The third quarter delivered a phenomenal return for equities, up over 19%, justifying our continued overweight position in this asset class. Bonds were weaker during the quarter resulting in a poor return overall of 1.1% for the All Bond Index with cash delivering 1.7%. The composite benchmark return was an excellent 13.7%. The Coronation Market Plus Fund returned 12.2% for the quarter, an excellent absolute return but behind the benchmark. The main reason for the underperformance was due to low weightings in resource shares which benefited from renewed interest during this quarter.

The prevailing view on commodity prices is that they will continue to maintain the record high levels into the future. We disagree with this and believe that, based on mid-cycle prices, the commodity sector generally looks expensive, with a few exceptions. As our investment views are based on long-term horizons we are happy to miss out on a few quarters' growth and reap the rewards over our investment horizon (typically a three year period). Gold shares in particular had a huge month in September despite many of them still being loss making at the current rand gold price. On a fundamental valuation basis we still do not hold a large position in these stocks.

Instead we own some great South African businesses which are doing particularly well in the growing local economy. We have added to our holding in Woolworths which is now being recognised as an excellent business with good defensive characteristics as well as great growth prospects. The relative weakness in some of the banks also created some buying opportunities for these businesses which are reporting earnings growth in excess of 20% accompanied by strong dividend flows.

We also boosted the weightings in stocks which offer some rand protection, mainly Remgro where the discount opened up during the quarter. We continue to have decent weightings in SABMiller and Richemont which offer further protection to a weakening currency.

As mentioned above our short position in bonds paid off during the quarter and we continue to be wary of venturing into a large weighting given the rising inflation outlook both locally and abroad, which has been worsened by the rising oil price. We prefer to hold cash and preference shares where the yields are more attractive.

Overall we still believe equity is the most attractive asset class and continue to hold an overweight position. While dividend yields are close to that of an after tax cash return we believe the investment case remains compelling, particularly given the strength of the underlying economy. We believe our objective of delivering real returns and beating the benchmark over the long term remains achievable.

Neville Chester
Portfolio Manager

The end of June marks the fourth anniversary of the launch of the Coronation Market Plus Fund. It has delivered an annualised return of 24.3% since inception and is ranked first in its category since inception. This is a very pleasing performance through what has been an extremely volatile period and once again confirms the strategy of offering a well-managed flexible fund which can take advantage of all the asset classes available.
The last quarter was a positive one for all asset classes. The equity markets delivered 7.2%, listed property 7.9%, bonds 4.7% and cash 1.9%. The fund delivered an excellent return of 6.8% for the same period beating the balanced benchmark of 6.6%. Our overweight equities position helped us even though we were underweight resources which were the main driver of equity performance for the index. Our large weightings in strong domestic performers such as Telkom, Naspers and Absa ensured that our equity performance remained very strong.
Our underweight position in bonds and overweight cash did not pay off, despite evident overvaluation in the bond market. The prices have been closely following the US market which appreciated during the period. We remain underweight bonds given our more bearish outlook on inflation for the year ahead.
We have consistently viewed the commodity sector as overvalued (with a few exceptions) as we believe on a normalised basis the valuation multiples are much too high. While we do expect the rand to be weaker from these levels we do not expect it to weaken enough to make any of these commodity shares look attractive as a long-term investment. Sasol and Impala are the two exceptions to this view where we continue to hold positions given the relatively undemanding valuations.
To take advantage of our view of a weaker currency we have maintained our holdings in non-commodity rand hedges such as SABMiller, Richemont and Remgro. However we still firmly believe in the local economy and have a large weighting in local industrial and financial shares.
Looking forward we remain convinced that equities will outperform over the longer term and have retained an overweight position in equities. It has however reduced slightly from last quarter due to some profit taking on some of our shares which outperformed. The underlying earnings growth remains strong and given interest rate forecasts we do not see too much likelihood that this will change any time soon. We have reduced our property weighting into some of the recent strength although the returns in this sector still look more attractive than bonds.
Overall the fund remains well positioned to deal with the volatile markets and we still firmly believe our objective to generate real growth in capital is attainable in the medium term.

Though Coronation Market Plus (CMP) has a bias towards equity, the mix of equity, property and fixed interest assets is managed aggressively. The result has been returns consistently in the top quartile of its sector. Over the past three years the fund has also delivered returns in excess of the top funds in the medium and high equity prudential all assets fund sectors. As an actively managed long-term investment CMP has a lot to offer.

Financial Mail - 8 July 2005

The first quarter of 2005 saw a turn in sentiment from foreign investors which flooded in most emerging markets last year. A realisation that the US will continue raising interest rates as well as a reduction in overall risk appetite saw foreign investments switch from emerging markets back to more developed markets. The only stocks not affected by this were resource-oriented stocks which continued to benefit from the exceptionally strong resource cycle.
Benefiting from the strong resource market (the Resources Index generated a return of 15.5%) and the weakening rand, the local market returned just over 5% for the quarter. Despite being fairly underweight resources from a valuation perspective, the Coronation Market Plus Fund still managed to return an excellent 3.8% despite being only 70% invested in equities for most of the period.
The reduction in global risk appetite and its effect on global emerging markets has been a key feature of debate in the markets over the past few months. Whilst many markets have benefited from investments purely to assist in diversification, the South African market has attracted interest due to the excellent fundamentals of the underlying economy as well as the relative cheapness of the equity market. We believe these key features remain intact and, as a result, we have not moved to decrease our equity position. In fact, we have used some of the recent weakness to bolster some of our positions.
Our positive outlook on the local economy stems from our belief that we will remain in a fairly benign interest rate environment. While we do not expect further rate cuts this year, we do not believe there will be any rate hikes. This current low level of interest rates combined with greater certainty as to where rates are likely to go in the foreseeable future will encourage consumers to continue to behave as they have in the last 12 months.
We are likely to see a continued uptick in the demand for credit as consumers continue to purchase goods across the spectrum from non-durables to durable goods. As always, the greatest threat to this view is a sudden and extreme weakening in the currency which we believe is unlikely due to the improved balance sheet of the country.
We have increased our weightings in the banking sector on the back of improved results and a slight de-rating in share prices. We have also added to our holdings in Woolworths and some of the media stocks. There has been some rotation in the local market from domestic exposure in the rand hedge resource counters. We have been happy to sit on the other side of some of these transactions as we believe our view of a slowly weakening currency is more than in the price of the expensive resource counters and will not impact the positive outlook for the domestic-oriented stocks.
The Coronation Market Plus Fund remains well positioned for the growth opportunities in the local economy and, where possible, we have selected appropriate stocks which are well priced and will stand to benefit from a steadily declining currency. We have started to add some bonds to the portfolio as yields have weakened but we still think it is too early to move significantly into this asset class. We continue to believe that the fund should be able to meet its objectives of providing good real returns over a three-year investment horizon.

The final quarter of 2004 delivered another period of strong growth in the equity market. Overall markets were up 8.1% but, once again, domestic financial and industrial stocks were the drivers with resources continuing their negative trend. This concluded the second consecutive year of growth in the South African equity market, with the All Share Index up 25.4% inclusive of dividends. The Coronation Market Plus Fund comfortably beat the overall market return by delivering a 36% return for the year. This was boosted by the 14% the fund delivered for this past quarter. We have seen renewed interest in South Africa which sparked a flood of buying from offshore investors, particularly in the second half of the year. After many years of domestic equities looking very cheap compared to other developed and emerging markets, they have now moved up to much more comparable levels of ratings. The key question for investors now, of course, is whether the current levels are sustainable and whether we can expect more growth from here on.
The key determinant is the direction of interest rates. If we continue to remain in a stable or mildly declining interest rate environment, the existing ratings are likely to hold and domestic companies can look forward to continued good demand from consumers which will underpin the good profit growth. If however we were to move into an upward interest rate cycle, that would start to bring pressure on the ratings of the equity market and possibly impact the current levels of profitability. Given all the current macro and economic trends our view is that the balance of probabilities favours the former and, as a result, we expect the continuation of the current benign environment which should continue to favour holding equities over other asset classes.
During the period the only major change in asset allocation was the reduction in our holdings in perpetual preference shares and an increase in our overall property holdings due to a significant change in the yield differentials. We have maintained a fairly steady weighting in equities with the bias remaining towards South African financial and industrial shares due to the macro factors mentioned above. Early on in the quarter we used weakness to increase our holdings in Remgro, Telkom and Netcare. Remgro continues to offer exposure to a great basket of local and offshore assets at a discount, while Telkom's strong cash flows continue to make it an attractive SA-focused asset. Netcare is a superior provider of healthcare services locally and abroad trading at an attractive price. This is partly due to uncertainty over the future direction of healthcare legislation but we are comfortable that this is more than accounted for in the price.
On the sell side we reduced our stake in the construction company Aveng which reacted very optimistically to the potential government capital expenditure plans and we believe is now fully priced. We also reduced our Investec stake as that price ran strongly on the back of better than expected results.
The strength of the bond market continues to surprise us and although we have performed better by being invested in equities there have been some good trading opportunities in the bond market during its strong run in the second half of the year. We remain of the view that the bond market is pricing in a 'best case' scenario and, as a result, the risks remain to the downside. We continue to prefer some of the property stocks due to the better yield opportunities available and some capital appreciation potential.
The fundamentals of the South African economy remain positive and as I write this with the rand sitting comfortably at 5.69 to the dollar and the oil price slipping below USD40 a barrel, the outlook for the domestic economy remains good. Pressure is building in the form of a worsening trade account deficit but there is currently more than enough demand from foreign investors to balance this to maintain a fairly strong currency which should keep inflationary pressures down. This should minimise the risks of an interest rate hike which should keep the benign growth story on track. As a result we continue to favour equities but emphasise the importance of stock-picking in a market which has already made substantial gains over the past 12 months.