The Coronation Top 20 Fund appreciated by 4.7% over the quarter. While this is a satisfactory performance, the fund's gain was behind that of the ALSI 40, which was up 7.3%. As a result, the fund gave up some of its year-to-date outperformance of the ALSI 40, and is now 3% ahead of the index.

The greatest positive contributors over the period were Impala Platinum and Iscor, which were both up by over 30%, with smaller contributions coming from Telkom, Naspers and the gold position, held through Harmony and Goldfields. Remgro, the biggest holding in the fund, detracted from performance, declining by 6% over the period. While the strength of the rand contributed towards Remgro's decline (with around 50% of the NAV being denominated in pounds sterling through the stake in British American Tobacco), the biggest factor was arguably the selling of defensive stocks as investors switched from defensives like Remgro into cyclicals. In other words, there had been very little change to Remgro's fundamentals and the fund therefore used this opportunity to increase its position in the stock.

Due to the acceleration of the global cyclical rally, Anglo American, BHP Billiton and Richemont all appreciated by over 20% as global investors rushed into shares with cyclical exposure, resulting in heavy buying of these three counters in the London and Swiss markets. The fund has very little exposure to these three index heavyweights as the fund manager's view the valuations of all three shares to be unattractive in hard currency.

Momentum and fear, rather than a significant change in company fundamentals, were the biggest drivers behind these price movements. Capital is at risk when momentum fades and there are weak fundamentals and a demanding valuation in the underlying stock.

As a result, rather than rushing into buying Anglo American, BHPBilliton and Richemont, which are trading on 15 -20 PE multiples and offering dividend yields of around 2%, the fund has been buying SA industrial and financial stocks, such as Remgro, Standard Bank, Tiger Brands and Telkom, which are trading on PE multiples in the 6 -8 range and providing dividend yields of around 5%.

The fund continues to take a bottom-up approach in building the portfolio and this continues to lead the fund manager's to the industrial and financial counters rather than the resource shares. The fund manager's view is that the resource shares as a category are overvalued, with many of them still pricing in a ZAR/US$ rate of 8.5 or higher. Amongst resources, the fund manager's do however believe that Sasol, Impala Platinum and Iscor are still reasonably priced, and the fund continues to hold positions in these shares. Protection against rand depreciation from these levels can also be found in shares such as Remgro, Venfin and Tiger Brands, all of which are trading well below their intrinsic values and all of which will benefit from a weakening rand.

When selecting investments for the fund, one of the key criteria the fund manager's look for in a company are high barriers to entry or, to put it another way, a business that has a moat around it. There are very few businesses that truly have moats around them, however, the fund does hold positions in several stocks which the fund manager's believe possess elements of this characteristic. Sasol's refineries in Gauteng, SAB's beer distribution in South Africa and Nasper's Pay-TV business (DSTV) would all be good examples. Having a moat does not on its own justify an investment in the stock: the valuation must be attractive and in the three above mentioned stocks the fund manager's believe that the valuations are very attractive.

The biggest change to the fund over the quarter was a significant increase in the position in Telkom, which was 3% of the fund at the time of the IPO, when the initial stake was bought, and has since been increased to 7% of the fund.

Telkom is made up of two parts: the mobile business, which consists of a 50% stake in Vodacom, and the 100% held fixed-line business. Both the mobile and the fixed-line business have moat-like qualities. In both businesses capital investment is significant (Telkom's fixed-line business spent over R40 billion in capex over the past five years), as is first mover advantage. On the mobile side, Vodacom is the number one in South Africa, having achieved, and maintained, that position several years ago through establishing distribution and nationwide network coverage ahead of the number two player. This critical mass within the SA mobile industry contributes towards Vodacom's moat. On the fixed-line side, although Telkom is facing imminent competition, it will still be a very formidable player.The network, IT systems, customer knowledge and the mission-critical nature of fixed-line networks to a corporate all contribute towards Telkom's moat. Both of these businesses generate significant amounts of free cash flow.

Over the past few months a number of positive factors, includingthe strength of the rand, management cost-cutting action and further delays in the SNO, have all converged. This, in turn, has resulted in an increase in the fund manager's estimation of Telkom's normalised earnings level and hence an increase in the fund manager's estimated fair value for Telkom. Telkom looks very attractive from a valuation point of view, trading on a forward PE of around 6.5 and a dividend yield of over 4%. More importantly, as a result of the fact that the depreciation charge is much higher than current capital expenditure, the Price/Free Cash Flow of Telkom is around 5. In other words, over time the depreciation charge will converge with the current amount being spent on capex, which means that the PE on normalised earnings is closer to 5. The global emerging market peer group trade on PEs of around 12 -15. Telkom is cheap any way you look at it, on an absolute level and on a relative basis, when compared to both the SA market and the emerging market peer group.

The fund manager's believe that the SA equity market is still undervalued and that the fund holds 20 of the most attractive large cap shares in the market. The high valuation of the US market remains the biggest risk to the SA market. A decline in the SA market in this event would provide an opportunity to buy further SA equities.

The Coronation Top 20 fund had a very good quarter, appreciating by 14.0%, and outperforming the ALSI 40 by 4.8%. Significant contributions came from positions in Remgro, Telkom, Dimension Data, Standard Bank and ABSA, all of which appreciated by more than 20% over the period.

At the end of the last quarter, the fund manager's indicated that the SA market had become too cheap and offered significant value on a long-term basis. At that point, the fund was fully invested, holding just 1% in cash.

It is always difficult to determine when markets will turn and, as a result, the fund does not endeavour to try to time markets, but to rather take the approach of buying stocks when they offer a significant margin of safety to their long-term fair value. This was the approach that was followed in the early months of the year and by being fully invested, the fund has participated in the re-rating of the SA market.

The core holdings of the fund remained unchanged over the quarter, with only one new small position being taken in Naspers. Within the core holdings, some positions were reduced as they approached fair value. The Anglo American, Impala Platinum, Remgro and Dimension Data holdings were all reduced after strong performances in all four counters. During the period, the Impala position was in fact increased (to 12% of the fund) before being sold down again (to 6% of the fund) after a strong recovery in the share price. The market had taken a particularly short-term view on Impala as a result of an appreciating rand, a declining platinum price, a strike and the royalty bill.

A not dissimilar situation is currently to be found in Sasol, already one of the largest holdings in the fund, and a stock that the fund manager's have continued to purchase on recent price declines. It is the fund manager's view that the market is, once again, being particularly short-term focused, effectively valuing Sasol on one year earnings which have been adversely impacted by the strong rand and a poor performance from its European Chemicals business. On a longer-term view, the fund manager's believe Sasol to be very attractively priced. The value of a business is not, and should not be, determined on one year earnings.

Over the quarter, the fund continued to buy Venfin. This share is trading at more than a 30% discount to its Net Asset Value, the largest component of which is its stake in Vodacom(40% of NAV), followed by cash (also 40% of NAV) and then by holdings in Dimension Data (8% of NAV in the form of a convertible loan) and Richemont(6% of NAV). The balance of the NAV (6%) is made up of smaller investments, some of the better known ones being eTVand Tracker. We like all of these underlying assets, particularly Vodacom, all of which we are able to buy at a 30% discount to their fair values.

The fund currently holds positions in 18 good businesses all of which are very attractively priced, with most offering high dividend yields. As a result, the fund manager's continue to expect above average returns over the long-term. The high rating of the US market, as always, poses a threat to the SA equity market as any retracement in the US market will impact the SA market. Over the longer-term, the value that is currently to be found in SA equities will be realised.

The FTSE/JSE ALSI40 has lost 18.4% year-to-date as a result of continued declines in global markets and the strong rand. Over the same period, the Top20 Fund declined by 13.7%. While the fund comfortably outperformed the index by almost 5% it is of little comfort to investors. The past 3 months provided very little place to hide and with an equity-only mandate it was impossible not to incur losses.

Several changes were made to the fund over the period. Within the resource universe, gold & platinum exposures were reduced. The outlook for platinum remains very positive on a long-term view, and as such the fund has retained its exposure largely through Impala Platinum, which is trading at a significant discount to Angloplats. Nonetheless, during the quarter, the opportunity arose to reduce the platinum holdings after a strong rise in both the platinum price and platinum shares. As a result, the fund's exposure was cut from 20% of the portfolio to 10%. The reduction in the gold weighting had more to do with the valuations of the gold stocks than a long-term view on the gold price. The entire BHP Billiton holding was sold and a large position in Sasol was established. With a normalised oil price of $20 and the current rand/US$ exchange rate, Sasol will earn around R10. On this basis, it is trading on a PE of 8 and is yielding 5.5%, which the fund manager's consider to be attractive. The funds holdings in Anglo American and Iscor were maintained, both counters are attractively priced and Iscor is benefiting from corporate action. The fund's banking exposure was also increased with a new position in ABSA, which is trading on a PE not far north of 5.

Within the industrial universe, the entire Richemont holding was sold as the fund manager's anticipate there to be more attractive valuation levels at which to buy this share. The European Luxury Goods sector remains to be at least 20%-30% overvalued and when the sector declines, Richemont will fall with it. The opportunity also arose to buy more SABMiller at very attractive levels after three factors combined to reduce the share price: firstly the continued de-rating of the FTSE (SABMiller being listed in London); secondly the de-rating of the European Beer sector, largely as a result of lower earnings due to the strengthening EURO (which does not impact SABMiller), and thirdly continued concerns over Miller in the US. The first two issues are not directly applicable to SABMiller and in addition to this, the fund manager's hold the view that at current levels, a "worse-case" scenario is being priced in with regards to the US market, and as such there is a free option on any US turnaround.

Other additions to the fund were initial holdings in Tiger Brands, AVI and Woolworths. All three of these shares trade on one-year forward PEs of below 7 and are offering dividend yields of around 5.5%. These companies all own some of the greatest brands in South Africa (AllGold, Tastic, Fattis & Monis, Panado, Spar and several others in the case of Tiger Brands; I&J, Willards, Five Roses and Pyotts in AVI and the Woolworths brand of course), and all three offer superior earnings growth over time. The fund also participated in the Telkom IPO, which was attractively priced after Government significantly reduced the price range due to adverse market conditions. While Telkom will face strong headwinds in the years ahead (particularly due to the introduction of competition) the fund manager's believe that the opportunity for free cash flow generation from the fixed-line business is significant. The mobile business, Vodacom, which makes up 75% of the valuation, is a quality asset with several years of above average growth ahead due to its continued dominance of the SA market and expansion into Africa.

While the South African market will, in part, be hostage to global markets and as such could decline further, it is the fund manager's view that it offers extremely compelling value, trading on a forward PE of 7.2 and dividend yield of over 4%. In addition to this, the SA Banks and local industrial companies are trading on a forward PE of 6.2 and offering a dividend yield of 5.5%. With interest rates set to decline this year, cash in the bank will earn maybe 9% or 10% and be subject to tax. Dividend income is tax-free, so the 5.5% dividend yield compares very favourably to the after-tax return of around 6% (40% tax rate) one would earn from cash in the bank. In the fund manager's view this is extremely attractive. The South African market is "on sale" and the fund manager's believe that investments made now will deliver handsome excess returns in the years to come.

The quarter to December 2002 was a difficult period for the fund. The rand appreciated by 22.3% during the final three months of the year and global markets conditions remained uncertain as a result of the prospect of war with Iraq. Against this background, these two factors ultimately flowed through to the rand-hedge dominated JSE ALSI40 (by weighting, around 75% of the value of the ALSI40 index is in rand-hedge stocks, many of which are dual-listed) which declined 3.4%. Over the period, the fund, which had high exposure to the large constituents of the index, fell by 5.3%. Its two largest positions were Gold and Platinum, which both fell by around 10%. The diversified mining stocks, Anglo American and BHP Billiton, both big holdings, also detracted from performance, losing 5% apiece. Positive contributions came from Venfin and Standard Bank, which appreciated by 8% and 5% respectively. The most significant contribution, however, came from Dimension Data which was up 36% for the quarter.

The only meaningful new purchase during the period was an initial position in SABMiller, which had retraced post the honeymoon period following the announcement of the Miller acquisition, when the stock experienced an upward re-rating. SAB has come a long way from the days when it sold beer only in South Africa. Over the past several years management has built an extremely successful global beer operation, taking on the giants such as Heineken and in the process internationalised the business to such an extent that the SA operations only contribute 30% of the group operating profits. This has resulted in a decreased cost of capital, which in turn should translate into a higher valuation. The market, however, in it's scepticism of the Miller transaction, has not awarded this higher valuation to SABMiller: the stock trades on a 1-year forward PE of around 11, Dividend Yield of over 4% and most importantly a Free Cash Flow Yield of over 10%. In addition to this, it is one of the cheapest brewing stocks globally, and is trading at a 40-50% discount to the major players, Anheuser Busch and Heineken. In the fund manager's view, the honeymoon is not over and the fund will patiently await opportunities to buy more SABMiller and participate in what should turn out to be an extended honeymoon period.

Global markets remain fragile and volatile and may well retrace further, particularly if war breaks out. The SA index will not be immune to a further fall in global markets, however, valuation is on our side, providing downside protection. The ALSI is on a 1-year forward PE of just above 9 and several sectors, including platinum, oil and banks, offer dividend yields north of 5%. With the retracement of the rand, the dual-listed stocks are now looking increasingly attractive, with Anglo American for example trading on a PE barely into the double-digits and yielding 4%. Value is now to be found within all three broad categories, Resources, Financials and Industrials, and the fund will endeavour to participate in the best of these opportunities.