The fund experienced a challenging quarter, delivering a return of 0.7% compared to its benchmark return of -1.0%, mainly due to weak domestic equity markets. The fund has performed well since inception and against its peer group over all meaningful time periods.

Against the backdrop of a slowing global economy, an escalating trade war and a revival of central bank stimulus measures, the MSCI All Country World Index ended the quarter flat in US dollar terms. Geopolitical risk in the Middle East, with escalating US-Iran tensions and a missile strike on a Saudi oil refinery - which is responsible for almost 5% of world oil supply - added to equity market volatility during the quarter. Emerging markets (EMs) continued their recent underperformance, declining 4.3% for the quarter (with returns now negative 2.0% over a rolling 12 months) relative to developed markets which were marginally positive for the quarter (+1.8% over a rolling 12 months). Notwithstanding this, the fund’s exposure to EM equities performed exceptionally well on the back of some excellent stock picking and our overweight exposure has in fact contributed meaningfully to performance over the past year. We continue to maintain a relatively large exposure to global equities and believe that our EM equity exposure - in particular - still offers compelling value.

The FTSE World Government Bond Index appreciated by just under 1% in US dollars for the quarter. In September, the European Central Bank announced its biggest package of rate cuts and economic stimulus in three years as President Mario Draghi warned governments that they needed to act quickly to revive flagging eurozone growth. The stimulus included cutting interest rates further into negative territory, reviving its contentious €2.6 trillion programme of buying bonds for an unlimited period and easing lending terms for eurozone banks. Soon thereafter the US Federal Reserve Board also cut rates by a further 25 basis points (bps), although the accompanying commentary was more hawkish than the market was expecting. Negative interest rates have led to significant distortions in asset markets. Currently roughly $13 trillion of global debt trade at negative yields – meaning you are likely to lose money if you hold these instruments to maturity. Furthermore, in Denmark - where banks have been grappling with negative interest rates longer than in any other country – banks are now offering home mortgages at negative interest rates, i.e. the bank is effectively paying the borrower to take money off their hands, so they pay back less than they have been loaned. The extent to which central banks continue to distort debt markets is concerning and we remain cautious on the outlook for global bonds.

Recent economic data served to reinforce how dire the domestic underlying economic situation really is. This has flowed through to corporate earnings and we have been bombarded with company profit warnings over the past quarter. Investor and consumer sentiment continue to remain very weak and government urgently needs to deliver on much-needed structural reform in order to restore consumer and corporate confidence and kickstart the economy. During September, the South African Reserve Bank (SARB) held the policy rate unchanged at 6.5%, but the SARB's statement was more dovish than in July when it did cut rates. Although the SARB’s view is that monetary policy is not the solution to South Africa's poor growth outlook, we believe that given the weak domestic economy, contained inflation and favourable global rate expectations, the SARB has room to further cut rates. Against this challenging economic backdrop, the rand weakened by almost 7% against the US dollar. The fund was well positioned for this move.

With local bond yields ticking up, the All Bond Index returned only 0.7% for the quarter. However, over the past year bonds have performed strongly (up 11.4% over the rolling 12 months). Given the attractive real yields, local bonds continue to offer reasonable value and our current bond weighting is the highest it has been for a number of years. The property stocks have been battered by the weak economy which is playing itself out through increasing vacancy levels, large rental reversions and reduced rental escalations. Much of the sector will struggle to show any distribution growth over the medium term. Our property holdings are concentrated in the A property shares, which we believe offer very attractive riskadjusted returns and we have a small position in some of the higher-quality property stocks, whose earnings should prove to be more defensive than their peers.

Overall, the JSE experienced a disappointing quarter, with the JSE Capped Swix All Share Index declining 5.1% (and with it dragging down rolling 12-month period returns to -2.4%). The weakness was broad-based but the financial and resource sectors fared the worst – both down over 6% for the quarter. The industrial sector was down only 2.5% with the large rand-hedge stocks such as Naspers (flat), British American Tobacco (+14%), Anheuser-Busch InBev (+16%) and Bidcorp (+6%) holding up well. Notwithstanding the challenging marke treturns, our equity holdings performed well on a relative basis. We believe that our equity holdings are currently offering compelling value and have used the weakness during the quarter to add to our position. It should however be noted that our domestic equity holdings continue to be skewed towards the global stocks that happen to be listed on the JSE. Although many domestic-facing businesses are starting to screen as extremely cheap, given the deteriorating macro environment, there is a high probability that many of them turn out to be value traps.

On the resources front, our large exposure to the platinum-group metals (PGM) sector contributed meaningfully to fund performance during the quarter. Northam Platinum and Impala Platinum (Implats) were up 40% and 37% respectively. Deficits in PGMs have seen the three elements’ (platinum, palladium and rhodium) basket price continue to rise. Despite their strong run, we still view the PGM stocks as very attractive. Northam Platinum and Implats currently trade on between six and eight times our assessment of normal earnings and still offer material upside to our fair values.

The Sasol share price has collapsed over the past 12 months (down 54%) as further cost overruns relating to the Lake Charles Chemicals Project (LCCP) emerged and management also had to announce a delay in the reporting of their full-year results in order to further investigate a breach of internal controls. Our underweight position in Sasol over this time has added to performance. We believe that the results delay is as a result of control weaknesses identified around the LCCP budgeting process and not centred around the financial statements themselves. Although further cost overruns are unlikely, our biggest remaining concern is that the budgeted profitability for LCCP disappoints on the back of ramp-up issues or pressure on commodity prices. Nevertheless, we expect the company to now shift to a phase of debt reduction and improved free cash flow generation. Sasol trades on four times 2021 earnings, which is calculated using what we feel are relatively conservative currency and oil price assumptions. This is very attractive for a business of its quality. We have used the share price weakness to increase our exposure but remain cognisant of the risks surrounding recent announcements and are managing the position size carefully.

The quarter was also characterised by corporate actions in several fund holdings. Some of those worth mentioning include:
- Prosus, the newly established corporate entity that will house Naspers’ global internet portfolio, including its stake in Tencent and its interests in online classifieds, food delivery and online payments. During the quarter Naspers listed and part unbundled 26% of Prosus to its underlying shareholders. This listing is another positive step by management in their efforts to try and narrow the discount at which Naspers trades relative to its underlying intrinsic value. A foreign listing of Prosus will assist Naspers in pursuing its ambitions to become a leading global consumer internet business by giving it access to a wider pool of investors and capital. Furthermore, going forward, the two-tier corporate structure provides Naspers with more financial flexibility and the ability to more efficiently manage the discount to its underlying intrinsic value by using capital allocation tools such as share buybacks. In this corporate action, we elected to take the full allotment of Prosus shares given the value unlock opportunity that we expected.
- In July, global food and beverage conglomerate – PepsiCo – announced a takeover bid for Pioneer Foods, at a more than 50% premium to the Pioneer share price at the time. The subsequent repricing of our holdings in both Pioneer and Zeder (whose largest asset is its stake in Pioneer) contributed meaningfully to performance during the quarter. We used the rerating in Pioneer to sell out of our position and redeploy the proceeds into other more attractive investment opportunities.
- Trencor recently announced that it will be unbundling its Textainer stake to its shareholders in the coming months. Coronation has been actively pushing for this unbundling over the last few years and are extremely pleased that it is finally proceeding. The share price reacted positively - up 37% for the quarter – and this also contributed meaningfully to quarterly performance.

In this volatile and uncertain world, our objective remains to build diversified portfolios that can absorb unanticipated shocks. We will remain focused on valuation and will seek to take advantage of attractive opportunities that the market may present and in so doing generate inflation-beating returns for our investors over the long term.

The fund had a good quarter, returning 8.5%. This was mainly due to strong global and domestic equity markets. The fund has performed well against its peer group over meaningful time periods.

The broad-based asset class declines experienced in 2018 reversed dramatically in the first quarter of 2019. The MSCI All Country World Index ended the quarter up 12.2% in US dollar terms, despite a deteriorating macroeconomic environment in which central banks have become meaningfully more dovish than they were late last year. Developed market equity markets, and in particular the US, performed strongly and recorded their best quarter in nearly 20 years. The fund has benefited from its large exposure to global equities and our overweight position in emerging market equities contributed meaningfully to performance during the quarter.

The Citi World Government Bond Index appreciated by 1.7% in US dollars for the quarter. Bond yields fell, with investors buying up debt as a haven amid mounting evidence of a global economic slowdown, continued political uncertainty and a more dovish outlook among global central bankers. This shift has seen the US Federal Reserve (Fed) signalling that rates will remain on hold for the rest of this year and announcing that the bank will end its balance sheet run-off programme. In addition, the European Central Bank announced future stimulus measures and that it too will leave rates on hold until the end of 2019. At the end of March 2019, the amount of global government debt with negative yields rose above the $10 trillion mark and European corporates such as LVMH and Sanofi were even raising debt at sub-zero rates (meaning you have to pay for the privilege to lend to these companies). The extent to which central banks continue to distort debt markets is concerning and we remain cautious on the outlook for global bonds.

The All Bond Index (ALBI) ended the quarter strongly (+3.8%) as the market started to price in potential interest rate cuts later this year. We believe the high real yields on offer are a reasonably attractive investment opportunity. Given recent global monetary policy developments and the South African Reserve Bank’s benign inflation outlook, coupled with weak economic growth, we expect policy rates to remain on hold for an extended period of time. The property sector underperformed during the quarter on broad-based weakness. Distribution growth rates are increasingly at risk given negative rent reversions in certain sectors and nodes, high vacancy rates in the office sector, and leveraged balance sheets. The fund’s property exposure, which is focused on the higherquality portfolios such as Redefine and Investec, together with our exposure to the A property shares, should weather the storm better than peers.

Overall, the JSE had a good quarter, with the JSE Capped Shareholder Weighted All Share Index appreciating 3.9%. Resources had another very strong quarter and were up 17.8% - bringing the sector’s rolling 12-month total return up to a whopping 41.6%. Platinum stocks in particular had a very strong quarter on the back of a rising platinum group metals (PGM) basket price.

During the quarter, all mining companies reported their annual or interim results for the period to end-December 2018. These results were characterised by a strong performance from the bulk metals (iron ore, coking coal, thermal coal and manganese). The theme of strong cash flow, deleveraging, and capital returns to shareholders continues. Shares reacted positively to financial results announcements and a strong commodity price environment, driven by tight supply-demand balances and an abatement of US-China trade war fears. Our large exposure to Anglo American (+22%) contributed to performance.

After a long and frustrating wait, PGM shares have finally begun to rally strongly with our holdings in Northam (+47%), Anglo American Platinum (+38%) and Impala Platinum (+66%), as well as our position in the Palladium ETF (+12% in US dollars) all contributing meaningfully to returns for the quarter. We feel that this is a vindication of our disciplined, long-term approach to investing, where we aim to assess information objectively and dispassionately avoid being swayed by the news and sentiment of the day. Subsequent to ‘Dieselgate’, negative headlines called for the death of the internal combustion engine and platinum demand along with it. PGM prices dropped below marginal costs of production. At the same time, electric vehicle commodities such as lithium and cobalt were rallying strongly (up three times). Tesla’s share price rose seven-fold in the last seven years and its market capitalisation is comparable to traditional automakers such as General Motors (GM) and Ford, despite the fact that the company has struggled to turn a profit and produces only 3% of the vehicles that GM produces. While we are long-term believers in battery electric vehicles, we expect the process to be evolutionary rather than revolutionary. In the medium term, we also expect PGM demand to surprise positively as a consequence of tightening emissions standards globally. In addition to this, material underinvestment in mine supply over the last decade means it will take many years before a sufficient supply can respond to current market deficits. We therefore expect structural PGM market deficits to persist for at least the next decade. After a challenging 2018, it was also particularly encouraging to see that a number of the fund’s other high-conviction ideas contributed meaningfully to returns during the quarter. These included Naspers, British American Tobacco and Quilter.

Naspers (+19%) benefited from a strong recovery in the Tencent share price as sentiment towards China shifted positively on the back of a reduction in trade war fears and a resumption in the licensing approval process of online games by the Chinese authorities. Naspers also surprised the market in March by announcing the offshore listing and part unbundling of its offshore internet portfolio (i.e. Tencent, Mail.ru, OLX, Food Delivery, et al.) in an effort to reduce the discount at which it trades relative to its underlying intrinsic value. While this is certainly no ‘silver bullet’ that will immediately remove the entire discount, we nevertheless view it as a marginally positive step in the evolution of the group into a global consumer internet powerhouse and will allow it access to a wider investor base.

The British American Tobacco share price (+27%) recovered strongly during the quarter on the back of reporting good results which allayed market fears around US volume declines, its debt levels, and the outlook for its next-generation products. It also appears that investor fears about the regulatory headwinds faced by the US business are abating and sentiment is finally starting to turn positive on the stock. Even after this short-term price rally, British American Tobacco is still trading on only 9.5 times one-year forward earnings and a 7% dividend yield. We still believe this to be very attractive for a stock of this quality and it remains the second biggest position in the fund.

Quilter (+28%) performed very well over the period. Its maiden full-year results materially exceeded market expectations. Quilter provided medium-term guidance on their profit-before-tax-margin aspirations. At 34%, this too exceeded expectations. The long-term outlook for integrated wealth managers with advice forces at scale remains very attractive. This positive outlook is driven by a decline in advisers following the UK’s adoption of the Retail Distribution Review, ‘pension freedom’ boosting demand for advice, and opening up the post-retirement market to wealth managers; as well as a shift away from defined benefit funds to defined contribution funds.

Stocks exposed to the domestic economy came under significant pressure during the quarter as the realities of operating in a ‘no-growth’ economic environment filtered through into corporate earnings. The quarter kicked off with a string of profit warnings from the domestic retailers, and the likes of Mr Price (-23%), Massmart (-22%), Truworths (-18.5%) and Dischem (-16%) all ended the period materially lower. Fortunately, the fund had no exposure to any of these stocks. Eskom remained in the headlines as it hit Stage 4 load shedding in the middle of March. Years of mismanagement, corruption and underinvestment are finally coming home to roost. Although, for now we appear to have received a temporary reprieve from the worst of load shedding, it has become clear that we are only starting to understand the true extent of the power utility’s problems and that its numerous issues could indeed take years to rectify. Unfortunately, if persistent load shedding becomes the norm over the next few years, the impact on consumer sentiment, business confidence and GDP growth will be devastating. We therefore continue to remain cautious on stocks that are heavily exposed to the domestic economy and our preferred exposures are through high-quality domestic defensive businesses that should weather the challenging environment better than their weaker, economically sensitive peers.

Notwithstanding the uncertainties that abound, our objective remains on building diversified portfolios that can absorb unanticipated shocks. We are happy with the current portfolio positioning and are excited about future return prospects. We will remain focused on valuation and will seek to take advantage of attractive opportunities that the market may present to us and in so doing generate inflation-beating returns for our investors over the long term.