"Anybody familiar with the workings of a Tupperware party will recognise the use of various weapons of influence" Robert Cialdini, Influence: The Psychology of Persuasion
Cialdini outlines 6 tendencies of human behaviour which induce us to change our behaviour or comply with a request. A few of these tendencies are very relevant for decision making in an investment context. One of the tendencies (social validation) is rampantly operative in our current resources investment environment. One of the main ways we make decisions is by observing the decisions of others - social validation. To return to the Tupperware party while the single most important facet might be to say yes to people you like, of critical importance is the social validation which comes from seeing others buying the product. Each transaction demonstrates that others want the product!
Investment professionals have ample opportunity to observe the behaviour of their peers. The "quarteritis" of the unit trust environment together with holdings disclosure means that we all know what the others are doing. According to Cialdini we have an innate tendency to want to do what others are doing. Indeed their actions persuade us that we should be doing the same. This would be very useful in many risky situations one can think of but not in investments! If we do what the others do our outcomes would be identical or worse. There would be no opportunity to deliver performance better than average. Naturally the more one moves away from the herd the riskier life gets - if one defines risk as an outcome significantly different from that of the herd. We however take comfort from the words of Charles MacKay "Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they recover their senses slowly, and one by one" in Extraordinary Popular Delusions and the Madness of Crowds, 1895.
This said we actively seek out opportunities to be different from the herd where that difference comes with very little extra risk. Two recent examples of this quest are the purchase of African Rainbow Minerals in the first quarter of the year and the decision to take the fund to the maximum level of foreign ownership allowable for a domestic fund in the previous quarter.
The fund delivered a return of 2.4% in the quarter behind the FTSE/JSE African Resources Index which returned 2.95%. In the quarter African Rainbow Minerals delivered a price performance of 42% making it the best performing stock in our universe. I'll quote from the March commentary: "We added African Rainbow Minerals to the portfolio in the quarter; this was a valuation driven decision. Investors tend to perceive African Rainbow Minerals as a proxy for Harmony given the size of Harmony in African Rainbow Minerals' NAV. We however were drawn to the investment by their other assets, especially the platinum projects which are yet to deliver." Please note that Harmony delivered a negative return of 12% in the last quarter. This was a view that worked big time!
The rand devalued by 8% in the last quarter, strangely many local rand geared companies declined in value despite the weakness of the currency, largely driven by the early indications of a fall off in dollar metal prices - something we have been waiting for. In most cases the benefit conferred by the currency move was lost in the negative hard currency price movements of the foreign holdings. In the event the strategy was better than buying the index as the international assets delivered a return of 4.8%.
In the quarter we sold Anglo American and bought BHP Billiton.
We believe that bid speculation and rand devaluation fear have driven Anglo American to levels very hard to justify with aggressive assumptions. Goodbye herd. We bought a significant amount of Aquarius Platinum. This stock now accounts for 8% of the assets of the fund. We love platinum and this is the cheapest cash flow producing platinum stock with significant volume growth in the next year. They will be doing a de facto share buy-back in the near term and are fully empowered in the South African assets. Being an African foreign inward listing we would be limited to a 5% exposure were we not able to buy the stock in London to bring our total up to the 10% limit for unit trusts.
We remain concerned about the absolute level of dollar metal prices. Some measure of sanity has returned to asset valuations with companies like BHPBilliton falling by 25% in hard currency, but the end of the party has only just begun. We are confident in the positioning of the fund to weather the storm and look forward to the December quarterly comment by which time we'll know whether Christmas 2006 was a happy one. A word for the wise over the holidays - do not attend any Tupperware parties!

Hugo Nelson and Henk Groenewald
Portfolio Managers

..Dance anyone?
"Once a price history develops, and people hear that their neighbour made a lot of money on something, that impulse takes over'; and we're seeing that in commodities and housing...Orgies tend to be wildest toward the end. It's like being Cinderella at the ball. You know that at midnight everything's going to turn back to pumpkins & mice. But you look around and say, 'one more dance,' and so does everyone else. The party does get to be more fun -- and besides, there are no clocks on the wall. And then suddenly the clock strikes 12, and everything turns back to pumpkins and mice." Warren Buffett
We are still breathing although fairly breathless after the last quarter. The fund returned 15.6% for the quarter against the 21.3% of the FTSE/JSE Resource 20 Index and the 15.1%. of the Equity Resources and Basic Industries Index. Massive volatility was the hallmark of the quarter as the recent risk loving (greedy) behaviour of global investors briefly gave way to some healthy fear. Central bankers played a key role in all of this as lending rates increased across the globe to combat the spectre of inflation. As a result, emerging market assets were liquidated - currencies, bonds, equities.
This process saw the rand weaken by 16.7% to levels last seen in September 2003. The rand started the quarter at R/$ 6.12 to end at R/$ 7.15, touching 5.99 and 7.41 along the way! Initially our portfolio benefited from the headwinds experienced by the sector as we were more defensively positioned. Once the currency started to weaken however the more marginal single commodity producing assets - the kind we do not own - outperformed the quality wide margin assets and so we ended the quarter behind the benchmark (having been ahead in the middle of June).
This quarter saw us take a significant strategic decision to diversify away from resources shares listed on the JSE exclusively. The key motivation being the unattractive valuation levels of many counters and the concentration of the sector (all translating into limited opportunity in an overvalued market). Conversely we saw many opportunities in foreign listed commodity producers due to these assets either being of superior quality or offering attractive valuations, or both! We thus bought dollars at an average rate of R/$ 6.37 and invested in six foreign listed resources and basic material stocks. These assets currently comprise 14% of the assets in the fund.
The best performer for the period was Amplats, up 35% given its gearing to the currency. In contrast, Impala returned 13.3% as investors panicked about near term earnings growth. We remain of the view that wide margin assets are the best to own through the cycle. They do not dilute us as shareholders by issuing shares to fund their existence, they gain market share from competitors in poor pricing environments and they generate enough cash to fund their growth! Impala is a classic example of such a company - having already paid out R65 in dividends this year. They are finalising a BEE deal which at current prices will erode 1.5% of shareholder value, well within the 3% impact most listed companies are achieving. The cash raised by the deal of just over R3 billion will be paid out in another special dividend (R46/share) or used to buy back shares were they to be cheap enough.
Investors in the JSE resources index have had a fantastic run. From January this year the total return (including dividends) is 29.5%, over a 1 year period 68.42%, and an average of 43.9% over the last three years. While we will enjoy the party while it lasts, we remind investors that resources are inherently cyclical and we are expecting the clock to strike 12 at any time. We remain more defensively positioned and will decline the "one for the road" being offered to us.

Hugo Nelson & Henk Groenewald
Portfolio Managers

Apart from brief periods of below-par returns, Coronation Resources (CR) has been a top contender in its sector since 2003. To keep it that way, one of manager Hugo Nelson's big bets is on oil. As at May 31, holdings in Sasol (15,4%) and Brazil's Petrobras (1,9%) gave CR an exposure of just over 17% to oil, compared with its seven competitors' average of about 12%. Offshore holdings total 8% of CR's portfolio and include Russia's Norilsk Nickel.

Financial Mail - 14July2006

"Occasional outbreaks of those two super-contagious diseases fear and greed will forever occur in the investment community. The timing of these epidemics is equally unpredictable, both as to duration and degree. Therefore we never try to anticipate the arrival or departure of either. We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful." Warren Buffet

As eager readers of our quarterly bulletins you must be tired of hearing how it will all eventually end in tears. The market appears to be proving us wrong and, given our defensive attitude, we are having to work hard to keep pace with a rampant dollar metal price market. This we managed to do in the first quarter of the year and the Coronation Resources Fund returned 12% versus the resources sector return of 11.7%. So, we pipped a rising market by 30 basis points.

During the quarter, brent oil rose 15%, dollar gold 13% and dollar platinum 9.2%. The rand strengthened by 3% over the quarter. As a result, the precious metal stocks led the way with Impala returning 25% after distributing a dividend of R65. Eland Platinum listed in the quarter delivering a 44% return on the pre-listing stock we acquired in the previous quarter.

The geared golds also did well. AngloGold lagged due to the overhang of the capital raising currently underway. During the quarter, we sold our Western Areas holding and switched our AngloGold holding entirely into Goldfields at the time of the Norilsk disinvestment. The sale of Western Areas was motivated by a significant downgrade in their reserves and the switch into Goldfields was motivated by the price action as Norilsk disinvested. We continue to believe that AngloGold offers the best value amongst this group of stocks - largely because it is the most defensive.

Mittal Steel and Sasol had a stodgy quarter and the big diversifieds Anglos and Billiton returned 10.8% and 8.3% respectively. We added African Rainbow Investments to the portfolio in the quarter; this was a valuation driven decision. Investors tend to perceive African Rainbow Investments as a proxy for Harmony given the size of Harmony in African Rainbow Investments' NAV. We however were drawn to the investment by their other assets, especially the platinum projects which are yet to deliver. Since purchase, African Rainbow Investments has delivered 5.5%.

We disposed of Afrox entirely as corporate activity involving its parent sparked speculation of similar activity locally which drove the share price well beyond fair value.

Appropriately we end with a quote from Charlie Munger after having started with Warren Buffett. Hopefully we are preaching a consistent message. This current environment will not continue forever and we are reminding ourselves daily to be fearful and to be aware of the level of the pond.

"Bull markets go to people's heads. If you're a duck on a pond, and it's rising due to a downpour, you start going up in the world. But you think it's you, not the pond." Charlie Munger

Hugo Nelson & Henk Groenewald
Portfolio Managers

If I had ever been here before I would probably know just what to do
Don't you?
If I had ever been here before on another time around the wheel
I would probably know just how to deal
With all of you
And I feel
Like I've been here before

Déjà vu, by David Crosby

Every February 2, people gather at Gobbler's Knob, a wooded knoll just outside of Punxsutawney, Pennsylvania. They wait eagerly for Punxsutawney Phil, the world's smallest and furriest weather forecaster. Residents claim he has never been wrong. The groundhog comes out of his electrically heated burrow, looks for his shadow on the ground and utters his prediction to a Groundhog Club representative in "groundhogese." This representative then translates the prediction for the general public. If Punxsutawney Phil sees his shadow, it means six more weeks of winter. If he does not see his shadow, it means spring is just around the corner.
"Groundhog Day" has been celebrated in Punxsutawney since 1887, but has achieved worldwide fame in 1993 due to the Bill Murray movie where a cynical weatherman has to relive the same day ad infinitum. Since the movie, the term "groundhog day" has become interchangeable with "déjà vu", the feeling of having experienced something before.
Recently, the CEO of a major international mining company described the current commodity cycle as "vuja de" - or the sense of never having seen this before - a totally new paradigm. The siren song of "this time, it is different" is sounding louder.
2005 has been a very good year for investors in commodity shares and investors often ask what we can be expected in 2006. We believe, as Mark Twain says, that while history may not repeat itself, it certainly rhymes. We cannot forecast with the accuracy of Punxsutawney Phil (we could if we were also allowed to answer in "groundhogese"), but we are certain that this commodity cycle will have more components of "déjà vu" than "vuja de"! Commodity prices are inherently cyclical and currently at high levels relative to their long-term averages. Sooner or later prices will adjust through the normal forces of supply and demand. It is unrealistic to expect a repeat of the performance we saw last year and the risk of value loss has increased. In this environment, we must retain our perspective and invest conservatively.
In the final quarter of 2005, the fund returned 8.4% versus the 9.14% of the benchmark. The total return (including dividends) for the year to December 2005 was 60.0% versus 55.6% for the benchmark. This is significantly higher than the annualised return over the last three calendar years of 25.6%.
The story of the quarter was precious metals with the gold index increasing 17% and the platinum index increasing by 26%. This was on the back of gold and platinum exceeding the US$500 and US$1000/oz levels during the quarter. The rand gold and platinum prices increased by 8% and 4% respectively.
During the quarter, we initiated or added to our positions in Western Areas, Omnia and Cashbuild. We also took a reasonably significant stake (3.5% of fund) in the unlisted Eland Platinum, which is due to list shortly. All of the purchases met our criteria of a significant discount to our estimate of long-term value.
Western Areas was by far the best performing gold share, returning 60% over the quarter. Our preference for Anglo American over BHP Billiton proved correct as Anglo outperformed by 12% over the quarter. Sasol declined 8% following a 10% decline in the oil price. We remain convinced of the merits of Sasol's investment case even when using a normalised oil price of less than half the recent peak. Impala Platinum (+29%) continued to outperform Anglo Platinum (22%). Our other large holding, Mittal Steel, increased by 8%.
We remain convinced that the individual stock positions in the fund carry a sufficient margin of safety. Even if the cyclical party ends, we anticipate an elegant exit, and waking without a headache. This is because we have been to other parties before, ones that ended badly. Given a conservative overlay, we are confident that in 2006 we can still have a good time. We have been here before.

Hugo Nelson & Henk Groenewald
Portfolio Managers

The fund's hefty Sasol holding, for once, did not help as it fell 8% during the quarter, but shares such as Anglo, Implats and Western Areas outperformed their peers in their sectors. The fund is defensive, with a quarter of its assets in industrials. Fund manager Hugo Nelson says that normal forces will dampen commodity prices and he would prefer to wake up from the resources shares party without a headache.

Financial Mail - 3 February 2006