World markets were encouraged by European Central Bank president Mario Draghi's Outright Monetary Transactions announcement to deal with the crisis facing the eurozone. This indicated a willingness to undertake unlimited buying of bonds of member states (provided they adhere to certain conditions) in order to drive bond yields lower. A few days later Federal Reserve chairman Ben Bernanke announced the third massive quantitative easing program (QE3) in the US. With QE3, the Fed has made it clear that interest rates will stay at these levels at least until 2015. Buoyed by these strong stimulus measures, developed markets returned 6.8% for the quarter, while the MSCI Emerging Markets Index returned 7.9%; indicating a strong shift back into risk assets. Concerns about the longer-term inflationary impact of these actions meant a strong quarter for gold, with the metal price up 11%. The return on the FTSE/JSE All Share Index for the quarter was 7.3%. The domestic market continues to be driven by industrial and financial stocks, while the resource sector lags. Some concerns about weaker Chinese growth and a sharp drop in the iron ore price resulted in the diversified miners remaining out of favour. We continue to find value in this sector, while we have reduced the fund's exposure to consumer cyclical stocks trading on unreasonably high multiples. The fund generated a return of 5.1% for the quarter and 15.9% for the past 12 months. On a 3- and 5-year basis the fund returned 12.4% and 10.9% per annum respectively. The high returns of the past year are much higher than what one should normally expect from a conservative product such as Balanced Defensive. We caution that returns of this magnitude are unlikely to be maintained in a world of extremely low yields. While the third quarter was positive from a returns point of view, in South Africa it was in some respects tragic. The events at Marikana and the resulting labour unrest that we continue to witness is a stark reminder of some of the challenges the country face, both socially and economically. The wage demands being presented will erode much of the remaining manufacturing competitiveness that this country still has. The Moody's downgrade in the final week of September week reflects the more fragile state of our public finances, and will likely lead to increased circumspection amongst foreign portfolio investors, rising bond yields and a weaker rand. The fund maintains its maximum permissible allocation to international assets at 25%. The longer-term side effects of the medicine being applied to cure the ills of the global economy are not clear. The fund's exposure to risk assets (equities and property) sits at 30.8%, which is well below the maximum 40% level we are allowed. We believe this more conservative stance is appropriate given the high macro risks and full equity and property valuations.
Portfolio managers
Charles de Kock, Mark le Roux and Neill Young Client

Financial markets remain understandably volatile during this time of great economic crisis in the Eurozone. We have written before how sentiment continues to shift from the 'riskon' to 'risk-off' positions almost at will depending on the economic news of the day. Whereas the first quarter was one of improved economic news, the mood shifted drastically to the 'risk-off' position during the second quarter. During the risk aversion stage, money poured into the safe assets of US dollar cash and bonds in markets such as Germany, Switzerland and the US. As a consequence, the bond yields in these countries fell to record lows during the quarter. In contrast the yields in countries at the epicentre of the European crisis widened even more. Global equities retreated, giving up around a third of its gains achieved in the first quarter of 2012. Emerging markets, being perceived as higher risk, underperformed the developed world in US dollar terms. Most emerging currencies also lost ground to the US dollar in this rush to safety. The MSCI Emerging Markets Index lost 8.8% compared to the smaller negative 4.9% return of the developed world (MSCI World Index). The JSE was one of the better markets as our industrial and financial shares performed well, posting a total return of 1.0% in rand terms for the quarter. Balanced Defensive is a conservative fund. While it should and does display some volatility, it is far less than that of more aggressive products. In order to achieve our aim of outperforming cash by 3% over the medium and longer term we ultimately have some exposure to risk assets. Our maximum exposure to risk assets is 40%, but the fund was well below that upper limit for the entire quarter as well as over the past year. We find the downside possibilities just too large to warrant a bigger exposure at this stage. The fund closed the quarter with a 31.4% exposure to risk assets, comprising 9.4% in SA equity, 12.0% in global developed world equity, 4.4% in emerging market equity and 5.6% to property. The fund achieved a 2.0% return over the quarter, 12.4% over the past year, 12.5% per annum over the past three years and 10.3% per annum over the five-year period. Over the one and three year periods the performance was more than 6% better than what one would have achieved by being invested in cash. The five-year excess return over cash is 2.3% per annum. Looking forward global economic growth continues to disappoint. Very importantly the Chinese authorities have recently cut interest rates for a second time in an attempt to promote faster economic activity as growth has slowed. Interest rates around the world will remain very low for much longer than most of us would have anticipated at the start of the global financial crisis four years ago. Our investment strategy remains unchanged. We have exposure to all the major asset classes. We still find most value in global equities where many world-class businesses, backed by very strong balance sheets, are trading at low price to earnings multiples. Domestic equities, especially the high quality defensive ones are however fully priced. The fund's exposure to SA equities is consequently slightly below 10% in contrast to the almost 17% exposure to the better valued global equities. The return of listed SA property has exceeded our expectations and has contributed to the fund's sound performance. We again sound a word of caution to investors to not expect returns from this asset category to continue to be as strong going forward. We may well trim exposure to property at these heady prices.

Portfolio managers
Charles de Kock, Mark le Roux and Neill Young Client

The five-year track record Regular investors with Coronation will know by now that we always try to stress the long-term performance record of our products. We consider five years to be the shortest meaningful period of performance measurement. We are therefore delighted to report on our first full five-year period this quarter. During this period, against the backdrop of a very uncertain world teetering from one crisis to another, the fund attracted a large amount of interest from cautious investors who want to beat cash, but do not want to be exposed to the volatility associated with more aggressive products. The fund ended the quarter with R9.65 billion under management, placing it among the larger funds in the South African unit trust industry.

The five-year return of 10.2% per annum was achieved with very low volatility, and in line with our aim never showed a negative return over any rolling 12-month period. The fiveyear return on cash amounted to 8.2% per annum. In addition, the fund's return of 13.2% per annum over three years and 12.6% over one year far exceeded the returns on cash of only 6.4% and 5.5% respectively. The fund also won the prestigious Morningstar award in February for best fund in its category (ZAR Cautious Allocation).

Review of the quarter
At the start of the year markets were priced for a continuation of the world's economic troubles. The agreement reached in Europe on the Greek debt restructuring and better than expected economic news from the US caught most nervous investors unaware, resulting in a rush to more risky assets. Global equities consequently delivered a strong performance with the S&P 500 up 12.0%, its best start to a year since 1998. Overall developed world equities rose by 11.7%, while emerging markets did even better, climbing 14.1% (both figures in US dollars) over the quarter.

The FTSE/JSE All Share Index followed global markets and posted a total return of 11.6% (in US dollar terms), but only 6.0% when measured in rands as the currency appreciated by 5.4% against the dollar over the period. Listed property showed a healthy 8.0% return for the quarter. Returns from the All Bond Index was 2.4%, while inflation-linked bonds returned 2.7%. Cash was the weakest area, returning only 1.4%. The fund's performance of 3.8% for the quarter is comfortably ahead of cash and reflects its moderate exposure to risky assets. The fund had an exposure of 32.4% to growth assets, well inside its permissible maximum exposure of 40%. Exposure to global equities was almost 18%, domestic equities effectively just below 10% and property at 5%. Of the total exposure to global equities about one third is invested in emerging markets.

Looking forward
The world is by no means out of the woods yet. Europe still faces serious challenges in addressing its sovereign debt issues. Likewise, the US and the UK still face major fiscal problems and monetary authorities in the Western world are likely to stick to the zero interest rate policy for the foreseeable future although the somewhat better economic news from the US has dimmed the need for additional quantitative easing. China's growth is likely to be somewhat slower than the almost 10% growth rate the world has become used to. This should not come as a surprise. We believe they will avoid a hard landing and the subsequent major declines in commodity prices it would inevitably lead to.

In the domestic economy we expect interest rates to be on hold for the remainder of the year as the Reserve Bank remains torn between the challenges of fighting inflation and supporting economic growth and employment. However, the direction of the next move in interest rates is up in our view, and we will take timely action in the fund to protect investors against the negative impacts that such a move may bring. We continue to find better value in global equities than in the local market. Conventional bonds are unattractive. We also continue to hold inflation linkers and selected corporate bonds.

Portfolio managers
Charles de Kock, Mark le Roux and Neill Young

The investment climate during the past year was extremely challenging. The unfolding sovereign debt crisis in Europe continued to dominate the economic news. Elsewhere faltering growth and rising inflation in most regions of the world added to investors' woes. Sentiment swung wildly from taking on to avoiding risk which resulted in extreme levels of volatility in equities and currencies.

The new president of the European Central Bank, Mario Draghi, reversed the rate hikes of his predecessor during the final quarter of 2011 to bring European interest rates in line with the zero rate policy already followed by the US and Japan.

South Africa also faced a challenging environment, with the severe slowdown in the construction sector and rising inflation probably the biggest concerns. In light of the weak domestic economic activity and serious concerns about the health of our major trading partners, the Reserve Bank kept local interest rates at historic lows despite inflation breaching the upper end of the target range in the final quarter of the year.

Notwithstanding an environment of low interest rates, high volatility in equities and a weak rand we are pleased to report that the fund returned 4.0% for the quarter, 10.3% for the calendar year and 12.0% per annum for the past three years. The returns are ahead of cash and inflation over all periods and it was achieved with very low volatility.

Our asset allocation decisions contributed positively as did our selection within asset classes. The decision to take our offshore exposure meaningfully higher early in the year paid off as the rand weakness added to performance. In the interest bearing area our high exposure to inflation-linked bonds and corporate credit also contributed positively. Domestic equity exposure was reduced to 9.6% by buying downside protection in the form of put options. Global equity exposure was 17% at year end, displaying our belief that it offers better value than the domestic equities.

Looking forward to 2012 we are of the view that the investment environment will remain tough. Returns from cash will again be very low and almost certainly below inflation in most countries. Economic growth will continue to be lacklustre, with Europe in all probability slipping back into recession. Growth in the emerging world and especially in China will be very important to the overall global financial environment. We remain positive on China, but cautiously so.

Notwithstanding the very challenging macro environment we continue to find many excellent businesses at reasonable multiples and with strong balance sheets. We believe exposure to the equity of these businesses will help the fund achieve its objectives in the years ahead. Conversely we still find conventional bonds unattractive at prevailing yields.

Portfolio managers
Charles de Kock, Mark le Roux and Neill Young Client