The Coronation Balanced Fund had a weaker third quarter, returning 3.3% against 4.7% from the benchmark. For the 12 months to 30 September 2007 the fund returned 27.8%, outperforming its benchmark by 2.9%. Over a rolling three year period, the fund returned 31.2% p.a. compared to 29.6% p.a. from the benchmark.

We are encouraged by our performance as bull markets are seldom kind to disciplined and valuation-driven investors. We expect returns to be a lot more muted over the next few years. This would suit disciplined stockpickers, such as ourselves, better than a market where a 'rising tide has lifted all boats'.

The global economic backdrop is a lot more uncertain than it has been for some time. While the US has deteriorated markedly, economies in the rest of the world continue to perform strongly. Financial markets are purging themselves of the excesses built up in a benign environment. In the US there will undoubtedly be some collateral damage to the underlying economy as tighter credit and the fall-out in the lower end of the housing market plays itself out. It is important that financial markets and the US economy 'take their medicine' after a prolonged period of complacency. A normalisation in risk appetite is healthy, and we certainly hope that the lessons learnt over the last few months will not be forgotten.

Notwithstanding a weaker economic environment we remain optimistic about developed market equities, which offer good value at undemanding ratings. We continue to watch global inflation pressures closely. Sustained low levels of inflation have been at the heart of the asset-friendly environment of the last few years. Globalisation, previously a strong driver of deflation, is now at risk of driving inflation upwards as demand for commodities from industrialising Asia drives prices of all commodities (including food) upwards.

The domestic economy is slowing appreciably as higher interest rates finally work their way through the system. The fall-out from higher rates is being compounded by high food inflation and oil prices. Despite these pressures, we remain of the view that this is a normal cycle and that the economy will comfortably absorb a slowdown in consumer spending. Higher levels of investment expenditure are addressing capacity constraints and improving the balance of the domestic economy.

Equities had another strong quarter, returning 6.7%. Resources (+13.5%) strongly outperformed industrials (+3.3%) and financials, which actually declined by 1.6%. The returns from our market this year have come largely from resources, which are up 39.6%, compared to 15.8% from industrials and 3.8% from financials. We remain of the view that we are in the late stages of a commodity bull market and that resources offer little value.

Supply is responding to high prices and it is only strong growth from China that is keeping commodity markets tight. The Chinese economy is not bullet-proof - it remains unbalanced and at risk of overheating. In our opinion the risks remain to the downside. In the quarter Exxaro, Mittal, Sasol and Impala contributed to performance while underweights in Anglo, Kumba and the gold shares detracted.

Oceana, New Clicks, Shoprite and AVI added to performance while Netcare, Woolworths and Amaps detracted. We remain defensively positioned within the domestic universe and continue to look for a bigger margin of safety before we increase our weighting in interest rate sensitive stocks. In the quarter we initiated a position in Ellerines. We believe that ABIL's acquisition of Ellerines will create significant value for shareholders. There are significant opportunities to rationalise costs in Ellerines' credit business and reduce its funding costs. These will be passed on to consumers and, in doing so, give the retailing business a competitive advantage in its market. We also believe that ABIL, with its strong and entrepreneurial management team, will add a lot of value in the retail business which is operating in an industry undergoing fundamental change.

Financials had another poor quarter with no stocks contributing to performance and ABSA, Discovery and Old Mutual detracting. While we have in the past consistently stayed away from Insurers, in the case of both Discovery and Old Mutual we believe that poor news-flow has provided an excellent investment opportunity for the long-term investor. Old Mutual has been hit along with its UK peer group and Discovery has been dogged by various regulatory concerns.

Bonds outperformed cash for the quarter with a return of 3.4% compared to 2.5%. Yields have firmed as inflation news-flow has improved and the market has started to price in the top of the interest rate cycle. Property had another very strong quarter, returning 9.5%. The Property market is currently the best it has been in decades, but we believe that supply will respond to the attractive returns currently available in the market and that property shares already reflect the strong earnings growth that will come over the next few years.

Louis Stassen and Karl Leinberger Portfolio Managers

After two very good quarters the Coronation Balanced Plus Fund had an indifferent quarter, returning 2.0% compared to 2.3% from the benchmark. For the 12 months to 30 June 2007 the fund returned 30.1%, outperforming its benchmark by 4.1%. As long term investors, we consider the longer term track record of the fund as paramount, and it is with some pride that we report a return over a rolling 3-year period of 35.4% as against 32.6% from the benchmark.

The global economic backdrop remains something of a mixed bag. In general, global growth has surprised on the upside with Europe, Asia and the Emerging Market economies all performing well. China continues to deliver quarter after quarter of rampant growth and, in so doing, drives commodity prices upwards. The US economy has slowed as it adjusts to higher interest rates and the fallout in the sub-prime end of the housing market. In our view the most significant development of the last few months has been the up-tick in inflation. Low inflation has been the single biggest driver of the 'goldilocks economy', because it has enabled Central Banks to keep interest rates low despite strong growth. Inflationary pressures have so far been contained to oil and food but, with tight labour markets in virtually every major economy, the risk that these inflationary pressures spread cannot be discounted. We remain of the view that Developed Market equities offer more value than Emerging Market equities. The following graph shows how materially our market has outperformed the S&P over the last few years. This positioning in our portfolios has detracted from short term performance but we believe it will add value over the longer term. Capital has poured into Emerging Markets and left many high quality businesses in Developed Markets on very attractive ratings.

The domestic economy has proved to be remarkably resilient over the last few years. In the coming months the consumer will be tested by high interest rates and we expect some fallout from those consumers who have overextended themselves in the good times. Notwithstanding this we expect a reasonably strong performance from the economy as infrastructure spend and manufacturing grow off a low base.

Equities had another strong quarter, returning 4.3%. Resources (6.8%) continued the trend of the first quarter by outperforming Industrials (4.3%) and Financials (-2.4%). Billiton, Sasol and Mittal added to performance while Impala, Anglogold and Goldfields detracted. During the quarter we further reduced our underweight position in the gold counters. While one can make the argument that the outlook for the gold price is positive, we believe the cost pressures being faced by the industry will undermine most of its gains at the revenue line.

Johhnic, Shoprite, Nuclicks, Oceana and AECI added to performance while Mr Price, Woolworths and AVI detracted. Within the domestic universe we are fairly defensively positioned. Ratings of the interest rate sensitive stocks are a lot higher than they were a the time of the last up-cycle in interest rates and we would need a much larger margin of safety before we considered building big stakes in these businesses.

Financials performed poorly in the quarter, with no stocks contributing to performance and Standard Bank and ABSA detracting. The banks are, in our view, attractive at current ratings (less than 10 times forward; their earnings bases are a lot lower than for other interest rate sensitive businesses because they have shown negative operational gearing over the last few years (profit growth has lagged advances growth). In addition, they have proven the robustness of their model and earnings stream over previous down-cycles.

Bonds had a weak quarter, returning -1.7% compared to 2.3% from cash. An increase in inflation sparked a fall-out in global bond markets. The local market sold off aggressively and we have, at yields close to fair value, increased our weighting off very low levels. Property stocks have been very resilient to the sell-off in the bond market and we remain of the view that they are priced for perfection.

Louis Stassen and Karl Leinberger
Portfolio Managers

The Coronation Balanced Plus Fund had a good first quarter, returning 8.1% against 7.5% from the benchmark. For the 12 months to 30 March 2007 the fund returned 29.0%, outperforming its benchmark by 1%. Over a rolling three year period, the fund returned 34.6% p.a. compared to 31% p.a. from the benchmark. This steady compounding of outperformance is what we believe our long-term value proposition to clients is, and our aim is to continue delivering in this regard.

After a prolonged period of prosperity, signs of overheating in the US housing market emerged in the first quarter. The risk that a sub-prime squeeze sparks a broader credit crunch in the US cannot be discounted. That would precipitate a consumer retrenchment which, after years of rising debt levels and declining savings, would put the broader economy at risk of going into recession.

Our base case, however, is not overly bearish. We expect the US economy to experience several quarters of anaemic growth, but do not think that this is a bad thing. The US captures all the headlines but developments elsewhere have actually been very encouraging. A period of slower growth in the US and stronger growth elsewhere will assist in the much-needed global rebalancing process. Of greater concern to us is the recent uptick in US inflation. If this is sustained, it will make it a lot more difficult for the Federal Reserve to manage the economy through soft periods as effectively as it has in the recent past. Low inflation has been at the core of the prolonged period of prosperity enjoyed by economies around the world because it has enabled central banks to keep interest rates low despite strong growth. A major deterioration in the long-term inflation outlook (once again not our base case) would have negative implications for the asset-friendly environment that investors have enjoyed over the last few years.

Emerging Markets had a strong start to the quarter and then experienced a sell-off towards the end of February. This was inevitable after six strong months in which investors became complacent and clear signs of overheating in financial markets emerged in the key markets of China and India. We remain of the view that Developed Market equities offer better riskadjusted returns than Emerging Market equities.

The domestic economy continues to surprise with its strength. We remain of the view that the domestic economy is a lot more robust than it was in the boom-bust period of the 1980s and 1990s. This positive long-term outlook will, however, be challenged by a deterioration in the near-term inflation outlook that has been caused by a spike in the oil price and rising food inflation (sparked by expectations of a poor maize crop). This has increased the chance of a rate hike at the next MPC meeting. That would, once again, not be a bad thing. Credit growth has been very strong and many consumers would find themselves in great difficulty were rates to increase materially from current levels. A little restraint from the consumer would help cool the economy down and improve the sustainability of the very real progress made by our economy over the last few years.

Looking at the underlying sectors, Resources outperformed the market strongly after lagging for the last few quarters. BHP Billiton and our platinum holdings added to performance while Sasol detracted. We remain of the view that the long-term price outlook for oil is a lot better than it is for the base metals, where the supply response to high prices will be more marked. In addition to this Sasol is a world class company with good growth prospects that is trading at an undemanding rating. Within Financials, our overweight position in Banks and underweight in the Life Insurers added to performance. Within Industrials, our holdings in Woolworths and Lewis Stores added to performance while Netcare detracted. As we have commented in previous quarterlies, we believe that Netcare's acquisition of GHG will create a lot of value for shareholders, but we stress the point that this will take time.

Bonds had a reasonable quarter, returning 1.6%. We remain of the view that bonds are currently priced for perfection. This situation is very much the case for all Emerging Market bonds (reflected in record-low EMBI spreads). Notwithstanding the support from lower bond issuances over the next few years, we believe yields are just too low to offer investors an attractive real return. At current levels we prefer cash, particularly the yields available in 2-3 year NCDs.

Louis Stassen and Karl Leinberger
Portfolio Managers

The fund had a very strong final quarter, returning 12.2% against the benchmark return of 8.5%. For the 12 month period to 31 December 2006 it returned 30.5%, outperforming its benchmark by 0.6%. Over a rolling three-year period, the fund has returned 32.5% per annum compared to 29.3% per annum from the benchmark. Bull markets are usually not kind to long-term, valuation-driven investors and we are greatly encouraged by the alpha we have achieved in an environment where a 'rising tide has lifted all boats'.

These pleasing calendar-year returns mask a year of abnormally high volatility. 2006 was a year of abnormally high volatility. Emerging markets, the rand and domestic interest rate sensitive assets experienced a dramatic sell-off in the middle of the year. For long-term investors, periods of uncertainty often provide fantastic long-term investment opportunities. This was the case in May/June, and our strong performance in the final quarter of the year was very much due to the asset allocation and stock selection decisions taken in that period.

The last few years have been a once-in-a-lifetime wealth creation opportunity for South Africans. In just under four years the market has increased 2.9 times in real terms. This compares favourably to the 2.9 times increase over 3 years in the late 1970s and the 4.5 times increase over 8 years in the 1960s. The returns in this cycle, however, are of a much higher quality than in previous bull markets. The bull market of the late 1960s was a global phenomenon and a large part of the returns came from rating expansion. In May 1969 the JSE peaked at 25 times earnings and over the subsequent two and a half years the market declined by 65%, giving up 80% of its gains. Investors had to wait till 1987 for the market to reach the same level as its 1969 peak (in real terms). The bull market of the late 1970s was driven by a commodity run, which saw the gold price peak at $850 in January 1980. In the following two years the market declined by 50%, with investors in this cycle giving up 75% of their earlier gains.

History has clearly not dealt kindly with extended bull markets and periods of euphoria, and we are painfully aware of this in our asset allocation and stock selection process. Developed Market equities are our preferred asset class. Capital has poured into emerging markets leaving blue-chip shares in the US, Europe and Japan trading at ratings not seen since the early 1990s. Notwithstanding the extraordinary returns of the last few years, domestic equities remain our preferred domestic asset class. We do not believe that the market is overextended, as it clearly was in 1969 and 1980, for the following reasons:

o Ratings are still undemanding, with South African stocks trading at significant discounts to their emerging Market peers and the JSE trading at a historically undemanding 11.8 forward p:e and 3.5% dividend yield.

o While earnings are high, much of the re-basing of earnings has come from sound macro-management of the economy and the underpin of an emerging middle class.

o While we expect low returns from commodity stocks in general, there is select value in the sector (which represents 40% of the market compared to a hefty 69% in early 1980).

From a global perspective, we expect a benign economic environment, with the greatest risk probably being complacency and investors' appetite for risk. Growth continues to moderate in the US, as consumer spending slows in the face of a soft housing market. Although we expect at least another year of sub-trend growth, we are not overly bearish. The US economy is very efficient, it 'takes its medicine' early and we therefore expect it to achieve some kind of a soft landing. We expect slower growth in the US to be offset by continued strength in Asia and Europe - this is part of a much-needed global rebalancing process.

The domestic economy continues to surprise. We believe the economy is a lot more robust and internationally competitive than it was in the 1980s and 1990s and believe that it will continue to take the tightening cycle "in its stride". Inflation is showing signs of abating, but consumer spending has been strong and we expect a further rate hike to help cool the economy down.

Looking at the underlying sectors, Resources lagged the market materially for the second quarter in a row. The signs of a maturing commodity cycle, which we referred to in last quarter's commentary, became increasingly clear in the final quarter. We continue to find good value in Impala and Sasol. In both these commodities we expect the long-term supply response to high prices to be more muted than in the bulks and base metals. Within Industrials we increased our position in Netcare. The acquisition of GHG, the largest private hospital group in the UK, is a very bold move not without risk. But we believe that significant value can be added to the business and that de-leveraging the balance sheet will create a lot of value for shareholders over the next 3 to 5 years. We took some profits in the interest rate sensitive industrial and financial shares we had acquired in the third quarter after very strong price recoveries.

Bonds had a strong final quarter, as the market became more comfortable with the tightening cycle and started to 'look through' the near-term increase in inflation. For the year however, bonds still underperformed both cash and inflation-linked bonds. After strong rallies, we took profits in the bonds and property stocks that we had bought in the mid-year sell-off.

Louis Stassen and Karl Leinberger
Portfolio Managers