The fund outperformed its benchmark by 0.6% p.a. over a rolling 5-year period (9.0% versus 8.4% p.a.). Since inception, the fund has outperformed its benchmark by 3.9% (17.3% versus 13.5%). The fund is one of the top performing funds in its sector over all meaningful periods. There is a sense of déjà vu as the economic and financial outlook continue to be clouded by the eurozone crisis, faltering economic recovery in the US and fears of a hard landing in China. Notwithstanding these lingering concerns, financial markets climbed higher with the MSCI World and Emerging Market indices returning 6.8% and 7.9% respectively for the quarter. Risk appetite returned when Mario Draghi, the European Central Bank (ECB) president, announced that the bank will do 'whatever it takes within its mandate' to preserve the eurozone. While the risk of a disorderly breakup of the euro has reduced, continued austerity will mean that low economic growth (and possibly recession) will be the likely outcome. In China the central bank has begun to ease monetary policy to stimulate economic growth, but the risk of a hard landing remains. As a large consumer of commodities, this risk is likely to place pressure on commodity prices and resource shares. The US Federal Reserve announced another round of quantitative easing to boost the faltering economy, which is being hampered by political dysfunction in the run-up to the November 6 general election. We remain positive on the US economy, which is well-diversified and has a bettercapitalised banking system than its European peers. It is our view that highly accommodative fiscal and monetary policy will manifest in higher inflation in the future and thus equities remain our preferred asset class for producing inflation-beating returns. We continue to hold what we consider to be a slightly underweight equity exposure. Despite the significant uncertainty in global markets, the FTSE/JSE All Share Index is at an all time high. This coupled with our view that domestic equities are fairly valued, does not justify higher exposure. Global equities on the other hand, remain attractive with many multinational blue chips trading on attractive PE multiples and healthy dividend yields. In our funds that permit holding 25% in offshore assets, we continue to hold close to the limit. South Africa's competitiveness as a nation has declined over the years. This is symptomatic of a highly inflexible labour force that has consistently received real wage increases without the commensurate productivity gains. The recent events at Marikana, while tragic, will result in a structural increase in labour costs and level of social spend required in the mining sector - a sector already under pressure due to falling commodity prices. The wage settlement reached (despite an existing agreement in place) calls into question the validity of other wage agreements, and labour unrest is unlikely to be contained to the mining sector. At the time of writing, the transport sector and some car manufacturers are on strike. The lost man-days place further pressure on a country already living beyond its means as shown by the large current account deficit. We are becoming increasingly reliant on foreign flows to balance the books. This is simply not sustainable. The rand remains vulnerable given these concerns and we retain a high exposure to attractively valued, rand hedge investments such as MTN, Naspers, SABMiller and British American Tobacco. The All Share Index returned 7.3% for the quarter. Industrials were the best performer with a 10.5% return, financials produced 6.5% and resources lagged at 2.9%. Resource stocks remain under pressure given concerns over the slowdown in China as well as the current labour unrest dominating local and international media. We continue to find value in selected resource stocks, trading at less than 10 times our assessment of normal earnings, namely Sasol, the diversified miners (specifically Anglo American) and Mondi. We have also started buying platinum producers, Impala and Northam. Approximately 75% of the world's platinum is mined in South Africa, which means that our platinum producers enjoy reasonable pricing power, and should therefore be able to recover increasing cost pressures (labour, electricity and water) from customers unlike the gold producers. Impala and Northam are our preferred platinum producers as they are low cost and cash flow positive in the current environment where other platinum producers are bleeding cash. This will allow them to weather the current storm until such time that demand improves. Banks returned 1.9% for the quarter, underperforming other financials. Despite giving up some of the earlier gains during the quarter, banks have returned 21% year-to-date, outperforming the market. We still retain a significant holding on the basis that valuations are fair at 10 times our assessment of normal earnings and price-to-book ratios of 1.8 times, especially when compared to highly valued domestic industrial equities. While inflation is currently contained within the SARB's target band, significant upside risks remain. As such, we remain defensively positioned by owning companies with quality franchises, pricing power and robust business models that are capable of defending and growing their earnings base in real terms. We continue to be cautious on consumer-facing businesses. The share prices of retailers have been bid up by aggressive foreign buying - foreigners now own roughly 40% of most South African retailers. Current valuations combine a high rating with a high earnings base and do not offer a sufficient margin of safety. We continue to find value in selected small caps with approximately 29% of equity invested outside the ALSI40. The disconnection between economic reality and financial markets is likely to persist, driven by the current global zero interest rate policy. Volatility will also persist as markets react to the news of the day.
Portfolio managers
Karl Leinberger and Quinton Ivan

The fund outperformed its benchmark by 0.8% p.a. over a rolling 5-year period (8.6% versus 7.8% p.a.). Since inception, the fund has outperformed its benchmark by 4.0% p.a. (17.2% versus 13.2% p.a.). The fund is one of the top performing funds in its sector over all meaningful periods. Increased risk aversion during the quarter resulted in a reversal of the strong gains enjoyed by equities at the start of the year. This was borne out by the MSCI World and Emerging Market indices which returned -4.9% and -8.8% respectively for the quarter. Europe remains the protagonist dominating global news. Steps to achieving a resolution of the Eurozone crisis were dealt a blow when the electorate of France and Greece voted against the German-enforced austerity measures, thereby increasing the likelihood of a disorderly break-up. This followed the dissolution of the ruling Dutch government on the same austerity issue. In Greece, the pro-bailout parties, New Democracy and Pasok, secured sufficient votes to form a coalition government, slightly reducing the risk of a Greek exit. Investor confidence was further shaken when Spain was unable to escape the contagion of uncertainty which saw Spanish bond yields rise to unsustainable levels. This culminated in a €100 billion bailout package for Spanish banks. Nearly three years into the Eurozone crisis, the economies of Ireland, Portugal, Greece and Spain have been bailed out and we are still nowhere near implementing the necessary structural reforms required for Europe to survive. The risk of a disorderly break-up of the Eurozone, in some form or other, is no longer a tail risk and market volatility will be with us for the foreseeable future. Outside of Europe, the US economy continues to recover; however, the pace has slowed as evidenced by slower gains in employment growth and housing market. To support a stronger economic recovery, the Federal Reserve will maintain a highly accommodative stance on monetary policy. It also announced a decision to extend Operation Twist until the end of the year. While growth has slowed, we remain positive on the US economy - it is well-diversified and has a better-capitalised banking system than its European peers. China's central bank surprised global markets by cutting interest rates for the first time since 2008. The cut follows a revision of its growth target rate to 7.5%. While still robust, this is a significant slowdown from prior years and the recent interest rate cut raises concern of a faster than anticipated slowdown. Austerity in the world's major economies virtually guarantees a low growth environment. To support growth, monetary and fiscal policy is likely to remain highly accommodative. Longer term we remain concerned that near zero interest rates and ultra loose monetary policy will manifest itself in higher inflation. In a low growth, high inflation environment, equities remain our preferred asset class for producing inflationbeating returns. We continue to hold what we consider to be slightly underweight equity exposure. Despite the significant uncertainty in global markets, the All Share Index is close to an all time high. This coupled with our view that domestic equities are fairly valued, does not justify higher exposure. Global equities on the other hand, are discounting a global downturn. This coupled with attractive valuations justifies a holding close to the 25% offshore limit in our domestic balanced funds. Increased risk aversion saw the rand, like most emerging market currencies depreciate significantly relative to the dollar over the quarter. We have raised concerns that the rand was overvalued in previous commentary. Post the recent sell-off it is closer to what we consider to be fair value, which still justifies a high exposure to rand hedge investments such as MTN, Naspers, SABMiller and British American Tobacco. They remain attractively valued relative to pure domestic businesses and comprise approximately 73% of our equity portfolios. The All Share Index returned 1% for the quarter. Financials were once again the best performer with a 4.6% return. Industrials returned 2.6% and resources lagged with a -3.6% return. Resource stocks remain under pressure given concerns over the slowdown in China, a large consumer of commodities. Although most commodity prices remain high, we believe that resources currently offer value, with selected resource shares trading at less than 10 times our assessment of normal earnings. While we continue to buy resources, the sustainability of Chinese demand remains the great imponderable and we do not have sufficient conviction to justify higher exposure at current prices. Our preferred resource holdings continue to be Sasol, the diversified miners (specifically Anglo American) and Mondi. We remain underweight gold shares as we believe they are overvalued based on our assessment of normal earnings. We also remain concerned over declining grades, impact of safety stoppages on production and enormous cost pressures faced by these businesses (labour, electricity and water). Banks returned 2.7% for the quarter, underperforming other financials. We have long espoused the attractiveness of SA commercial banks in previous commentary. Year-to-date, banks have returned 18.8%, comfortably outperforming the market and we have taken profits. We still retain a significant holding on the basis that valuations are fair at 10 times our assessment of normal earnings and price-to-book ratios of 1.8 times, especially when compared to highly valued domestic industrial equities. The SA economy continues to show reasonable growth. Despite the sell-off in the rand, falling oil and food prices have resulted in inflation surprising on the downside. While the latest CPI figure of 5.7% is within the SARB's target range of 3% to 6%, we are concerned about inflation longer term. This is premised on high administered prices, above inflation wage settlements and accommodative monetary policy as evidenced in current negative real rates. While the recent downside surprise raises the prospect of a rate cut, we continue to believe that the next meaningful move in interest rates will be higher. Given these concerns, we remain defensively positioned owning companies with quality franchises, pricing power and robust business models. We are cautious on consumer-facing businesses and believe current valuations that combine high ratings with high earnings do not provide a sufficient margin of safety. We continue to find value in selected small caps with approximately 29% of equity invested outside the ALSI40. Markets remain extremely challenging. We expect volatility to continue, exacerbated by political brinkmanship and policy paralysis, especially out of Europe. In an environment where markets oscillate wildly depending on the news of the day, we remain committed to our investment philosophy of 'cutting out the noise' and investing for the long term.

Portfolio managers
Karl Leinberger and Quinton Ivan

The fund outperformed its benchmark by 1.0% p.a. over a rolling 3-year period (23.6% versus 22.6% p.a.) and by 1.0% p.a. over a rolling 5-year period (9.0% versus 8% p.a.). Since inception, the fund has outperformed its benchmark by 4.2% (17.5% versus 13.3%). The fund is one of the top performing funds in its sector over all meaningful periods.

Equity markets had a fantastic start to the year with the MSCI World and the MSCI Emerging Market indices returning 11.7% and 14.1% (in US dollars) respectively for the quarter. Risk assets received support during the quarter from the approval of a bail-out for Greece and another tranche of easing by the ECB via the long-term refinancing operation (LTRO). Financial markets have seemingly shrugged off concerns over the European sovereign crisis, a soaring oil price and a potential Chinese hard landing.

While the 'risk on' switch may be pressed at present, we remain cautious on the global economy. Europe remains in crisis and an orderly default from over-indebted sovereigns (like Greece and possibly Portugal and Ireland) is a likely outcome. We expect some fiscal transfer from Germany and France to the periphery in exchange for these sovereigns relinquishing some of their financial autonomy. While Europe may avert a recession, a period of stagnation is a certainty. The key risk remains a vulnerable banking system in the event of a disorderly default.

The US economy, on the other hand, continues to recover - employment, retail sales and housing data all show an improving trend. While economic growth has the potential to surprise on the upside in 2012, the US financial system relies on investor confidence. If one blocks out the name of the country and looks at the magnitude of the budget deficit, coupled with the unprecedented fiscal and monetary stimulus thrown at the global crisis, you would be hard pressed to understand why US treasury yields are so low.

A further risk to global economic growth remains China. It is an unbalanced economy driven by significant investment in infrastructure and very little domestic consumption. As a large consumer of commodities, the fortunes of resource shares will rise and fall with Chinese demand. During the quarter, China revised their target growth rate to 7.5%. While still robust, this is a significant slowdown from prior years and spooked markets causing a sell-off in commodities and other risk assets.

Austerity in the world's major economies virtually guarantees a low growth environment. This low growth will be punctuated with periods of significant volatility as markets react to the news of the day. We continue to believe that inflation remains a threat longer term, given accommodative monetary and fiscal policies in the world's major economies. This is the price to be paid for running three decade low interest rates together with three decade high debt levels. In a low growth, high inflation environment, equities remain our preferred asset class for producing inflation-beating returns. We continue to hold what we consider to be a neutral equity exposure in our balanced funds. At the time of writing, the All Share Index is very near an all time high and is certainly not pricing in a sharp correction in the global economy. This, coupled with our view that domestic equities are fairly valued, does not justify higher exposure. Global equities on the other hand, are discounting some probability of a global downturn. We remain of the view that global equities are far more attractively valued than domestic equities and consequently our domestic balanced portfolios remain close to their 25% offshore limits.

The return of risk appetite saw the rand appreciate by 5% relative to the dollar for the quarter. We believe the rand is overvalued and maintain a high exposure to rand hedge investments such as MTN, Naspers, SABMiller and British American Tobacco. These shares remain attractively valued relative to pure domestic businesses and will benefit from a depreciation of the rand. At quarter end, approximately 62% of our equity portfolios were invested in rand hedge counters. The All Share Index returned 6% for the quarter. Financials were the best performer with a 12.8% return. Industrials returned 10.5% and resources lagged with a -3.4% return. Resource shares have now underperformed financials and industrials over 3, 5 and 10-year periods. We remain slightly overweight resources in our equity and balanced portfolios. Although most commodity prices remain high, we believe that resources currently offer value, with selected resource shares trading at less than 10 times our assessment of normal earnings. The sustainability of Chinese demand remains the great imponderable and we do not have sufficient conviction to justify higher exposure at current prices. Our preferred resource holdings remain Sasol, the diversified miners (specifically Anglo American) and Mondi. We remain underweight gold shares as we believe they are overvalued based on our assessment of normal earnings. We also remain concerned over declining grades, impact of safety stoppages on production and enormous cost pressures faced by these businesses (labour, electricity and water).

Banks returned 15.6% for the quarter, outperforming other financials. We have advocated the attractiveness of SA commercial banks in previous commentaries, and while we have taken some profits, we remain overweight on the basis that valuations are attractive at 9.5 times our assessment of normal earnings and priceto- book ratios of 1.7 times. Earnings remain below our assessment of normal as a result of depressed net interest margins, driven by 30-year low interest rates, and high credit loss ratios.

The SA economy, while by no means booming, continues to show reasonable growth. Despite a strong rand, inflation remains above the SARB's target range of 3% to 6%. Although food inflation appears to have peaked (for now), we expect inflation to remain above target until around mid-2013 driven by high administered prices, above inflation wage settlements and accommodative monetary policy. Monetary policy is already loose as evidenced by a negative real repo rate. This, coupled with inflation that is above target, points to the next meaningful move in interest rates to be higher. Given these headwinds, we remain defensively positioned, owning companies with quality franchises, pricing power and robust business models such as Mediclinic International, Famous Brands, AVI and the Spar Group. We are cautious on consumer-facing businesses and believe current valuations that combine high ratings with high earnings do not provide a sufficient margin of safety. We continue to find value in selected small caps with approximately 30% of the fund invested outside the ALSI40. The fund currently offers 30% upside to our assessment of fair value for the underlying counters.

We expect markets to remain challenging for the foreseeable future. In an environment where equities are no longer breathtakingly cheap, stock picking becomes more important. We remain committed to our philosophy of investing for the long term and capitalising on any mispriced opportunities as markets respond to short-term news and where emotion trumps reason.

Portfolio managers
Karl Leinberger and Quinton Ivan

The fund outperformed its benchmark by 1.0% p.a. over a rolling 3-year period (18.9% versus 17.9% p.a.) and by 1.2% p.a. over a rolling 5-year period (9.8% versus 8.7% p.a.). The fund is one of the top performing funds in its sector over all meaningful periods.

The past year was characterised by periods of extreme volatility. In the first half financial markets had to digest the implications of the political unrest in North Africa and Middle East as well a devastating earthquake and risk of possible nuclear meltdown in Japan. The second half was dominated by continued political wrangling which saw policy makers fail to resolve the ongoing Euro crisis. This fuelled uncertainty as global investors reduced exposure to growth assets.

The global economy and financial system remain unbalanced and are being distorted by unprecedented monetary and fiscal stimulus. The precarious state of the global economy has a bearing on market sentiment. In volatile times, emotion often trumps reason resulting in investors mispricing assets. As a valuation-driven, bottom-up stock-picker, Coronation remains resolute in its philosophy of investing for the long term. While this may result in periods of short-term relative underperformance, we believe it will produce superior returns for our clients over the long term.

Given the current global and domestic economic outlook, equities remain our preferred asset class for producing inflation-beating returns. Following the panic that consumed markets in the third quarter of 2011, equity markets recovered in the final quarter which created the opportunity to reduce exposure to what we consider to be a neutral equity exposure in our balanced funds. The All Share Index is currently very near an all time high and is certainly not pricing in a sharp correction in the global economy. This coupled with our view that domestic equities are fairly valued, does not justify higher exposure. Global equities on the other hand are discounting some probability of a global downturn. Domestic equities have outperformed global equities significantly over the last decade (15.2% p.a. for the All Share Index versus 0.1% p.a. for global equities in rand terms). We remain of the view that global equities are far more attractively valued than domestic equities. This view was vindicated in 2011 with the MSCI World Index (in rand terms), comfortably outperforming the All Share Index by 13% for the year (15.8% for the MSCI World Index versus 2.6% for the All Share Index). Our domestic balanced funds remained close to their 25% offshore limit for the duration of the year.

After a prolonged period of strength, the rand (together with other emerging market currencies) experienced a sharp selloff towards the end of the third quarter. Given our long-held view that the currency was overvalued, our rand hedge investments such as MTN, SABMiller and British American Tobacco contributed to overall equity performance. We continue to favour global businesses that happen to be listed in South Africa. They remain attractively valued relative to pure domestic businesses and are diversified across numerous geographies and currencies. At the end of 2011, approximately 63% of the fund was invested in rand hedge counters.

The All Share Index returned 8.4% for the quarter. Industrials were the best performer with a 9.2% return. Financials returned 8.7% and resources lagged with a 7.3% return. Resource stocks have now underperformed financials and industrials over a 3-year period. Having remained underweight resources for most of the year, we moved slightly overweight. Although most commodity prices remain high, we believe that resources currently offer value, with selected resource shares trading at less than 10 times our assessment of normal earnings. The great imponderable impacting commodity prices and therefore the valuations of resource shares remains demand from China. China has been the single largest consumer of commodities, responsible for, on average, approximately 40% of global demand for most commodities (and even higher in the case of iron ore where China constitutes 60% of global demand). The Chinese economy is extremely unbalanced having been driven by significant investment in infrastructure and very little domestic consumption. The country is also in the process of attempting to cool an overheated property market. Any Chinese hard landing will have dire ramifications for commodity prices and consequently, the pricing of resource shares. It is for this reason that we remain only marginally overweight. Our preferred resource holdings are Sasol, the diversified miners (specifically Anglo American) and Mondi Limited. We remain underweight gold shares as we believe they are overvalued based on our assessment of normal earnings. We are also concerned over declining grades and enormous cost pressures faced by these businesses (labour, electricity and water).

Banks returned 7.8% for the quarter, underperforming other financials. Banks have been very poor performers, however we continue to hold our overweight position on the basis that valuations are attractive at 9 times our assessment of normal earnings and price-to-book ratios of 1.7 times. We believe earnings are low as a result of low net interest margins and high bad debts. This, coupled with a low rating, represent a highly attractive investment proposition.

In contrast, we remain concerned over the earnings base for the average industrial company, especially consumer-facing businesses. These businesses have benefitted from significant tailwinds such as falling inflation, declining interest rates, an emerging middle class and significant social grants. These benefits are in the base, which will make it challenging for these businesses to defend and grow off their current earnings. Consequently, we own very little retailers, other than Woolworths and Mr Price and remain defensively positioned. We continue to find value in selected small caps.

It remains our view that the global economy will face an extremely difficult period in the years ahead. The investment environment is therefore likely to remain volatile and challenging for the foreseeable future. Global equities, however, discount many of these concerns and we believe offer good value. In an environment fraught with uncertainty, we remain committed to our investment philosophy of investing for the long term.

Portfolio managers
Karl Leinberger and Quinton Ivan