The fund had an excellent quarter which topped off another strong year. It returned 10.3% for the period against the benchmark return of 9.0%, and 30.4% for the year compared to the balanced fund benchmark of 21.3%. The annual return is again impressive in that it is in excess of the total JSE return of 27%, even though the fund was only 65% invested in equities for the period. Importantly the fund return is net of fees. The long-term track record of the fund, which is the most important metric, continues to be impressive. Over the past ten years, it has delivered a return in excess of 20% per annum (roughly a 14% real return assuming average inflation of 6%). We caution investors that we think the absolute levels of returns generated from the capital markets are unsustainable, but we expect to be able to continue to add significant outperformance through our focus on long-term investing. Our equity building blocks have continued to deliver excellent performance ahead of the market. For the quarter, our weighting to resources and select global industrials in our SA portfolio added positively to performance. In particular, our large overweight in Mondi continued to do extremely well and was by far the largest contributor to outperforming the market. In the financial space our overweight position in Nedbank drove good performance, as well as our holding in MMI which we have subsequently reduced. Some of the smaller stocks that have also come through include Altron, which has rallied very strongly off its lows as well as Royal Bafokeng Platinum and Northam Platinum, which have both benefited from the improved outlook for the platinum market. Our global equity, Global Emerging Markets (GEM) and Africa equity funds have done extremely well ? all outperforming their respective benchmarks over the past year. The emerging market universe has lagged the returns delivered by developed markets as the talk of tapering saw a lot of hot money leave emerging markets. This has resulted in valuations in the emerging market universe looking much more attractive and we have increased our weighting to the GEM fund. The same tapering effect also impacted quite significantly in the fixed interest market. After having very little exposure for many years, we took advantage of the sell-off to add some nominal government bonds to the fund at attractive yields of close to 9%. We expect the risks to remain on the upside for yields, so we remain underweight looking for opportunities to add more. In a similar vein we increased our weightings to local property stocks, buying some selective names but not in major size yet as we still think the listed property sector, relative to bonds, remains expensive. The fund had no exposure to the recently announced corporate bond failure, First Strut, as our credit committee had identified it as a high- risk instrument. Our offshore allocation in total remains around 30% although we have moved it tactically as the rand has range traded between 9.70 and 10.50 to the US dollar. Given the poor local macro fundamentals and generally high level of valuation of domestic assets, we remain happy with a high weighting to offshore assets.

Coronation Absolute Fund has closed & amalgamated into Coronation Market Plus Fund.

The fund had an excellent quarter, especially given the huge dislocations that occurred in capital markets during the period. The fund returned 2.4% against the benchmark of 0.3%. It also measures up well against the JSE All Share and bond market returns which were negative for the quarter. The key drivers of the good returns were the fund's low weighting in domestic equities, the negligible exposure to domestic bonds and the high weighting to offshore equity. We have long spoken about our preference for global equities, where valuations were still attractive and opportunities for growing earnings far better. This view has played out as we have seen the signs of a nascent recovery in the US. US equities in particular have recovered nicely, and at the same time the initial comments by the Federal Reserve about the winding down of quantitative easing (QE) have caused a huge sell-off in bonds and emerging markets in general. The major side effect of QE was that all these funds left the US in search of higher yield. It ended up investing in various global bond markets, but also into emerging market equities on expectations of better growth and returns. As the situation improves in the US and interest rates start to rise, we face the prospect of this money returning to the US, resulting in a rise in global bond yields and a sell-off in emerging market assets; bonds in particular but equities will be impacted as well. As a result of the above, valuation is returning to the spotlight. We have always emphasised the importance of valuation. While one can get carried away with trends and themes, the reality is that one can never call the inflection points as these change. All one can do, in particular to protect capital, is to focus on valuations and make sure that one never overpays for assets. A lot of emerging market assets became very expensive over the past few years and now, as the money leaves these markets, share prices will revert to their fair value. Domestically, we have started to find some value in a few local assets. In particular, the big local banks are starting to look attractive on 9 times forward earnings and dividend yields in excess of 5%. Our banks remain well capitalised and very lowly leveraged, and as a result should escape any impact of the new regulatory changes. While the bursting of the microlending bubble is no surprise to us, it should have very limited impact on the big banks as their exposure as a percentage of the overall book is fairly low. Retailers have sold off quite aggressively this year, but overall still look expensive. One or two names are starting to look attractive but we remain concerned about the level of earnings. Resource companies have also had a torrid time as the poor outlook for resources has been compounded by the poor labour relations outlook for this year. Values are now quite compelling in this sector, so we continue to add to our positions but always cognisant of the risks in this sector. On the fixed interest side we are starting to see some opportunities; primarily in inflation-linked assets, but more recently in nominal bonds as well. Offshore yields have started to move, but still do not offer much value except for specific credits that we continue to hold. It is always pleasing to see the fund do well in difficult times and we remain happy that it is structured appropriately to continue delivering inflation beating returns over the long term.
Portfolio manager
Neville Chester

The fund had a good start to the year, supported by a strong rally in local and global equity markets which seemed to shrug off last year's concerns. In an unusual period all capital markets delivered good returns, with equities, property and bonds (mainly via credit) each having had a strong start to the year. The weakening rand also benefited the fund, which had moved to an optimal weighting in offshore assets. For the quarter, the fund delivered 7.7% versus the benchmark return of 3.3% and the South African equity market's return of 2.5%. At the top level, dealing with asset allocation, we continued to reduce our exposure to equities, which makes the great returns for this period more remarkable. Equities continued to rally into the new year on a surge of optimism; or as pessimists would point out, on a wave of central bank driven liquidity. What makes us wary is that not much has changed this year compared to the situation last year. Yet markets are up significantly since then, making potential returns less attractive. The one economy that has improved is the US, where the housing outlook and employment numbers are certainly looking better. Europe and Asia however remain in a similar growth vector to last year. As alluded to earlier we have increased the fund's offshore weighting to what we think is a more normal through-thecycle weighting for a South African investor, which is around 30%. This benefited the fund nicely as the rand weakened further due to South African specifics, being the tough economic outlook, continued labour instability and deteriorating trade and current account deficits. In addition to reducing our equity weighting, we have continued to reduce our property exposure as these assets have also rallied strongly this quarter and look fully valued, with the sector trading on yields of between 6 and 7%. The net result of this has been an increase in cash in the portfolio, on which we have looked to maximise the yield through appropriate credit enhancements. This cash is readily available to be re-employed into riskier assets as and when the returns become more attractive. Within equities we have had a fantastic period with strong alpha being produced by our local, global and emerging market equity portfolios. A number of our long held positions came through nicely for the fund, resulting in us taking some profits in a few of these and establishing some new positions. Mondi has been an outstanding performer for the fund and is one of the biggest overall contributors to alpha for the period. While it is classified by the JSE as a resource counter it is predominantly a packaging business, which has been run extremely well and continues to be well positioned for longterm growth in a cyclical industry. The fund remains overweight resources, with big investments in Anglo American and Sasol. While Sasol has also delivered good performance on the back of strong results, Anglo American continues to underperform the market and its peers. Based on the quality of its assets, we don't believe this underperformance is justified. Roughly two thirds of our overall equity weighting of 62% is JSElisted counters and a third is made up of our global and emerging market investments. But within the JSE component, over half of the investments are in businesses with strong global operations and exposed to growth outside the borders of South Africa. In an environment of spiralling wage, electricity and other administered costs we cannot get excited about the South African economy's prospects. The weighting to bonds has increased slightly as we have managed to source some good quality bonds, which are floating rate notes. We continue to believe that nominal bonds are expensive and investors should not be taking a view on rates declining further from these levels. Roughly half of our bond position of 15% is linked to floating rates while the other half is linked to inflation. We have also built up a portfolio of good international credits, with attractive yields in dollars and euros. While we are also negative on global bonds, these specific credits offer very high yields, which make them attractive assets to hold for the long term. The majority of the underlying companies are large South African domiciled businesses, which have issued offshore debt. The investment outlook remains very challenging as the globe slowly recovers and central banks around the world launch some of the most extreme monetary policies we have ever seen. We remain cautious and conservative in the construction of the fund, cognisant that there are many assets around the world that are not normally valued, skewed by the extreme printing of cash. Against this backdrop, inflation remains a constant concern, eroding real value. We therefore need to ensure that over the longer term, we are invested in the right assets to preserve real wealth.

Portfolio manager
Neville Chester

Despite the major concerns affecting the global economy - the breakup of the euro and the looming US fiscal cliff - capital markets globally and locally delivered very strong returns in 2012. Equity markets, bond and credit markets as well as property all performed extremely well around the world. The driving factor remains the unprecedented surge in money printing by central banks worldwide. This trend seems unlikely to abate in the short term. In fact, recent political changes in Japan indicate they are likely to join in the money printing frenzy. With interest rates being kept artificially low around the world, this surplus cash has been looking for yield opportunities, which has seen risk assets do well worldwide. In this challenging environment it is very pleasing that the fund has delivered 22.5% (after fees) for the year, outperforming the benchmark return of 22.1%. The global equity component of the fund performed well, with our international equity and emerging market building blocks outperforming their respective benchmarks. In addition, with the rand weakening over the course of the year, the fund's overweight allocation to offshore assets has helped to drive overall returns. Based on our research, we continue to believe there is better value in global equity markets than in domestic markets. We will therefore maintain a high weighting to these assets. The fund has also benefited from its investments in global property and high yielding credits. These assets have all rallied strongly on an improving global outlook and the search for yield referred to above. These assets provide a good level of income as well as potential capital gains, which reduces the risk and volatility in returns generated by the fund. The domestic equity weighting has been held constant by selling at the margin as key stock picks have come through. Domestic industrial shares and financials have been sold down, and resources have been increased, as this is where we continue to find the best value. Generally negative sentiment towards global growth (primarily China) has seen commodity shares under pressure and offering good long-term returns. The fund's resource equity weighting has increased primarily through adding to African Rainbow Minerals and Exxaro Resources. In the domestic fixed interest space the fund has done extremely well from its holdings in inflation-linked bonds. These instruments have rallied strongly as markets are anticipating inflation levels to spike due to labour concerns and the feed through from the weaker rand. We have further sold down our exposure to nominal bonds and only hold a few credit bonds, which mature over the next eighteen months, ensuring that there is very little duration risk in the fund. The fund has also reduced its exposure to South African property, taking advantage of the strong demand for these yielding stocks to exit fairly large positions. Given our longer-term concern about interest rates in South Africa, we remain convinced that owning large positions in property stocks is not appropriate at this point in the cycle. Given the strong returns from most risk assets last year it is challenging to identify the major opportunities for 2013. We have reduced our domestic equity exposure as we have struggled to find much value here. The international allocation is full, given our expectations of a deteriorating currency against the major cross currencies.

Portfolio manager
Neville Chester