During the September quarter, the Coronation Industrial fund performed best in its sector but the performance has dipped slightly since then. The greatest contributor to third-quarter returns was the fund's long-held Sun International and Kersaf holdings. Remgro disappointed but the fund took advantage of the sell-off to increase its position to a full 10%.

The Coronation Industrial Fund appreciated by 7.2% over the quarter. For the year to date, the fund has gained 11.2% which is a significant outperformance of the INDI25's -0.9%. Over one year, the fund has produced a return of approximately 25% and continues to be SA's top performing Industrial Fund.

The greatest contributor to performance over the quarter came from the funds long held positions in Sun International and Kersaf (together making up 8% of the fund), with both of these stocks appreciating by around 25%. Johnnic Holdings and Mr Price also contributed, gaining by around 20% over the quarter.

On the negative side, the performance of Remgro was disappointing, with the share losing 6%. While the strength of the rand contributed towards Remgro's decline (with around 50% of the net asset value (NAV) of the share being denominated in pounds sterling through the stake in British American Tobacco), the biggest factor was arguably the selling of defensive stocks as investors switched from defensives like Remgro into cyclicals. The fund took advantage of this investor behaviour to increase its position in Remgro to a full 10% weighting.

Four new positions were added during the period. An initial stake in Nampak was bought as the share was sold down as a result of the selling of defensives described above. Nampak, which is dominant in many of the packaging areas in which it operates, is trading on a single-digit PE and offering a dividend yield around 6%. A small stake in Chemserve was bought prior to the announced take-out offer from AECI, which the fund manager's believed would happen over time, but certainly came earlier than anticipated. The purchase price, which was 30% above the levels at which the fund manager's bought Chemserve, is made up of a combination of cash and AECI shares. AECI is one of the fund's core holdings and the fund manager's are happy to receive additional AECI shares.

A position was also built in Adcorp, which is generally under-researched and, as a result, neglected by investors. The core business of Adcorp is that of temporary and permanent staffing, with a few smaller business areas. The group has been significantly restructured over the past few years and is now starting to return to a normal level of profitability, and on these numbers is trading on a Price to Earnings (PE) of below 5. While the fund manager's wait for the normalised earnings level to be reached, they are receiving a most attractive dividend yield of almost 10%. The fund also bought a stake in NuClicks, which, in the fund manager's view, is very attractively priced if one is prepared to take a two to three year view and not focus on a short time horizon of six months or a year.

An initial stake in Telkom was acquired at the time of the IPO. Telkom is made of two parts: a 50% stake in Vodacom and the 100% held fixed line business. Vodacom is the number one mobile operator in the maturing SA market. The SA business of Vodacom generates significant free cash flows, and growth over the next five years will come from expansion into other African countries -partly funded by the free cash coming out of the SA business. The fixed line business is facing imminent competition, but will still be the dominant player within the industry. This business is also starting to generate significant amounts of free cash flow.

Over the past several months there have been a number of positive fundamental changes that have impacted the fund manager's estimation of Telkom's normalised level of earnings and, as a result, the estimate of Telkom's fair value. These factors include the continually strengthening rand (60% of Telkom's capital expenditure is denominated in hard currency), better than expected cost-cutting through management action and further delays in the SNO. Telkom is now trading on a forward PE of around 6.5, Price to FreeCash Flow of 5 and is on a dividend yield of above 4%. The fund manager's find this valuation very attractive and, as a result, the fund built a significant position in Telkom during the quarter, taking the weighting to 7% and making it the second biggest individual holding in the fund.

The SA industrial sector has enjoyed a period of significant outperformance over the past year or two. Despite the appreciation in many of the stocks within the greater industrial area, most notably the retailers, there are many stocks which have not re-rated despite continually being able to show superior earnings growth. There are still selective retailers that the fund manager's find attractive (Woolworths, Pepkor, Mr Price and Nuclicks) and about 10% of the fund is invested in this area. However, the fund manager's believe that even more attractive opportunities are to be found in other areas with exposure to the consumer including food (Tiger Brands and AVI), telecommunications (Telkom and Venfin) and media (Naspers and Johnnic Communications). The fund manager's continue to find significantly undervalued shares within the fund's universe and, as a result, the fund manager's expect to see further good gains from the industrial arena.

The fund produced a return of 14.9% for the quarter. Contributors to this performance included Johnnic/ MTN, Remgro, Naspers and Dimension Data, all of which appreciated by over 20% during the period.

The only significant change to the core portfolio over the quarter was the sale of our holding in MTN Group held through the Johnnic position. It was sold after it was unbundled out of Johnnic and started approaching the fund manager's estimate of fair value. Johnnic, and hence MTN, which made up 85% of the NAV of Johnnic, had been one of the largest positions in the fund over the past year or so and has been a significant contributor to performance as it was bought at the height of market pessimism towards MTN and its Nigerian operations. At current share price levels the fund is probably close to reaching maximum market optimism as regards the Nigerian operations, with the result that most of the good news is in the price and better opportunities are to be found elsewhere within the industrial universe. The fund manager's have retained the funds Johnnic shares as they believe that what remains after the MTN unbundling, most notably a 62% stake in Johnnic Communications, is very attractively priced. Johnnic Communications in its own right remains as a core long-term position in the fund. This company, which owns stakes in some of South Africa's best media & entertainment assets including Caxton, M-Net Supersport, The Sunday Times and Exclusive Books, is trading on a normalised P/E of below 7 and has started paying dividends again after three years of no dividend payments.

We continued to build the position in Mr Price, which we had started doing in the first quarter, and we added to Venfin and Tiger Brands, both of which are already Top 5 holdings in the fund. An initial position was also taken in SAB Miller, using the fund's offshore cash to buy the London unit. SAB Miller, at current levels, is trading at the lowest P/E that it has over the past 20 years, which is around a 10 multiple. The stock has been sold off for two primary reasons: firstly as a result of a de-rating of its peer group, the European Beverage sector, as a result of earnings downgrades due to US dollar exposure, and secondly as a result of concerns over the Miller business in the US.

On the first point, a weak US dollar is actually positive for SABMiller as they report in dollars, yet generate a portion of their revenue in euros, as opposed to the European brewing companies who report in euros and earn a portion of their revenues in US dollars. On the second point, at around 400p (or R50 at the current exchange rate) the market is implying a zero value for the US business. In the fund manager's view this is inappropriate and by buying into SABMiller at these levels you have an option on the US business, the option value being the true value of Miller, which in the fund manager's view is not zero.

The fund's other new purchase was Tongaat-Hullet, which has lost 40% of its value over the past several months. This share has now reached the point where in the fund manager's view any further downside is limited, but the upside over a longer-term horizon could be significant. As is the case with so many SA equities, the strength of the rand will impact Tongaat's earnings. However, the fund manager's believe that there has been a disconnect between the impact of the rand on the long-term fair value of the company and the actual share price behaviour and this presents an opportunity.

The fund manager's continue to believe that the broader industrial sector is one of the most attractive areas in the current SA equity market, which is cheap as a whole. The industrial counters are generating reasonable earnings growth, in many cases not impacted significantly by the current rand strength and in some cases, such as the telecommunications & media sectors, actually positively impacted by rand strength. In addition to this, the industrial sector trades on very attractive valuations, with many of the individual stocks being valued on just a 6 or 7 P/E, and offering dividend yields in the region of 4 or 5%.

The first quarter of the year saw the industrial index lose 18.75% of its value. This was mainly as a result of significant declines in Richemont & SABMiller, the two largest components of the index. The Coronation Industrial Fund did not have any exposure to these two stocks and this, together with positive returns from holdings in stocks such as Sun International and Ellerines, resulted in the fund's decline being limited to 9.8%. Consequently, the fund outperformed the industrial index by 8.9% for the quarter. Over one year, the fund has generated a positive return of 5.8%, which places it significantly ahead of all other industrial and consumer funds, and has outperformed the Industrial Index by approximately 34%.

There were no significant changes to the core portfolio over the quarter, although there was some activity within the retail sector. The fund manager's sold the funds positions in Edcon and Foschini as both stocks were approaching the fund manager's estimate of their fair value. At the same time, the fund manager's continued to build a position in Woolworths, which is now a Top 10 holding in the fund. Woolworths has one of the strongest consumer brands in the South African market, continues to take market share and is achieving growth through the continued roll-out of the food only stores. The return on equity continues to show improvements and is now north of 20%. In addition, the company has been buying back its own shares, which not only enhances earnings but also improves the returns generated on shareholders' equity. The stock trades on a PE of around 7 and offers a dividend yield of 6%, which the fund manager's consider to be particularly attractive for a stock of this quality. The fund manager's also started building a position in Mr Price after the significant share price decline of the past few months.

The fund has retained its large position in telecommunications, held primarily through Johnnic Holdings and Venfin. At the time of writing these stocks were the two largest holdings in the fund. In addition to this, the fund manager's also bought some Telkom shares on the IPO. The fund manager's see good upside in all three of these counters.

Global stock-market conditions remain difficult and the strengthening of the rand continues to put pressure on the short-term earnings of most South African companies. However, with the SA Industrial Index, excluding Richemont & SABMiller, on a forward PE of 6.4 and offering a dividend yield of around 5.3% the fund manager's believe that these factors are more than priced into the market, and continue to see significant value within South African industrial counters. Interestingly, SABMiller and to a lesser extent, Richemont, are now starting to offer good value.

The Coronation Industrial Fund performed well over the quarter, generating a return of 12.3%. As a result, the fund ended the 2002 calendar year with a return of 8.1%. Over the same period, the JSE Industrial25 index declined by 14.0%, resulting in the fund outperforming the index by 22.0%. For 2002, the fund significantly outperformed many of its competitors, taking the no. 1 position among all industrial funds.

The most significant contribution for the quarter came from the funds position in telecommunications, notably MTN Group and Johnnic Holdings, which as at September 2002 together made up 10% of the portfolio and was the fund's largest position. In the funds last quarterly report the fund manager's expressed the view that these stocks were undervalued and that the share prices were being suppressed by panic selling. The fund manager's purchased more MTN and Johnnic during this period. Since 30 September, following excellent interim results from MTN, the share prices of both MTN & Johnnic have appreciated by over 50%. The fund manager's have since sold down the funds MTN weighting and retained the Johnnic position as a result of their view that corporate activity is imminent. Another of the fund manager's favourites, MIHL, showed further price appreciation of around 30% during the quarter (after increasing 70% in Q2) which meant that it came close to reaching the fund manager's fair value and as a result they sold most of this position. The funds newly acquired positions in Dimension Data and Naspers also made positive contributions, increasing by approximately 40% over the quarter. The fund manager's believe both stocks are still undervalued and as a result have maintained these positions.

New purchases during the quarter included: Oceana (quality rand-hedge stock benefiting from improving fundamentals in the fishing industry and trading on a single-digit forward pe); Tiger Brands (high quality branded foods portfolio, trading on a single-digit p/e whilst providing a dividend yield of almost 5%); Johnnic Communications (portfolio of household-name media assets including CTP, M-Net, Nu-Metro, Sunday Times and Exclusive Books, and trading at a significant discount to our valuation of these assets); and Sun International (free cash flow generating potential not recognised by a short-term focused market). The fund manager's also added to some of the fund's core holdings including Remgro (trading at a 25% discount to a quality, undervalued portfolio of assets and yielding over 4% before special dividends) and ABI (superb franchise in the Coco-Cola brand, good cash flow generation and longer-term take-out potential).

As the fund manager's have continually stated over the past several months, although global stock market conditions remain difficult, they believe that significant value is to be found within South African Industrial counters, which are largely unaffected by global conditions and generally trade on single-digit multiples. The fund manager's continue to seek and find good opportunities within the industrial universe that offer a significant margin of safety.