The Coronation Top 20 Fund appreciated by 18% for the third quarter of 2005. The FTSE/JSE Top 40 Index returned 20% over the same period. Over the 12 month period to 30 September 2005, the fund outperformed the index by more than 13% returning 59.8% against the index return of 46.6%.

Once again Sasol contributed the most significant return among all holdings for the quarter (+36%) and remains the largest holding at 11%. This performance was predictably fuelled by a rampant oil price in the aftermath of those terrible twins Katrina and Rita. Being two hurricanes which all but crippled the Gulf of Mexico oil production and refining capacity for a significant length of time. As highlighted in our June comment we do not regard oil prices of US$60 per barrel as normal but regard Sasol as a superior investment for the long term on much more conservative assumptions.

We have added significantly to our holding in Woolworths to the extent that it is now the fourth largest holding in the fund. We regard Woolworths as a premium company on an average market rating - hence the attraction. The food division which makes up 37% of profit will continue to enjoy significant space growth. It also possesses high barriers to entry (the 'Woolies' brand, R&D and store locations) in the premium food retail market. We believe that the food business is an excellent business and therefore value it at a significant premium to the market. The clothing division which contributes 39% of profit is a third of the way into a turnaround and initial progress has been encouraging. We regard this as a market average business but believe the market is not fully discounting a successful turnaround of this division. The loan book which contributes 20% of profits is the best quality book in the industry. This part of Woolworths we value at a small discount to the market. Blending all these divisions and ratings together yields our expectation that Woolworths should be valued at in excess of 12 times its normalised earnings whereas its current pricing implies a forward PE multiple of only 11 times. Woolworths has a superior brand and shareholders will continue to enjoy the benefits of the competent exploitation of this brand into the future. Woolworths appreciated by 25% in the quarter.

Impala, Tiger Brands and Naspers all contributed returns in the mid to low twenties. We have not continued our Mittal Steel buying programme as the stock appreciated away from our buying level. Mittal did however contribute 21% in the quarter. A small exposure to Anglo American was purchased at R169 - as we believed the core PE of 10.3 (stripping out all the listed subsidiaries) together with Anglo's rand gearing and conservative view of the commodity cycle to be enough of an inducement. A portion of the Telkom holding was sold in favour of VenFin (which was purchased) on valuation grounds - we continue to regard both counters as attractively valued.

The local market is up by just under 44% over the last year with the resources and financials sectors both up 38% and industrials up 52%. The 15 shares held in the fund however offer significant upside over cash and bonds.

In closing lets remind ourselves that these are turbulent times. Natural disasters and geopolitical uncertainty, together with the madness of crowds, all conspire to separate us from our hard earned capital. Having a robust investment philosophy is of paramount importance - or to borrow a phrase from Phillip A Fisher, "Conservative investors sleep well".

Hugo Nelson & Gavin Joubert
Portfolio Managers

The Coronation Top 20 Fund appreciated by 12% for the second quarter of 2005. The FTSE/JSE Top 40 Index returned 7% over the same period. Over the 12-month period to 30 June 2005, the fund outperformed the index by more than 11% returning 52.54% against the index return of 41.18%.
The biggest single contribution in the quarter came from Sasol which returned 24% for the quarter. Sasol is currently the largest holding in the fund at 11.5%. The strong share price performance was driven by a strong oil price which recently reached US$60. While no longer as attractive as it was a year ago, the current share price still reflects no value for Sasol's GTL (Gas-to-Liquids) business. In addition, Sasol has invested R27 billion in capex in the last few years; R10 billion of which is still not contributing to profit. Finally, Sasol does not have a problem with reserve life. Most of the global oil majors have a 10-year reserve life which they are struggling to maintain or extend. By contrast, Sasol's reserve life is 35 years. At a normal oil price of US$32.50 and a fair value of R7 to the dollar, Sasol is on an 11 PE to June 2006. This is still undemanding for a company of this quality.
Old stalwarts Impala, Tiger Brands and Naspers contributed returns in the mid-teens. Richemont, which we added in the first quarter, similarly rewarded with 15% in the quarter. Netcare was sold as the price appreciated to levels at which we were not prepared to continue buying up to a meaningful holding.
We have started buying Mittal Steel as it has fallen back to more attractive levels due to investor fears about the global steel cycle rolling over.
At our normal steel price assumption of US$350 per ton and a currency of R7 to the dollar, Mittal Steel is currently on a PE multiple of 6.5 times normal earnings. Over the next two years, a fair amount of cash will be returned to minorities before earnings decline to our normal earnings level; this implies that we are actually paying somewhat less than a 6.5 times PE on normal earnings. Currently Mittal Steel has R13.50 per share on the balance sheet. Assuming this is paid out to investors leaves the business on a 4.8 PE on normal earnings. Furthermore, Mittal Steel is an integrated steel producer as it pays Kumba cost plus 3% for the bulk of its iron ore requirements. Being integrated is a key sustainable competitive advantage in a deeply cyclical business. Finally, Mittal Steel has a de facto monopoly in the South African market. All of this makes for a very compelling buy case as Mr Market gives this valuable company away on fears of near-term earnings momentum.
Although the local market is up around 40% over the last year (Resources - 37.34%, Industrials - 46.28%, Financials - 41.74%) we remain convinced that the 14 shares we are invested in offer significant upside over cash, bonds and international equity markets. We continue to trawl the universe for new opportunities and are happy to wait for them to arise.

The Coronation Top 20 Fund appreciated by 3.4% for the first quarter of 2005. The FTSE/JSE Africa Top 40 Index returned 6.8% over the quarter as a result of the depreciation of the rand and resultant strong performance from rand hedge stocks. Over the 12-month period to 31 March 2005 the fund, with a return of 37.8% has convincingly outperformed the Top 40 Index, which has produced a return of 27.2% over this period.
Any period of short-term rand weakness sees the exact same predictable herd behaviour from many foreign and local investors. What many investors do is to start buying up rand hedge shares, typically resource shares. To do this they need to sell other (non rand hedge) shares. So typically the resource shares go up in price because of the buying pressure from these investors, and the local industrial and financial shares go down as a result of the selling pressure from these same investors. As a result, the Resources Index was up 16.8% over the quarter whilst the Financials Index only rose 1% and the Industrials Index was flat over this period.
Our approach is to value resource shares using a normalised level, as opposed to current levels, for both commodity prices and the rand. We do believe the rand will depreciate, but that most resource shares are pricing in a rand of 7.5 or 8 or higher and, as a result, are unattractive. Exceptions to this in our view are Sasol which makes up 10.8% of the fund, and Impala Platinum which makes up 7.5% of the fund. Therefore we were not buying more resource shares over the quarter and believe that investors who were doing so are putting capital at risk. We still hold the view that the industrial and financial stocks are the most undervalued area of the market, with Absa, Standard Bank, Woolworths, Telkom and Remgro all trading on P/E's of less than 10 and dividend yields of 4% or higher. Over the quarter, we also took the opportunity of this scramble for resource shares to sell the fund's holding in BHP Billiton, which is now trading on a P/E multiple approaching 20 on our estimation of normalised earnings.
The fund purchased two new shares over the period, Netcare and Richemont. The private healthcare sector in South Africa is a very attractive industry. Three players dominate (Netcare, Medi-Clinic and Afrox Health) and own over 80% of the private hospitals in the country. State healthcare is poor and continues to deteriorate making private healthcare an attractive alternative proposition. In addition, changing demographic trends and an emerging middle class ensure continuing demand for these services. Without the risk of regulatory intervention in this industry we believe that these stocks would trade on P/E multiples well above the market. Unfortunately, the risk of regulatory interference, rational or irrational, is ever present and, as such, the sector is very unlikely to command P/E multiples of 15 as they should without this risk. However, one is currently able to buy Netcare on a P/E multiple of around 8 on normalised earnings and a forward dividend yield of 5.5% and, at these levels, we believe that an investor is being more than compensated for the regulatory risk.
The fund has not owned Richemont for some years and, over the past three years, the Richemont share price has declined by 13%, partly as a result of the strength of the rand. Over this time frame, the litigation risk in tobacco has reduced significantly (British American Tobacco (BAT) makes up 40% of Richemont's share price at current market values) and the luxury business, after losing its way, has again focused on both the top-line (creativity and the launch of new products) and the bottom-line (cost-cutting). This business is cyclical and in our view does not deserve the 30 or 40 P/E multiple ratings it enjoyed at times in the past, however at the same time the business owns some of the best brands in luxury in particular Cartier, which contributes over 80% of the luxury division's profits. Richemont's luxury business is now trading on a P/E of 17.4 on normalised earnings if one strips out the BAT stake at current market prices. We do not consider this to be particularly attractive. However, we believe that BAT is undervalued, and using our fair value for BAT results in an implied P/E multiple on the luxury business of 16.1, which is slightly more attractive. Then finally, cash has been building up on the Richemont balance sheet (some EUR 800m of it) and taking this out of the valuation and including BAT at our fair value results in a P/E of 14.4 for the luxury business on normalised earnings. For a business that owns Cartier, Van Cleef & Arpels, Montblanc, Panerai and IWC amongst others, we believe that a valuation at these sorts of levels is beginning to look attractive and, as a result, the fund started building a position in Richemont.
Even though the domestic equity market has enjoyed a great recent period in terms of performance (appreciating by around 28% over the past 12 months, with the Financial and Industrial indexes both up around 40%), we still view it as attractively valued, particularly when compared to the returns available from cash or bonds, or when compared to expected returns from international equity markets. The risks however, have increased as valuation multiples expand, and careful stock selection will now be more important than it has been over the past year or two. We are comfortable that the Top 20 Fund holds positions in 16 stocks that are still undervalued and we will continue to search for new opportunities and wait patiently for them to arise.

The Top 20 Fund produced a return of 38.9% for the year to December 2004, compared to the 23.5% return of the ALSI 40, resulting in outperformance of the index of 15.4% for the year.
The most significant contributor to performance came from Naspers, which is the single largest position in the fund. Naspers appreciated by 80% over the course of the year as Mr Market finally appeared to start recognising the quality of the assets in the Naspers stable, notably Multichoice (DSTV) and Media24, and the magnitude of the free cash flow generation of these assets. We hold the view that despite this share price appreciation, Naspers is still fundamentally undervalued: the group trades on a normalised free cash flow multiple of around 10 and we believe that given the quality of the core assets, a multiple far north of this can be justified. In addition, we believe that there is optionality that comes in the form of a potential Pay-TV business in China. Naspers has had a presence in China for several years and is well placed to benefit from the opening of the Pay- TV market in that country. It is our view that within the next two years Naspers will have a Pay-TV business up and running in China. We have no idea what this business could be worth; it may be worth nothing or it may be worth R20 a share. What is important is that at the current share price, we are paying nothing for it.
The other big contributor to performance came from the position in banking stocks, with Absa appreciating by 80% over the year and Standard Bank by 68%. This performance was driven by excellent earnings growth from the sector, a general re-rating of the banks and by consolidation dynamics, with Barclays making a bid for Absa and other foreign banks expressing an interest in the South African banks. We believe that the banks are still attractively valued and as such have retained most of our position in the banking stocks.
Towards the end of the year we increased our position in Sasol, which has been a long-term holding in the fund. Using a more normalised oil price of between USD25 and USD30, and a ZAR/USD exchange rate of around 7, Sasol will be on a single-digit PE. We believe that Sasol is a premium business and as a result warrants a multiple well above that of the average South African company. In addition, at the current share price of around R122, there is optionality in the event that the oil price remains at current levels for a longer period of time and/or the rand depreciates further than 7 against the dollar. Sasol also has an aggressive and exciting future GTL (gas to liquid) project pipeline, which in our view has not been factored into the current share price, and as such also represents optionality that we are not paying for today.
Even though the domestic equity market has enjoyed a great year in terms of performance (appreciating by around 25% over the past 12 months, with the Financial and Industrial Indexes both up around 40%), we still view it as attractively valued, particularly when compared to the returns available from cash or bonds, or when compared to expected returns from international equity markets.
The risks however have increased as valuation multiples expand, and we are finding it more difficult to uncover new investment opportunities. We are however comfortable that the Top 20 Fund holds positions in 15 stocks that are still undervalued and we will continue to search for new opportunities and wait patiently for them to arise.