The quarter once again delivered a strong equity return while there was some rebound in the property stocks, although interest rates struggled to find direction. The rapidly depreciating rand however boosted offshore returns and those of resources shares. The fund has remained heavily exposed to equity for the quarter, with close to 80% being invested in domestic and international equity. This has paid off in generating decent returns. Within the equity portfolio however our exposure to domestic shares over resource counters has counted against us. Equities returned 6.1% for the quarter whilst the fund delivered 5.1% a great return despite not being fully invested in the equity market.
The move to introducing some international holdings at the beginning of the year was once again vindicated as the rand sold off exceptionally during the quarter. In our opinion, excessively so. However we remain comfortable with our holding as it is in international equity which we believe to offer compelling value currently.
In terms of asset allocation the fund was a reasonably big buyer of bonds for the first time, when spreads had weakened. In particular we have focused on corporate bonds where the credit risk is quantifiable and the spreads attractive. Locking in good yield in excess of 10% for 5 and 10 years seems too good an opportunity to miss. MTN bonds in particular have proved to be quite attractive. The fund has also added significantly to its property stock holdings. Initially these fell away quite sharply in June and July offering some attractive entry points. They did bounce back quite sharply, but some stocks have been unwinding these gains, again presenting opportunities to get some good yield from diversified portfolios fairly cheaply.
Our view on resources in the equity portion of the fund has detracted from the overall performance of the fund in the short term. Even though we have seen commodity prices top out, and in some cases start coming down the equities have been protected by the very sharp depreciation in the rand which we believe has been overdone to some extent. We continue to expect that the excessive prices of commodities will return to more normal levels and this will ultimately bring commodity shares back to valuations which more closely reflect their long term values. We have built up in the mean time a great portfolio of SA based businesses which have great characteristics and are priced extremely reasonably. We expect that over the medium term these shall deliver good earnings and the prices of these assets will respond accordingly.
Due to the great outlook we believe is evident in the equity market the fund remains overweight equities. While still underweight we have added to the fixed interest position and property. This has been funded from the cash position. We are confident of maintaining our long term track record of outperforming the benchmark and inflation over a rolling 3 year period.

Neville Chester
Portfolio Manager

The second quarter saw some large moves across asset classes, with a number of our expectations coming to fruition in the fixed interest market, and some unexpected gyrations in the equity market. Overall the benchmark return was 3.8% but within that the ALBI was down 3.6% and listed property down 19%. The 19% drop in the property index came as quite a shock to many who believed it was a steady source of income, a stark reminder that property stocks are not risk free. The All Share Index was up 4.9% but within that the resource shares were the strong performers up close to 20% with the rest of the index generally negative, in particular the interest rate sensitive stocks. The fund underperformed for the quarter, delivering a return of -2.9% due to our equity exposure to predominantly domestic stocks.
This quarter marks the 5th anniversary of the fund, which has delivered an annualised return of 25.1% against the benchmark of 19.8% since inception, and is currently ranked 1st out of 14 funds in its category.
A number of events occurred during the quarter, some taking place offshore and some locally. The first big event was the indication from the Fed in the US that the initial talk about a rate pause was misleading and that interest rates would be rising further. This seemed to cause global investors to reverse their appetite for risk, sending the EMBI spread up 50 to 70 bps and starting a run on certain emerging market currencies and equities - as well as a sharp pull back in commodity prices. Initial targets were those countries with large current account deficits. Turkey was the first casualty which as a defence, immediately hiked rates by 1.75%. Shortly thereafter the Reserve Bank hiked rates by 50 bps surprising most of the local market and sparking fears that this was the start of many rate hikes. This data was followed by a worse than expected domestic current account deficit for the first quarter and a further surprise rate hike in Turkey of 2%. Despite significantly different fundamentals between the two countries, domestic equity markets reacted as if a similar situation to Turkey would evolve in SA
The subsequent moves locally saw all interest rate sensitive assets reprice sharply downwards. Bonds sold off over 100 bps, property stocks fell sharply and the credit retailers as well as the banks came under aggressive selling pressure. Local and foreign fund managers were both responsible for this as risk aversion seized the market. At the same time the currency sold off sharply resulting in rand hedges and resources shares in particularly doing very well.
The fund had been positioned very short of bonds and property with negligible exposure to each of these asset classes. We had recently taken money offshore and invested in offshore equities which did help somewhat due to the currency sell off, although foreign equities also came under some pressure. The major negative impact came about as a result of our being underweight resources and overweight domestic shares. This strategy has been in place since last year on the basis of stretched valuations in our opinion in the resource sector matched with overvalued commodities. On the other side domestic stocks are not pricing in any growth expectations despite the benign local economic outlook, which remains despite the recent interest rate uptick.
If one believed that the recent strong growth in the SA economy has been entirely cyclically driven, and that we were about to enter into a number of sharp and fast interest rate hikes then the rotation from SA stocks would make sense. We do not believe in either of these cases. While interest rates have definitely played their part in our recent economic growth, there is definitely an element of secular growth as a structural change unfolds in the demographics of our country. Together with a strong growth plan and local investment spend by government we believe this should continue to drive growth. As to the interest rate cycle, we do not believe this is a 'wheels off' scenario as in Turkey. Turkey's central bank only started hiking rates after the inflation figure had moved well outside of the inflation band. SA inflation is still comfortably within the range of 3% to 6% and we expect this should remain, with only a further 100 to 150 bps rate hikes over a twelvemonth period.
These recent moves have created opportunities with both bonds (in particular corporate bonds) and property stocks starting to look interesting once again, and certainly some domestic stocks are at very attractive levels. We continue to actively identify investments that we expect over the longer term will deliver good returns for investors. In the short term volatility is likely to remain high, and investors with short term horizons should remain on the sidelines. Investors with an appreciation for the long term nature of investments will realise that markets such as now are where real opportunities are created.
Neville Chester
Portfolio Manager

The first quarter of 2006 started pretty much like the last quarter of 2005, with a raging equity market fuelled by international investment flows into emerging market currencies and commodities. The Coronation Market Plus Fund returned 10.4% for the period, comfortably beating its benchmark of 9.2%.

Our overweight position in equities helped greatly while stock selection underperformed slightly due to our lower weighting in resources. Our low weighting in bonds in preference for cash has not been a big winner or loser, but property continues to do exceptionally well, despite ratings looking a little stretched.

The debate on the allocation to equities is, needless to say, quite intense given the recent strength in equities. Ratings have moved up, although a lot of the return has come from exceptional earnings growth. This has raised the question of whether or not margins are too high. Any way you look at it the risks involved in holding equities have increased although this does not mean they are not still the preferred asset class. Our view on domestic equities is that there are still good returns to be earned, predominantly from continued earnings strength due to the benign local conditions. That said, the influence of foreign investors on the local market has been huge and will result in far greater volatility in the returns over the year. Foreign investors tend to buy in large size and are generally less price sensitive, this tends to cause markets to increase as they buy up their positions but likewise can lead to sharp sell offs when they decide to close out their positions. Estimates differ but foreigners could have bought up to R70 billion in domestic equities in the last five quarters.

Bonds continue to look expensive, especially when the sell off in US treasuries is factored in, the relative rating differential is looking very thin. Due to revenue overruns government has not been issuing much debt which has meant supply has not kept up with demand but we expect lots more debt to come to the market in order for parastatals to fund the infrastructure roll out and as banks optimise their balance sheets after the massive loan growth experienced over the last few years.

Similarly, property yields relative to bonds do not factor in much risk and, as a result, they look expensive relative to an already expensive asset class.

The net result is that we are still overweight SA equity and underweight bonds and property. We have decided to take this opportunity of current rand strength and high relative SA ratings to move some money into international equity. We believe the ratings on international companies are not too demanding and it is likely that, over time, we will see some rand weakness in order for our economy to remain competitive and our current account deficit to stop ballooning. We believe this will add significantly to our long-term outperformance objectives.

Neville Chester
Portfolio Manager

of returns that have been consistently in the top quartile of its sector and its manager, Neville Chester, who has been it fund manager since its launch in 2001.
Its flexible mandate permits allows Neville to structure its portfolio in a manner that is most suited to market conditions.
His style entails an aggressive approach to asset allocation. But though Coronation Market Plus's asset allocation is aggressive, Neville is not an overly active trader. Neville explains that equity selection is based on a long-term view driven by Coronation's big research team. "There is no chopping and changing," he says.
Its track record and well considered strategy make CMP an appealing fund for those seeking asset diversity and active management.

Financial Mail - 13 April 2006

Equities once again were the best performing asset class for the quarter, justifying our heavy weighting in equities over bonds and cash. Towards the end of 2005 markets were getting cautious given the bearish stance of the South African Reserve Bank and the expectation for interest rate hikes in early December or by latest February seemed to be weighing heavily on the investor mindset. However the spate of benign inflation data and the rampant strong rand has put paid to any interest rate hike fears and given the current trajectory of the rand I imagine most economists are now pencilling in interest rate cuts for 2006! This was the catalyst for the strong run up in equity markets and provided a decent boost to the bond market as well in the last quarter.
For the quarter the fund returned a commendable 6.9%. Although this was lower than the equity market's 7.7% return it was still an excellent return given that the fund had not been fully invested in equities. The take out of VenFin by Vodafone was the highlight of the quarter as the fund did have a large stake in VenFin. Indeed this corporate action was probably the major catalyst for the final charge in the equity markets in the second half of the quarter as foreigners once again looked to the SA market as a source of inexpensive equities.
The equity portion of the fund has remained focussed on the domestic equity sector given our concerns over the current point in the commodity cycle. We believe domestic economic conditions remain favourable and will do so for the foreseeable future. This should result in solid earnings growth for domestic companies which are currently on reasonable ratings. The massive rally in resource shares in the last quarter has just made the ratings look more expensive and as a result we see few resource shares as offering much value.
Bonds rallied on the back of the change in interest rate expectations and the strengthening rand. They look very expensive on most measures and as a result we have a bias towards shorter term cash-type instruments. Our investments in listed preference shares have done well during the period and provide a great tax-free return and have provided some capital return as well. The PSG preference shares were a great investment at low risk. While the ordinary shares of PSG are trading up over 160% this year the preference shares were being valued as if PSG was going to go out of business.
Looking to 2006 we are more cautious about equity returns. While they are still our favourite asset class the returns are likely to be much less spectacular than 2005. They should however still generate good returns on the back of strong earnings growth.

Neville Chester
Portfolio Manager