For the third quarter of 2005 the Coronation Balanced Plus Fund generated a return of 12.9%. Over the 12- month period to 30 September 2005 the fund, with a return of 42%, has convincingly outperformed its benchmark return of 5%.

The domestic stock market continued its strong upward trend, returning 20% in the third quarter and 37% year to date. The returns over longer periods have been nothing short of exceptional, with the All Share Index up almost two times over the last three years and up more than three times in dollar terms. In a period of strong absolute returns we are encouraged by the fact that we have performed well against both the peer group and the broader market.

What makes these returns even more exceptional is that they have been achieved in a low inflation environment. Much like the American experience in the 1980s, the move from a high- to a low-inflation environment has been a big driver of returns for financial assets. Bond returns have been more muted this year, but have also been very strong over longer periods. The All Bond Index has returned more than 15% per annum over rolling three, five and 10 year periods.

The currency strengthened over the quarter to such an extent that it erased most of the weakness seen in the first half of the year. But tracking the currency against the dollar can be a bit misleading due to its high levels of volatility. If one looks at the euro and pound sterling over the last two years one can see that the rand has been consistently strong and has stayed in a surprisingly narrow trading band. While the environment is likely to remain benign for the foreseeable future, we remain of the view that the risk is to the downside and that the rand remains vulnerable to a decline in either global risk appetite or the commodity cycle.

The last few years have been an extraordinary period for corporate South Africa. We are now in the 28th consecutive quarter of uninterrupted economic growth. Consumer spending has exploded as a very strong cycle has coincided with the structural underpin of an emerging black middle class. Earnings are now high and we are very mindful that a rising tide lifts all boats. Over the full cycle the quality companies will differentiate themselves and therefore, for as long as premium ratings for these companies remain undemanding, our portfolios will be heavily invested in shares like Naspers, Tiger Brands, Pick 'n Pay, Standard Bank and Afrox.

Resources had another strong quarter returning 26% (60% year to date). The strength in the performance of resources this year has caught many investors by surprise. Forecasting market returns is not a high conviction activity and we therefore get great comfort from the results that our bottom-up, valuation-driven process has delivered throughout this period of macro volatility. We remain of the view that the commodity cycle is extended and are therefore light in the diversified mining houses, particularly Billiton. Sasol and Impala delivered strong returns and, while we continue to hold significant positions in both, they are now trading much closer to their long term fair values.

Financials continued to lag, returning 13% (19% year to date). Insurers continue to underperform as they deal with the challenges of operating in a low-growth market and the unwelcome scrutiny of the Pension Funds Adjudicator. We are of the view that insurers need to change their business model if they are to deliver more value to consumers and retain their relevance in the market. The banks continue to achieve very strong asset growth, with earnings lagging asset growth as margins are squeezed by lower interest rates and increased competition. We continued to take advantage of sector rotation into resources by increasing our stake in Standard Bank over the quarter.

Industrials had another good period, returning 20% (29% year to date). Our big holdings in Naspers, Woolworths and Tiger Brands contributed strongly. We also took advantage of sector rotation to buy Super Group and Woolworths at prices we consider to be attractive.

The bond market weakened over the period as high oil prices and indications of a tick-up in food inflation fuelled concerns of an increase in inflation. We remain bearish on bonds, holding the view that they are unattractively priced. Real yields are unattractive, the risk to inflation is on the upside, US yields are low and the government has clearly communicated its intention to drive economic growth through expansionary macro policy. Interestingly, our heavy weighting in inflation linked bonds has been a significant contributor to performance this year with inflation linkers delivering a 14% return, compared to 6% from the All Bond Index.

Louis Stassen & Karl Leinberger
Portfolio Managers

The Coronation Balanced Plus Fund generated a return of 7.7% for the second quarter of 2005. Over the 12- month period to 30 June 2005 the fund, with a return of 42.7%, has convincingly outperformed its benchmark return of 35.6%.
The second quarter proved to be another strong quarter, with virtually every asset class achieving strong returns. The primary driver of the stronger equity market was a weaker rand; for the bond market it was a rising US market, accompanied by an increased appetite for risk.
As bottom-up stock-pickers there is nothing we like less than a one-way trending market. We are investors and not economists. We invest significantly in our own research. Over the years this has consistently delivered high conviction ideas, enabling us to construct portfolios and deliver performance that does not rely on a trending market to deliver results. We therefore welcome the reversal of a three-year trend of rand strength. We also consider it to be healthy for our economy, which was at risk of suffering long-term damage from an overvalued currency.
The decision to move 10% of the fund into foreign cash in the first quarter has paid dividends sooner than we expected. If the local equity market continues its strong gains we will reduce our exposure accordingly and invest the offshore cash in international equities.
Resources had another strong quarter, returning 9% (27% year to date). This outperformance was driven by rising commodity prices and a weakening rand. We remain of the view that commodity prices are above mid-cycle levels and we therefore remain light in Anglo and BHP Billiton. We are however significantly invested in Sasol and Impala, companies that we believe trade below their long-term values. We are watching with interest the decline in Mittal Steel. Although the steel cycle is rolling over, the share is starting to look attractive.
Financial shares delivered less spectacular, but still rewarding, returns of 5% for the quarter. Our longsuffering holding in Alexander Forbes performed well. The company has now restructured its underperforming international risk services business and improving business prospects have drawn the attention of investors to its very undemanding rating. Although banks have reported fairly high levels of earnings, ratings are undemanding. We have taken advantage of the market's aggressive rotation into resources to increase our holdings in Absa and FirstRand.
Industrial shares also performed well with a return of 7% for the quarter. Our big holdings in Naspers, Telkom, Tiger Brands and Richemont performed well as did our more contrarian holdings in Delta and Netcare. On the back of the sector rotation into resources we selectively bought domestic shares (in particular Lewis) at prices that we consider to be attractive.
The bond market rallied over the quarter, reversing the decline in the first three months of the year. The rally was kick-started by a surprise rate cut in April and spurred further by the rally in international markets. Despite a bearish positioning, our fund performed well with a large weighting in inflation-linked bonds. We remain bearish on the rand and hold the view that inflation is currently at unsustainably low levels. While US yields remain at such low levels the environment for local bonds will remain benign. But bonds are, in our view, "priced for perfection". They do not offer attractive long-term real returns, US yields are now very low and inflation is at a cyclical low.
Investment returns over the last two years have been exceptional, and we therefore caution investors to bear this in mind when framing their long-term expectations. The level of earnings of South African companies is now high and ratings are no longer undemanding. That said, we remain fully invested in equities, largely because of our view on the rand and its implications for the investment merits of rand cash and bonds.

A manager's ability to read market trends is a key consideration when you select a fund. Coronation Balanced Plus (CBP) has had its periods of underperformance, but reading trends has been one of its strongest attributes.

This was seen in 2004, when CBP went against the tide by reducing holdings in shares linked to the domestic economy and raising exposure to rand hedges. It proved to be an astute move: this year, investors dumped domestic shares and scrambled into rand hedges at the first sign of rand weakness.

"We are value-driven investors; domestic shares looked expensive and rand hedges looked cheap," says Karl Leinberger, who was joined recently by Louis Stassen as co-manager of CBP. Other strong calls, such as Remgro, Telkom and Naspers, have also paid off.

Leinberger concedes that the recent market move has improved the value of domestic shares relative to rand hedges and also feels the rand could be due for a rally. But he adds: "The rand is still overvalued; our strategy is to retain a heavy bent towards rand hedges."

Rand hedge exposure will generally, however, be in nonresource shares. "The commodity cycle looks stretched, though there are exceptions such as Sasol and Impala," says Leinberger.

At the start of 2005 CBP's co-managers backed their view of the rand by shifting cash offshore. "This was done at under R6/US$," says Leinberger. Foreign exposure, now at 12% of the portfolio, is all in cash and could be invested in equity at some point, he adds. This would entail reducing SA equity holdings.

A decision to shift cash offshore is one many other funds still face and one that can't be done at the flick of a switch. "Obtaining Reserve Bank permission is a lengthy process," says Leinberger.

The co-managers also hold a negative view on bonds. Almost half of CBP's 12% exposure is through low-risk, inflation-linked bonds. "We view bonds as overvalued," says Leinberger. "People don't grasp that it was the strengthening rand that produced low inflation; even if the rand remains stable we expect the inflation rate to rise."

Financial Mail - 17 June 2005

The Coronation Balanced Plus Fund generated a return of 3.59% for the first quarter of 2005. Over the 12-month period to 31 March 2005 the fund, with a return of 32.7%, has convincingly outperformed its benchmark return of 25.6%.
For the first time in more than a year, we introduced international assets to the fund's portfolio. This is largely for diversification reasons and is based on our view that the rand will weaken over the longer term. The fund has a limit of 15% foreign exposure in terms of its mandate and is currently 10.5% exposed to foreign cash.
For the quarter, the All Share Index returned 6%, Financials 1%, Industrials 0% and Resources an impressive 17%. This strong resource outperformance was achieved on the back of a 10% depreciation of the rand/US dollar exchange rate over the quarter, an acceleration in the commodity price cycle, strong operational results from BHP Billiton and iron ore contract settlements that significantly exceeded market expectations. Despite this sudden rotation into resources, it is our view that the commodity cycle is overextended and bound to pull back in the medium term. Our favoured holdings continue to be Impala Platinum and Sasol and we remain underweight gold shares such as Harmony and Gold Fields.
Financial shares performed well over the quarter and we increased our weightings in Absa and Standard Bank on the back of improved results and a slight de-rating in these share prices. While the level of earnings in these companies is now becoming quite high, medium-term prospects remain good. Amongst the insurers, Metropolitan remains our pick because it trades at a discount to embedded value, despite the fact that it is growing its underlying business very strongly.
The current low level of interest rates, combined with high real wage increases, will continue to drive consumption expenditure. This will provide a strong tailwind for consumer stocks, which have delivered very strong earnings growth for several years now. We believe however that, as good as their prospects are over the next few years, the level of earnings in these companies is now very high. Despite this observation, we continue to find value in Naspers, Woolworths and Pick 'n Pay.
Our favoured industrial stock picks include Trencor, VenFin, Telkom and Tiger Brands. Rand hedge stocks which are fairly priced for the current rand are a great investment opportunity. Examples include Remgro and AECI. We believe that these counters will be big winners should our view that the rand is overvalued, and in overshoot territory, prove correct.
Although the domestic bond market started the year off by extending the rally seen in the second half of 2004, and even reaching record low yields in February, March saw a change in sentiment. The extent of the sell-off in bonds saw the All Bond Index lose 3.7% in that month alone, dragging the overall first quarter performance to - 0.3%. The correct duration and curve positioning of the fund's bond exposure resulted in the fund handsomely outperforming the market benchmark by over 1.5% for the first quarter of the year.
The outlook for bonds is still risky given a backdrop of rising South African inflation as well as uncertainty regarding the pace of increase in US interest rates (which will leave higher risk assets such as emerging markets vulnerable). Our investment stance is thus still conservative with an emphasis on low capital risk until bond valuations are more attractive.
The past year has seen exceptional returns from the equity market. Investors should however be cautioned that there is unlikely to be a repeat of previous years' performances. We believe that the value in the market is now less obvious, with the price differential between average and quality companies having narrowed. This has made stock selection and portfolio diversification key.

The mandated offshore exposure limit of the Coronation Balanced Plus Fund has changed with effect 1 Mar 2005. The previous mandated offshore exposure was 0% this has been increased to 15%.

The Balanced Plus Fund generated a return of 12.7% for the quarter which resulted in a strong return of 32% for the calendar year. This compares favourably with 26% from the benchmark and 29% from the peer group average.
Domestic financial and industrial shares experienced a strong end to the year as low interest rates, low inflation and a strong rand led to record levels of expenditure over the festive season. This left share prices of most retail and banking shares more than 25% higher than at the start of the quarter.
Robust credit growth, continued improvement in bad debt levels and further hints that other South African banks may also be acquisition targets for foreign banks drove the prices of bank shares higher over the quarter. The fund benefited from exposure to Standard Bank, Absa and FirstRand. A higher equity market and indications that excess capital would be returned to shareholders lifted the shares of life assurers and short-term insurers. Our holdings in Metropolitan, Sanlam and Santam are major beneficiaries of this and they all consequently performed well.
Within the industrial sector, domestic cyclical shares ruled the roost with the companies experiencing the most buoyant operating environment in many years. Investments in Edcon, Foschini, Woolworths and Truworths delivered excellent returns. Our key picks in the industrial sector, Naspers and Telkom, found new support from superb financial results and delivered very strong returns of 47% and 33% respectively.
Resources shares suffered at the hands of a stronger rand and a surprise interest rate hike in China added to the woes of the sector over the quarter. Gold shares, led by Harmony (-42%) in its hostile bid for Gold Fields (-21%), were the worst performers for the quarter. A small gold exposure meant that the fund was largely unscathed by these severe declines. Our exposure to Impala Platinum (8%) however did count against us as the strong rand, a strike and uncertainty over the ownership of their Zimbabwean assets pushed the share price lower.
South African long-term interest rates continued to trend lower on the back of lower inflation and narrowing emerging markets spreads. This resulted in underperformance from the fixed interest portion of the fund, given our short duration stance. As in the previous quarter, exposure to Liberty International (+10%) offset some of this cost.
Given the sharp increase in both equity and bond valuations over the last quarter, we approach 2005 with a much higher level of caution than was the case in 2003 and 2004. While valuations are not yet demanding, they are no longer compelling. Although there are still more than enough opportunities for stock-pickers such as ourselves to deliver above-average long-term returns, we expect those returns to be well below those achieved over the previous two years.