The past few months have seen one of the most vicious sell-offs in global equity markets since formal stock markets were established. Global Emerging Markets (GEM) have fared worse than most and at the time of writing (12 October 2008) they have lost over half of their value in dollars this year. This is largely due to stock market declines but also partly due to depreciating emerging market currencies.

When the fund launched in January this year, it was our view that emerging markets were generally expensive, in particular the BRIC countries (Brazil, Russia, India and China) but that there was selected value in some of the more out of favour countries like South Africa and Turkey. The fund therefore held 40-50% in cash in its early days and began adding to the equity exposure as emerging markets started declining in January and February. Today, given the significant declines in GEM equities, we are finding a ton of value and are subsequently fully invested (90% equity exposure).

For the year- to-date (1 January 2008 - 30 September 2008) the MSCI GEM index declined by 21.8%. In contrast, the Coronation Global Emerging Market Fund declined by 7.3%. Whilst the fund is therefore almost 15% ahead of the index, it is never pleasant to have negative returns. We do however believe that GEM equities are now very cheap and that our decision to be fully invested at this point will generate rewards over time. The MSCI GEM equity index is now trading on an 8.5 P/E and the dividend yield is above 3%.

The market declines have been most severe in the BRIC countries. This makes perfect sense: these countries were investors' favourite and when everyone likes something, valuations typically become extended. Today, given the large declines in these markets, we are spending most of our time looking at stocks in these four countries. Members of the team have just returned from a trip to Russia and we are currently preparing for a research trip to India. While we believe that China and India are still generally expensive (to the extent that we are still unable to find even one undervalued share in India) we are now finding better value in Brazil and have been adding to the fund's Brazilian exposure. Russia however, is where we feel the real massive opportunity now lies. The Russian market has crashed (there is no other word for it) and is now down almost 70% from its peak earlier in the year.

Russia is a resource-rich (particularly oil & gas) country that has benefited significantly from the commodity boom of the past several years. The country has a large population (140 million), and including the former Soviet states, which share linguistic and historic ties, the total population on this land mass is closer to 300 million. The commodity boom has resulted in high GDP growth and a significant increase in disposable incomes. While the best days for commodities may be over, demand from other emerging market countries like China and India will not suddenly come to an end. In our view oil & gas in particular have favourable long-term supply and demand fundamentals, which bodes well for any country rich in these reserves, as Russia is.

The large decline in the Russian market has been driven by a multitude of factors, including high valuation levels due to a frenzy for Russian equities by foreign (momentum) investors which was followed by reduced risk appetite by these same investors given the turmoil in global markets. Declining oil prices have also played a role as has the invasion of Georgia and a verbal attack by President Putin on one of Russia's mining company's (Mechel). There is no doubt that the outlook for Russia over the shorter term is worse than it was 6 months ago. There is also no doubt that the risk rate for Russia has increased given the political uncertainty. However, being long-term, valuation-driven investors, the key issues for us are the longterm prospects for the Russian economy and businesses and if the valuations are attractive. The long-term prospects, in our view, are still very promising and the valuations are extremely cheap.

Some 5% of the fund was invested in Russia on launch, but with the sharp share price declines and ongoing buying over the past few months we now have 15% of the fund invested in Russia. We have invested in several Russian (and Russiandominated) companies including: Gazprom, the state controlled gas company which supplies 25% of Western Europe's gas requirements; Sberbank, which is the largest bank in Russia with an unparalleled retail branch network; MTS and Vimpelcom, who are the #1 and #2 mobile phone operators respectively; NLMK, a steel company that is largely fully integrated and generates amongst the highest margins within the global steel company universe, and X5 Retail, the largest food retailer in Russia that continues to consolidate what is a fragmented market. In addition to these Russian companies, the fund is invested in Carlsberg who, although being listed in Denmark, generates half their profits from the Russian beer market, and Food Empire Holdings, a Singapore-listed food and beverage company that owns the best selling instant coffee brands in Russia, Ukraine and Kazakhstan.

All the Russian companies that we hold now trade on single digit multiples, but the extent of the buying opportunity in Russia today is perhaps best illustrated by considering the valuation of Gazprom, which is now trading on a 2.5 P/E of what we believe the company will earn 2 years from now (assuming an arguably conservative oil price of US$ 70). This is simply not rational and we believe that the fund will benefit significantly over time from these investments in Russia, and indeed many other emerging market countries, today.

Gavin Joubert, Mark Butler and Suhail Suleman
Portfolio Managers

The Coronation Global Emerging Market Fund launched on 28 December 2007 after a 2 year preparation process, which included the hiring of a team of six investment professionals and the researching of stocks within the emerging market universe for potential inclusion in the portfolio.

Whilst emerging markets have just experienced 5 years of 30% per annum appreciation, resulting in valuations that are at the high end of their historical range, we believe that the long-term (5-10 year) potential investment opportunity is still extremely compelling. This is perhaps best illustrated by the table below which shows that whilst 85% of the world's population live in emerging markets, these markets only contribute 30% of the world's GDP and make up 20% of the world's stock market capitalization. Given the economic growth rates in emerging markets (more than double that of developed markets) within the next 25 years emerging markets are likely to make up 50% of the world's GDP and in turn it's quite possible that the market capitalisation approaches a similar ratio. We are certainly cautious of emerging market valuations in general at the moment. However, just as there are always shares in any stock market that are in favour and as a result arguably overvalued and shares that are out of favour and arguably undervalued, the same holds true in emerging markets. Today, countries like Brazil, Russia, India and China (the so-called BRIC countries) are very much in favour, with the result that valuations are in our view generally unattractive. At the same time, there are many countries like Mexico, Turkey, Korea and South Africa (and companies in these countries) that are out of favour with resultant valuations that are in our view very attractive. As a result, the portfolio has a relatively small amount invested in the BRIC countries and a relatively large amount invested in Mexico, Turkey, Korea and South Africa. The mandate of the fund has been designed to be as flexible as possible, to enable the fund to hold large holdings of cash should attractive opportunities not be available due to valuation levels. The fund started the year with very high levels of cash (some 40% - 50% of the portfolio during January) but bought as equities declined during January and February. We continued to add to equity exposure with the result that the fund is now 90% invested in equities and 10% in cash. Over the past six months, the fund has built up positions in several great businesses across a range of emerging markets at what we believe are very compelling valuations. While we will discuss many of these investments in more detail in future reports, opposite we provide investors (and potential investors) with a feel for the holdings in the portfolio:

o Naspers (South Africa): owner of dominant Pay-TV assets in South Africa and Africa as well as stakes in leading internet assets in China, Poland and Russia
o Gazprom (Russia): owner of the largest gas reserves in the world
o Sberbank (Russia): largest and dominant bank in Russia
o America Movil (Mexico): #1 mobile operator in Latin America
o Grupo Televisa (Mexico): dominant media (TV and Pay-TV) owner in Mexico
o Cemex (Mexico): 3rd largest cement company in the world
o Coca-Cola Femsa (Mexico): #1 Coca-Cola bottler in Latin America
o Embotelladora Andina (Chile): Coca-Cola bottler in Chile, Argentina and Brazil
o Telkom Indonesia: #1 mobile and fixed-line operator in Indonesia
o Garanti (Turkey): One of the 5 largest banks in Turkey
o Focus Media Holding (China): dominant owner of out-ofhome media assets in China
o Bovespa Holdings (Brazil): operator of the Bovespa Stock Exchange.

Emerging markets can be very volatile and this year has been no different. The graph below shows the performance of the MSCI Global Emerging Market index (in US dollars, based to 100) from 1 January to early July. In the space of just six months, emerging markets fell by 12%, appreciated by 11%, declined by 14%, rose by 18%, and finally fell by 14%! We include this merely to make the point that we would encourage potential investors in the fund only to invest if they are prepared to take a long-term view and can stomach short-term volatility. A 6-month period, or indeed even a 1 or 2 year period is far too short to draw any conclusions on performance. That said, the fund has had a reasonable start with a return of +7.3% year-todate compared to the 1.5% return from the MSCI GEM index. The prospects for emerging markets over the next 10 years are very exciting and there are numerous great businesses to be found in these markets at attractive valuations. We look forward to the challenge of uncovering the best of these opportunities and in doing so, achieving the fund's objective of generating capital appreciation over the longer-term by investing in emerging markets.

Gavin Joubert & GEM Team
Portfolio Managers