a rising food price environment. The management team is shareholder friendly, with a long history of value creation through unbundling, and we believe that the unbundling of Adcock will be no exception. Our position in Standard Bank was also further increased, and remains our top-banking pick. We support the ICBC acquisition and believe that relationship will further strengthen the banks drive into Africa, and create value for shareholders over the long term. Other purchases for the quarter include adding to Woolworths, Remgro, Richemont and Bidvest.

The equity component of the portfolio remains very focused, with the top 10 positions accounting for two thirds of this. We believe the positioning is also defensive, with no exposure to high-flying commodity and construction shares.

Listed property had a poor quarter with the index declining by 0.4%, but remains the best performing asset class over the past year. Our positioning here remains focused on a handful of high quality properties. During the quarter we increased our position in Hospitality A shares through underwriting of a rights issue. With a yield comparable to current government bond rates, and growth in distributions of 5% guaranteed before B shareholders receive any income, we believe it to be an attractive investment.

Bonds also had a poor quarter, with the All Bond Index return of 0.9% below the cash return of 2.7%. We have been bearish on bonds over a long period, and sold the position taken during the second quarter of the year. Our preference remains for cash and short term money market assets which are offering very attractive returns currently.

During the quarter we also increased our holding in preference shares through buying Absa prefs. With these shares trading at yields of 76% of prime and higher, we believe they are very attractive currently. In addition to offering attractive after tax yields, we believe there is a fair chance of capital appreciation to enhance returns over the longer term.

International markets were negative over the past quarter, with the MSCI falling by 2.3% in dollar terms, and the rand appreciating marginally. Despite this negative environment, returns in the international component of the portfolio were only marginally down. Our conviction remains high for maximum offshore allocation currently, especially given the present level of the exchange rates and inherent risks in the current environment.

The fund has come through the volatility of the past year quite well and remains defensively positioned. It is well placed to protect capital going forward and we will continue to use market uncertainty to acquire quality assets as prices decline.

While nominal returns are expected to be lower than the past few years, we remain confident that we can continue to deliver on fund objectives going forward.

Edwin Schultz and Gavin Joubert
Portfolio Managers