Market overview
The surge in liquidity provided by the ongoing easing of monetary and fiscal policy in global economies provided a favourable backdrop for global equity and credit markets over the past quarter. The period was characterised by compelling equity valuations, increasing risk premia and improving corporate profitability contributing to a positive quarter for equity markets with the MSCI World index returning 4.9%. Conversely, global sovereign bond markets suffered their most significant losses in recent memory, as the combination of improving global growth and the Federal Reserve's comments in June dispelled any imminent threat of deflation.

Japanese equity markets were the best performing developed market over the quarter with the Nikkei 225 up 12.5% as a result of improved economic data, ongoing corporate restructuring and a reduction in the unwinding of cross shareholdings. This positive news flow has fuelled renewed international interest with international investors leading the buying activity over the quarter (as most international fund managers have been underweight Japan). The Nikkei 225 has now generated a year to date return of 20.9% in local currency, and 27% in US dollar terms.

US markets continued to move higher over the quarter, with the S&P 500 up 2.2%, supported by current monetary and fiscal policy as well as the expectation of improving corporate profitability led by productivity gains and cost cutting. Europe proved to be the laggard amongst global developed markets. The CAC produced a quarterly return of 1.65% and the Dax1.12% as deteriorating economic conditions in Germany and France combined with a significantly stronger Euro in September held back performance for most continental bourses over the period.

Performance commentary
The period under review is the first full quarter for the International Active Fund of Funds in its new restructured form. The fund enjoyed a positive return of 5.79% in US dollar terms, against the MSCI World index return of 4.9%. Currently, the fund looks to hold a reasonably limited number of 'absolute return orientated long only fund managers' with the managers applying a variety of different investment techniques to achieve this.

A broad range of good performances by all the fund managers has driven performance. In the US Wanger's focus on small capitalisation stocks helped the fund to outperform the S&P 500 with a return of 11% versus the market's (S&P) return of 2.2%. The most recent investment at the beginning of the quarter was to US fund, Close Finsbury North America Fund managed by Ed Walczack. The fund, which has a value approach, generated a positive return of 5.2% over the quarter with no exposure to technology.

The funds European managers have focused more on asset allocation than stock selection and moved from a cautious position at the beginning of the quarter, in terms of cash and fixed income holdings, to a more aggressive portfolio construction as they sought to take advantage of a more favourable environment for equities. Odey Continental Europe, with a more technical approach, were up +5.56%, while JO Hambro, which follows a stock specific bottom-up approach, were up 8.4% against the MSCI Europe return of 1.99% (all returns in US dollar). The funds exposure to the UK has been in the small cap universe with Aberforth UK Small Companies which generated a return of 12.6% over the quarter against the FTSE All Share index of 4.5%.

In Japan the fund manager's have been rewarded for working with the highly rated fund management company, Morant Wright, and negotiating the launch of a long only fund in an approved jurisdiction. The manager follows a deep value approach in Japan and as a result has managed to provide downside protection to investors, while offering tremendous returns as Japan restructures and the international investing community re-allocate capital to the region. The fund was up 15.9% for the quarter with the maximum cumulative loss being limited to -1.5% while the Nikkei 225 returned 21% (in US dollars) over the quarter but incurred a maximum loss of over -4% over the period.

GLG Capital Appreciation is the only global manager in the portfolio and has a mandate to hold a variety of asset classes. This fund enjoyed a strong quarter with returns of 6.2% against the MSCI World's 4.9% while demonstrating a good ability to protect the downside with a maximum cumulative loss over the period of -1.47% versus the MSCI World's -3.81%.

Over the quarter, South Africans saw a further rebound in equity markets, with the funds benchmark index, the MSCI World index, rising by 16.4%. For the same period, the Coronation International Active Fund of Funds returned -6.0%. On a twelve month rolling basis (to end June 2003), the index produced -4.1%, while the fund returned -10.5%. Since inception in 1997, the fund has produced a compound annual return of 3.6% against the -2.0% produced by the MSCI World index, resulting in an outperformance by the fund of 5.6%.

The end of hostilities in Iraq pushed all other geo-political and, surprisingly, economic concerns to the back burner as investors around the globe increased their appetite for riskier assets. This was assisted by one of the largest ever monetary stimulus packages being orchestrated by world central banks. At odds with the strong equity rally and improving investor sentiment (measured by declining implied volatility) were global bond markets, where yields declined significantly over the period as investors doubted the pace and strength of any global economic recovery. Over the next few months, investors will receive the feedback they require in order to determine whether the sovereign bond markets were correctly cautious or whether this asset class was moving through the late stages of a valuation bubble.

A combination of an increase in investor appetite for risk, better than expected corporate earnings, and importantly the drying up of large sell orders from insurers supported the strong technical bounce this quarter. European markets were the best performers (DAX +32%, CAC +17.7%) versus the US (S&P 500 +14.9%) and Japan (Nikkei +13.9%).

The outperformance of European markets was concentrated in April as forced selling from European insurers slowed while a stronger euro in the latter part of the quarter looked to put pressure on European corporate profitability and, as a result, European equity markets. The ongoing cross shareholding unwinding and liquidation of pension fund portfolios being handed over to the Japanese government slowed toward the end of the quarter resulting in that market finishing the quarter strongly.

The short-term performance of the fund has been significantly impacted by the writing down of the funds exposure to the Lancer Offshore Fund to zero. Any future returns from this position will result in gains for the fund.

Over the quarter the fund has been restructured so as to reflect the constraints imposed on funds by the Financial Services Board. As a result, the fund manager's allocation to alternative investment strategies has been replaced with a portfolio of 'owner managed' investment houses where, preservation of capital is very much an objective of the experienced investment teams and index constraints are excluded from investment decisions. Where the fund manager's have not found suitable investment vehicles with a similar investment objective to theirs, they have used their good relationships with high calibre alternative investment teams and initiated their setting up of vehicles in approved territories for investment by the International Active Fund.

The fund manager's remain committed to the strategy, which is aimed at achieving positive absolute returns during all market cycles. The fund now comprises of eleven core managers specialising in a variety of asset classes and includes small, mid and large cap exposure with eclectic investment styles ie, not style specific. The fund manager's believe that this group of investment managers are well equipped to participate in the upside of equity markets while at the same time preserving, to the best of their ability, the fund's capital in a declining equity market.

The first quarter of 2003 has seen further losses in equity markets with the fund's benchmark index, the MSCI World index, falling by 5.5%. For the rolling twelve months ending 31 March 2003, the index was down 25.4% on the back of the worst set of consecutive annual declines (2000 -2002) since the market collapse post the 1929 bull market. The fund manager's are, therefore, pleased that the Coronation International Active Fund of Funds has largely preserved value through this period of market turmoil. The fund's return for the rolling twelve months to 31 March 2003 was negative 2.5%. Since inception in 1997, the fund has produced a compound annual return of 4.9% (USD terms), compared to the MSCI World Index which has returned an annual negative 4.7%(USD terms).

The fund manager's remain committed to the strategy, which is aimed at achieving positive absolute returns during all market cycles.

Manager Selection

The overriding theme being followed by the fund managers at present is that corporate profitability will continue to remain weak for some time, and that a relatively fast conclusion of the war in Iraq will not help to create any sustained improvement in profitability. This is despite some strongly held contrary opinions from many market commentators who foresee the end of the war as potentially unleashing a period of renewed, and sustained economic energy. Although the recent equity market sell-offs have offered some compelling value opportunities, the managers have needed to maintain the discipline of selling once short-term price targets are reached. It has not been a market environment which is conducive to holding conviction medium-term positions.

During the quarter the fund manager's have continued the program of portfolio reconstruction. As investors will know, the bulk of this reconstruction is cantered around removing all hedge funds, and redeploying the proceeds into traditional funds which are managed with an absolute returns orientation.

Performance review

The fourth quarter saw a significant bounce in equity markets with the funds benchmark, the MSCI World index, rising by 7.3% in US dollars. Despite this recovery, the index is still down by 21.1% for the year ended 31 Dec 2002. This decline, coupled with the declines of 2000 and 2001, represent the worst set of consecutive annual declines since the market collapse post the 1929 bull market. The fund manager's are, therefore, pleased to report that the Coronation International Active Fund of Funds has preserved capital over these periods of market turmoil. For the quarter, the fund returned 3.9% in US dollars, and for the year ended 31 Dec 2002, recorded a return of 4.7%. The fund's compound annual return since inception in 1997 is 6.2%, compared to the benchmark MSCI World index return of 0.8%.

The fund manager's remain committed to the funds strategy, which is aimed at achieving positive absolute returns in US dollars during all market cycles or conditions.

Manager selection and strategy

The rally experienced during the fourth quarter of 2002 was a surprise to many of the funds managers, most of whom remain unconvinced that economic recovery is just around the corner. The majority of the funds managers continue to be defensive.

The following managers have been added during the quarter: JO HambroEuropean Fund; ComgestAsia Fund; OdeyContinental Europe Fund; GAM International Growth Fund; GLG European Fund.

Despite the fund manager's strong conviction that we are in a secular bear market, the fund manager's do expect the recent rally (Oct-Nov 2002) to gather some momentum over the next couple of months, before resuming a downward trend in 2003.

Although share ratings have declined significantly, valuations have not yet reached levels that signify the end of a major bear market. For instance, when the Japanese equity market advanced by 50% from August 1992 to August 1993, it looked like a bull market. It was not however the end of the structural bear market which continued thereafter.

Looking at the equity valuation bands of the past 25 years highlights the fact that long-term average PE multiples for the S&P 500 (around 15 times) are still well below current levels of 18 times (using optimistic earnings projections) to 40 times (using core earnings which adjust for options and pension fund accounting). Market ratings today are only back to the 1997 levels -which, at the time, were considered to be extremely high. The 1997-2000 surge in market valuations was so irrational and extreme that a 50% decline still leaves markets expensive by any rational longer-term measure.

The fund manager's expect that the market will broaden out into a bear market for at least another two years, rather than reverting to a bull market in the near future.