The funds benchmark index, the MSCI World index, fell by an astonishing 18.7% during the third quarter, and by an even more staggering 26.5% for the first nine months of 2002. This decline, coupled with the decline of 2001, represent the worst set of consecutive annual declines since the market collapse post 1929. Most conventionally managed, large cap global equity portfolios have been severely damaged by these falls, and are showing market value declines similar to those experienced by the headline indices. The fund managers are therefore pleased to report that the Coronation International Active Fund of Funds has maintained its value over these periods of market collapse. The fund's return for the quarter, and nine months ended 30 Sep 02, are -2.9% and 0.8% respectively.

The fund managers approach to managing their clients' offshore investments has consistently been based on the maxim that "relative dollars are hard to spend". The fund managers therefore, have concentrated their efforts on generating low volatility positive returns, rather than being satisfied with a return, which, although beating the benchmark, is negative in absolute terms. This is based on the fund managers view that enjoying the returns from bull markets is very important in wealth creation, but that stemming losses during falling markets is what differentiates enduring fund performance from erratic bull market returns. While the fund managers have regularly pointed out to their clients that the International Active Fund of Funds may under perform the market during a sharp bull market run, the fund managers analysis of market conditions makes them very sceptical as to the likelihood of this happening.

The fund managers foresee a protracted period of volatile, but downward trending returns from the top 100 shares around the world. This universe of shares is simply still too highly rated to give great returns. The equity managers that they believe will generate positive returns (in the 5%-15% range) are those that follow one of two core strategies. The first strategy is doing extremely thorough research of a narrow universe of shares that fall into the "value" category. These shares are normally only included in a portfolio once high conviction on the investment merit is achieved. The second is that of actively trading the portfolio of shares on the basis that, although the market remains volatile, if you know your shares well you will be very sensitive to valuation bands. The fund managers continue to have high conviction that the strategy of investing in a fund of absolute return managers is the vehicle most suited to achieving low volatility positive absolute returns over the coming months and years.

The Coronation International Active Fund of Funds has, since its launch in August 1997, outperformed its benchmark by approximately 13% per annum in rand terms (net of all fees), and is regarded as one of the premier international investment vehicles in South Africa.

The fund's return for the quarter ended 30 June 2002 was 2.4% (US$), compared to the MSCI World index, which fell by 9.5%. For the first half of the year, it returned a positive 3,7%, and for the rolling year to 30 June, a positive 2.0%. This compares to a negative 9.5% and negative 16.3% respectively for the MSCI World index over the same time frames.
The global bear market is now in its third year and shows no sign of letting up. Therefore, the fund's ability to consistently produce positive returns over all medium term (one year or more) periods is extremely pleasing. The fund has all the positive characteristics of a well-diversified fund of funds focused on capital preservation in US dollar terms. These are positive returns over all medium-term periods; lower volatility of returns thatn the MSCI World index; low correlations with the MSCI World index; and either positive or minor falls during periods of declining world markets.
Unfortunately, despite the periodic prospect of surprisingly strong market rallies, the fund managers foresee a protracted period of poor performance from the large-cap world equity indices. A further one or two years would not surprise Coronation.
Coronation believe the recipe for a profitable, but low-anxiety, exposure to world equity markets lies in having low expectations from overall equity markets; a greater focus on mid-cap equities with identifiable valuation characteristics underpinning their share prices; and, adhering to the strategy of selecting talented, non-market correlated fund managers such as those so successfully included in Coronation's International Active Fund to date.

The Coronation International Active Fund of Funds returned 43.89% (Rands) for the 12 months ended 31 Mar 2002, which was in excess of 10% of the mean of the Foreign Equity General category of unit trust funds.
This outperformance can be attributed to the focus on capital preservation by the underlying fund managers, which was evident in the face of the 2001 bear market. The first quarter of 2002 saw many of the managers lengthen their stride, ie increase their market exposure as the fund managers see opportunities from the market having more direction than last year.
Over the quarter, the fund produced a positive Dollar return of 1.2% versus the neutral Dollar return of the MSCI World index. This is in line with the fund manager's expectation of the fund producing positive Dollar returns throughout 2002.
International markets are currently torn between the contrary pulls of the credit (balance sheet) cycle and the industrial (real economy) cycle. While in January 2002 markets were negatively affected by worries over accounting standards and balance sheet risks, February 2002 and March 2002 saw a series of positive economic indicators, which increased confidence surrounding the industrial cycle. This in turn led to a sharp rally in cyclical shares.
The US is undoubtedly experiencing an economic recovery from the inventory reduction induced slowdown of 2001. Although this trend is set to continue for some months, the fund manager's are skeptical of its longevity. Whether it disappoints due to weak pricing power and surplus capacity, or is restricted by credit markets (bond yields) still nervous of credit excesses, is still unclear. The fund managers believe it is unwise to be overconfident of a US economy plagued by many imbalances, such as consumer and corporate debt levels, when the only cure (further monetary and fiscal stimulus) only aggravates the problem.
The headline equity indices remain, in the fund manager's opinion, overvalued. Although there will be significant earnings rebounds from a number of sectors, a Fed funds rate of 1.75% is simply not sustainable for any length of time. Any sustained economic upswing will inevitably be countered by a swift rise in interest rates to more sustainable levels. This will place a definite lid on consumer spending levels, as well as equity market ratings.
In these circumstances, the fund managers will continue to target stock specific opportunities rather than broader market and cyclical themes.