The Top 20 fund generated returns of 29.97% and 44.04% over the 1 and 3 year time periods to the end of September 2006. This can be compared against the FTSE/JSE Africa Top 40 benchmark returns of 36.72% and 39.65% respectively. The recent quarter was marked by significant currency weakness as global growth fears persisted. Strangely the rand performed worse than even the Thai baht despite Thailand having suffered a military coup de tat. Dollar commodity prices remained weak and in some cases outweighed the beneficial impact of the currency on commodity producers. Gold shares were among the worst performing of the Top 40 shares for the quarter. As always these short term gyrations create opportunities.
We added to our Edgars position during the quarter and the fund now has a 6% position in this company. Edgars is the largest clothing retailer in South Africa, with a strong brand and an excellent management team. Consequently they have the ability to exploit their size and franchise value. They have a long credit history on lower and middle LSM groups which represents an untapped financial services opportunity. It is our view that the concern which the market has on the quality of their book is overdone. They were ahead of the market in taking pain on their book and we do not expect the bad debt charges to balloon out of control. From a long term perspective (25 year history) the earnings are not high and margins are not high in a global context. The market is telling us that the earnings of the company are about to decline significantly, but we believe that Edgars will in fact grow its earnings albeit at a slower pace than in the recent past.
We bought Netcare up to 6% of the fund in the quarter. Hospitals are tollgate businesses. They trade on superior multiples globally and have great earnings visibility. Netcare has recently acquired half of the largest hospital group in the UK and funded this purchase virtually entirely with debt. Furthermore this debt arrangement is entirely without recourse to the South African balance sheet. This represents an incredible free option. In addition to very favourable healthcare trends in the UK market, we anticipate that Netcare management will drive efficiencies in their new acquisition which will deliver value over the next few years. These benefits will crystallise in cash generation which will allow the degearing of the balance sheet thus creating a unique investment opportunity. Very little of the investment case we have outlined is discounted in the current price of the company.
BHP Billiton was also bought in the quarter and currently represents 5% of the fund. While we remain pessimists on the dollar commodity cycle we believe that BHP Billiton has begun discounting significantly lower dollar metal prices - having declined in value by 26% in hard currency. We are not completely convinced that the worst possible outcome is currently discounted and hence our reluctance to invest more of your capital in this company. We also perceive risk in the fact that the value of the company as expressed in rands has not declined as dramatically and were the rand to strengthen from current weak levels this would be negative for the share price as expressed in rands.
Whilst domestic interest rate headwinds and emerging markets concerns may persist for some time, we remain confident that all holdings in the fund are significantly undervalued and that over time this value will be recognised and translate into attractive returns for the fund.

Hugo Nelson and Gavin Joubert
Portfolio Managers

The Top 20 fund generated returns of 45.1% and 43.5% over the 1 and 3 year time periods to the end of June 2006. This can be compared against the FTSE/JSE Africa Top 40 benchmark returns of 55.6% and 40.3% respectively. The recent quarter was marked by significant market volatility as fears arose of excessive monetary tightening in the first world. The consequent anticipated negative impact on global growth combined with a risk re-assessment of financial assets soured the taste of global investors for emerging market assets. At the same time the rand depreciated by some 20% against the US dollar. Somewhat surprisingly, commodity prices did not experience significant declines and the net result of all of these factors was that resource shares continued to increase whilst industrial and financial shares experienced sharp declines. We believe that these price moves created opportunities to add further to the fund's industrial and financial positions.
The fund made three new purchases during the quarter: MTN, Edgars Stores and FirstRand. All of these stocks were purchased on single digit forward PE multiples. Currently MTN is trading on more than a 20% discount to our fair PE for the South African market. The market has gone from overvaluing the growth potential in this business to discounting it substantially. This pessimism has come about due to the looming end to the Nigerian tax holiday in 2007 and the purchase of Investcom for a fairly full price. The consequent flat near-term earnings outlook does not alter the fundamental cash generative nature of the business. It is our view that the business will generate substantial amounts of free cash flow over the next 5 and 10 years, driven by strong mobile subscriber growth in the African and Middle Eastern countries in which MTN now operates, including Nigeria, Cameroon, Iran, Syria, Sudan and Ghana.
Edgars and FirstRand were both victims of the panic which spread through the market in the wake of Governor Mboweni's 50 bps hike in interest rates. In our view, both companies share prices started discounting significant further hikes in interest rates and consequent negative domestic demand growth effects. Whilst we acknowledge that the domestic economic outlook has worsened over the past few months, the future would have to be very bad to render these valuations expensive. Edgars is on almost a 40% discount to what we consider a fair market PE multiple.
The fund also added to its Standard Bank and ABSA positions, to the extent that banks now make up around 15% of the fund compared to 9% at the end of March 2006. The 20% to 25% decline in banking shares over May and June would indicate that these companies generate 100% of their earnings from loans to low-end retail consumers, which is of course not the case. The South African banks generally have well diversified earnings streams, with a mix of retail vs corporate, and interestrate linked vs fees and commissions. In addition to this, a rising interest rate environment results in interest income margin expansion and a positive endowment effect (higher interest earned on cash). Lastly, in the case of Standard Bank, a depreciating rand results in higher rand earnings from its offshore operations, which contribute around 20% of earnings. As result of all of these factors, we do not believe that there will be a significant deterioration in the earnings of banking shares over the next few years, and the severe price declines therefore provided us with an opportunity to increase the fund's banking exposure.
Whilst domestic interest rate headwinds and emerging markets concerns may persist for some time, we remain confident that all holdings in the fund are significantly undervalued and that over time this value will be recognised and translate into attractive returns for the fund.

Hugo Nelson & Gavin Joubert
Portfolio Managers

Coronation Top 20 (CT20) is the only actively managed fund in the large-cap sector and, with never more than 20 shares in its portfolio, is home to big-bet views. The approach has delivered strong returns well in excess of CT20's benchmark, the Alsi top 40 index. Over five years, for example, CT20's capital appreciation stands at 223% compared with the index's 124%. Given its record, CT20's recent below-par returns appear likely to be short-lived.

Financial Mail - 04August2006

The Coronation Top 20 Fund returned 10.6% in the quarter compared with a return of 12.2% for the FTSE/JSE Top 40 Index. The quarter's laggards were Sasol (2.9%), SABMiller (2.8%), Richemont (6.5%) and Mittal Steel (3.3%), which all underperformed the benchmark return of 11.5% thus detracting from short run performance. We also went into the quarter with quite a high effective cash holding which did not help in a strong upwardly trending market. Major contributors to performance were Impala Platinum (25% - after distributing a R65 dividend), Metlife (19.4%), Tiger Brands (19.5%), Telkom (19.2%), Woolworths (15.4%) and Absa (14.9%). Other holdings generated a return close to that of the market. Since inception the fund has beaten the market by a margin of 10%.

The two additions to the portfolio in the quarter were Shoprite and Pick 'n Pay. The portfolio has been invested in food retailing for a while via our holding in Woolworths, whose merits we have discussed in earlier quarterly comments. We regard food retailers of the calibre of Pick 'n Pay and, to a lesser extent Shoprite, as premium businesses. They should trade on PE multiples well in excess of that of the average company listed on the JSE. Food retailers are unique in that they have a negative working capital cycle: this means that in the absence of capital expansion they pour cash. In addition, the South African food retailing market is quite consolidated. The incumbents all possess sizable market shares making a greenfield attack by a foreign competitor impossible. Any prospective entrant into the South African market would have to buy one of our incumbents.

Current growth strategies being pursued by both management teams are serving to distort the attractive valuation of the core businesses. In the case of Shoprite management are pursuing an African growth strategy which has not yet delivered any returns. The recent losses reported in certain African businesses depress the overall margin of the group and create the impression that Shoprite is being valued appropriately relative to history. This belies the low PE (14 times) on which the core business is trading.

The same is true of Pick 'n Pay where the value of their core business is being distorted by losses currently being suffered in Australia. We estimate the core PE of Pick 'n Pay to be 13.5 times. This is cheap when one considers that the overall market is trading on 12.5 times. Both of these businesses are attractive to us given their inherent defensiveness. We do not believe that their current level of earnings is particularly high or that earnings would decline in the event of a more challenging economic environment.

We remain confident in the undervalued nature of all current fund holdings and while we do not expect the exceptional returns of the past few years to be maintained, we are nevertheless optimistic about the positioning of the fund.

Hugo Nelson & Gavin Joubert
Portfolio Managers

The Coronation Top 20 Fund produced a return of 50.9% for the one-year period ended 31 December 2005 resulting in 2.6% outperformance of the FTSE/JSE Top 40 Index, which appreciated by 48.2% over the same period. The fund has now outperformed the index for five years in a row, with the average outperformance being over 10% per annum.
On the back of a very strong year from the equity market, driven by resource shares, we were satisfied to have kept up with, and actually exceeded, the market's return. Although the fund held a total resources position that was well below that of the resources component of the FTSE/JSE Top 40 Index, the resource shares that the fund did hold performed particularly well, with Impala Platinum appreciating by 95% over the year and Sasol by 87%. In addition, the fund held a 10% position in VenFin, which appreciated by 90% following the take-out offer from Vodafone Plc.
The fund has held a significant position in VenFin for the past few years because we believed that the largest asset in VenFin, being Vodacom, is a great asset that grows its business value year in and year out through significant free cash flow generation. In addition, VenFin always traded at a large discount to its NAV which provided good downside protection. The market's view was that there was no 'catalyst' to unlock this discount and so VenFin would always trade at this discount to NAV. Our view is that valuation is the only catalyst that an investor needs and we were happy to buy an asset that was trading at such a large discount to the underlying value of its investments, and wait patiently for that value to be recognised. Vodafone Plc saw that value and on the day of the announcement of the transaction the discount that had been in place for five years disappeared in the space of a few minutes with the VenFin share price appreciating by over 30% in one day. The fund today holds a large position in another stock that trades with this nonsensical 'holding company' discounts, being Remgro, which like VenFin, is controlled by the Rupert family. We are not sure if this investment will be as rewarding as VenFin, but what we do know is that Remgro own some great assets, particularly British American Tobacco, FirstRand and Impala Platinum, and the stock is trading at a large discount to the underlying value of these respective assets.
There were no new purchases over the past few months, however we did add to a few existing positions including SABMiller, Standard Bank and Metropolitan. These positions were all added to for the same reason, being that the share prices of these companies had not increased for some time yet their business values had continued to grow which meant the gap between the share price and business value, being the margin of safety, opened up sufficiently. At the same time we reduced the fund's positions in Tiger Brands and Impala Platinum as these stocks moved closer to our estimation of their respective fair values.
Cash levels in the fund are slowly building up, with 6% in cash at the moment. In addition, the cash from the VenFin transaction should be coming into the fund before the end of January, which means that, given that VenFin is now 12% of the fund, the total cash position will be over 15% by the end of January. We are currently working hard to try and find new potential ideas for this cash, however, if we cannot do so we would rather take a defensive approach and hold a slightly higher than normal cash position until suitable investment opportunities arise.

Hugo Nelson & Gavin Joubert
Portfolio Managers