Equity markets in the third quarter delivered a phenomenal return with nearly all stocks in the top 150 delivering positive returns. The clear winning sector was the resource sector where renewed excitement about commodity prices saw local and foreign investors buying commodity shares aggressively. Concerns around the oil price, the impact of the various hurricane disasters in the US and both of these external shocks on the global economy also saw a surge in the gold price and exponential movements in the gold shares. Despite this, domestic-oriented shares still delivered decent returns for the quarter, driven mainly by strong earnings growth.

The Coronation Equity Fund delivered a phenomenal 17.6% in the quarter driven by strong returns from our stock picks. This was however behind the 19.2% return from the All Share Index for the quarter. Our large underweight in Anglo American (up 18% in September alone!) and underweight in Billiton counted against us during this quarter as they were both up in excess of 21% for the quarter. In addition, gold shares also had a strong run, up on average 22% for the quarter, and once again we have a significant underweight here. It bears repeating that we are long-term investors who identify businesses that represent value in the medium to long term. Our view, which remains consistent, is that the resource shares are pricing in very optimistic forecasts of metal prices which are well above their long-term means. We continue to be underweight most of these companies. We did however benefit handsomely from our positions in Impala and Sasol which also did well during the quarter.

During the quarter we took advantage of price movements to add to our holdings in Remgro and SABMiller. These are two excellent businesses which are great investments on their own merits and also add an element of currency protection. We also added further to our holding in Woolworths which has since continued to perform superbly as the quality of the underlying businesses becomes evident. Finally we took up a position in the Liberty Group using weakness surrounding some adverse publicity to buy into a business geared to the equity markets, yet not reflecting the strong run that has recently taken place in equities.

The fund has had an excellent year to date and remains comfortably in the top quartile of general equity funds. This longer term performance is generated by taking large positions in companies which we believe are fundamentally undervalued. Such a strategy does not deliver smooth returns from month to month, but typically over a cycle delivers significant outperformance. We believe the fund continues to be well positioned to deliver such returns over the medium to long term. Equity as an asset class remains our preferred asset class and we expect to continue to deliver real returns over our investment horizon.

Neville Chester & Charles de Kock
Portfolio Managers

A steady outperformance of its sector since early 2003 accelerated in 2005, as benefits of Coronation Equity's exposure to big caps and rand hedges kicked in. Most of its top 15 holdings, making up 73% of a focused portfolio, also proved their worth, with particularly strong showings from long-held favourites such as Naspers, Telkom, Impala and Remgro. Overall, the fund continues to impress as a long-term investment.

Financial Mail - 24 June 2005

The first quarter of 2005 was marked by aggressive switching in the local market as investors moved into resources due to a slightly weaker rand. While the overall market was up 5% this was all due to a very strong return from the Resources Index of 15.5%. As a result of our large underweight in resources due to overstretched valuations we slightly underperformed the market, delivering a still pleasing 4% return.
Even more pleasing was our relative return where we remained comfortably in the first quartile of general equity funds due to excellent stock selection. Although underweight resources, our big weighting in outperformers like Sasol and Impala Platinum were key to our returns.
Despite this sudden rotation into resources we remain firmly committed to our large holdings in domestic stocks. We are expecting continued strong earnings growth which has recently been confirmed by some of the strong trading updates from some of our large domestic holdings such as Tiger Brands and Foschini. Despite this excellent growth outlook, ratings remain undemanding and we believe still offer good value to the long-term investor.
Our view of a benign interest rate environment and good economic growth remains intact supported by a reasonably robust rand and good demand for commodities. The greatest risk to our portfolio would be a sudden currency shock necessitating aggressive large interest rate hikes. We do not believe this is likely and have positioned the overall portfolio to benefit from a slowly weakening rand and good domestic growth. Big positions in stocks like Telkom, Naspers, Standard Bank and Absa will benefit from this domestic growth while SABMiller, Sasol and AECI should benefit from strong underlying demand for their products as well as a slightly weaker currency.

The fund owns a maximum of 30 shares and aims to reflect Coronation's main house view equity bets, so there are chunky holdings in house favourites such as Telkom and Naspers. The portfolio has a higher rand hedge component (Implats, Sasol and Remgro) than most of its competitors as it considers many of the domestically focused businesses, such as credit retailers, to be overpriced.

Financial Mail - 11 February 2005

Neville Chester, a key member of the Coronation investment team since August 2000, has been appointed as manager of the Coronation Equity Fund with effect from 1 February 2005.

Just over two years ago, in line with its change to a pure domestic fund, the Equity Fund has remained in the upper quartile amongst its comparable peers. Furthermore, it has managed to consistently outperform its benchmark.
Our focused approach to the investment process is working and we see no reason why we should not increase this focus to say 25 stocks instead of the self imposed 30 stock mandate. This always will bring short-term volatility but in the long term increased returns. It is far easier to understand and monitor a small group of shares than a large one.
The markets have been very rewarding for investors over the last two years. A pull back of some kind is expected. Furthermore the global landscape does not look encouraging. The long-term effect of the US not being a provider of the last resort will bring major upheaval to many economies. Local markets will not escape this adjustment. Fortunately there is a strong underpin to earnings for local companies.
Should the rand weaken the fund is well positioned. Counters such as Bidvest, Impala, Sasol and Remgro have a strong rand hedge element to their earnings. Together this group makes up almost 20% of the fund.