Has the dawn for small caps finally arrived? After years of investor neglect, it is reassuring to note that the anticipated revival has materialised handsomely. For the quarter, the fund posted a return of positive 6.7% versus the All Share's negative 11%. For the year, the fund's return of 31.6% compares very favourably to the All Share index of 18.3%.

The earnings growth in select small/mid caps has always been impressive, but the catalyst has been the recent surge in corporate activity (large caps fishing for the minnows) which has aroused the attention of institutions.

One of the funds largest holdings, Energy Africa (Enr), was the subject of a rather cheeky bid from its Malaysian parent, Petronas. The bid values Enr's oil reserve profile at about $3.30 per barrel whereas the most relevant comparison (Triton, USA was purchased recently) was concluded at $5.50/barrel. Needless to say the fund managers will be rejecting the offer for one of the hottest oil exploration assets outside the Middle East. The quarter also saw Rembrandt offering to buy out the minorities of HLH, another top ten stock of the fund. The bid was in line with the fund managers valuation metrics. Both events illustrate that corporate South Africa has finally recognised that there are some compelling, yet neglected, propositions in the small cap sector.

It is only a matter of time until fund managers wake up to the opportunity too. Given the illiquidity of this market, a slight shift in institutional focus would cause a dramatic bounce. Now that we have a synchronised downturn in three of the world's major economies, fund managers must be far less inclined to chase the resource rich ALSI 40, especially when one factors in the uncertainty created by the Mining Charter. Has the time for small caps finally come? The fund managers look forward to further positive developments.

A tendency to take big market bets has resulted in a volatile performance record from Coronation Specialist Growth. In 2000 the big bet was on financial services and IT. It failed. More recently it has been on industrial companies set to gain from the weak rand's positive impact on export earnings. This time the strategy has worked and, with increasing interest in smaller-cap industrial value shares, looks likely to continue working.

The world continued to be spellbound by the resilience of the US consumer whose 'shop till you drop' mantra was boosted by the lower interest rates. This has provided a reassuring backdrop for resource shares whose earnings growth prospects still look attractive, despite the adverse impact of the stronger rand. However, the risk/reward proposition has certainly tilted against resources as the sustainability of the US recovery comes into question. Some profits have been taken in Northam Platinum and Energy Africa during the quarter, although the latter was repurchased at opportune prices.
A review of our economy reveals that a major portion of the growth achieved over the past year has been export related. This is entirely consistent with the fund manager's view of the stock market; identifying and buying the export success stories has been the single most important contributor to this fund's success.
AECI is a new entrant that fits this bill. A supplier of paints and synthetics into our car industry, the company will be a major beneficiary of burgeoning vehicle exports. Oceana, a diversified fishing company which has recently secured four-year licences, was also added to the fund. China has suddenly emerged as a substantial buyer of the company's langoustines and fishmeal.
Netcare was reduced in the fund after a spectacular run over the last year. Although its prospects remain intact, valuation levels elsewhere appeared more attractive. The holding in Idion Technology was also sold. The fund manager's have been ardent long-term admirers of this company's software, but the takeover price (which was raised from 65 cents to 180 cents, no small part being played by Coronation) was irresistible in light of the impending downturn in US software spending.
The fund manager's remain confident of the medium term prospects of the fund in light of the valuations on offer, coupled with the earnings profile of the fund's holdings. The institutional shift away from large cap resource shares to the neglected value on offer in the small cap arena should continue to benefit the fund.

One would have been forgiven for believing that the Trade Center tragedy would have profound repercussions in financial markets, particularly on the risk averseness of investors. However, the resurgence of the American shopper from the rubble of September 11th has been nothing short of heroic.
The pace of the global recovery, spearheaded by the US, has astounded most commentators, and this has been clearly seen in our markets through the outperformance of resource stocks. Yet one should not overlook the abundance of value present in the mid/small cap sectors - the mid-cap sector has outperformed the finanical/industrial index by 13% over the last six months.
As stated previously, it is a company's valuation and its growth prospects that will ultimately determine its safe haven status. The small cap universe has already suffered from a large capital outflow over the last two years, and there is a plethora of companies with single digit PEs, competent and incentivised managements that have responded admirably to the Rand slide. The fund manager continues to be excited by the prospects of our portfolio.
Stock selection has been a major contributor to the recent outperformance. Energy Africa impressed the market with a string of oil discoveries in West Africa, demonstrating its prowess in working with the oil majors. The current valuation needs no heroic assumptions on the oil price, but the recent Middle East tensions must improve the appeal of its West African reserve profile. Anglovaal Industries fired on all cylinders to surprise the market with its earnings, with stellar growth emanating from its fish operations which benefited from dollar hake prices. An old laggard in the fund, Idion was (finally!) vindicated by the emergence of a Canadian bid for the company. The fund manager envisages the stakes to be raised substantially.
The fund outperformance was also attributable to the absence of the furniture credit retailers. The fund manager maintains a rationalisation is imminent in the industry, implying more pain before any future gain.
Investors should be assured by the strong Rand hedge component in the fund. Delta (8.7%), Steinhoff (3.8%), Energy Africa (8.2%) and Tourvest (9.2%) should all benefit from an increase in competitiveness and higher margins, a direct result of the startling drop in the Rand.
The fund manager envisages further outperformance over the Findi index in the near term.

The Coronation Microcap Growth Fund has been merged with the Coronation Specialist Growth Fund following the September 2001 balloting of unitholders. The fund will maintain the investment mandate and name of the Coronation Specialist Growth Fund and the merge will take effect from the 18 January 2002.