The fund had a strong quarter, delivering a return of 8.1%. Its long-term track record remains compelling, with the fund performing well against both its peer group and the quantitative benchmarks over most meaningful periods.

Our large weighting in global and, in particular, selected emerging market equities, significantly added to fund performance this quarter. Three of the fund’s largest international holdings, i.e. Kroton (+41%), Sberbank (+41%) and 58.com (48%) delivered very strong performances during the quarter. 58.com operates an online marketplace in China for local merchants and consumers. We believe the business will benefit from the secular trends in China of increasing online hiring, secondary housing transactions and used goods sales, all of which are still at very low penetration rates. 58.com is on the cusp of becoming the dominant online multi-category classified business in China and should experience rapid revenue growth, coupled with very strong margin expansion as they leverage their cost base. Tencent also owns a 23% stake in the company - a great partner to have for a business operating in China.

Overall, the JSE had a good quarter, with the All Share Capped Index returning +8.4% (9.4% over a rolling 12-month period). Returns for the quarter were driven by a strong performance from the resources sector (+17.8%) and outsized returns from some of the large industrial sector constituents such as Naspers (+15%) and Richemont (+15%) which masked the poor performance of many SA-focused domestic shares. The financial sector lagged the overall market, returning 5.1% for the quarter with life insurers underperforming in this challenging operating environment. Although we still maintain a relatively full offshore equity position, we have used further weakness in the rand and domestic equity markets to gradually increase our domestic equity exposure.

We continue to maintain a reasonable exposure to resources in our equity and balanced funds based on our assessment of their long-term value. Our overweight positions in Anglo American (+41%), Exxaro (+35%), Glencore (27%) and Northam (+16%) have all contributed meaningfully to performance over the past quarter but we still see value in these stocks from current levels. As examples; Anglo American is trading on c9x and Exxaro c7x our assessment of normal earnings respectively. An interesting theme buoying commodity markets of late has been China’s increasing focus on air pollution. The Chinese government has clamped down and enforced production cuts in a number of commodities. These include coal, steel, iron ore and aluminium. This has had a series of knock-on effects as in some cases China has had to increase imports, thereby buoying prices. Oil prices also moved sharply higher during the quarter (+14.5% in US dollars) as OPEC producers adhered to planned supply cuts. However, gains in Sasol were muted due to the announcement around the unwinding of its BEE scheme and the potential dilution from the replacement scheme. We have used price weakness to increase our position. The company’s $11 billion Lake Charles Chemical project on the US Gulf Coast will be starting up in the next 18 months. As the capital spend on this project tapers off and the plant ramps up, Sasol will start to generate significant amounts of free cash flow. This will enable de-gearing of the balance sheet and support healthy earnings growth in the medium term.

Earnings disappointments, deteriorating investor sentiment and large share price declines have provided an opportunity to increase our stakes in some defensive, high-quality, domestic businesses. We have bought broadly in names including Spar, Netcare and Curro. Funding for these positions has come predominantly from a reduction in the size of the Naspers position. This has certainly not been an easy call to make. The Naspers investment case remains compelling; Tencent is a phenomenal business and is at the core of a rapidly growing Chinese internet economy with numerous opportunities to further monetise its massive user base. As an example; we believe that Tencent’s move into payments and financial services creates a market opportunity several times the size of its current gaming business. Naspers currently trades at an almost 30% discount to its Tencent stake alone - in our view, a complete pricing anomaly. Furthermore, we have been very encouraged by the steps Naspers management have taken to streamline the rest of the Naspers portfolio. Although Naspers remains the largest single position in the fund, we felt that the absolute size of this position had grown too large for a clean-slate fund and had created stockspecific risk for investors in absolute terms.

The local equity portfolio remains skewed towards stocks with large offshore earnings exposure (Naspers, British American Tobacco, MTN, UK-listed property holdings and Steinhoff). We believe valuations for these businesses are extremely attractive. As an example:

· Steinhoff: After significant underperformance over the past 12 months, Steinhoff is now trading on a 10x 1-year forward PE multiple and c8.5x our assessment of normal earnings. We acknowledge the risks in the investment case (aggressive tax planning, high gearing levels, continuous M&A activity) but still believe the stock is breathtakingly cheap and we rate the management team highly.
· MTN is a business that has been undermanaged for a number of years and although there have been several positive developments in recent months, this has yet to reflect in market sentiment towards the stock and in its share price. The history of operational disappointments in Nigeria and South Africa, which have decimated the earnings base; the current negative investor sentiment towards volatile markets like Nigeria, Iran and Syria; and the regulatory headwinds across its various geographies have scared off many in the market. However, given this low base, coupled with the sweeping management changes that took place over the past 12 months, we are very excited about the opportunity for a significant turnaround. MTN is trading on 9.5x our assessment of normal earnings.
· UK property stocks: The share prices of these stocks have been hit hard by the uncertainties surrounding Brexit. It is difficult to know with certainty how these will play out, but Intu, Hammerson and CapCo currently trade at substantial discounts to their reported NAVs (43%, 31% and 23% respectively) and the former two produce forward dividend yields of 6.4% and 5.0%. While the disclosed NAV rests on a number of assumptions regarding future events and may fluctuate somewhat over time, the attractive dividend yields afford one the opportunity to wait for the impact of a more stable environment to manifest.

In this uncertain world, our objective remains on building diversified portfolios that can absorb unanticipated shocks. We will remain focused on valuation and will seek to take advantage of attractive opportunities that the market may present and in so doing generate inflation-beating returns for our investors over the long term.

Portfolio managers
Karl Leinberger, Sarah-Jane Alexander and Adrian Zetler as at 30 September 2017

The fund has delivered a return of 13.7% p.a. over a rolling five-year period (outperforming its benchmark by 0.6% p.a.), 11.1% p.a. over 10 years (outperforming its benchmark by 0.7% p.a.) and 16.3% p.a. since inception (outperforming its benchmark by 3.2% p.a.).

The JSE had another poor quarter, with the JSE All Share Capped index returning a negative 1.0% (1.5% over a rolling 12 months). The local savings industry is not accustomed to so many years of anaemic, low-volatility returns. As a result, we believe that many investors are abandoning equities in favour of the yielding asset classes that have outperformed over this period. We believe this to be an error. We believe that fixed-rate bonds are overvalued, and that equities offer more value than at any other time in the last five years.

The local economy remains mired in recessionary conditions. It is, in fact, deteriorating at an accelerating rate as business and consumer confidence has evaporated in response to a tough economy and very concerning political developments. The defining position in our local equity portfolio remains the high-quality global companies that happen to be listed on the JSE (Naspers, British American Tobacco, UK listed property holdings and Steinhoff). However, we have used the weakness in domestic stocks to start accumulating high-quality stocks that have started to discount the bad news. Examples include Spar and Pick n Pay. These businesses are battling in the tough trading environment. However, both are high-quality businesses that have multi-decade track records of performing well in tough economic times. High-quality businesses always fare better than poor-quality businesses in times of adversity.

The much-feared mining charter was gazetted in the past quarter. This is a draconian piece of regulation (it is technically not legislation because it was not passed by parliament), that would ultimately destroy the mining industry if sanity does not prevail. The local mining industry is on its knees and has shrunk meaningfully over the last decade. The decline over the last decade will be minor compared to the damage this charter would do to the industry, its employees and the surrounding communities. South Africa cannot afford such a damaging outcome. We hold some local mining stocks, although they are largely ones that have excellent empowerment credentials (Northam and Exxaro). No miner will be immune, but these companies will suffer less collateral damage than the rest of the industry.

A high exposure to UK property stocks remains a big differentiator in our fund. They delivered marginally positive returns in the quarter. We consider our three holdings (Intu, Hammerson and Capco) to be exciting opportunities for the patient investor. Our largest holding is Intu, which owns a portfolio of high-quality shopping centres. It currently trades on a 5.5% forward dividend yield and at a 34% discount to net asset value (NAV). The NAV represents the value that independent valuers believe the portfolio is worth in the current depressed retail environment (post a c.6% knock taken for transaction costs). At these yields, we are happy to earn a dividend yield of more than 5% and wait for the uncertainty surrounding Brexit to clear. Although we expect Brexit to be damaging to economic activity, we think that economic considerations will be increasingly prioritised as time passes and reality sinks in for the UK electorate. We therefore do not expect a hard Brexit, one that would permanently and meaningfully destroy the economic prospects of the UK.

The fund retains the maximum exposure to global equities. Although many believe global equities to be overvalued, we continue to find many highquality stocks at attractive prices. The fund's exposure to emerging market equities has contributed to performance in the recent past. A good example of this is the exposure to two Russian stocks, X5 and Sberbank. These holdings do not reflect a strong macro view on the Russian economy, but rather the very attractive valuations that they trade on.

Markets remain as uncertain and challenging as ever. However, we are comforted by the fact that we find more value today than we have at any time over the last five years. Volatility is not to be feared. It typically presents great opportunity to the patient, long-term investor. We remain alert to opportunity. We also understand the risks that the current environment presents to the real value of our clients’ retirement capital. We believe that it is in these difficult times that we can add most value to our clients.

Portfolio managers
Karl Leinberger, Sarah-Jane Alexander and Adrian Zetler as at 30 June 2017

The fund has delivered a return of 13.8% p.a. over a rolling five-year period (outperforming its benchmark by 0.2% p.a.), 11.4% p.a. over 10 years (outperforming its benchmark by 0.6% p.a.) and 16.6% p.a. since inception (outperforming its benchmark by 3.2% p.a.).
Global markets continued to climb a wall of worry in the first quarter of 2017, with the US equity markets leading the charge. The All Share Index returned 3.8% for the quarter and 2.5% for the rolling 12-month period.

The local economy weakened in the quarter with real retail sales dipping into negative territory for the first time since the global financial crisis. A fragile economy was further undermined by political events towards quarter-end. The firing of former finance minister, Pravin Gordhan, damages fiscal credibility. As the ANC leadership battle continues to play out in the lead up to their national conference in December, we expect significant volatility and uncertainty to prevail. The outcome of this conference will prove to be a defining one for all stakeholders.

We see value in SA equities, which have delivered close to zero return over the last three years. Our rand hedge holdings, in particular, offer compelling stock-specific fundamentals. These remain the cornerstone of the fund. An example of where we have increased exposure during the quarter is MTN. After many years of misguided investment in the business, we are very encouraged by the new management team's actions to date. We think there is enormous opportunity to rejuvenate the company, improving capital expenditure efficiency and driving margins across the group. The share has halved from its peak a few years ago and sentiment is currently very negative. Although the risks inherent in regions like Nigeria and Iran are high, we believe that the potential upside in the stock justifies our current weighting.

Prices in the resource sector spiked towards quarter-end due to the earnings protection they offer as a result of the weaker rand. Stock picks that performed well include Northam Platinum (up 27%), Exxaro (up 32%) and Glencore (up 13%). Although we have taken profits in some of our resource holdings, we retain a meaningful weighting in the sector. The platinum sector remains an interesting one. Although the equities have recovered strongly off their lows, they remain depressed. A stock like Impala trades 87% off its peak at the top of the commodity market in 2008. It trades at a 50% discount to its book value and only breaks even at current platinum group metals (PGM) prices. PGM markets are in deficit and mine supply is likely to continue to reflect the mining companies' underinvestment over the last 10 years. The industry cannot survive at current prices. We think there is significant optionality, should prices increase to a level sufficient to keep platinum miners in business. Northam is our key pick in the sector. It is a low-cost producer with less labour intensive operations than its peers. A strong balance sheet and significant optionality in its ore bodies supports its ability to grow relatively quickly, should the cycle turn.

Financials underperformed for the quarter as the market priced in the ramifications of rising capital costs and a more challenged domestic economy. Reliance on external funding and heavily geared balance sheets make banks extremely vulnerable to shocks of this nature. We have not yet considered taking advantage of the lower prices in the sector as we believe the risks are skewed to the downside, given the market's very benign reaction to recent developments.

UK property stocks remain a meaningful exposure in the fund. We believe that the sector is an exciting opportunity for the patient investor. Our largest holding is Intu, a portfolio of high-quality shopping centres. It currently trades on a 5% dividend yield and a 30% discount to net asset value (NAV). The NAV represents the value that independent valuers believe the portfolio to be worth in the current depressed retail environment (post a c.6% knock taken for transaction costs). At these yields we are happy to earn a 5% dividend yield and wait for the uncertainty surrounding Brexit to clear.

The fund increased its position in Porsche, the holding company of VW. The stock trades at just over five times 2018 earnings, which is very cheap in the context of what we believe to be exciting prospects over the next five years. The 'dieselgate' scandal was a watershed moment for VW. Although it has caused much damage, we believe it has driven a very positive change in the company's culture - one that better prioritises shareholders' interests (this should strongly support the bottom line in the years ahead).

The world remains as uncertain as ever. Internationally, 2017 has thus far not delivered the kinds of surprises that we saw in the prior calendar year. With the upcoming elections in France, a volatile US government and rising US interest rates, we remain alert to opportunity. The South African political environment has been less benign. In aggregate, we think the portfolio is well positioned with an overweight position in rand hedge equities. We do not believe that the decline in pure domestic stocks compensates investors for the deterioration in the macroeconomic environment and enhanced risk. Our disciplined and long-term investment philosophy, and the advantage it typically provides in volatile periods, remains our anchor in these uncertain times.

The fund has delivered a return of 14.1% p.a. over a rolling five-year period (marginally underperforming its benchmark by 0.3% p.a.), 12.0% p.a. over 10 years (outperforming its benchmark by 0.5% p.a.) and 16.5% p.a. since inception (outperforming its benchmark by 3.2% p.a.).

2016 was a year full of surprises. Against the backdrop of Brexit and the election of Donald Trump as the next US president, not many would have anticipated the resilient performance delivered by global markets over the 12-month period. In US dollars, the MSCI All Country World Index returned 7.9% for the year, while the MSCI Emerging Market Index delivered 11.2%. It is principally this strength in the rand that resulted in the anaemic returns from local equities for the year. The FTSE/JSE All Share returned 15.9% for the year in US dollars, but only 2.6% in rands (this comparison is necessary in an equity market where more than 50% of that market has rand-hedge qualities).

The strong recovery in commodity prices in 2016 surprised all and sundry. This resulted in a very strong performance for resource shares, which returned 34.3% for the year, comfortably outperforming industrials and financials (that returned -6.6% and 5.4% respectively). Some of the notable moves (in US dollars) in commodity prices included zinc (+61%), oil (+52%), and palladium (+21%). The fund accumulated an overweight position in resource shares in 2014 and 2015 which detracted from performance over that period. However, much of this underperformance was recouped in 2016 with the surprising recovery in the sector vindicating our view that markets cannot be timed.

As expected, the US Federal Reserve continued the process of increasing interest rates off multi-century lows. Our base case remains that the pace of interest rate normalisation will be gradual and that interest rates will remain at historically low levels for longer. Despite the obvious political uncertainties inherent in a Trump presidency, markets have taken the view that accommodative monetary policies, fiscal stimulus (lower taxes and increased state spending on infrastructure), and a commitment from the US government to cut regulation and support business will be very positive for equities.

Locally, the political backdrop remains volatile; however, with the progress made since Nenegate, we have seen some improvement in investor sentiment. We expect the outcomes of the ANC elective conference in December will prove to be a defining moment in SA’s history. Despite the weak base set in 2016, the domestic economic growth outlook remains anaemic.

Notwithstanding the very strong performance of the resource sector in 2016, the longer-term underperformance relative to industrials and financials remains stark. Based on our assessment of fair value, resources are attractive enough to warrant a reasonable weighting in portfolios. We have however trimmed some positions into strength given the reduced margin of safety. Our preferred holdings remain Anglo American, Mondi, Exxaro and the lowcost platinum producers Northam and Impala Platinum. We continue to favour platinum over gold producers.

We believe the global businesses listed in SA are attractively valued and, as such, our portfolios have healthy weightings in stocks such as Naspers, Steinhoff International Holdings, British American Tobacco and Anheuser- Busch InBev. These businesses are exceptionally well managed and are diversified across numerous geographies and currencies, which make for a robust business model and protect the companies from an earnings shock in any single market. High weightings in these stocks reflect our view on underlying valuations and not a view on the currency. We do not currently have a strong view on the currency, believing it to be fairly priced.

We continue to hold reasonable positions in the food retailers and producers as well as selected consumer-facing businesses (Woolworths and Foschini). These businesses are exceptionally well managed and trade below our assessment of fair value.

Banks returned 11.0% for the quarter, outperforming the broader financial index. Valuations remain reasonable on both a price-to-earnings and priceto- book basis. These businesses are well capitalised, well provided for and trade on attractive dividend yields. Our preferred holdings are Standard Bank, Nedbank and FirstRand, and we have increased our exposure to the sector over the last six months. Life insurers returned -2.2% for the quarter. We prefer Old Mutual and MMI Holdings, both of which trade on attractive dividend yields and below our assessment of their intrinsic value.

The global equity picks in the portfolio performed well over the year. The idea behind the fund’s global allocation is that it represents Coronation’s highest conviction stock picks from across the world. Many of these stocks delivered strong performances in 2016, with good examples being the alternative asset managers (Blackstone, KKR and Apollo), Kroton (Brazil’s leading private education company) and Vostok Nafta (a technology investment holding company). Recent additions to the portfolio include Nike (a very high-quality company that has been punished by the market for some recent trading disappointments) and Deutsche Wohnen (a German residential REIT). We believe that house prices in Germany are low. In addition, the residential market is undersupplied and strong demand from a buoyant domestic economy should serve as a further underpin in the years ahead.

As we start a new year, we are bombarded with predictions from numerous financial experts about what lies ahead in 2017. History has taught us that our ability to forecast the immediate future is limited. We will remain focused on long-term valuations and seek to take advantage of whatever attractive opportunities the market presents us to generate long-term rewards for our investors. In an incredibly uncertain world, we continue to strive to build diversified portfolios that can absorb the many surprises that are likely to come our way in 2017.