The fund had an excellent quarter, now returning 15.0% p.a. over a rolling 3-year period (compared to 13.8% from the benchmark). Over a rolling 5-year period the fund outperformed its benchmark by 2.6% p.a. (23.6% vs. 21.0%). The fund remains one of the best performing funds in its sector over all longer-term periods.

Markets remain very challenging. The current environment will go down in history as one of the great crises of the modern era. Credit is the oxygen that feeds economic activity. With the credit crunch as far advanced as it is, there can be no doubt that many countries will go into recession. Even the emerging economies, thought by many to be immune to the woes of the developed world, now appear unlikely to escape unscathed.

To add salt to the wounds, this downturn is unlikely to be short and sharp (as was the case in 1987, the early 1990s, 1998 and the early 2000s). One should not underestimate the impact that deleveraging will have - consumers around the world are geared to overpriced houses and this will take years to correct.

On a more positive note, regulators and governments are now united in their resolve to get 'ahead of the curve' and restore confidence in the system. Ad hoc solutions are no longer working, systemic solutions are required. We therefore expect more deposit guarantees, further recapitalisation initiatives (outside the US) and synchronised rate cuts. The good news is that we think that the crisis will pass. The global economy is much better balanced than it has been for many decades.

In times of crisis, allocators of capital look for opportunity. While many will argue that the current environment calls for a focus on a return of capital (i.e. cash), we think that the opportunity for the long-term investor lies in equities (a return on capital). As we commented in the June quarter, we believe that buying quality assets at low prices is the route to wealth creation. The pendulum has swung from greed to fear. Investors have capitulated - they are now giving equities away with little regard for valuation. We do not expect the macro environment to improve in the near term. We also have no idea when markets will turn. But we do know that equities are cheap. It has been 20 years since global equities traded at such low ratings and the margin of safety is now large.

Equities declined by 21% in the quarter (resources -38%, financials +12%, industrials -4%). It was somewhat of a watershed quarter for Coronation in that it vindicated our longheld view that commodities were overvalued. We had no special insights into what was coming. Our advantage lay in our investment philosophy - an uncompromising commitment to the long term. Commodities are notoriously cyclical. Whenever investors talk of structural change, beware of the cycle! To this day we are amazed at the capital around the globe that poured into commodities 8 years into the biggest commodity bull market in history. That said, the sell-off has now been so severe that we are now seeing good value in selected commodity counters. Billiton has demonstrated over the years the superior quality of its assets (low cost, long life) and its management team. The share has declined by close to 50% as commodities have sold off. The company now trades at 5.5 times current year earnings and 11.4 times our assessment of mid-cycle earnings.

In a single quarter banks have gone from being reviled to being loved. The relative performance of banks to resources in the quarter was a 5 sigma event, comfortably fitting the definition of a fat tail. Once again, we had no special insights - just the broad shoulders to recognise that quality franchises, with excellent management teams trading at 5.5 times their earnings presented an excellent buying opportunity (even with the interest rate cycle against you).

We have seen dramatic moves in domestic counters (Mr Price +48%, Absa +35%, Aspen +33%, Truworths +30%) as investors have come to realise that a lot of the bad news was in the price and that South Africa is one of the few countries that moved early with rate hikes. While we have kept the DNA of the portfolio very much intact, we have taken some profits in domestic counters and invested it in selected resource counters (mainly the diversified miners, whose diversification across commodities and producer currencies is attractive at this point in the cycle).

MTN declined by 8% in the quarter. In the past we have been uncomfortable with the premium one had to pay for its growth prospects. This premium has disappeared in the emerging market sell-off and we have now acquired a substantial position in the stock (top 5 position in the fund).

The bond market had an astonishing quarter (+12.6%), with July being its third best month in history. The move contributed to performance as we had resisted the temptation to sell on deteriorating newsflow and had bought big volumes on long dated NCDs. Property also had an astonishing quarter (+23%). This move contributed substantially to performance as we had sold into the strongly rising market of 2007 and then bought into the sell-off in the first half of this year.

In conclusion, while we acknowledge that it is not easy, we strongly encourage investors to put emotion aside and focus on the once-in-a-generation opportunity that markets are currently offering the long-term investor.

Louis Stassen and Karl Leinberger
Portfolio Managers

The Coronation Balanced Plus Fund had a fair quarter, with the fund returning 20.7% for the rolling three year period compared to 22.1% from the benchmark. Over a rolling 5-year period the fund outperformed its benchmark by 0.8% p.a. (25.3% p.a. vs 24.5% p.a.) The fund remains one of the best performing funds in its sector over all longer time periods.

The global environment deteriorated significantly over the last quarter. Growth is slowing, inflation is on the rise and central banks are reluctantly responding with interest rate hikes (particularly in emerging markets where monetary policy has been too expansionary). Debt levels are high and the deleveraging process will constrain growth for some years to come.

The local environment is just as challenging. The consumer is on the brink of recession after having to absorb 10 interest rate hikes over the last 2 years. Inflation, principally food and energy, is crippling the low end of the market. Finally, to add salt to the wounds, sentiment and confidence has been damaged by the political uncertainty we are experiencing as the ANC transitions itself to a new leadership.

We live in an uncertain world in which forecasts have less value than we often like to acknowledge. In Richard Oldfield's book, "Simple but not easy", he notes that:

o Western Union believed in 1876 that the telephone had too many shortcomings to be seriously considered as a means of mass communication.
o HM Warner of Warner Brothers asked an audience in 1927 'who the hell wanted to hear actors talk?'
o In 1943 IBM forecasted a world market of no more than 5 computers.

Market sentiment has swung from euphoria to despair. The optimistic forecasts of just over a year ago have evaporated as the economic environment has soured. In times like this it is important to remind ourselves of what we do know:

o After 5 asset-friendly years (low inflation and strong growth) the environment has deteriorated.
o Markets have ruthlessly discounted this information as they have endured wave after wave of selling pressure (Chinese Shanghai Exchange down 54% from its peak, JSE Financial Index 40%, India 37%, Nikkei 29%, Dax 21%, FTSE 20%, S&P 20%).

Managing retirement capital in this environment is not easy. We need to preserve the real value of hard-earned savings. But we believe that we also need to take advantage of the long term opportunity that markets are currently presenting. Buying quality assets at low prices is the route to wealth creation. The pendulum has swung from greed to fear. Investors have capitulated - they are now giving equities away with little regard for valuation. We do not expect the macro environment to improve in the near term. We also do not know when markets will turn.

What we do know is that equities are cheap. It has been 20 years since global equities traded at such low ratings and the margin of safety is now large. While it is tempting to turn to cash, our highest conviction view is to stay invested in equities - whether it be European, US, Japanese or Emerging Markets.

Local equities returned 3.4% for the quarter. This benign number (once again!) masks strongly divergent sector moves.

Resources performed strongly, returning 13%. Anglo American, BHP Billiton, Sasol and ArcelorMittal performed strongly as commodities surprised with their resilience in a deteriorating economic environment. Gold shares once again performed poorly and we have started to build a position in this sector for the first time in many years.

Financials (-15%) and Industrials (-3%) had a torrid quarter. Ratings have now declined to levels last seen in early 2003. The selling pressure has been indiscriminate, with many highquality, defensive companies coming under as much pressure as interest rate-sensitive companies with high levels of operational gearing. We continue to find great quality companies with excellent management teams at very attractive prices (examples include Discovery, AVI, Spar and Reunert).

Bonds continued their losing streak, underperforming cash by 7.8% in the quarter. We remain underweight bonds, although we are a lot closer to buying levels. Property has become attractive, in our view. The sell-off has been severe and we benefited from avoiding the sector in the late stages of the bull market. At current levels they offer attractive yields with good prospects of real distribution growth over the medium term.

In summary, while it is tempting to 'sit on the sidelines' until markets stabilise and the outlook improves, we believe that current prices are compelling. The cycle will turn. Buy low, sell high.

Louis Stassen and Karl Leinberger
Portfolio Managers

The Coronation Balanced Plus Fund had a disappointing quarter, with the fund returning 4.6% for the rolling one year period compared to 8.7% from the benchmark. Over a rolling 5- year period the fund outperformed its benchmark by 1.3% p.a. (28.2% p.a. vs 26.9% p.a.). The Fund remains one of the best performing funds in its sector over all longer time periods.

Global markets experienced something of a meltdown in January, as the banking crisis escalated and it became increasingly clear that the US economy is headed for recession. The banking crisis will precipitate a contraction in credit as banks de-leverage and rebuild their balance sheets. As house prices continue to slip, consumers will come under increasing pressure to retrench and rebuild savings.

Despite these very real concerns, we are optimistic about global equities. While it is tempting to 'sit on the sidelines' while the news-flow is poor, stocks are now trading at very attractive levels. It has been 20 years since developed market stocks traded at such attractive ratings and many blue-chip US stocks now trade at the absolute levels they did 10 years ago. The market is a very efficient discounting machine. The pendulum has swung and risk aversion is now at levels not seen since the big 3 buying opportunities of the last 10 years (the 1998 bottom, 9/11 and the first quarter of 2003). As long term investors we have taken full advantage of this opportunity by taking equity weightings to fully invested levels.

The outlook for the domestic economy has deteriorated as inflation remains stubbornly high and higher interest rates bite. Confidence has collapsed as power outages and political uncertainty aggravate an already fragile situation. Although higher interest rates are working, the risk of further rate hikes cannot be ignored. Fortunately the downturn comes at a time of massive infrastructure spend which should smooth the cycle out somewhat. We are of the view that this remains a normal cycle. While the market has gone quiet on the 'structural' gains made by the economy over the last decade, there is no doubt that some of these will prove enduring. For us, the key issue is economic policy. The ANC government has adopted business friendly policies that have greatly benefited all stakeholders in the economy. If the new leadership of the ANC makes a material shift in policy then we all have a lot to lose.

For the entire duration of the bull market a 'rising tide lifted all boats' and virtually all sectors produced handsome returns. Over the last 12 months returns have diverged, with commodity stocks continuing their rampant run and domestic stocks coming under heavy selling pressure. Negative headlines have found their way to the pricing of local equities to such an extent that they currently price in a material decline in earnings over the next few years. Many quality companies, with excellent management teams and strong balance sheets trade at 8 times forward earnings and at 7% dividend yields. While there is no doubt that corporate earnings are under pressure, we have been able to find many quality companies with strong franchises and good earnings prospects at ratings we haven't seen since early 2003 (one of the biggest buying opportunities in history).

The big global trade (wisdom) is to short the dollar and go long commodities. As fundamental, valuation-driven investors we are underweight commodity stocks and overweight domestic stocks and non-resource rand hedge shares (Remgro, Richemont, Liberty International etc.). It is, in our opinion, 'late in the day' to be long commodities - a notoriously cyclical industry. While this has detracted from performance over the last year, we remain convinced that it is the right positioning for the longer term.

Equities returned 2.9% for the quarter. This benign number masks strong moves within the quarter (down 7% in late January) and across sectors (Resources +18%, Industrials -5%, Financials -6%).

Resources continued to run strongly. Although ratings are low, earnings are high. In a cyclical industry this is the time to be selling not buying. We have taken profits in Sasol and Impala Platinum, two stocks that have contributed strongly to performance over the last few years.

Industrials performed poorly, with Netcare, Woolworths and AVI detracting from performance. All three stocks offer good upside for investors prepared to take a longer term view. Financials had another poor quarter, with ABIL and Investec pulling down performance. ABIL is a stock that we believe has fantastic growth prospects and will extract significant value from the Ellerines acquisition. At a 10% forward dividend yield, the market is giving investors that optionality for free.

Bonds (-1.9%) underperformed cash (+2.8%). We have reduced our underweight in bonds as yields have become more attractive. Property stocks had a very poor quarter, returning - 10.9%. We have been warning investors for some time that property stocks were overvalued and priced for perfection. At the market lows we increased our exposure to the sector.

Louis Stassen and Karl Leinberger
Portfolio Managers

The Coronation Balanced Plus Fund had a reasonable year, returning 13.1% against 14.0% from the benchmark. Over a rolling 3-year period the fund outperformed its benchmark by 0.9% p.a., while over 5 years the out-performance increased to 1.5% p.a. The fund remains one of the best performing funds in its sector over all longer time periods.

We continue to remind investors that market returns over the last 5 years (25.4% p.a.) have been abnormally high. International and local markets have benefited from a low base and a very asset-friendly environment. We expect the next few years to be more challenging and returns to be more muted. That environment should better suit a disciplined and valuationdriven investment house like Coronation.

The global economic environment remains uncertain. The US economy is flirting with recession as a liquidity squeeze in the banking system has caused a credit crunch in the broader economy. House prices are under pressure and this will force consumers to retreat. With inflationary pressures in the system the Fed also cannot respond as freely as it did in the last cycle. Notwithstanding these concerns, we are not negative in our outlook for global equity markets. Although Emerging Markets are pricing in a lot of good news, Developed Market Equities are attractively priced and there is no doubt that the global economy is more balanced and robust than it was in the last cycle.

Our view on the domestic economy has not changed. The consumer is under pressure after a very aggressive response by the Reserve Bank to a spike in inflation that has largely been driven by rising food and energy prices. Notwithstanding this headwind, we expect investment spending to underpin growth for the next few years.

Equities had a weak quarter, returning -3.0%. For the first time in a while resources (-7.5%) underperformed both the Industrial sector (+1.7%) and financials (-0.7%). Sasol, Exxaro and our zero gold position contributed to performance. We have reduced our weighting in Resources after some profit-taking in Sasol, a stock that has been a major holding in our portfolio for many years. We are not uncomfortable with this underweight position - commodity prices are significantly higher than normal, longterm levels and demand is under pressure at a time when supply is finally responding to several years of high prices. Tiger automotive, Shoprite and Remgro contributed to performance while Trencor, Amaps, Naspers and Woolworths detracted. We remain defensively positioned in the domestic universe. While interest rate-sensitive stocks have declined materially, they have generally not reached the lows of the third quarter of 2006, despite a materially worse outlook.

Financials had another poor quarter. Abil and Old Mutual contributed to performance, while Investec (a recent addition to our portfolios) and Absa detracted. South African banks are now priced at between 7 and 8 times earnings one year forward. These ratings are as low as they were at the market low in early 2003 and we think they present a compelling opportunity for the patient, long-term investor.

Bonds (+0.9%) underperformed cash (+2.7%). We remain underweight bonds. While yields are looking a lot more attractive, we have resisted increasing our weighting until we have more clarity on the commitment of the ANC's new leadership to inflation targeting. Property stocks finally responded to the weakness in our bond market with a return of -0.4% in the quarter. We remain underweight property, with the view that the sector is priced for perfection.

Louis Stassen and Karl Leinberger
Portfolio Managers

Please note that this fund has moved to the Domestic Asset Allocation Prudential Variable Equity category with effect from 1 Jan 2008.
Nothing else has changed in terms of the fund mandate and the change was approved by the ACI with full retention of pricing/performance history.