The fund returned -0.02% for the quarter, in line with the benchmark MSCI World Index. On a rolling 12-month, the fund has returned 5.4%, against the benchmark's 7.9%.

The past quarter will long be remembered for the credit meltdown that occurred in August. After many years of building a house of cards based on ratings, statistics and never ending house price appreciation, the credit market decided that the foundations, (the underlying cash instruments), were decidedly weak collateral for the risks they were taking. The subsequent unwinding of leverage rippled across global financial markets. The inter-bank money market was seriously affected and required Central Bank intervention in all regions; but even this wasn't enough to stop a run on the UK's Northern Rock which required government intervention to resolve. Once the dust settled and the US Fed cut rates by 0.5%, equities rebounded strongly, although some markets will take longer to return to normal.

Asia ex Japan, as the world's current growth driver, gained 13.3% (in US dollar terms) for the quarter followed by North America and Europe, some way back at 2.7% and 2.4% respectively. Japan ended at -0.82% for the month.

During the quarter we switched out of Odey Japan Fund into IFDC Japan Dynamic Fund. Odey had a disappointing run when a call on interest rates and domestic demand failed to materialize, and the fund was punished during August with a large exposure to banks. While the manager may prove to be correct in his thesis, we decided to invest with IFDC which has a long track record in Japan and is more pragmatic in its approach. We also added another Asia fund, Prusik. This fund is run by Heather Manners who follows a thematic absolute return strategy. We are impressed by her current thoughts and the quality of the companies which she had sourced for the portfolio.

UOB Kinetics Paradigm Fund, currently our largest position, had a great quarter. They returned 11.9% as positions in Canadian oil sands, exchanges and China infrastructure and consumer stocks paid off handsomely. This was offset by Cantillon Global Value and Edinburgh Partners Global which both lagged the index over the period.

The fund also benefited from its Asia exposure through Comgest and Prusik. Asia is growing rapidly and although some stocks are priced for perfection, there is still value to be found in the region. Comgest has more than 20 years experience investing in the region, and a strong presence in Hong Kong enables them to source ideas and visit companies.

A near melt down in credit markets coupled with volatile equity markets makes it difficult to have a strong view of the future. On balance though, we believe that equities are on reasonable valuations and that Asia currently represents the best opportunities.

Tony Gibson
Portfolio Manager

The fund returned +2.2% for the quarter against the +3.2% delivered by the benchmark MSCI World Index. For a rolling 12- month period the fund's return of +18.8% is behind that of the benchmark +22.2%.

Strong April returns meant that the quarter started on a positive note as M&A activity and booming Asian economies overcame news of the weak first quarter US GDP numbers. However, as predicted by the Fed, the US economy showed signs of picking up even as the housing slump continues to drag on the economy. As a result, the Dow, S&P and many Asian markets set all-time highs. In general, it was full steam ahead until mid- June when long-term rates picked up and the sub-prime issue came back to haunt two credit hedge funds managed by Bear Stearns. Markets trickled lower as nervous investors feared a wider contagion but ticked up again towards the end of the quarter as the storm clouds moved on.

The underperformance for the quarter was primarily driven by the regional allocation, where the underweight to North America and overweight to Japan detracted from overall performance. An underweight to North America has generally been a good position over the last two years, but US stocks had a good quarter. The overweight to Japan was to benefit from the ongoing economic reform and recovery in the country. However, although the position did very well in 2005, the markets have struggled in 2006 and the first half of 2007.

In selecting our fund investments, we look for managers who have a long-term investment horizon and are benchmark agnostic. This can often lead to a disconnect in their performance and that of the various indices, both positively and negatively. While a few of our managers are performing as expected, some are having a challenging time.

Odey Japan in particular performed poorly in the past quarter, going long financials in the expectation of an early rate increase. This did not materialise, which resulted in a -0.3 return (in yen terms) compared to the Topix at + 3.6%. Japanese large caps have also outperformed mid and small caps in the last 12 months so, although they have underperformed the Topix, we are pleased that Morant Wright is only 0.4% behind (in yen terms).

The Asia fund, Comgest Nouvelle Asie, with +10.3% was in line with the benchmark. Comgest, with long experience in the region, are of the opinion that markets are running ahead of reality and have gone slightly defensive.

Of the Europe funds, Ruffer European Growth had an excellent quarter, returning almost double that of the index. Edinburgh Partners Europe, our core holding, was slightly behind the benchmark as it continues a weak period of performance. Of the US funds, UOB Kinetics Paradigm and Hippocrates were both ahead of the S&P but their good returns were diminished by Copper Spire which had a very poor quarter, underperforming by 4.1%.

IFDC Japan, a new holding, was added on reducing our exposure to Odey Japan. IFDC is solely focused on Japan and has managed money since 1983. In contrast to Odey's topdown approach, Albert Abehsera is a GARP-biased, bottom-up manager with a great track record.

The next quarter should prove to be interesting. A number of central banks globally are biased towards a rate increase on inflation concerns and economists in the US have radically adjusted their cut expectations to a more neutral stance. Although inflation has shown signs of moderating recently, the risk remains to the upside.

Tony Gibson
Portfolio Manager

Market overview

Financial market behaviour in the first quarter of 2007 is a continuation of a pattern that has been forming for the past year and a half: a very benign investment environment (as measured by most risk yardsticks) suddenly hit by a sharp sell-off as investment liquidity is removed from equity markets. In the past 12 months the market has experienced two of the most severe corrections (and one-day falls) that we have seen for the past five years. In early March, a butterfly effect occurred, whereby a little flap in China sent a small storm through world markets. China, superficially anyway, was the catalyst for the correction. More likely however, the equity markets simply needed a correction after the uninterrupted rise in markets since mid-2006.

To add some perspective, at a recent research meeting with one of the US investment managers that we use in our international fund of funds, a question was posed by the fund manager. He asked: "Is it Goldilocks or the three bears who will win in the US economy?" Goldilocks is of course the 'sweet spot' that investors generally long for. That is when the global economies show sufficient growth so as to support corporate profit growth, but not so strong as to induce interest rate hikes by the central banks. Interest rate rises are disliked by equity investors as they generally attract investor flows away from equity markets. At present the equity market bulls subscribe to this sanguine view of the world economy. In contrast, the bears worry about the negative effects' three factors; all of which begin with the letter 'D'- Debt, Dwellings and Derivatives.

Probably the best way to decide on this 'Goldilocks' debate is to look at the various risk measures, thereby getting the answer from the 'collective wisdom of individual investors'. During the recent sell-off, volatility as measured by the VIX Index, which had been hovering at a multi-decade low near 10, rocketed by almost 100% to the high teens. The same pattern occurred in mid-2006, with the index rising to over 20. It is however important to note that another risk indicator has acted decidedly differently. While the VIX Index measures price and market volatility, the spread between AAA and BBB bonds gives a better measure of risk aversion more specific to company fundamentals. In mid-2006 this spread did widen quite noticeably, whilst it remained static during the recent market correction. This divergent reading would suggest that the recent correction in equity markets was induced by exposure risk, and therefore liquidity adjustments, rather than concerns over the health of the corporate sector. The latter generally has more serious and lasting consequences.

There is no doubt that the recent excess of global liquidity has caused some problems, the price for which is that the periodic sharp downward movements of the past year look set to plague markets for some time. Therefore price volatility should be expected to rise from current low levels on a more sustained basis.

However, taking a longer term perspective, it is possible to build an optimistic argument for global equity markets. The core of this argument is that the globe tends to move through broad super-cycles of economic growth. In recent (long-term) history two cycles are notable. In the US, tremendous economic wealth was generated in the late 19th century during the rebuilding of the economy following the end of the US civil war in 1865. Similarly, Europe experienced a multi-decade period of super growth as capital was pumped in to rebuild its economic infrastructure following WWII.

There is a very compelling argument that the current rebuilding and investment growth in China and India is as powerful. The economic consequences from the ending of (economic) communism in China, and the rapid de-regulation of India are as great in regional magnitude as the two earlier examples. The implications from this regional economic super-cycle could only just be beginning, and will continue to provide a major underpin to global growth. Under this scenario, shorter-term market pricing corrections should be treated as just that, and investors should rather focus on the longer-term bullish outlook underpinning global equities.

Performance commentary

The Coronation International Active Fund of Funds returned 5.6% for the quarter behind the MSCI World Index return of 7.0% (both in rands). On a rolling 12 month basis, the fund's return of 29.5% was behind the benchmark's performance of 37.8%.

The MSCI quarterly return of 7.0% was an unexpected outcome after a volatile start to 2007. After a good January and a sharp drop to end February, March was looking to contribute to a negative quarter. However, this was not to be and a decent rally in the last two weeks gave rise to the respectable return. Investor nerves were shaken by the sub-prime problems and weakening economic data in the US in early March but officials moved quickly to contain any panic. The Fed changed its stance on interest rates to neutral but Bernanke was of the view that the economy would strengthen towards the end of the year and that inflation remained a concern. Europe released some positive economic data while China forecast growth of 10% for 2007. Continuing M&A activity also contributed to the final flourish and in summary, company fundamentals and profit growth are satisfactory.

The fund's performance was hampered by weak returns from some its core managers. Odey Japan returned -0.7% as their bet on regional banks worked against them. They have high conviction on the trade and may be right in the medium term, but they were definitely too early. Edinburgh Partners Global Fund also had a poor quarter with -1.5% as its positions in tech stocks underperformed and Lagardere, a major position, disappointed the market in early March. As can be expected, their European fund also stumbled in March on Lagadere and other disappointments, returning only 1.8% for the quarter. Lastly, Comgest Nouvelle Asie was hit with the volatility in February and March and did not recover as quickly as the others.

Copper Spire and UOB Kinetics both benefited from a stronger small and mid-cap market in the US and enjoyed decent quarters. Cantillon Global Value finished higher than the MSCI with 3.0%. The best performance came from Ruffer Europe which returned 6.9% for the quarter, well ahead of its benchmarks. The fund has a bias towards small and mid-cap stocks and the manager has demonstrated his stock picking capability over the prior 12 months.

Tony Gibson
Portfolio Manager

Market overview
Recent anecdotal evidence is sounding a warning about a new potential bubble which may be forming. As was pointed out by the Financial Times in a recent article, it was ten years ago that the then chairman of the US Federal Reserve Bank, Alan Greenspan, made his celebrated remark about 'irrational exuberance'. Of course in 1996 Greenspan was referring to the equity markets which he believed were entering overvalued territory. With the benefit of hindsight he was of course way too early in his warnings, as the US equity market went on climbing for another three years, in which time the Dow almost doubled and the NASDAQ nearly quadrupled. His argument was essentially concerned with value, recognising that during bubbles, value tends to lose its relevance as markets follow a momentum trend. During the late 1990's bubble in tech stocks, the penalty for following a value driven approach was severe, and many money managers lost their jobs as punishment for missing this bubble. But Warren Buffet steered clear of hightech stocks on the grounds that he didn't understand them, an approach that proved invaluable when the market crashed.

In value terms Greenspan was proven right with the flux of time. The Dow has only recently crept back above its bubble peak, while the NASDAQ is still more than 50 per cent below it. Two recent pieces of anecdotal evidence again sound a warning about a new potential bubble which may be forming. The first is the fact that Ford Motor Corporation recently issued a tranche of 'CCC' Debt. Those who follow debt markets will know that, amongst other 'health-warnings', the Standard & Poor's definition of 'CCC debt' is stated as ' currently vulnerable to non-payment'. It goes on to state that 'in the event of adverse business, financial or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation'. What is therefore very interesting is that, not only was the US$ 3 billion issue fully subscribed, it in fact attracted additional funds of a further US$ 2 billion. A second piece of evidence, but no less concerning, is the comment by the CEO of Morgan Stanley, stating that 'all Morgan Stanley trading desks are at maximum credit limits'.

We know that there continues to be a considerable amount of liquidity in financial markets which has manifested itself in a number of ways; corporate cash balances, private equity activity, emerging economies' central bank reserves and rapid growth in corporate profits. While the most direct impact on stock markets has been the persistent takeover activity generated by private equity, the repricing of debt risk poses a greater potential threat to market stability. While there is some clarity on the absolute amount of leverage in the financial system, there is far less as to where the ultimate liability will reside if things go wrong. Although it is true that risk is much more widely spread through instruments such as credit derivatives and debt securitisation, the problem today is that the banking system, unlike in earlier cycles, no longer holds the bulk of the credit risk. They have sold this on to 'the market'. The future direction of market sentiment is therefore a key risk, and as we know this sentiment is prone to unpredictable behaviour.

The big question will therefore remain on of what happens to global liquidity. After the tech bubble burst, Greenspan pumped huge liquidity into the system to keep it afloat. The bubble effect therefore was not eradicated, but it merely moved on; first to housing, then private equity and debt pricing. Just as the wave of irrational money flowed into 'concept' tech stocks in the 1990's, the remarkable compression of risk premia on investment markets today does sound a warning. US$ 5 billion happily invested into a company that is 'currently vulnerable to non-payment' does not seem like entirely rational investor behaviour.

The question to consider therefore is one of whether the huge wall of liquidity has ultimately doomed us to a 'binary outcome'. In other words, will this all end in tears one way or another? On the one hand it could result in a major repricing of risk, and therefore financial assets, which will lead to severe deflationary forces coming into play as asset prices collapse, affecting consumer behaviour and corporate risk taking on a global basis. On the other however, it could ultimately lead to continued robust economic growth, which leads to severe inflationary pressures as wage demands claim more of the economic prosperity at the expense of shareholders. We obviously do not know the answer to this issue, but suffice it to say that the unfolding of any bubble scenario normally ends in an unpleasant way. Turning to economic indicators, a minor equity market pullback did materialise during the middle of the fourth quarter. The major catalyst - certainly for European markets - was the sudden weakness in the US dollar, when it fell by over 6% against the Euro. With the benefit of hindsight the dollar weakness was triggered by the Democrat clean sweep of Capitol Hill.

Performance commentary
The Coronation International Active Fund of Funds returned -2.3% in rands for the quarter, in line with the MSCI World rand return. On a rolling 12- month basis, the fund's return of 30.5% trailed the benchmark's 33.2%.

In reverse of previous quarters, the fourth quarter was negatively impacted by a strengthening rand; the main determinant of the negative performance. Global markets had another strong quarter and finished the year strongly, some to record. In US dollar terms, Asia ex Japan led the regional returns with 16.8%, followed by Europe on 11.5%. North America and Japan were distant laggards, returning 6.8% and 5.0% respectively.

Although the fund's US and European managers achieved excellent results for the quarter, returns were hampered by poor performance from the Japan and Global managers. Japan's economic recovery continues to stutter and any positive market performance is dominated by large-cap stocks while small- and mid-caps continue to fall or lag. A scenario which hampers Odey and Morant Wright, both of which have significant exposure to mid-and small-cap stocks. However, the managers firmly believe that, despite the headlines, Japan is recovering well and this will eventually be reflected in their stocks.

On a more positive note, Eclectica, a new Europe fund, had a great quarter, returning 12.9% which was far ahead of the European markets. This performance was enhanced by another offer for ENI which has been a longstanding holding of the fund. Lansdowne Europe and Edinburgh Partners also had good quarters and ended ahead of the markets.

In the US, UOB Kinetics did well from its exposure to global stock exchanges and the Canadian oil sands to deliver 13.5% for the quarter. Copper Spire benefited from good results and newsflow for its top holdings and a general improvement in midcap value stocks to return 11.2%.

Tony Gibson
Portfolio Manager