In what was a very challenging quarter, the fund generated a negative return of 5.5%. Whilst disappointing, this was well ahead of the -18.9% produced by the JSE Industrial 25 index. For the quarter, the fund was placed first in the industrial fund category, and for the year to end September 2002 was up 6.9%.

The most significant contribution for the quarter came from the funds position in MIHL, which has appreciated by over 70% during the past few months. The fund managers did indicate at the end of last quarter that the stock was substantially undervalued, and that they were building a large position. The recent price increase has been driven by a number of issues, the most notable being a proposed take out offer of minorities by Naspers, announced at the end of September. HL&H also provided a good return as a result of minority shareholders being bought out at a premium by Remgro. The funds relatively high exposure to Telecommunications through holdings in Johnnic, M-Cell and Venfin was the single largest negative contributor for the period. The fund managers continue to believe that the sector is undervalued, and that it is suffering from fear and irrational behaviour, as such they have maintained exposure. Other core positions are largely unchanged, with the only notable activity being the sale of Truworths. The funds realised a 30% return on its initial entry price to this stock and have now purchased the more defensive, and attractively priced, Shoprite Holdings. The fund managers also increased the funds TMT exposure through purchases of Dimension Data and Naspers.

Market conditions have been very difficult over the past months, with global stock markets under significant pressure. The South African market is not immune from these forces, and as such the fund managers do not expect significant capital appreciation from South African industrial counters until global markets show some sign of turning. Valuations of industrial stocks in South Africa are however still very attractive: the industrial index excluding Richemont and SABMiller is on a 12 month forward PE of 7.6. This valuation level limits the downside and also provides the potential for significant upside under more favourable market conditions. Furthermore, the industrial arena is the least likely to be affected by any value destruction as a result of economic redistribution. The fund remains close to being fully invested, and can see significant opportunities within selected counters in the broader industrial index.

The Coronation Consumer Growth was re-launched in August as the more diversified Coronation Industrial Fund. Managers Michael Lawrenson and Gavin Joubert have a "special situations", stock-picking bias; undervalued "NAV-based plays" form a chunk of the portfolio. The fund's only direct competitor is the Metropolitan Industrial Fund and, though it's too early to assess comparative performance, past return records suggest the Coronation fund should have the edge.

The proposed change of the Coronation Consumer Growth Fund to Coronation Industrial Fund has been passed and the Financial Services Board has approved the name change. The Coronation Consumer Growth Fund will change to Coronation Industrial Fund with effect from 1 August 2002.

For the quarter, the fund generated a positive return of 9.6%, placing it first in its category.
Positive contributors came from a range of counters, and the most notable category was retailers, with Truworths, Foschini, Ellerines and Pick 'n Pay all appreciating by over 20% during the period. Negative contributors were few, with only the telecommunications stocks (HCI and Johnnic) and media stocks (Primedia and MIHL) showing marginally negative returns. On that note, the fund manager's reduced our Johnnic exposure after realising a 25% return from our entry price. However, subsequent to that strong run, the telecommunications stocks have seen substantial price declines, mirroring their international peer group. As a result, the fund manager's have again increased the fund's telecommunications' exposure: increasing the fund's holding in Venfin and buying M-Cell, whilst retaining a position in Johnnic based on the fund manager's view that there is a reasonable probability of corporate action in the medium term. Exercising patience with regards to the fund's large Kersaf holding is also beginning to reap rewards as a result of the renewed focus on unlocking shareholder value.
Other new entries to the fund include Delta and MIHL. The fund manager's consider Delta a quality rand-hedge stock at levels below R50, (currently trading on a 1-year forward P/E in the single digits) and the fund manager's view MIHL as having considerable value: the current market cap is close to the value of the cash and stock proceeds from the sale of their stake in Open TV and, as a result, one is getting the core business for free - an extremely attractive proposition in the fund manager's view.
In these difficult markets, the fund manager's have positioned the fund with a bias towards what the fund manager's term 'special situations'. No less than five of the fund's largest holdings are NAV-based plays (Remgro, Venfin, Kersaf, Johnnic and HCI). All of these counters trade at significant discounts to their underlying assets, based upon the fund manager's valuations. The fund manager's see considerable upside in all five holdings, both through a re-rating of the underlying assets and a narrowing of the respective discounts.
In general, the fund manager's remain cautious on the outlook for the SA consumer given the current inflationary and interest rate environment, but the fund manager's continue to see considerable value in selected stocks within the broader industrial arena. The cash levels are low and, in reviewing the fund's holdings to identify potential sales, there are no obvious candidates.

The Rand depreciation in the final months of 2001 fuelled an upward inflationary trend, initiating the Reserve Bank to hike interest rates. This resulted in the environment and outlook for SA industrial stocks worsening, leading to significant de-rating in the last quarter of 2001 and the 1st quarter of 2002.
For the quarter, the Coronation Consumer Growth Fund was down 6.99%. However, on a 12-month rolling basis, it has returned 17.31%, which is significantly ahead of the 9.5% of the industrial index. The fund is currently placed first in its category.
The positive contributors to performance were AECI, AVI and Tongaat. All three stocks generate a reasonable portion of their revenue in US Dollars, with the latter two being defensive in nature. Negative contributions came from Ellerines, which was impacted by Profurn developments, and Comair, which has a large percentage of its cost base denominated in US Dollars.
The fund manager believes that while the trading environment for SA industrials will remain difficult over the short- to medium-term, this is already reflected in the valuations.
It is difficult to find a SA industrial stock with a double digit PE (with the exception of the highly rated dual listed companies, such as Richemont and SAB). The industrial index, when one strips out these two stocks, is trading on a one year forward PE of 8, which the fund manager finds particularly attractive.
On this note, the fund has maintained its significant position in Remgro, which trades at a discount to NAV of over 25%, has strong rand hedge exposure through it's holding in BAT, is trading on a forward PE of 6.5 and is offering a forward dividend yield of around 4%.
The fund has also built up exposure to selected retailers, notably Truworths and Foschini, who are also trading on forward PEs of below 8, and divided yields of above 3%.
In addition, the fund manager has introduced a holding in Johnnic: for the first time in years, M-Cell, the underlying asset in Johnnic, is trading on reasonable multiples and he believes that the telecommunications sector is relatively defensive in nature, as regards consumer spend.
In summary, the average forward PE of the stocks in the fund is 7.6. Looking forward, the fund manager believes there is potential for significant re-rating from these levels.

The proposed change of the Coronation Consumer Growth Fund to and industrial fund has not taken place. Coronation balloted existing unitholders in September 2001, however, the minimum 25% of completed ballots was not completed and therefore the proposed change could not take place. The response from investors was to effect the change and therefore a second ballot for the proposed change will be conducted in the near future.