The fund appreciated by 8.4% during the first nine months of 2007 taking its one year return to 15.4%. Over the past three years the fund has generated an annualised return of 23.8% and in the eight years since inception has generated an annualised return of 19.3% per annum, compared to the 8.4% annualised rand return of the MSCI World Index and the 25.5% annualised return of the FTSE/JSE All Share Index over this same period. Importantly, the returns of Optimum Growth have been generated with half the volatility of both the JSE All Share Equity Index and the MSCI World Index (10.5% volatility in the case of Optimum Growth compared with around 19% in both the indices).

This year (and indeed the past few years) has been characterised by high risk appetites amongst investors, with commodity shares, emerging markets (in particular China and India) and small cap shares being the main beneficiaries of this risk-taking. There was a brief pause in the appetite for these risky assets during August as a result of the US sub-prime fallout, but subsequently they have continued their upward surge. Whilst the fund does hold a few commodity shares (Impala Platinum and Sasol), selected emerging market shares (but only one Chinese share and no Indian shares) and a few small cap shares, the portfolio is dominated by large cap noncommodity shares in South Africa and the developed markets, in particular Europe, the UK and the US. As a result the fund's performance, whilst satisfactory and well ahead of it's target of inflation+5%, has been more subdued than would have been the case had the fund been invested in some of these more risky assets. We prefer to make sure that we have reasonable downside protection in each and every asset held, even if that means sacrificing some 'potential' return. Moreover, we are comfortable that the fund's current holdings will generate attractive returns over time. Over the past few months we have added a few new positions, both in South Africa and internationally.

One of the largest new purchases in South Africa was a position in Ellerines (now 1.5% of fund). During August ABIL (African Bank) announced a takeout offer for the entire share capital of Ellerines and it was in the weeks subsequent to this announcement that we bought the shares. We believe that the deal is very positive for ABIL (and Ellerines shareholders, as the tender consideration is ABIL shares) and by buying Ellerines at R74 a share we were effectively buying ABIL at R29 a share compared with the share price of ABIL at the time of R31.50. We believe that the deal will go through, and if it doesn't we believe that our downside in Ellerines is marginal over the longer term. Whilst the credit furniture industry is currently under pressure (due to the NCA and rising interest rates) and is arguably undergoing structural change, we hold the view that there is significant potential in a combined ABIL/Ellerines unit with the opportunity for market share gains from the other furniture retailers, cost savings due to current duplication of the credit function and the potential to release excess capital. We also rate ABIL management very highly and believe that this management team can execute the transaction in a way that creates significant value for shareholders.

Internationally the fund's largest new purchase was a 1.5% position in Coca-Cola Femsa, the world's 2nd largest Coke bottler and distributor. Whilst being based in Mexico, the company has operations all over Latin America including in Mexico, Brazil, Argentina, Colombia and all of the Central American countries. The company has generated revenue growth of 24% per annum compounded over the past 15 years, earnings growth of 24% over this same period, free cash flow growth of 37% and dividend growth of 15%. At the time of purchase (during August) the company was trading on a 2007 free cash flow multiple of 10 which we believe is very attractive for a company with this track record and opportunity for continued strong growth into the future.

The fund also bought a basket of South Korean stockbrokers (Shinyoung Securities, Hanyang Securities and Dongbu Securities totalling 3.2% of the fund) during the August global market sell-off. The primary reason for buying these shares was not because of their stockbroking businesses but rather due to the fact that all three hold a stake in a very valuable unlisted asset, the Korean Stock Exchange. We have written before about the very attractive long-term fundamentals for stock exchange businesses all around the world and the Korean Stock Exchange is no exception. This exchange however is still privately owned (by the stockbroking community, just as was the case in South Africa) and as such there is no tangible value for this asset. Based on our calculations of what we believe this asset is worth, it makes up a substantial part of the market capitalisation of the Korean stockbrokers, in particular Hanyang Securities and Dongbu Securities. We have no idea when this asset will be listed, but it is only a matter of time (the listing has been announced and then postponed on two occasions already) and are prepared to wait patiently until this happens, at which point we believe that the extremely cheap implied valuations of some of the Korean stockbrokers will become apparent.

We continue to hold the view that the equities, both international and South African, held by the fund are undervalued and continue to grow their business values. We also hold the view that the rand will depreciate over longer time periods and with almost 70% of the fund invested internationally this will benefit the fund. As a result, we expect the fund to continue to generate attractive real returns over longer time periods.

Gavin Joubert
Portfolio Manager

The Coronation Optimum Fund appreciated by 4.8% in the first quarter of 2007, taking its one-year return to 30%, which is well ahead of its return objective of inflation +5%. Over the eight years since inception, the fund has generated a return of 20% per annum.

There have not been any significant changes to the portfolio over the past few months and as we have stated in previous commentaries, we are struggling to find attractive new investment opportunities in the SA equity market and are finding far more value in selected international markets. As a result, we have continued to reduce the fund's SA equity holdings and take the proceeds offshore.

The fund now has 38% of its assets invested in South Africa with the balance of 62% being invested offshore. The bulk of the international exposure is invested in developed markets which we believe are more attractively valued on a risk-adjusted basis than emerging markets. There is however still value to be found in selected emerging markets with Thailand being one such country.

During a trip to Asia in February we visited 15 Thai companies in Bangkok, followed by several Singaporean and Malaysian companies. Whilst the prospects for Asia over the next 5-10 years are still very exciting, the valuations of many of the Asian companies, including those in Singapore and Malaysia, are not currently attractive in our view given the strong share price appreciation in these markets over the past few years.

Not so Thailand, where the stock market has barely increased over the past few years and where investor sentiment is very poor given the military coup, the announcement of foreign ownership restrictions and finally the bomb blasts in Bangkok on New Year's Eve. Markets do not like uncertainty and at the moment there is uncertainty in Thailand. In our view this presents an opportunity for investors with a long-term time horizon and we have started to buy selected Thai shares for the fund.

One such example is CP-711 who operate 7-11 supermarket stores in Thailand, as well as hypermarkets in China. The Thai business is a good business that generates attractive margins and strong cash flows, and has significant potential for future store roll-out and new product additions particularly in the convenience food area.

The Chinese business on the other hand is incurring significant operating losses due to the infancy of the business and strong competition. The company is however taking several steps to turn the Chinese business around, including the appointment of new management and a new strategy and have also stated that selling the business is an alternative. Due to the losses in China the valuation of CP 7-11 does not look attractive on a group earnings level, however excluding the losses in China, the core Thai business is currently trading on a P/E multiple of around 10. In addition to this, the earnings of the Thai business are below a normal level in our view and should increase significantly over the next few years due to continued store rollout, strong same store sales driven by increased footfall and new products and margin expansion from more convenience ready-prepared food sales. The fund also added significantly to its position in Limited Brands, the owner of Victoria's Secret in the US. The share price has continued to fall as a result primarily of what appears to be concerns over the US consumer, and whilst consumer spending may be under pressure over the next year or so, we are making an investment on a 10-year view and not a one-year view and are buying a high quality business on a P/E multiple of around 13 - well below that of the market. We continue to hold the view that the SA equities that the fund holds are still undervalued and continue to grow their business values and additionally that there are many attractive opportunities within international equity markets. As a result, we expect the fund to continue to generate attractive real returns over longer time periods.

Gavin Joubert
Portfolio Manager

The fund appreciated by 31.1% during 2006 and has generated an annualised return of 24.8% over the past 3 years. The primary drivers of the strong performance over the past year were the relatively high allocation of capital to equities, strong performance from individual stock positions (particularly the international stocks), and to a lesser extent, the depreciation of the rand.

2006 saw another year of strong share price appreciation from most global markets, in particular emerging markets (including South Africa) and Europe. The fund benefited from this as it had relatively high equity exposure and positions in several stocks that appreciated by 50% or more over the past year. Against a backdrop of cheap global credit, 2006 was also the year during which private equity made the headlines on a weekly basis. No less than three of the fund's SA equity positions (Peermont, Edcon and Primedia) were subject to private equity bids and potential bid talk continues to surround many of the fund's international holdings including Home Depot, Vodafone and Limited Brands. Whilst we are quite happy to sell to private equity buyers at the right price, the investment choice in the SA market continues to decline as a result of the private equity phenomena, and makes having a global mandate all the more valuable.

With the SA equity market continuing to appreciate we have been reducing the fund's SA equity exposure as individual shares approach fair value, and taking this cash offshore in order to participate in an infinitely larger universe and in what we believe are more attractive relative valuations. At the time of writing, 65% of the fund was invested internationally with the SA exposure having being reduced further to around 35% of the total fund. This compares to 60% SA exposure 2 years ago when SA equities in particular were very attractively valued. The total equity exposure of the fund is now 75%.

The fund made no new SA equity purchases over the past few months as we are struggling to find attractively valued new ideas. We did however add to the fund's existing positions in Telkom (which is one of the most hated stocks in the SA market and which we believe is very cheap) and Netcare (where we hold the view that the market is underestimating the potential growth from this company over the next 5 years). Naspers continues to be the fund's largest position and although it appreciated by 45% during the course of 2006, we still hold the view that the high quality assets held by this media group are under appreciated and significantly undervalued.

On the international equity part of the portfolio, our patience with regards to the fund's large telecommunications position continued to reap benefits with China Telecom being a very strong performer, up 60% over the past 6 months, and France Telecom, Telefonica, Vodafone and MTS all appreciating by more than 30% over the same period. We continue to hold the view that telecommunications generally are undervalued across the globe and are currently looking at a few new potential purchases, particularly within the Asian region.

The fund made two new purchases of international stocks over the past few months. Hellenic Exchanges is the operator of the Greek stock exchange and possesses the same fundamentally attractive qualities that are found in most stock exchanges around the world: monopolistic or dominant positions, positive operational gearing to increasing market turnover driven by new products and hedge fund activity and great free cash flow generation. Within the global universe, Hellenic Exchanges in particular is in our view also very attractively valued at 15 times earnings. We also added to the fund's position in the Nasdaq Stock Market as concerns lingered over the LSE bid and increased competition in the US market. A total of almost 7% of the fund is now invested in various stock exchanges around the world (NYSE, Nasdaq, JSE and Hellenic Exchanges) and whilst some of these shares may appear expensive on shorter term valuation measures, we believe that on a longer-term 10 year view they are still attractively valued.

Limited Brands is a US-listed retailer that is made up of three parts, with the largest being Lingerie (Victoria's Secret and the recent purchase of the Canadian-based retailer La Senza) and the two smaller units being Beauty and Personal Care (Bath and Body Works) and Apparel (The Limited and Express). Victoria's Secret is the dominant brand within the US lingerie market and enjoys operating margins of around 20% (compared to margins at the group level of 11%). The market however appears to focus on the smaller struggling apparel unit and in doing so is in our view not fully recognising the quality of the other franchises. The La Senza acquisition, although relatively small (less than 5% of group EBIT), will provide the company with expertise on international expansion with which La Senza has been very successful, and international expansion of Victoria's Secret for example could be a very exciting addition to what is already a compelling investment proposition: the share now trades on a forward P/E multiple of less than 14.

Finally we continued to accumulate Pfizer as the share trades at its lowest valuation level in the past 20 years. The short-medium term outlook for the large cap US drug stocks is not particularly appealing with patent expiries, weak pipelines and resultant slow earnings growth. However, Pfizer is now trading on a p:e multiple of 12, has a significant net cash balance and continues to generate large amounts of cash which in turn can be deployed in acquiring smaller promising drug companies, or returning cash to shareholders in the form of dividends and share buy-backs. As a result, we feel the risk/reward relationship favours us as investors in Pfizer today, with limited downside but potentially substantial upside over the next few years.

We believe that there are still various exciting investment opportunities to be found within a global universe and hold the view that the fund is well positioned to produce annualised returns well ahead of inflation over longer time periods.

Gavin Joubert
Portfolio Manager