Equity markets across the globe delivered very good returns for the quarter, helped by an especially strong September. The JSE All Share Index delivered a total return of 8.74% for September and 13.3% for the three-month period. Resources lagged the general market, returning 7.1% for the quarter. Despite the relatively good period, the Resources Index is still below its level at the start of the year.

Your fund outperformed the Resources Index and delivered 9.23%, slightly behind our benchmark (the mean return of our competitors) of 9.26%. For the last 12 months the fund returned 17.96% versus 13.10% for our benchmark.

For the quarter, our holdings in Mondi, Pan African and Metorex contributed to our performance, while Metmar, Hulamin and Pallinghurst detracted.

This quarter was yet another good illustration of the recent volatile market movements, with strong returns in July and September, and negative returns in August. Commodity prices have also been volatile, but generally continued the recovery in 2009 from the 2008 bottom. Most commodity prices are now back at levels last seen in 2008, and the gold price has reached an all time high in nominal terms. At the same time, the dollar weakened against most major currencies and the rand, which breached R7/$, a level also last seen during 2008. The strong rand acted as a drag on fund performance given our high offshore exposure. We continue to believe that the maximum 20% offshore exposure is the right one for the longer term. Everyone reading or watching the news gets assaulted on a daily basis by numerous analysts, forecasters, economists, astrologists and others trying to predict the future. We will decline to add our prediction to the tumult and stick to J.P Morgan's reply when asked what the stock market will do: "It will fluctuate."

Our main focus is on calculating the correct value for the businesses operating in the resource sector. Based on our own research and long-term valuation methods, we believe that your portfolio is well placed for a number of future scenarios. After underperforming the general equity market and many other asset classes, we believe that reasonable returns are still available in the sector.

Portfolio managers
Henk Groenewald and Duane Cable Client

"Under stress human beings react fairly predictably. Their time horizon shortens dramatically and their decision making processes tend to be driven by their limbic system (or lower brain function) which reacts instinctively and emotionally. Longer term plans and rational thought go out the window and avoidance of pain becomes the dominant objective. Investment decisions made in this state are often emotionally satisfying in the short term, but often financially injurious in the long term." David Nelson, Legg Mason

The fund returned -8.3% for the quarter against the benchmark return of -10.8%. For the year to June, the fund returned 23.1% against the benchmark's 17.6%.

The greatest contributors to quarterly performance were our overweight positions in AECI and Sasol, and underweight positions in ArcelorMittal and BHP Billiton. Our overweight position in Anglo American relative to BHP Billiton also contributed to performance. Our underweight position in gold equities detracted from performance.

The past three months has indeed not been a good one for global markets. We presented a rather cautious view in our previous commentary and fortunately our high cash position at the start of the quarter was able to cushion the fund from some of the losses resulting from the sharp market correction. The macro-economic news has indeed been poor and it is currently not possible to pick up a newspaper without being flooded by articles dealing with fears of a double-dip recession, the European sovereign debt crisis or the slowdown in China. Commodity prices have certainly responded to the bearish sentiment with copper down 17%, nickel down 22% and aluminium down 16% for the quarter. The massive change in investor sentiment among market commentators and investors have also been fairly predictable as stress levels have increased in response to increased uncertainty, and avoidance of pain has become the dominant objective. The mood has indeed soared with market commentators' recent fascination with bullish catch phrases such as 'v-shaped recovery', 'commodities super cycle' and 'de-coupling' now a thing of the past. The levels of uncertainty in the market have certainly increased, however increased levels of uncertainty has certainly presented us with good investment opportunities.

During the quarter, we took advantage of lower price levels to add to some of our existing holdings primarily Sasol, BHP Billiton, Zimplats and Pan African Resources. We have funded these purchases by taking some profits in some of our bigger positions (AngloGold, AECI, Palladium ETF and Mondi) that have worked well for us.

We also initiated a position in Highveld Steel and Vanadium Corporation (HVL), which is a vertically integrated steel and vanadium slag producer. HVL is 85% owned by Evraz Group SA, one of the world's largest vertically integrated steel and mining businesses. The stock is currently ignored by the market because of its limited free-float. The steel sector currently faces poor newsflow with rising raw material costs and declining demand diminishing the appetite for owning steel equities. We believe the current poor environment and fundamentals presents investment opportunities to those who are prepared to focus on long-term valuations. We believe the current earnings base for HVL is depressed and based on our assessment of normal earnings the stock is significantly undervalued.

Globally we continue to face great uncertainty and stress levels amongst investors have definitely increased after a fair level of complacency crept in after the rally of 2009. Based on our assessment of long-term valuations we are excited about the position of the fund and specific opportunities that have presented itself within the resources sector. When building your portfolio, we strive to ignore the constant noise in the market and identify undervalued and mispriced companies based on long-term valuations. History has taught us that our ability to forecast the immediate future is limited. However, despite short-term market uncertainty, we will continue to strive to deliver superior returns relative to the benchmark over the long term.

Portfolio managers
Henk Groenewald & Duane Cable

"I call investing the greatest business in the world because you never have to swing. All day you wait for the pitch you like; then when the fielders are asleep, you step up and hit it. The problem when you're a money manager is that your fans keep yelling, 'Swing, you bum!" Warren Buffet

The fund returned 3.6% for the quarter against 2.9% for the benchmark. For the year to end March, the fund returned 53.9% against the benchmark's 42.1%.

The greatest contributors to quarterly performance were our overweight positions in Mondi and Exxaro, as well as our underweight position in gold equities. Our holdings in Pallinghurst Resources, Sasol and Metorex detracted from performance, while our overweight position in Anglo American relative to BHP Billiton and underweight position in Kumba Iron Ore also detracted.

During the quarter, we took advantage of lower price levels to add to some of our existing holdings, primarily Sasol, AECI, AngloGold and Pan African Resources. We took advantage of strong price action to take some profits in both Mondi and the Palladium ETF given the reduced margin of safety. Given relative market moves we used the proceeds from the sale of Northam Platinum to add to our holding in Impala Platinum.

In our previous commentary we reviewed the performance of the last decade, a period in which China made its presence felt on the global stage. China was able to grow GDP well in excess of its 8% target in 2009 thanks to massive monetary and fiscal stimulus. China has impressively been able to deliver compounded annual GDP growth of 10% over the last thirty year period and many market commentators assume that China will be able to grow by approximately 8% annually in the coming years. China has continued to look bullet proof in the first few months of 2010, delivering very strong growth in industrial production for January and February. Many market commentators and sell-side analysts have already forgotten the lessons learnt in the commodities bust of 2008/9 and are once again extremely bullish on China and the prospects for commodity prices. Regular commodity price upgrades by sellside commodity analysts have once again become the norm, as have references to 'commodities super cycle', 'de-coupling' and 'its different this time'. It's amazing to see how much has changed in the last year. After trading at levels below the marginal cost of production in early 2009, most commodity prices are once again trading significantly above levels we consider normal. We do not argue that the growth prospects for China are not attractive, we simply believe that commodity prices have already priced in a fair amount of this news.

The fund remains fairly concentrated with our top 10 holdings accounting for 70% of the fund, with a further 8% held in cash. The current cash holding is high relative to the history of the fund and is reflective of our cautious view on the markets as a whole. The investment industry is plagued with 'quarteritis', where funds are measured based on quarterly performance and money managers are under pressure to deliver market-beating returns on that basis or risk losing clients. Regular readers of our quarterly commentaries and those familiar with our investment process will be aware of our emphasis on long-term investing. In pursuit of long-term sector beating returns and as custodians of your capital we will remain vigilant and wait patiently for attractive investment opportunities to present themselves before we deploy capital and will not 'swing' despite the 'yelling' which may be coming from the stands.

Portfolio managers
Henk Groenewald and Duane Cable

2009 was a good year for your fund. The fund returned 43.5%, relative to the resource sector (35.4%) and the average of our competitors (37.4%). In the last three months the fund returned 13.71%. The year started poorly, but since early March resources shares has been on the rise - recovering 50% in rand terms and 115% in dollars.

Last year also brought an end to the 'noughties' - the first decade of the 21st century. We thought it would be interesting to look at the resource sector performance over the past 10 years. As Winston Churchill purportedly said: "The further backward you look, the further forward you can see."

The last decade has indeed been interesting. We have witnessed two major equity market crashes (dotcom in 2000 and the global financial crisis in 2008), major terror attacks (in the US, Madrid, London), natural disasters (Sumatra tsunami, Hurricane Katrina, Chinese earthquake), wars (Iraq, Afghanistan) and the rise of China.

It took years of preparation and growth, but in this decade China made its presence felt on the global stage. China went from the world's seventh largest economy in 2000 to the second largest 10 years later. China is now the world's biggest exporter, the biggest producer of steel, cement, ships, cars, air conditioners and rice. It is also the biggest emitter of CO2 and the largest lender to the US. This was clearly the Chinese decade.

Chinese growth had a major effect on world commodity markets, contributing the bulk of demand growth. After 20 years of flat commodity prices, most prices increased markedly. The oil price ended the nineties at the same level it ended the seventies, but in the noughties it tripled (including a visit to $140/bbl!).

China's demand for commodities and their consequent price rises has also had a large effect on the South African market through our mining shares. Even though the resource sector ended the decade at lower levels than where it was in 2007, it handsomely outperformed the JSE All Share Index over the entire decade. The Resources Index (RESI) increased 6.5 times; the ALSI 'only' 4.5 times.

Compared to developed markets, investors in South Africa have been very fortunate. The US, UK and Japanese markets are down on the levels they started the decade, while the SA market increased 2.8 times in dollars and 1.8 times in real (inflation adjusted) terms (excluding dividends).

In general, we now consider global markets to be more attractive than the SA market. This view is informed by both valuation and our expectation of a weakening rand. Consequently, your fund (and across the Coronation product range) has utilised the maximum offshore exposure (20%).

What can we learn from the past 10 years for the future? Over the past decade Chinese investment in infrastructure lead to increases in demand, which lead to higher commodity prices, which in turn lead to strong earnings growth from the resource sector. Increasing earnings were the major contributor to returns in the last decade. As ratings are already high, we expect earnings growth to remain the major determinant of returns going forward.

Earnings for the resources sector recovered from very depressed levels at the start of the millennium and increased 2.5 times in real dollar terms to their current levels. While commodity prices will continue to benefit from strong Chinese and other emerging market growth, earnings are now at levels we consider close to normal. We do not see a repeat of the strong growth of the previous decade.

In short, we cannot aspire to forecast the future. Our Churchillian logic suggests that the earnings base of the resources sector looks on the high side and so does the rating. Hence one does not have to be a prophet to expect modest returns in the decade ahead. While we are managing down your expectations on average sector performance in future, our real job is to deliver performance above that of the sector.

Over the past 10 years, the fund has succeeded in its mandate to outperform the sector (see table 2). Over the next decade we promise to do our best to continue delivering sector-beating returns.

Happy new decade!

Portfolio managers
Henk Groenewald and Duane Cable Client