The FTSE/JSE All Share Index returned -2.13% for the quarter and 4.79% over the past 12 months. The industrial sector continued to outperform the broader market, which continues to be dragged down by the resource sector, and returned 0.8% for the quarter and 15.76% over the past 12 months. The rand depreciated 12.1% against the US dollar over the quarter and rand hedges subsequently enjoyed a strong quarter, with the best performing sub-sectors being beverages (up 25.1%) and tobacco (up 17.4%). The domestic economic outlook continued to worsen and GDP growth projections were considerably marked down. As expected, the South African Reserve Bank (SARB) kept interest rates on hold at 6%, but we are becoming increasingly concerned about the impact the rapid deprecation of the rand is having on inflation expectations going forward.

Against this backdrop, the fund still managed to produce a small positive return for the quarter, but slightly underperformed its benchmark index. For the quarter, the fund returned 0.15% versus 0.8% for FTSE/JSE Industrials Index. However, as usual, we like to keep the perspective firmly on longer-term returns. Over the past 12 months, the fund achieved a return of 20.39% versus 15.76% for the FTSE/JSE Industrials Index and for the three-year period, the compound annual figures are 26.61% and 24.21% respectively.

Shares that added to performance during the quarter were our positions in Reinet and Steinhoff. Our large Steinhoff position has also contributed meaningfully to fund outperformance over the past 12 months, along with our positions in Pioneer Foods and Zeder. Our relatively low weightings in MTN, Sasol and Aspen have also contributed to performance for the quarter and the past year. MTN declined by 20% over the quarter on the back of a deteriorating Nigerian macro environment (driven primarily by the collapse in the oil price) together with management's poor execution in their two biggest operating markets, i.e. Nigeria and South Africa. Steps are being taken to address these issues (such as network investment in Nigeria and improving service levels in South Africa by appointing new management and investing in IT systems). Although the valuation is starting to look more attractive, we continue to remain cautious. The biggest detractor to performance over the three-month period was our underweight position in SABMiller, which rallied strongly during September on the back of confirmation that a potential bid by Anheuser- Busch InBev might be offered to shareholders. At the time of writing, the situation remains very fluid and we are monitoring events, and our position in the stock, very carefully. Recent portfolio changes worth mentioning include the new position in Mediclinic and our holding in Reinet. We re-established a position in Mediclinic during the quarter after previously disposing of our stake on valuation grounds. After the share price peaked in April 2015 (at just under R130 per share), it retraced by more than 30%. The fund used this opportunity to build an effective exposure of just over 3% (including through our indirect holding of Mediclinic within Remgro). Mediclinic is a fantastic business that enjoys high barriers to entry. Margins and earnings are very defensive and management have done a fantastic job at building a platform through which the business can grow from its current footprint into a global hospital group. During the quarter Mediclinic undertook a rights issue to fund the purchase of a 29.9% stake in UK-based Spire Healthcare Group. We are excited about the value accretion opportunities that have been created by this purchase.

Reinet is another stock in which we have built a sizable position to around 3% of the fund. Reinet is the holding company for the Rupert family's remaining interests in British American Tobacco (BAT), which makes up almost 65% of Reinet's intrinsic value. In addition, over the past six years, it has diversified into a number of other investments mainly in the insurance and alternative asset management space. Although its relative size within Reinet has reduced over time, BAT remains a great business and we also hold a material direct exposure of over 6% in the fund. Reinet's other major investment - comprising almost 20% of its intrinsic value - is a 43% stake in Pension Insurance Corporation (PIC). PIC is one of the largest providers of annuity solutions to UK pension funds. It operates in an industry with a massive addressable market and has grown its policyholder liabilities by 40% p.a. between 2008 and 2014 and its embedded value by 35% p.a. over the past three years. The business has historically also generated very attractive returns on its embedded value of between 15% and 20% p.a. We think this is a great asset with exciting growth prospects and believe it is underappreciated within Reinet. Furthermore, the Reinet share price currently trades at a discount to its net asset value of around 25%, which we believe to be very attractive given the quality of the underlying assets and superior capital allocation track record of management.

On the selling side, we sold out of our Spar and City Lodge positions into share price strength. We also reduced our weighting in Master Drilling as the share approached out assessment of fair value.

Portfolio managers
Sarah-Jane Alexander and Adrian Zetler

The FTSE/JSE All Share Index returned -0.2% for the quarter and 4.79% over the past 12 months. The industrial sector continued to outperform the broader market, which has been dragged down by the resource sector, and returned 1.65% for the quarter and 14.04% over the past 12 months. The relative outperformance of the industrial sector compared with the resource sector is now quite staggering over longer time periods. As an example, over the past five years the industrial sector returned 27.12% per annum, while the resource sector returned -0.04% per annum over the same period. To put this into perspective, if you had invested R100 in the in the FTSE/JSE Industrials Index five years ago, your investment would be worth R332 today, while that same R100 invested in the FTSE/JSE Resources Index would be worth just a little bit less than your original investment. In this environment, the fund produced satisfactory returns on an absolute and relative basis. For the quarter, the fund returned 2.89% versus 1.65% for FTSE/JSE Industrials Index. However, as usual, we like to keep the perspective firmly on longerterm returns. Over the past 12 months, the fund achieved a return of 18.60% versus 14.04% for the FTSE/JSE Industrials Index and for the three-year period, the compound annual figures are 30.28% and 28.07% respectively. While we continue to strive to generate outperformance relative to the benchmark and peers, we once again caution investors around their expectations for future returns.

Shares that added to performance during the quarter were our positions in Pick n Pay and Spur, while large weightings in Pioneer Foods and Zeder contributed meaningfully to the fund's outperformance over the past 12 months. Our large Steinhoff position has also contributed well to 12-month returns and we continue to view the share as being attractive at these levels. Our relatively low weighting in SABMiller has also contributed to performance for the quarter and the past year. The biggest detractor to performance over the three-month period was our underweight position in Sasol, which rallied strongly during the quarter on the back of a recovery in the oil price. Our position in Grindrod has been a detractor from performance over the quarter and the past 12 months. Dry bulk shipping rates have continued to remain weak and the terminals business has been under significant pressure as iron ore and coal prices have collapsed.

The domestic economy is still not in a great place. We have now begun to see rolling blackouts really bite and impact negatively on the reported earnings of many domestically-focused companies. Under normal conditions, the weak currency should be a boon for local manufacturers but the country's lack of power, together with a challenging labour environment, are proving to be major headwinds and hampering investment. Unless valuations are compelling, we continue to remain cautious on businesses exposed solely to the South African economy.

Major portfolio changes for the quarter worth mentioning include the new position in Omnia and our further increased holding in Pick n Pay and Pick n Pay Holdings (the holding company for a 54% stake in Pick n Pay). We have been building our position in Pick n Pay and Pick n Pay Holdings over the past two quarters to a combined holding of almost 3% of the fund. The business and share price has been under pressure over the last few years. This has stemmed from it being slow to adopt a centralised approach to grocery distribution, having a bloated cost base and due to insufficient stores being rolled out. The result has been a reduction in margins and lost market share. Throughout this period, however, Pick n Pay's brand has remained very strong and its customers loyal. While turning around a business takes time, we are very encouraged by the steps new management are taking, including increasing capital expenditure on store refurbishments and store roll-outs; sharpening its marketing strategy to address price perception issues; improving range availability and; introducing more staff accountability. We believe they will ultimately return the business to the champion that it once was. Pick n Pay trades on a 25x forward PE. Although the stock looks expensive on near-term earnings multiples, on our assumption of an improvement in margins and some market share being regained, it trades on 15x our assessment of normal earnings. We believe this to be attractive for a high-quality business, especially relative to the expensive opportunity set that is available. Omnia is a business that the fund has previously owned but sold out of in the third quarter of 2014 as it had reached our assessment of fair value. Since then the share price has been under significant pressure as the market became increasingly concerned about its exposure (in particular) to the mining sector, where commodity prices have been under significant pressure. After the share price peaked in September 2014 at just over R240 per share, it retraced by more than 30% and the fund once again started building a position.

Omnia is a business with a superb, entrepreneurial management team and we believe the business can still grow volumes in its explosives business in a low commodity price environment. Its fertilizer business is also doing extremely well and continues to take market share from weak competitors. Omnia trades on an 11.5x forward PE and 9.6x our assessment of normal earnings. We think this is particularly attractive for a well-run business with attractive growth prospects, and we will continue to build on the position should the share price weaken any further.

On the selling side, we continued to lighten our Zeder and MTN positions into share price strength. We also reduced our weighting in Imperial as we have become increasingly concerned about the impact the weak rand will have on the earnings in its automotive distribution business.

Portfolio managers
Sarah-Jane Alexander and Adrian Zetler

The FTSE/JSE All Share Index returned 5.8% for the first quarter of the year, reaching a record peak in late February. Over the same period, the fund delivered 7.3% versus a return of 5.6% for FTSE/JSE Industrials Index. Twelve-month returns are 27.7% and 22.3% for the fund and benchmark index respectively.

Major contributors to fund performance over the past year were our sizeable positions in Pioneer Food Group and Zeder. We reduced our direct holding of Pioneer Food Group as the share price rose further in the first quarter of the year, buoyed by news of inclusion into a number of indices. We retain exposure indirectly through Zeder, which holds Pioneer Food Group at a discount. Benchmark relative underweight positions in MTN and Richemont also contributed to performance. Richemont is battling a slowdown in Chinese luxury spend and the challenge of softer demand was compounded by the strengthening Swiss franc, a major manufacturing currency for Richemont. However, we believe the share offers long-term value due to its impeccable brand credentials and retain a sizeable holding. Falling oil prices, weak consumer demand and political uncertainty have made trading conditions in MTN's Nigerian business extremely challenging. We added to MTN on the pullback.

Domestic conditions remain challenging with electricity load shedding hampering productivity and increasing production costs, coupled with a volatile labour environment. While interest rates remained unchanged in the period under review, expectations remain for future rate rises. Combined with rising fuel levies, increasing utility bills and a higher tax take, the consumer outlook remains subdued. Selective positions we have taken in the domestic industrial sector in the form of Barloworld, Imperial and Grindrod have cost performance. We believe these shares are cheap and even with near-term challenges, offer longer-term value relative to an expensive industrial sector.

New positions established in the quarter include Reinet, Pick n Pay and Bell Equipment (Bell). Reinet was funded from our position in British American Tobacco (BAT). We believe Reinet offers more attractive exposure, not only for the discount at which it trades to British American Tobacco (its largest asset) after considering management fees but also for its Pension Corporation investment. Pension Corporation is growing rapidly as companies look to outsource their pension liabilities, reducing the uncertainty of retaining these liabilities on balance sheet. New management at Pick n Pay are making substantial changes to the business, wholly committing to a centralised supply chain and the efficiencies this will drive. While this significant change is underway, margins remain below peers and the market is losing heart in the turnaround. Share price underperformance relative to both broader industrials as well as competitors has made the valuation more attractive. Bell has struggled in a tough mining cycle but aggressive restructuring of the business by management (who are also significant shareholders) has strengthened the balance sheet and should improve production utilisation, supporting an earnings recovery.

In addition to the already mentioned reduced holdings in Pioneer Food Group and BAT, we sold out of our holding in AECI. AECI had held up relatively well despite the tough mining investment cycle. Earnings pressure on its major mining customers is likely to result in tougher trading for AECI going forward.

At the end of the first quarter, the reclassification of Sasol as a chemical share has led to its inclusion in the benchmark industrials index and therefore in the fund's investable universe. As a sector, industrial shares have continued their strong run of the last few years, with prices rising well ahead of earnings expectations. We remain cautious on future returns.

Portfolio managers
Sarah-Jane Alexander and Adrian Zetler

The FTSE/JSE All Share Index returned 1.4% for the quarter and 10.9% for the year. However, these market returns mask the continued strong returns achieved by the industrial sector which outperformed the broader market over both periods. In this environment, the fund produced satisfactory returns on an absolute and relative basis. For the quarter, the fund returned 8.9% versus 7% for FTSE/JSE Industrials Index. However, as usual, we like to keep the perspective firmly on longer-term returns. Over the past 12 months the fund achieved a return of 21.1% versus 16.8% for the FTSE/JSE Industrials Index and for the three-year period, the compound annual figures are 31.6% and 30.4% respectively. The industrial sector has clearly experienced a purple patch over the past few years and at this stage it would be prudent for us to caution investors around their expectations for future returns.

Shares that added to performance during the quarter were our large positions in Pioneer Food Group and Zeder, which also contributed meaningfully to the fund's outperformance over the past 12 months. Our relatively low weightings in MTN and SABMiller also contributed nicely to performance for the quarter and the past year. The biggest detractor to performance over the three-month period was our underweight position in Richemont, which rallied strongly after reporting its interim results. Our relative underweight position in Aspen continued to detract from performance over the quarter and past 12 months.

The domestic economy has remained a challenging place for businesses to operate in and the debacle at Eskom, along with the subsequent load-shedding, has added to the woes. The impact of the rolling blackouts is clearly poor for economic growth and company earnings are likely to be hurt. On a positive note, the recent drop in the oil price should lead to lower inflation and reduce the pressure for any further rate hikes, thereby providing consumers with some much needed breathing room. Furthermore, a weaker local currency should bring some relief to the beleaguered local manufacturing sector but we continue to remain cautious on the prospects for companies heavily exposed to the domestic economy. In the fund, we continue to favour quality global stocks that happen to be domiciled in South Africa such as Naspers, British American Tobacco, Richemont and Steinhoff, together with SA businesses whose earnings should benefit from the weaker domestic currency. Major portfolio changes for the quarter worth mentioning are the increased positions in Distell/Capevin Holdings (the holding company for a 27% stake in Distell) and Steinhoff. We have been building our position in Distell and Capevin Holdings over the past few quarters to a combined holding of almost 8% of the fund. We are very excited about Distell. The management team is newly energised and heavily focused on shareholder returns under recently appointed CEO Richard Rushton. The business has exceptionally strong brands and a massive opportunity set in South Africa and the rest of Africa where it is investing heavily to establish brand awareness amongst emerging consumers and expanding its distribution capabilities. Furthermore, we think the valuation is attractive for a growing, defensive business, trading on 12x our assessment of normal earnings.

Steinhoff is a relatively new addition to the fund. The business has an entrepreneurial management team that is heavily invested in the company, and is led by a visionary CEO in the form of Markus Jooste. Management have proven to be very good allocators of capital over time and over the last few years the company has transformed itself from being purely a furniture manufacturer into one of the leading furniture retailers in Europe that is also vertically integrated into manufacturing and sourcing, logistics, and property ownership/management. Through the global financial crisis they consolidated a fragmented European furniture retail market and have emerged from a very challenging economic environment a much stronger business with improved prospects for cash flow generation. During the quarter, the company also announced its acquisition of 92% of Pepkor Holdings for a consideration of R62.8bn. This is a game changing transaction for Steinhoff and we are very excited about the opportunity set the combined Steinhoff/Pepkor group is presented with; not only in the form of cost synergies that exist but also through the organic growth prospects on offer. Steinhoff is trading on 12.5x our assessment of normal earnings, which we believe to be attractive for a rand hedge in a relatively expensive domestic market with a management team that should continue to create value over time.

Portfolio manager changes
Dirk Kotze has been a portfolio manager on the fund for the past 10 years and has made a significant contribution to its track record. With effect from 1 January 2015, he will however focus on the management of institutional funds. Joining Sarah-Jane Alexander as co-manager of the fund is Adrian Zetler. Adrian has been a member of the Coronation equity team for the past 5 years and has already contributed to this fund through his analysis of a number of industrial companies. We look forward to his future contribution.