Despite the ups and downs created by macroeconomic news flow, the fund continues to have a good year, generating a return of 16.1% year-to-date (YTD) in ZAR, and in doing so outperforming its benchmark of inflation + 5% by 8.1%. In USD, the fund's return YTD is 12.8%, marginally behind the return of the MSCI World Index (13.6%) as a reference point. Over 1, 3 and 10 years, the fund has achieved returns well in excess of inflation + 5% (it is only the 5-year period where returns are below this level), while over 3, 5 and 10 years the fund has outperformed the MSCI World index in USD. Over 1 year it is only marginally behind. Our views on the main asset classes remain largely unchanged. We feel that selected global equities are very attractive (resulting in net equity exposure of around 80%) and believe that global government bonds are overvalued (resulting in a 0% position). In terms of Global versus South Africa, we continue to believe that global assets are far more attractively valued than South African assets and this is reflected in the fact that around 85% of the fund's assets are invested offshore. Despite the fact that the higher quality global businesses have enjoyed strong share price performance over the past few years, we continue to believe that a number of these assets remain attractively valued given favourable long-term fundamentals. The global spirits industry is but one example where we have positions in the two largest spirits companies in the world: Diageo and Pernod Ricard. Diageo are the owner of among others Johnny Walker, J&B, Smirnoff, Baileys, Hennessy, Moët & Chandon and Guinness, while Pernod Ricard own Chivas Regal, Jameson, Martell, Absolut, Kahlua, Havanna Club and several others. The previous graph shows the largest spirits markets in the world, by US dollar sales. Interestingly, China and India are already two of the three largest spirits markets in the world. Individuals in emerging markets are consuming large amounts of spirits: 82% of the world's spirits (by volume) are consumed in emerging markets! What is relevant for the global spirits companies is that very little of this consumption is of international spirits brands (the brands that are sold by Diageo and Pernod Ricard). The graph below illustrates what percentage of overall market volumes are made up by international brands, and it is clear that the potential for premiumisation is significant, with only 1% of volumes sold in China being that of international brands, compared to 40% or more in most developed markets. In our view, the move to international premium brands will provide several years of growth for the global spirits companies. Besides the opportunity for premiumisation, the global spirits companies have significant pricing power, particularly in Scotch and Cognac as a result of their long ageing periods (ranging from 3 to 15 years). For example, in any particular year there will be a limited supply of 7 year Scotch. If demand exceeds supply (as it often does), automatic pricing power sits with the spirits companies. Pricing (as opposed to volume growth) is the best form of top-line growth as there is no additional cost associated with pricing (as there is with volume), so operating margins expand. Globally, the spirits market is very fragmented: the top two (Diageo and Pernod Ricard) have a combined market share of 7%, whereas the two largest global beer companies (AB Inbev and SABMiller) have a combined market share of over 40%. Diageo and Pernod Ricard now trade on around 16x the next 1 year of earnings, with dividend yields of 2% - 3%. We believe this is attractive given the very high quality of these assets that have several years of low double-digit earnings growth ahead.
Portfolio manager team
Neville Chester, Gavin Joubert, Karl Leinberger, Louis Stassen and Mark le Roux Client

Global markets continued to be driven by European newsflow in the first six months of the year - up, down and then up again. Against this backdrop the fund appreciated by 9.18% in ZAR YTD (+8.23% in USD). In the 13 years since inception the fund has generated a return of 13.21% p.a. in ZAR and 10.90% in USD. We continue to believe that selected global equities are by far the most attractive asset class, and as a result the fund's equity exposure remains relatively high (79%), with the bulk of this invested offshore. Only 15% of the fund is invested in SA. At the same time we believe that government bonds are significantly overvalued and therefore have no exposure. We have regularly made the point that a disconnect often exists between the newspaper/CNBC headlines/permabear newsletters on macroeconomic news (predominantly the Eurozone at the moment) on the one hand and the operational performance and share price behaviour of individual companies on the other. Making decisions based on macroeconomic newsflow more often than not leads to negative outcomes, yet time and again this is what people do: buy when the newsflow is good and sell when the newsflow is bad. Probably the most frequent question we are being asked at the moment is 'why should I invest in global equities now, in light of all the negative things happening in Europe'. Using this 'newspaper headline' approach to investing, one would never have invested in Inditex (the owner of clothing retailer Zara) given that 70% of the company's revenue is generated from Europe, of which 25% is generated of from Spain alone! Yet Inditex's share price is up 30% this year, after recently producing results that showed revenue growth of 15% and profit growth of 35%. Again, there is often a disconnect between macroeconomic newsflow and the fundamentals and valuations of individual companies. In our view one is far better served by focusing on the latter. An additional point that we would make is that we hold no European banks, no commodity shares and very little cyclical assets. Most of the fund's holdings will continue to do quite well operationally whether global GDP is -1% or -1%. We continued to add to the fund's position in Tesco (a top five holding) over the past few months. The adjacent graph shows the long-term (17 years) earnings track record of Tesco (the blue bars, with each bar being an individual year from 1995 to 2012) as well as the earnings of the MSCI World and the UK market (the two white lines). A couple of points are apparent:
" Tesco has an exceptional track record of growing its earnings over long periods of time;
" it has grown its earnings well ahead of the market over time; and
" its earnings have been more stable than that of your average company (i.e. the market).
Tesco's history tends to indicate that this is an above average business. Yet the share now trades on 9.3x earnings and a 4.8% dividend yield, more indicative of a low quality (or broken) business. It was not always this way. Not too long ago Tesco used to be a market darling and traded on 20x earnings. The table below clearly shows how the market has gone from being in love with Tesco to hating it. Over the past five years Tesco's revenue, earnings and dividends are all up around 50%, yet its share price has lost 28% of its value. As a result of this (growing earnings and declining share price) Tesco has gone from being rated on almost 20x earnings in 2007 (with a 2.3% dividend yield) to being rated on 9x earnings today, with almost a 5% dividend yield. The market appears to be taking the view that Tesco's UK business (2/3rds of profits today) is broken. Our view is different: firstly, Tesco generates 1/3rd (and growing) of profits from its international business (which is mainly in emerging markets including Korea, Thailand, Poland and Turkey), where it has a no.1 or no.2 position in 10 of the 12 countries in which it operates. The international business has grown its earnings by 28% p.a over the past 10 years and continues to do well. Secondly, we believe that the UK business is not broken: instead of having long-term structural problems, its problems are short-term in nature that can be fixed (underinvestment in stores and people). The fact is that in the UK Tesco is almost twice the size of the Asda (the 2nd biggest player), with Tesco having 31% market share compared with Asda's (owned by the mighty Walmart) 17%. Over the past five years Tesco has lost negligible market share (31.3% five years ago versus 31.0% today) and has continually proven to be at the forefront of innovation in the UK food retail market (Clubcard, convenience corner stores, banking, etc.). Due to reinvestment, profits are likely to be subdued for the next two years, a prospect that a short-term investor cannot tolerate. However, for a longer-term investor this provides a very good opportunity to buy a world-class retailer on a single digit rating.

Portfolio manager team
Neville Chester, Gavin Joubert, Karl Leinberger, Louis Stassen and Mark le Roux

The fund had a good start to the year, appreciating by 7.2% in ZAR and by 12.9% in USD. In doing so, the fund outperformed global equity markets, even though the equity exposure was in the 80% - 85% range. The fund is also 3.7% ahead of its benchmark (inflation plus 5%) year-to-date, in large part due to good stock selection. Since inception 13 years ago, the fund has generated an annualised return of 13.3% in ZAR and 11.5% in USD, outperforming its benchmark by 1.8% per annum.

Given the strong share price appreciation of a number of the fund's holdings, we have reduced equity exposure somewhat from the mid 80% level late last year to the high 70% level at the end of March. We do however continue to hold the view that equities are by far the most attractive asset class globally and this is reflected in the fact that equity exposure remains in the high 70% level. As reference points, the maximum equity exposure in the fund would be around 90% and we expect the average equity exposure to be around 75% over a 5-year cycle.

We also continue to hold the view that global government bonds are significantly overvalued and as a result we have no exposure whatsoever to this asset class. The fund has had 20% - 30% invested in global bonds in the past and will do so again should the valuation of this asset class become attractive again. The other big decision in terms of asset allocation is the mix of South Africa versus Global, and in this regard we continue to hold the view that global assets (equities in particular) are far more attractive than South African equities. This is reflected in the fact that only 10% of the fund is invested in South African equities and 69% in global equities. A total of 15% of fund is invested in South Africa.

Over the past few months we increased the fund's position in Blackstone substantially, to the point where it is now the third largest position at 3.5% of fund. Blackstone is effectively an asset manager that generates a reasonably large percentage of its revenue from performance fees. As such, it is a business that has parallels with Coronation and is also one that we understand. Although perhaps best known as a private equity house, Blackstone has a number of significant other businesses (credit, property and hedge fund solutions) which not only provide a diversified earnings stream, but also place Blackstone in a strong position to attract new funds as pension funds/endowments look to consolidate the number of service providers they use. In addition to this, pension funds are increasingly allocation to alternatives and these flows continue to be invested with the big names, like Blackstone, who have strong brands and long histories of generating above average investment returns. Employees own 60% of the business and are significant investors in the Blackstone funds, resulting in an alignment of interests with minority shareholders. We believe that Blackstone can earn over $2 per share a year in the medium term, driven by continued flows and more normal performance fees, which are currently low. In addition to this, the company currently has around $3.50 per share in net cash/investments/unrealised carry. The current share price is around $14.50 (or $11.00 stripping out the effective net cash), which means that Blackstone is currently trading on 6x more normal earnings and the dividend yield on this year's earnings is around 5%. Given the long-term prospects for the business and the current valuation, we think Blackstone is a very attractive investment at the current share price.

Portfolio manager team
Neville Chester, Gavin Joubert, Karl Leinberger, Louis Stassen and Mark le Roux

The volatility in global markets continued as 2011 came to a close. The fund ended the year with a ZAR return of 18.5%. As reference points, the South African equity market was +2.5%, global equity markets (MSCI World Index) appreciated by 15.8% and global bonds by 28.8% (Citigroup Global Bond Index). In dollar terms the fund was marginally negative (-2.8%). As reference points, the MSCI World Index was -5.0% for the year and the JSE All Share was -16% (both in US dollars). Our view for the past two years has been that global equities are far more attractive than domestic equities, and we continue to hold this view. Global equities significantly outperformed South African equities in 2011 (by over 13% in US dollars or in ZAR) and we expect this to continue to be the case going forward. The asset allocation of the fund reflects this view, with 85% of the fund invested offshore and only 15% in South Africa.

One cannot simply conclude that because the world is a mess one should not invest in equities. In fact, the opposite is typically the case: the best time to invest is when the outlook is gloomy. Basing investment decisions on TV or newspaper headlines is probably one of the worst investment 'strategies' around. Yet time and again one hears this 'messy world/don't want to invest' argument. In a year when the MSCI World Index declined by 5%, Domino's Pizza, appreciated by an incredible 112% in 2011 (we have since sold this position) and Mastercard which appreciated by 67% in 2011 (we still have this position as we believe Mastercard remains undervalued even after this appreciation). These two examples yet again point to the fact that one can't come to a one-line conclusion on equities: one must evaluate each and every business on its own and make an investment decision on that particular equity. Google and Apple are both Top 5 holdings in the fund today. While we own a number of technology stocks (including Microsoft, Cisco and Symantec), it is Apple and Google who are seen as being the more 'sexy' (and hence overvalued) stocks. Our view is different - firstly we believe that Google and Apple are higher quality businesses than your average technology company and have better long-term prospects due to the large potential markets that they serve, and secondly we believe that both are actually very attractively valued.

Google dominate the online search market and the resultant advertising spend that is increasingly shifting from paper to online. Many countries around the world are still in their infancy with regards to the shift in adspend from newspapers/magazines to the internet. In our view, this structural shift will continue for many years to come. In large part due to this shift, Google managed to grow their revenues year on year by 33%, and earnings by over 20% during the period when the European crisis accelerated (July-Sep 2011). Google is also now truly a global business, with over half their revenue coming from outside the company's home market, the US. The company also has an extremely strong balance sheet, with net cash of around $40 billion and free cash flow generation of around $10 billion a year, which results in an ever increasing cash balance. While there are of course risks to the business, at current share price levels Google trades on around 13x 2012 earnings excluding the net cash balance (which earns close to nothing due to low interest rates). At these levels, we believe the risk reward is in one's favour.

Apple has a number of key similarities with Google: a strong position in what is a massive and growing end-market (online advertising in the case of Google and smartphones/tablets in the case of Apple), a strong balance sheet ($80 billion in net cash already and free cash flow generation of well over $30 billion a year), a global presence (60% of revenues from outside the US) and an attractive valuation (less than 9x this year's earnings excluding the net cash position). Apple has become a very big and profitable business, and while it will undoubtedly become harder for the company to grow revenues and profits from current levels, the penetration rates of Apple's products is still very low with plenty of room to grow. For example, Apple currently only has 5% market share of the global cellphone market and within the cellphone market, smartphones are rapidly taking share from traditional handsets. Additionally, Apple only has 5% market share in the PC market (through the Apple Mac) and in turn the tablet market (iPad and similar) is still only a small percentage of the overall pc/laptop market. The death of the visionary Steve Jobs is undoubtedly a negative, however most of the key senior management team have been with the company since the late 90s and additionally the Apple platform and core products have already been established. Like Google, there are risks facing Apple, but at the current effective single-digit multiple, we believe that the risk-reward profile is very attractive.

We continue to find very good value in global equities (Google and Apple being just two examples) and as a result the equity exposure of the fund (84%) remains at the high end of its historical range. We remain negative on government bonds (due to low unsustainable yields/high valuations) and therefore have no exposure.

Portfolio manager
Gavin Joubert