The fund has outperformed its benchmark by 0.7% p.a. over a rolling 5-year period (16.4% versus 15.7% p.a.) and by 2.2% p.a. (16.6% versus 14.4% p.a.) since inception. The fund is one of the top performing funds in its sector over all meaningful periods.

The All Share Index declined 2.1% for the quarter. Financials returned 0.4%, while industrials and resources fell 0.7% and 7.1% respectively. We have for some time highlighted the divergence in performance between the resources sector and the rest of our market.

On the macro front, the economic outlook remains uncertain. Although the US economic statistics have positively surprised, risks around Europe and China continue to increase. China remains the most important economy for resource demand, and recent data confirms that growth is slowing. The weaker macro environment, strengthening of the US dollar and increase in mine supply across key commodities have been negative for commodity prices, and weigh heavily on the resource sector. Some notable declines (in US dollars) for the quarter were:

Iron ore - declined 18%, now trading 56% below its peak of 2011.
Brent crude - declined 14%, now trading 37% below its peak of 2008.
Platinum - declined 12%, now trading 44% below its peak of 2008.
Gold - declined 8%, now trading 37% below its peak of 2011.

In general, most commodity prices are now trading at, or below, our assessment of normalised or mid-cycle levels. In the long run commodity prices are determined by the cost of production. Our assessment of normalised commodity prices is based on a detailed analysis of the cost structure of each commodity, demand/supply outlook, incentive prices and long-term industry margins. Given the inherent risks in forecasting, we look at various scenario analyses to sense-check our assumptions and ensure our investment case for individual positions is sufficiently robust at more bearish scenarios.

It is human behaviour to extrapolate past performance when making future investment decisions. Thus it is no surprise that the resource sector is largely unloved. We maintain a healthy exposure to resources in our equity and balanced funds. Our preferred holdings remain Anglo American, Mondi, Sasol and Exxaro. We favour platinum over gold producers and our preference remains the low-cost platinum producers, Impala Platinum and Northam. In addition, we also have a healthy weighting in the platinum and palladium exchange-traded funds. Domestic equities, in general, remain fairly valued. We continue to favour the quality, global stocks that happen to be domiciled in South Africa, such as MTN, British American Tobacco, Richemont and Naspers. Although these shares have performed extremely well relative to the broader market, they remain attractive based on our assessment of their intrinsic value, and are particularly attractive relative to pure domestic businesses. We have owned very few domestic businesses, especially consumer facing ones, on the basis that valuations were not attractive. Banks declined 1.2% for the quarter, underperforming the broader financial index. Net interest margins should benefit once interest rates are eventually hiked. While this will be offset by rising credit loss ratios, banks have used the current environment to bolster general provisions, which should blunt some of the impact. Current earnings for the large commercial banks approximate our assessment of normal. Valuations are reasonable and we have maintained our weighting. Life insurers, on the other hand, currently trade on premiums to their embedded value and do not offer value. The greatest contributors to quarterly performance were our overweight positions in Sappi and Pioneer Food Group, as well as our underweight positions in BHP Billiton and Steinhoff. Our overweight positions in African Bank, Northam and Impala Platinum detracted from performance. In terms of asset allocation, our global balanced funds remain at the maximum 25% offshore limit. Given the global macroeconomic uncertainties, we believe that interest rates are likely to remain lower for longer. In such an environment, equities remain our preferred asset class for producing inflation-beating returns. We continue to favour global over domestic equities. The valuation of global equities remains attractive, with some of the world's best companies trading on compelling PE multiples, with fortress balance sheets and all the while growing their earnings and dividends at a steady rate.

The bond market returned 2.2% for the quarter, outperforming cash at 1.5%. Inflation-linked bonds underperformed nominal bonds, returning 1.0% for the period. We believe the real returns from cash and bonds are likely to be relatively poor over the long term, both from a local and global perspective. As a result, we have no exposure to local and global government bonds in our portfolios. We continue to hold a significant position in inflation-linked bonds and maintain a good exposure to local corporate bonds. Listed property returned 7.2% over the quarter. The returns from this asset class over the last decade have been exceptional as yields declined in line with falling interest rates, and property re-rated relative to nominal bonds. At current levels, we believe property yields, in general, are too low and do not offer substantial value. However, following the sell-off in the property sector (in sympathy with a correction in nominal bonds) earlier this year, we have established positions in some of the higher-quality property stocks which we believe will offer better returns than bonds and cash over the long term.

We have maintained a high cash holding across both domestic and global balanced portfolios, given our cautious outlook for the market. Although we believe the longer-term real returns for cash will be poor, we view it as an underrated source of tail risk protection, which provides us with the flexibility to respond in a market correction. In today's environment there are many unknowns. The most dangerous thing we can do when investing our clients' money is to pretend that we have all the answers. Overconfidence in investing is a dangerous thing. At Coronation, we try to distinguish clearly between what we know, what we expect and what we don't (or can't) know. We diligently stick to our investment philosophy and allocate capital based on our bottom-up assessment of intrinsic value for each position in the portfolio. History has taught us that our ability to forecast the immediate future is limited. However, despite short-term market uncertainty, we will continue to strive to deliver superior returns relative to benchmarks over the long term.

Portfolio managers
Karl Leinberger and Duane Cable

The fund has outperformed its benchmark by 0.6% p.a. over a rolling 5- year period (18.7% versus 18.0% p.a.) and by 2.2% p.a. (16.9% versus 14.7% p.a.) since inception. The fund is one of the top performing funds in its sector over all meaningful periods.

Equity markets maintained their strong run with the MSCI World Index returning 5.1% in US dollars for the quarter. Although the US Federal Reserve continued to taper its quantitative easing programme, monetary policy remains very accommodative, with most members of the Federal Open Market Committee only expecting the first interest rate hike in the second half of 2015. The recovery in the world's largest economy continues to gain traction and, at the time of writing, the S&P 500 Composite Index is at an all-time high.

We continue to prefer global to South African equities on the basis of valuation. Although international equity markets have rallied strongly, we are still able to find some of the world's best companies trading at attractive ratings and dividend yields, with strong balance sheets and excellent, shareholder-friendly management. The MSCI Emerging Markets Index returned 6.7% in US dollars for the quarter and has lagged developed markets over the last year. We currently prefer emerging market to developed market equities. Our global balanced funds remain at the maximum 25% offshore limit.

Locally, the JSE All Share Index returned 7.2% (in rands) for the quarter, also reaching a new all-time high. The rand weakened by 0.9% against the US dollar over the quarter. We remain concerned about the deterioration in South Africa's fundamentals, namely the twin deficits (current account and fiscal), an uncompetitive manufacturing sector, lack of progress on much-needed structural reform and an inflexible and militant labour force. In a small, open economy like South Africa, the currency is the release valve for all these pressures. Notwithstanding that the rand may be oversold at current levels, it remains vulnerable unless the aforementioned issues are remedied. At quarter end, approximately 62% of our equity portfolios was invested in rand hedge counters.

Industrials were the best performer with a 9.1% return for the quarter. Financials returned 7.8% and resources lagged with a 2.9% return. The decline in commodity prices has weighed on the resource sector, resulting in a stark divergence in performance across sectors. Resource equities now lag financials and industrials by a significant margin over all meaningful periods. We maintain a healthy, albeit not portfoliodefining, weighting to resources. Our inability to forecast continued Chinese commodity demand with any degree of conviction prevents us from having a larger exposure.

Our preferred resource holdings remain Anglo American, Mondi Limited and Sasol. We continue to favour platinum over gold producers and prefer the low-cost platinum producers, Impala Platinum and Northam. This quarter saw the resolution of the five-month long platinum strike - the longest in South Africa's history. While workers have returned to work, it will take several months before full production is restored. Deep-level mining in South Africa is a challenged industry. Producers face enormous cost pressures (labour, electricity and increased mining depths) and require significant capital investment to maintain production in the face of declining grades. South Africa mines around 80% of the world's platinum affording our producers pricing power. Metal prices will have to adjust upwards to reflect these cost pressures and incentivise new production. It is for this reason that we prefer platinum miners over gold producers and why we also have a healthy weighting in platinum and palladium exchange-traded funds (ETFs). Palladium is mainly used to reduce carbon emissions in petrol engines. Residents of fast-growing markets such as India and China mainly drive vehicles powered by petrol engines. The palladium ETF offers a way to gain exposure to vehicle sales growth in these markets. We continue to favour the quality global stocks that happen to be domiciled in South Africa, such as MTN, British American Tobacco, Naspers, Richemont and SABMiller. Although these shares have performed extremely well relative to the broader market, they remain attractive based on our assessment of their intrinsic value as well as relative to pure domestic businesses. That said, we have taken healthy profits on some of these counters to fund recent purchases. We have owned very few domestic businesses, especially those that are consumer-facing, on the basis that valuations were not attractive. While we remain concerned over their ability to defend their earnings base, ratings are now fair to attractive and provide an adequate margin of safety. Our main retail holdings remain The Foschini Group, Clicks Group and Woolworths Holdings. Banks returned 8.5% for the quarter, outperforming both short- and longterm insurers. The recent interest rate hike should be positive for net interest margins. We believe the current interest rate hike cycle will be a shallow one, with an expected 2% hike in rates from trough-to-peak. This view is predicated on inflation being relatively well contained despite upward pressure from currency weakness, and credit growth staying muted when compared to the last hike cycle. As a result, we believe that credit loss ratios will remain restrained. Also, each of the large commercial banks have entered the current cycle with healthy general provisions that will buffer any future credit losses. Valuations are reasonable and we maintained our weighting. Life insurers, on the other hand, trade on premiums to their embedded value and do not offer value. The bond market returned 2.5%, outperforming the cash return of 1.5% for the quarter. Inflation-linked bonds outperformed nominal bonds, with a return of 5.9% for the quarter. We believe the real returns from cash and bonds are likely to be relatively poor over the long term, both from a local and global perspective. As a result, we have no exposure to local and global government bonds in our portfolios.

We continue to hold a significant position in inflation-linked bonds and also maintain a good exposure to local corporate bonds. Listed property returned 4.4% for the quarter. At current levels, we believe property yields, in general, are too low and do not offer substantial value. However, following the sell-off in the property sector (in sympathy with a correction in nominal bonds) earlier this year, we have established positions in some of the higher-quality property stocks which we believe will offer better returns than bonds and cash over the long term. In conclusion, financial markets continue to grind higher with very little regard for the underlying risks facing the real economy - the eventual withdrawal of accommodative monetary policy and concerns over a slowdown in China. In such an environment, we remain committed to our proven investment philosophy of focusing on valuation and investing for the long term. We believe this will generate the best reward for our clients.

Portfolio managers
Karl Leinberger and Duane Cable

The fund has outperformed its benchmark by 1.9% p.a. over a rolling 5-year period (18.0% versus 16.1% p.a.) and by 2.3% p.a. (16.9% versus 14.6% p.a.) since inception. The fund is one of the top performing funds in its sector over all meaningful periods.

2013 turned out to be another good year for most asset classes worldwide, with markets continuing to benefit from record-low interest rates and a benign outlook for inflation. Locally, the JSE All Share Index returned 21.4%, surging to new all-time highs in December. Global markets also had a strong year, with the MSCI World Index returning 27.4% in US dollar terms. The rand weakened by 23.2% against the US dollar over this period. We have for some time highlighted the attractiveness of global equities and the vulnerability of the rand, and both these views came through strongly in 2013.

In December US Federal Reserve (Fed) chairman Ben Bernanke announced the Fed's decision to taper its quantitative easing policy by $10 billion per month, to $75 billion, putting an end to market speculation of when tapering would eventually start. The market had already anticipated the start of tapering with the rise in bond yields and weakening of emerging market currencies in the second half of 2013. Gold has been the standout mover in commodity markets, recording its biggest annual fall since 1981.

The All Share Index returned 5.5% for the quarter. Industrials returned 6.7% and financials 6.9%. Resources were the worst performer with a 2.1% return. We maintain a healthy exposure to resources in our equity and balanced funds. Our preferred holdings remain Anglo American, Mondi Limited and Sasol. We continue to favour platinum over gold producers and our preference remains the low-cost platinum producers, Impala Platinum and Northam.

Investors in the resource sector will be forgiven for thinking they have been left with a lump of coal in their Christmas stocking with the JSE Resources Index returning only 1.4% for the year. We have for some time highlighted the divergence in performance between the resource sector and the rest of our market and this trend continued in 2013.

The decline in commodity prices continues to weigh on the resource sector. The returns for the resource sector have been poor, underperforming the industrial, financial and property sectors over all meaningful periods. It is human behaviour to extrapolate past performance when making future investment decisions. It is therefore no surprise that the industrial sector has become the darling of the market, whereas the resource sector is largely unloved.

One of the top holdings across our portfolios remains Anglo American. Anglo has been a significant underperformer relative to both the benchmark and BHP Billiton. We don't believe one can build an investment case on relative underperformance alone. At current prices one is buying Anglo at 7x our assessment of normalised earnings and 0.8x book value. This means that the market assumes Anglo will not deliver returns in excess of their cost of capital through the cycle, which has not been the case historically.

Anglo's recent track record on capital allocation has been poor; overpaying for acquisitions at the top of the cycle and subsequently having to impair those investments. The risks of further impairments are likely; however, these concerns are more than discounted in the current share price. Anglo has some high-quality assets, but poor capital allocation, underperformance of Anglo Platinum and weak management has detracted from the investment case. The new CEO, Mark Cutifani comes with operational experience and a much improved capital allocation track record, which should go some way to getting the business back on track. We believe the improved focus at board level on capital allocation and fixing underperforming assets will unlock a tremendous amount of shareholder value.

Domestic equities, in general, remain fairly valued. We continue to favour the quality, global stocks that happen to be domiciled in South Africa, such as MTN, British American Tobacco, Naspers and SABMiller. Although these shares have performed extremely well relative to the broader market, they remain attractive based on our assessment of their intrinsic value and particularly attractive relative to pure domestic businesses.

We have owned very few domestic businesses, especially consumer-facing ones, on the basis that valuations were not attractive. This view has been vindicated thus far, with retailers among the worst performers in 2013. The Foschini Group and Clicks Group are the only retailers we have exposure to in the portfolio. While the earnings base for Foschini remains high, the rating is attractive and provides an adequate margin of safety to build a position. We would view Clicks as a defensive business with long-term growth potential which trades at an undemanding rating based on our assessment of normalised earnings.

Banks returned 5.9% for the quarter, underperforming the broader financial index. Net interest margins should benefit once interest rates are eventually hiked. While this will be offset by rising credit loss ratios, banks have used the current environment to bolster general provisions, which should blunt some of the impact. Current earnings for the large commercial banks approximate our assessment of normal. Valuations are reasonable and we have maintained our weighting. Life insurers, on the other hand, currently trade on premiums to their embedded value and do not offer value.

The greatest contributors to quarterly performance were our overweight position in Sappi, as well as our underweight positions in Gold Fields and Truworths. Our overweight positions in Anglo American and Exxaro detracted from performance. Our underweight position in Steinhoff also detracted.

In terms of asset allocation, our global balanced funds remain at the maximum 25% offshore limit. The unwinding of quantitative easing is likely to be slower and interest rates are likely to remain lower for longer. In such an environment, equities remain our preferred asset class for producing inflation-beating returns. We continue to favour global over domestic equities. The valuation of global equities remains attractive with some of the world's best companies trading on compelling PE multiples, with fortress balance sheets and all the while growing their earnings and dividends at a steady rate.

The bond market returned 0.1% for the quarter, underperforming cash which returned 1.3%. Inflation-linked bonds outperformed nominal bonds with a return of 2.8% for the quarter. We believe the real returns from cash and bonds are likely to be relatively poor over the long term, both from a local and global perspective. As a result, we hold zero exposure in global government bonds across our portfolios; however, we have used the sell-off in the final quarter to build a small position in local government bonds. We have maintained our significant holding in inflation-linked bonds.

Listed property returned 1.0% for the quarter. The returns from this asset class over the last decade have been exceptional as yields declined in line with falling interest rates and property rerated relative to nominal bonds. At current levels, we believe property yields are too low and do not offer substantial value. We have, however, bought some of the higher-quality property stocks which we believe will outperform bonds and cash over the long term.

We have maintained a high cash holding across our balanced portfolios, given our cautious outlook for the market. Although we believe the longer-term real returns for cash will be poor, we view it as an underrated source of tail risk protection that provides us with the flexibility to respond in a market correction.

As we start a new year, we are bombarded with predictions from numerous financial experts about what lies ahead in 2014. History has taught us that our ability to forecast the immediate future is limited. We will remain focused on long-term valuations and will seek to take advantage of whatever attractive opportunities the market will present in order to generate long-term rewards for our investors.