The highlight of the global investment landscape over the last quarter was the coordinated response to the deepening global fiscal crisis and resultant lower economic growth outlook. European Central Bank (ECB) president, Mario Draghi, was first to make the now infamous pledge to 'do whatever it takes' to preserve the eurozone. This was followed by the bank's announcement to implement an open-ended strategy of buying short-dated Italian and Spanish bonds provided these countries adhere to certain conditions. This minimised the threat in investors' minds (perceived and real) of a break-up of the euro. Shortly thereafter, Federal Reserve chairman, Ben Bernanke, announced a third quantitative easing programme for the US over an indefinite period in response to the country's sluggish labour market recovery. In a slightly less dramatic fashion, the central bank of Japan also stepped up its efforts to stimulate the economy through liquidity injections. Global economic data point releases since the start of the quarter continued to point to a sharp slowdown in economic activity - even in countries like China, Brazil and Australia - which put severe pressure on commodity prices during the quarter. The one exception has been the oil price, where ongoing political uncertainty in the Middle East contributed to heightened anxiety among investors and end users, resulting in a rising price trend. The impact of the announced significant liquidity injections resulted in a sharp rerating of risk assets at the start of September as investors' focus briefly shifted away from the weakening economic landscape. Most commodities rebounded strongly following these announcements, with the price of iron ore for example up 34% from the lows it reached earlier in the quarter. The 'risk on' trade also resulted in a strong recovery for global equity markets. The MSCI World Index returned 6.8% for the quarter and an incredible 22.3% for the last 12 months. As expected, emerging markets delivered a slightly better return of 7.9% for the quarter, although the annual return of 17.3% lags that of the developed world. Global bond markets continued to remain quite firm, clearly benefiting from ongoing central bank intervention. In US dollars, the Citigroup World Government Bond Index returned 3.0% for the quarter (supported by a stronger euro and tightening spreads from the European peripheral countries) and 3.3% for the last 12 months (where a weaker euro over this period detracting significantly). The South African investment landscape was overshadowed by the tragic events at Lonmin's Marikana platinum mine and the subsequent wave of labour unrest that swept through the country. Foreigners behaved quite agitated (understandably so) and shares with large foreign ownerships had a rocky ride. As an example, Mr Price (one of the many retail stocks enthusiastically supported by foreign investors) experienced share price movements in excess of 3% per day for the first 10 days of September! The rand also weakened sharply against a basket of currencies (some of this occurring after quarterend), ending the three-month period 3% - 3.5% weaker. The FTSE/JSE All Share Index returned 7.3% for the quarter and a very strong 24.4% for the year to end September. Resource shares lagged the broader market by a wide margin (around 6% for the quarter and over 20% for the year) on the back of the poor economic outlook and growth jitters out of China. Despite the weaker currency, our bond market continued to defy gravity and produced a healthy 5.0% for the quarter and 17.0% for the 12- month period, clearly benefiting from the global search for yield in a world where short-term interest rates are expected to continue yielding negative real returns for the foreseeable future. Inflation-linked bonds performed even better, producing a quarterly return of 8.5% and an annual return of 18.2%. In line with the bond market performance, listed property also continued to shine with returns of 11.0% for the quarter and 37.2% for the year. The fund had a good quarter, returning 4.75% after all fees. For the 12 months to end September, the fund returned 15.2%; 11.64% p.a. for the past three years and 14.43% p.a. since inception. We have handsomely outperformed our inflation plus 4% target over almost all periods, but are marginally behind over the five-year period that includes the global financial crisis. Our stock selection in the local market remained poor, with the major detractors being our resource and construction exposures. The domestic market saw a dramatic sector rotation in September, but this did not reverse the poor absolute performance by some of our resource counters earlier in the quarter. The most notable of these positions was Anglo American, our single largest position in the fund. We continue to expect great returns from this holding going forward, despite the recent short-term disappointments around operational performance in some of its divisions. Our nominal bond performance also lagged the index given our more bearish stance, but the inflation linkers in the portfolio performed well. The fund benefited from our very large exposure to offshore assets, with this portion of the fund performing very well. We continued to reduce our South African equity exposure as we consider most of the domestically focused businesses in our market to be fully valued. We added to some of the resources positions given the almost desperate outlook (in our opinion) discounted in their share prices. While we do not necessarily forecast a rosier outlook for global growth, we do not expect China to stop growing, and therefore have a more sanguine outlook for commodities. Recent events in the labour market resulted in some value destruction, but in our opinion less than what has been discounted by investors. We also continued to buy protection given that the local market is at all time highs and the cost of protection very low. During the past 12 months the cost of our protection programme ranged between 80 - 90 basis points, but we consider it an essential risk management tool, particularly during times of distress in financial markets. Within our offshore component we increased our exposure to foreign property stocks as we have done more work to understand the dynamics of these markets. We took some profits in offshore credits towards the end of the period, and successfully traded the currency given the substantial weakening post quarterend. The fund's overall exposure to risk assets has been reduced over the period, and will continue to be reduced. The outlook for global growth remains muted, and there are some substantial 'unknowns' we face in the immediate future. We are therefore cautious enough to justify a more subdued portfolio positioning.
Portfolio managers
Louis Stassen, Henk Groenewald and Duane Cable

The optimism of the first quarter of the year quickly evaporated in May as doubts about European fiscal health and bank balance sheets reappeared. Political instability and resistance to imposed austerity measures called into question the ability of the fragile political consensus to take the hard decisions necessary to resolve the European crisis. Signs of faltering growth in the US and China also unsettled investors and led to greater financial market volatility. World equity markets declined by almost 5% over the quarter, with emerging markets (-8.8%) underperforming developed markets. Over the last twelve months global equity markets are back in negative territory. Returns from South African equities were also negative in dollar terms, but managed to eke out a positive 1.7% return (as measured by the FTSE/JSE Shareholder Weighted Index) for the quarter given the sharp depreciation in the exchange rate. In this environment, assets perceived as less risky fared much better than risk assets. Global bonds delivered a small positive return and continued their outperformance of equities as investors continued buying into the perceived safe havens of US and German government bonds. The picture was no different in South Africa, with a further rerating in government bonds leading to an All Bond Index return of 5.2%. The best returning local asset class over the quarter was (once again) listed property, which delivered a 10.3% return over the quarter. Over the past quarter and year, investors were not compensated for taking on additional risk in equities globally. This has happened despite strong growth in underlying earnings and earnings power of many of the companies that make up global indices. In the developed world, company dividends now yield more than government bonds, a situation not seen on a sustainable basis since the fifties. In finance courses, we all learn that bonds are less risky than stocks. The yield you will receive if you hold a bond to maturity is certain, unlike the dividends and earnings of companies. We believe this view of risk is misguided. Long-term history teaches us that companies in general grow their earnings in real-terms over time and investors should be excited about potential future returns from stocks. Conversely, global safe haven bonds are priced at extremely unattractive levels. While the return you will receive is certain, it is extremely unlikely to protect your capital against inflation and there is an additional risk of capital loss if bonds derate. We strongly believe that the future return of an investment is primarily determined by the price you pay. We also believe that risk should not be measured in volatility, but rather in the probability of capital loss. We believe global equities offer an exceptional opportunity for investors brave enough to buck the trend. The fund delivered a disappointing return of 0.9% for the quarter, mainly due to equity selection. Pleasingly, returns for the last twelve months of 10.7% are still ahead of our benchmark of inflation +4%. Longer-term returns are still very good, with the fund beating its inflation benchmark by over 4% since inception in 2001. The international exposure contributed significantly to the returns over the quarter and the year, with a notable contribution from our global bond holdings. We continue to find value in international markets, not only in equities, but also in selected property and fixed income instruments. We are currently at the maximum allowed exposure to international assets, with a small portion of our exposure hedged back into rand to reduce volatility. We will continue to actively manage physical and currency exposure. The local fixed income portion performed slightly behind the All Bond Index over the quarter. We hold no government bonds in the portfolio and in general have very little exposure to interest rate risk. This unfortunately means we do not participate in the rerating of government bonds, an opportunity we are happy to let go given our view of the potential risks. Our holdings of bonds are concentrated mainly on short duration nominal and inflation-linked corporate bonds which face less interest rate risk and should protect the portfolio against some inflation risks. Equity selection in this period was poor, with the fund's equity holdings significantly underperforming market indices. The main culprits for the quarter were the resource shares (Anglo American, Impala Platinum, Sasol and Arcelor Mittal) and construction stocks (Aveng and Group Five). Remgro, Tongaat Hulett, Trencor and Distell contributed to performance. South African and global equity markets have seen a tremendous rerating of defensive quality companies over the last twelve months. Sectors like food retailers and clothing retailers are trading at extremely high multiples; in many cases above that of international peers. In most cases, the share prices of these companies discount all of the undoubtedly good news and are now trading above our fair values. In contrast, cyclical companies are unloved, and have performed poorly over the last three years. In response to this, we have reduced our holdings of defensive companies and increased our holdings of the more cyclical sectors. In general we would expect to be early in our switching, and the past year is no exception. We would rather be early than face potential capital erosion by owning expensive assets. Importantly, we still believe the positions we have taken will add value to the fund over the medium term. Cyclical companies are unloved at the moment, and much of the bad news is already known and priced into the shares. Given valuation levels and the large differential between our long-term value for these shares and the price they are selling at, we believe that these cyclical companies will act much more defensively in future. In many cases (Anglo American, Arcelor Mittal, Aveng) these companies are trading close to or below their net tangible assets which should limit the downside. We are mindful of the risk in introducing more volatile shares into the portfolio. We have reduced equity exposure slightly over the quarter and continue to hold put protection against the equities. Around a fifth of our equity exposure is currently protected. The search for returns is getting tougher with less risky options rerating. With 10-year nominal government bonds currently yielding 7.2%, this is the return you will receive if you hold these bonds to maturity. Investors must have exposure to risk assets if they are to grow their capital in real terms. We are still finding value in equities and international assets and believe the payoff will be pleasing, even though the ride might be bumpier. We remain committed to our dual targets of returns of inflation +4% and no negative return over a rolling 12-month period.

Portfolio managers
Louis Stassen, Henk Groenewald and Duane Cable

The start of 2012 saw a continuation of the positive sentiment trend in global equities experienced during the last quarter of 2011, with the MSCI World Equity Index returning 11.7% over the first quarter, taking the total return to 20.3% over the last 6 months. Investors chose to focus on the positive aspects associated with the announcement of a further €1 trillion liquidity injection by the ECB in the form of low cost, long-term funding to the European region's banking system to try and resolve the Greek debt crisis. Economic data releases in the US continued to surprise on the upside, pointing to a more sustainable recovery in that region, while in China fears of a hard landing subsided further, despite an official announcement around lower future expected economic growth. The 12-month lagging return from global equities has now turned marginally positive (+1.1%), emphasising just how vicious the sell-off during the third quarter of 2011 has been.

Emerging equity markets outperformed the world indices by a small margin, although China lagged the overall MSCI Emerging Markets Index. Over the last 12 months emerging markets have however still lagged the overall MSCI World Index by almost 10%. Within the developed markets there was not a large divergence in performance over the quarter, highlighting the fact that this rally really represents a change in overall sentiment, rather than changes in specific regions' economic outlooks. Global bond markets reflected the same trend, with traditional safe haven markets selling off, and peripheral European countries experiencing an improvement in borrowing costs. The gold price also retreated somewhat, again reflecting the increased risk appetite of investors. Some of these trends are being reversed as we write this commentary, indicating how fragile these developments are.

In our opinion, a fair number of these positive developments address the symptoms of the current crisis, but not the roots. We continue to expect anaemic economic growth out of the European block for a while, while governments come to the realisation that ultimately they will have to live within their means. Austerity measures are not a thing of the past, and we anticipate the US to announce some further measures once the presidential election is out of the way. Even the US Fed has expressed caution of the sustainability of the US recovery. On the other hand, more emphasis is being placed on the social costs associated with austerity programmes, with the anticipated pushback from voters gaining momentum in some of the more fragile political systems.

While South Africa as a country is largely unaffected by the dayto- day swings in sentiment, we continue to operate as a very open economy, directly affected by the health of the global economy. Commodity prices recovered during the quarter, and the rand gained over 5% against the US dollar over the period. Our equity market gained 6.0% over the three months, and in US dollar terms our market returns matched those of the MSCI World Index, and marginally underperformed the MSCI Emerging Markets Index. Over twelve months, while up 7.5% in rands, our equity market is down 5.2% in US dollar terms.

Our nominal bond market returned slight positive numbers over the quarter (+2.4%), but a strong 13.2% over the last year, with inflation-linked bonds doing slightly better over both periods (+2.7% and 14.8% respectively). The bond market was supported by a positive budget plan announced in February to reign in government spending by focusing on the large salary bill spent on government employees. Cash yielded 1.4% and 5.8% over the corresponding three-month and one-year periods. Preference shares sold off after the higher than expected increase in dividends tax announced in the budget, but bounced back somewhat in March, returning 1.2% over the quarter and an attractive 11.3% over the last year. Property stocks continued to perform well, with strong underlying results announcements and low cash yields keeping the sector in favour with investors.

Your fund performed well in this environment, returning 4.6% over the quarter and 11.4% over the last year. As a result it comfortably beat its benchmark of inflation plus 4% over both periods by almost 1.5%. More importantly, over most longer time periods the margin of outperformance increases. Since inception in July 2001 the fund has outperformed its benchmark by 4.3% per annum (after all costs).

The fund's equity holdings performed marginally ahead of the benchmark over the quarter, with some of the biggest winners coming from previously unloved sectors like construction, paper and the old stalwart Naspers. Smaller companies that disappointed us in the recent past, performed better as sentiment towards the 'fallen angels' improved. Examples include Dawn, Illiad, and Northam Platinum. The resources sector performed poorly as concerns over longer-term commodity prices depressed share prices. Our biggest disappointments in the quarter all fall in this category and include ArcelorMittal, AngloGold, Anglo American and BHP Billiton.

The fund's bond holdings performed largely in line with the indices, with the nominal bonds underperforming, and the inflation linkers doing better. The foreign holdings performed well, aided by strong returns from the offshore property holdings and some of the fixed interest positions. We continue to hold close to the maximum of the fund's assets offshore, both as a diversification strategy, as well as expressing a view on the relative attractiveness of offshore assets (in particular equities) over domestic assets.

The put protection embedded in the fund's derivative strategy cost the fund in opportunity cost, a situation we are happy with. As is the case with a personal insurance policy, the insured is only too happy when there is no need to claim, as this will indicate that no negative event has impacted him. It is just a pity that the fund does not qualify for a no claim bonus! We will continue to buy protection against adverse events as and when we think the time is right and the prices are reasonable.

We have continued to reduce the fund's equity exposure into the rising market, both through selective buying of the above mentioned put protection and by selling physical equities. Because of the rising equity market, a large portion of our holdings are now closer to our estimates of fair value, prompting us to re-evaluate their positions in the portfolio. We have also increased the fund's exposure to more defensive businesses, which should provide further protection for the fund in the event of a sharp reversal in equity market fortunes.

The fund has started the year on a good note, but we remain concerned that the clouds that darkened the horizon during the third quarter of last year have not passed, and we thus remind investors and potential clients not to raise their expectations too high. Investment market cycles often reflect the human cycles of fear and greed, and in our opinion we have very quickly and without much fundamental change in the underlying situation, moved from the former to the latter.

Portfolio managers
Louis Stassen and Henk Groenewald

2011 was an eventful year. In March, global markets were first jolted by the Japanese earthquake and tsunami, but then recovered. The dysfunctional political process in the US regarding the country's debt ceiling led to the first downgrade of US debt in history, and counter intuitively was followed by a decline in equities and a rally in bonds. At the same time, the European sovereign debt crisis reignited fears of a global recession, while the political landscape of North Africa and the Middle East was permanently changed by the events of the Arab Spring. In China signs of a slowdown in the property market led to more caution on global commodity stocks.

Despite the volatility and oscillations caused by all these events, the FTSE/JSE All Share Index ended 2011 essentially flat. The meagre total return of 2.6% for the year all derived from dividends. In the final quarter of the year, the index was up 8.4%.

Fixed interest assets performed better over the course of the year, with the All Bond Index delivering 8.8%, preference shares 8.4%, inflation-linked bonds 13.1% and property 8.9%.

International equity markets, however, had a poor year, with the MSCI World Index returning -5% and the MSCI Emerging Markets Index -18.2% (both in US dollars). For South African investors, the 22% weakening in the rand over the year helped soften the blow, and resulted in decent rand-based returns. Measured in dollars, the performance of our local assets were much worse than those of developed markets and slightly better than the emerging markets index.

The fund delivered a return of 7.5% for the year, below its benchmark of inflation +4%. This was due mainly to the low returns on offer in local assets - none of the domestic asset classes returned much more than 4% above the average inflation rate over the year (6.4% estimated). The offshore component of the fund contributed to the return. Longer term performance is still satisfactory: over the last three and five years, the fund delivered compound returns of 12% and 9.1% respectively.

Equities are the only asset class that will enable the fund to exceed its inflation benchmark in the medium term. The years in which equities do not outperform inflation by a significant margin will always be challenging for the fund. The low returns on offer this year was unfortunately compounded by our poor stock selection within domestic equities. The equity portion of your fund delivered a return below that of the major market indices for the 12-month period. This was mainly caused by our position in construction stocks and more cyclical companies like Sappi and the platinum miners.

The domestic equity market of 2011 was characterised by strong performances from the relatively defensive industrial sector and underperformance by the more cyclical sectors like resources and construction shares. At current prices, we believe cyclical companies are relatively cheap and price in a very poor outcome. As is often the case, we have entered these companies too early, but we still expect them to provide the fund with good returns going forward. In most cases we used the weakness in share prices to add to our holdings.

The put protection we bought for the fund last year also had a negative impact on our equity performance. When equities perform well, this insurance premium matters less relative to the return generated, but pays off handsomely when the return on equities is negative. In 2011, the cost of protection was more keenly felt as the cost relative to the return on offer was relatively large. We still believe that protecting the equity part of your portfolio is prudent and should pay off in a scenario where equity markets perform poorly. A large part of the cumulative performance of investors over time is by avoiding big capital reductions in tough markets.

The past year was only the second in the last 10 years during which international equity markets outperformed domestic ones when measured in rand. This certainly added to performance, with the international portion of the fund outperforming the MSCI World Index over the period. Much of last year's performance was driven by the significant weakening of the rand and we have hedged back a small part of our offshore currency exposure into rand. We continue to prefer global equities to domestic assets and are close to the maximum allowed weighting.

We remain nervous holders of South African listed property, mainly because of the poor returns on offer in the cash market. The same argument applies to our inflation-linked bonds, where we probably would have been sellers of these instruments had the alternative investments offer more attractive returns. These instruments should also serve us well if our fears of increased inflationary pressures in South Africa play out. We continue to avoid government nominal bonds as we remain negative on global nominal bonds and the potential inflationary pressures referred to above.

We have been warning investors for some time that they should expect weaker returns in future than what they have become accustomed to. The table above should remind us that the last 10 years were unusually fortuitous for domestic assets (and poor for global equities) in the context of longer-term history.

Lower returns will make our mandate more challenging. We are acutely aware that the assets entrusted to us by clients are a critical part of their retirement nest egg. In future, with returns harder to come by we will continue to work hard to generate returns within acceptable risk parameters. We urge clients to be realistic about future returns and select drawdown levels that can be sustained. As has been communicated, Coronation reduced the performance fee participation cap on this fund from 1.5% to 1.0%. This is a material reduction and should aid investors in achieving their financial objectives over the economic cycle.

Portfolio managers
Louis Stassen and Henk Groenewald