The fund has benchmarks of 65% equities, 25% bonds and 10% cash, which it aims to beat by 2%. Fund manager Neville Chester has weighted equity as high as 82% and as low as 50%. In October, he trimmed the equity holding from 73% to 68%, but still expects it to outperform cash and bonds. He does not hold government bonds, preferring corporate bonds, and property, which yields above 10%.

The strength of the equity market in the third quarter was a further reminder of how difficult it can be for people to time the market and the importance of remaining invested for the long-term. The All Share delivered a huge 16.3% return for the quarter, with most sectors contributing to the appreciation. Renewed interest in South Africa by foreign investors and a shift in investment trends locally from fixed interest towards equity were the main drivers of the re-rating. This renewed interest was sparked by the strong earnings growth from domestic companies as well as the low level of interest rates. The Market Plus fund delivered a solid 13.2%, comfortably outperforming its benchmark of 12.2%. Good exposure to domestic SA stocks ensured that the fund surpassed its objectives. While our underweight bond exposure was a small negative for the period, our weighting in equity and property more than compensated investors for this.
We made a number of changes to the portfolio during the quarter, although our overall equity weighting was maintained fairly level around 70%. We did use the strength in equities to realise some profits. The larger moves included increasing our weighting in Billiton on the back of favourable commodity prices, especially oil; increasing our bank exposure due to the improving banking environment, and switching some of our existing retail exposure from Massmart into New Clicks and Truworths. The low interest rate environment currently being experienced is proving to be a major boost to the domestic market, facilitating strong volume growth, which in turn has been very beneficial for pricing. While the likelihood for further decreases is slim, we do believe the risk of very large interest rate hikes is small which should continue to provide a stable environment for growth. Dividend yields remain fairly attractive, particularly in light of the alternative yields available on cash, which provides a further underpin for the equity market.
The fixed interest market also had a strong third quarter as the SARB surprised all market participants with a further interest rate cut. We are of the view that bonds are pricing in a perfect situation which is at risk to higher than expected inflation. The rampant oil price could have a detrimental impact on inflation going forward, and any currency weakness could also push up the inflation rate to beyond the target range. We remain underweight bonds although we have added some corporate credit for additional yield. A much more attractive proposition is the listed property sector where yields remain stubbornly high and where we have increased exposure to some great quality portfolios yielding in excess of 10%.
Asset allocation is crucial in this fund, and given the very strong run in equities this quarter one is tempted to reduce the overall equity exposure further. Against this however one has to identify opportunities to earn a better return than equities - and these are not readily evident. Cash and bonds currently have return expectations of between 6% and 8%. Against this, equities still look attractive with expected returns of 12% to 15% if our macro-economic outlook comes through. So we remain overweight, but re-emphasise the importance of stock selection going forward given that many companies have re-rated significantly and their prospects of future return are limited.

It is Coronation's intention to merge the Coronation New Era Fund with the Coronation Market Plus Fund. This process will be initiated shortly and Coronation expect it to be completed by the end of the first quarter of 2005.

The anomalous strength of the rand contributed to a poor second quarter in the equity markets, with the overall JSE Index down 5.5%. However domestic shares in general continued to outperform the dual listed and rand hedge shares, providing investors some scope to avoid all this downside. The Market Plus Fund managed to deliver a positive 1.1% return despite the negative market return; again showcasing the benefits of investing in a flexible mandate fund. Once again, our weighting in financials and selective stock picking amongst the domestic industrials enabled us to deliver these good returns.
The overall structure of the fund remained largely unchanged over the period. While we generally continued to lighten some resource exposure, we did start to build up some non-resource rand hedge exposure. The reason for this course of action is our view on the rand, which we believe will weaken from current levels in the medium term. On the domestic stock front we reduced some of our retail exposure in Massmart and Pick 'n Pay (both at great levels) and re-invested this into Woolworths, increasing our existing position in this consumer stalwart. The sale by Thinthana of its stake in Telkom enabled us to increase our existing position at very attractive levels which has already contributed 10% performance. Weakness before results also allowed us to pick up a nice stake in Alexander Forbes at very cheap levels, which should also benefit the fund when we encounter currency weakness.
Our fixed interest exposure fluctuated during the quarter, with a number of trading opportunities being taken as the government benchmark bonds traded in a fairly wide spread. At current levels, we remain fundamentally bearish on bonds given our negative outlook on inflation for the year. However, we will continue to look to trade opportunistically on big interest rate moves. Over the quarter, we retained a low exposure to domestic property on the back of this bearish view of bonds as despite there being much more value in property stocks they do tend to track bond yields quite closely.
We continue to see selective value in the SA equity market. The benign interest rate environment and moderate GDP growth continues to provide a favourable environment for domestic companies not exposed to exports. As a result, recently reported results from large SA based companies (banks, telco's etc.) showed very strong earnings growth. This should continue, providing a firm underpin for these share valuations. In the longer term, however, we believe the structural imbalances building in the local economy will result in a weakening of the rand from current levels to a level where exporters return to profitability, enabling an offset to the current high level of imports. Given this view, we have started to identify those companies which stand to benefit most from this change, and will position the portfolio appropriately. We do not expect a huge shock movement and therefore continue to favour domestic exposure overall, nonetheless, we do believe that some risk mitigation is prudent.
The end of the quarter signifies the third anniversary of the launch of this fund. Since inception we have managed to deliver a return of 66%, or 18% annualised for our investors. This is against a benchmark of 32% and 10% respectively. As I have maintained, managing a flexible fund is extremely rewarding for the fund manager as it enables one to fully implement one's own views on appropriate asset allocation. At the same time, I am very happy to have been able to deliver these excellent returns to our investors. I believe the fund is positioned to continue to outperform its benchmark into the future.

Fund manager Neville Chester has made full use of his ability to move between asset classes, selling down bonds and property in the first quarter. Rand hedges Anglo and Billiton were reduced, and cheap life companies such as Metropolitan and Liberty were accumulated. Chester predicted at quarter-end that domestic stocks would continue to outperform the resource counters, though with hindsight a 65% equity exposure was too high.