Those Investors who have been patient have been well rewarded. Since inception (5.5 years ago) the fund has delivered a return of 120% and, on an annual basis, the return with dividends has compounded at a rate of 20%. Ironically, a similar return has been achieved for dollar investors. If we continue at this pace the power of compound interest will triple our money within ten years.
The domestic allocation within the fund continues to compensate for the strong rand and conservative approach followed offshore. It is also important for investors to note that their return is net of performance fees.
The dilemma with which we are now faced is: what now? For investors who know Coronation well, understand that we thrive in pessimistic times and tend to stay on the sidelines when the market is optimistic. However, the market appears to be quite correct in its optimism.
What this means is that we will have to work harder to ensure that we correctly price the growth as the margin of safety required would have diminished. We will also have to be far more vigilant offshore. Equities in the US look appropriately priced, and our exposure to the East has increased gradually over time. Similarly, we will sit on the sidelines. Our challenge in the meantime will be to seek a higher yield without increasing our risk.
Thus, at this time, our expectations are subdued. We believe that the return over the next year will be in the region of 10%; should the rand levels change however, all this will change.

Portfolio structure
The current allocation of the fund is quite conservative with 46% invested in local equities, 16% in foreign equities and the balance of the fund in foreign cash (38%).
The South African rand is by far the biggest exposure at 45%, followed by the pound sterling at 19% and the euro at 17%. The balance is made up of dollars, yen and other global currencies.
The entire cash pool of the fund is offshore. In this respect we have been very conservative and invested in sovereign debt at the expense of higher interest rates. This policy allows us to sleep better at night and not worry about the bank going bust.
Thus it follows that all things being equal, should the rand strengthen by 5%, our fund takes a 2.5% hit. This is an important calculation and goes far to explain the performance. More on this later.
Equities make up 62% of the fund, with the top 10 investments making up 36% of the portfolio. One would like to see this higher and more focused.
Our intention is to get these 10 investments to form a higher percentage of the fund, although this will bring more volatility in the short term. Investors will note that we have a few investments in other managers. The reason for this that while Coronation may not have an expertise in a particular region we still believe that the fund needs the exposure to the region. This is predominantly in the Far East. We do not wish to increase exposure to too many funds as this has two distinct disadvantages: liquidity and cost.
In the offshore fund we have been taking profits on quite a few shares, namely, Gillette, ADP, First Data, and Altria. The proceeds have mainly been reinvested in two new shares Petrochina and Kookmin Bank. These two counters have fallen quite dramatically and are not expensive on any measure. The balance of the proceeds have been invested in existing shares. Our portfolio is defensive and will remain so in the short term. Our shares are fairly predictable and some are on attractive dividend yields.

Performance of the fund
For the nine months to end June 2004, the fund delivered a return of 13%, while the All Share Index produced 15%. Cash and bonds gave single digit returns. As mentioned before, the returns mask the strength of the rand. The rand appreciated by 11% against the US dollar. So if we refer to the above example, our fund was down by 6%. To put this into context we would have to make about R50 million (our local portion of the fund) to break even, assuming all investments remained flat. What this means is that because our fund has a R265 million exposure, we would have to generate a return of between 15% and 20%. Our calculations tell us that locally, the fund did about 20% to 25%.
Offshore, our investments have been rather good in preserving capital. With the exception of one share all investments have performed reasonably. However, our equity exposure has let us down, and I find it quite hard to purchase equities that do not appear to have a high margin of safety.
As mentioned previously, we have sold a number of the foreign shares which have performed very well for the fund. In addition, our offshore funds in the East have done reasonably well over the short term but have not outperformed their indices. Going forward, we will certainly review their position.

Prospects
Investors will recall from our last quarterly report our subdued expectation for returns for the rest of the year. This has not changed. The correction we expected has not really come through and, to add salt to the wound, the rand continues to strengthen. It will be very hard to generate substantial returns in the short term. But this does not mean that we will throw up our hands and blame the rand. We need to continue to look for short term strategies that will generate some small returns which when combined will make a small difference.

Despite the strong appreciation of the rand against the US dollar, the fund still managed to deliver a return of 13.37% for the year to end December 2003, and 10.32% for the fourth quarter.

The fund manager's local stock picking on some of the funds long-term investments was excellent, in particular African Bank and Kersaf performed well. In addition, the fund manager's offshore stock picks also did quite well. In hindsight the fund manager's major cost to the fund was opportunity cost. The fund manager's were simply too conservative and the funds investments were too small as a percentage of the fund, ie, they should have been 2% and not 1% of the fund. The fund manager's tortoise approach is working -but they feel they could have done better.

In the last quarter the fund manager's managed to increase the fund's offshore exposure from 42% to 52% at considerably lower exchange rates. The funds current equity exposure is 62%, of which the funds local exposure is 44%. The fund manager's continue to favour local industrial and financial stocks, and many of the funds companies are single P/E stocks with very good dividend yields. The funds time horizon is normally two years and stocks like Nampak, Tiger Brands and AVI will do quite well to grow their intrinsic value. The fund manager's challenge this year will be to pick those stocks which have done well but do not reflect the full value of the business.

Offshore, the challenge is very difficult. Both the US markets and European markets have re-rated significantly, which means that value is hard to find. The funds returns on cash are low and ultimately inflation will result in bonds being a poor choice. The fund manager's believe the opportunities will be in the East, and over time the fund manager's have increased this exposure to 5% of the fund. In the past the fund manager's have successfully selected two stocks for the fund from this region, and continue to monitor for further opportunities.

The fund manager's expected returns for the year are subdued. Unless the rand weakens dramatically the fund manager's expect returns to be much the same as 2003. The fund manager's main aim will be to preserve capital through not overpaying for good businesses. It may mean the fund manager's will miss the continuing bull market, but that is an opportunity cost the fund manager's are prepared to pay.