The fund is one of the pioneering targeted-return funds. The category is not ranked, as different strategies are used. But over three years Capital Plus happens to have provided the highest return in its category, of 69,3%, outperforming other pioneers such as Prudential Inflation Plus and Sanlam Inflation-Linked.

Unlike its competitors, Capital Plus is not obliged to keep a core holding in inflation-linked bonds. Portfolio managers Gavin Joubert and Edwin Schultz have a modest 3% exposure to inflation linkers, which they at least consider to be a better investment than conventional government bonds, in which they have a token 2% holding.

Historically, stockpicking has been the main driver of excess return - though the domestic equity holding (excluding property) is capped at 50%. The fund aims to show no losses over a rolling 12-month period; a portion of fees is rebated in the event of loss. As the market has got stronger, the fund has taken profits and the equity holdings were reduced in the third quarter by 1,5 percentage points to 41,2%. Of this, 20% was hedged in the derivative market. The equity holding is even lower when Makalani and Bidbee, which have characteristics closer to fixed interest, are excluded. These two shares account for 3% of the portfolio.

No more than 3,5% of fund assets can be held in a single fund and shares are sold as soon as they reach fair value: Consol was recently sold after a strong run and Sanlam after a rebound, and Growthpoint was reduced.

Many of the top holdings overlap with Coronation's more relativist house view portfolios - shares such as Sasol, Remgro, Naspers, Implats and (a boost to recent performance) VenFin.

Joubert says that the downside risk in these counters remains low and they all have growth potential. But he has been more aggressive than his relativist colleagues in moving out of sectors that have rallied, like banks.

He prefers the media sector, which he considers to be a bargain on a price to free cash flow basis - Primedia, Johncom and Kagiso Media are in the portfolio along with Naspers.

Financial Mail - 18 November 2005

The Coronation Capital Plus Fund returned 8.0% for the quarter, bringing the return for the year to date to 16.8%, and for the one year to 30 September to 27.6%. This return is well in excess of the funds return objective of inflation plus 4%, but importantly has been achieved without taking undue risk in the fund. In line with our philosophy, this return was achieved within strict risk parameters, in line with our objective of capital protection over a one year period.

Equity exposure averaged around 40% over the quarter, with 20% of this exposure being hedged through the derivative market for the whole period, implying that a further 8% of the total portfolio was protected from any significant declines in the equity market.

Equity selection continued to be very good, with continued strong contributions from the larger holdings such as Sasol, Naspers, Implats, Woolworths and Primedia. Some of the smaller holdings also contributed significantly to performance, with strong contributions from Spar, Sun International and BJM. BJM increased by more than 40% over the quarter, on the back of improved JSE trading volumes, the unwinding of onerous investment structures and the settlement of the ITI dispute. These and other factors contributed to better visibility on the underlying NAV of the business, and thus limited downside in the business going forward.

In line with our long-term focus, there were no significant transactions over the quarter, apart from increasing our exposure to core holdings such as Implats, Remgro and Woolworths. The one holding we sold out of, on the back of a strong performance, was Consol. While we continue to believe that it is an attractive business with excellent management, we believe the valuation is quite full at current levels, and no longer provides the required downside protection to the fund.

We continue to believe that bonds are overvalued, and consequently remain positioned with very low exposure to long-term bonds. The All Bond Index returned a disappointing 1.1% over the quarter, less than the return on cash of 1.8%. We retained our exposure to inflationlinked bonds, which benefited from a further decline in real yields, and a positive inflation carry relative to cash.

Listed property continued to do well, and we still prefer this exposure to long bonds going forward. Valuations of listed property have however become more demanding, and we will remain positioned with below-average exposure around 5% of the total portfolio. We are very selective in terms of our picks in the sector at this stage of the cycle, and are positioned in the companies which we believe have superior quality properties with more sustainable rental streams and growth prospects through the cycle. We have reduced exposure to Growthpoint which has performed very well, but we believe is now fully priced at current levels.

The rand strengthened by a further 5% against the dollar over the quarter, providing a headwind to the international component of the portfolio. We will continue to run as close to the maximum 15% global exposure as possible at the current levels of the exchange rate.

Going forward we believe the fund is well positioned to generate its return objective of inflation plus 4% with a low probability of losing capital over a 12-month period. Cash levels in the fund are currently quite high, and we will remain patient in waiting for better value to emerge in other asset classes before we deploy this cash.

Edwin Schultz & Gavin Joubert
Portfolio Managers

If funds in the sector were ranked, Coronation Capital Plus (CCP) would be first out of six over three years and third out of 20 over 12 months, achieved in part by an equity content of up to 50%, high by sector norms. Manager Edwin Schultz has been reducing equity exposure but says, on a selective basis, value is still to be had. CCP targets a return of at least CPIX+4% and its sibling, SA Capital Plus, which has no foreign exposure, CPIX+3,5%.

Financial Mail - 02 September 2005

For the first half of 2005, the Coronation Capital Plus Fund appreciated by 8.1%, and for the one-year ended 30 June 2005, the fund has returned 30.3%, which is some 22% ahead of its return objective of inflation plus 4% (which has been 7.9% for the period, with CPIX running at 3.9%).
The biggest contributors to the fund's performance this year have been the core equity positions, particularly Sasol (+54%), Impala Platinum (+25%) and Telkom (+21%). Despite these share price increases, we have retained the fund's position in all three of these stocks. Whilst we hold the view that Sasol is no longer cheap, we also believe that, at the current share price, the market is ascribing very little value to Sasol's GTL (Gas-to- Liquid) business. In addition, in line with our investment philosophy which is both conservative and of a very long-term duration, we have valued Sasol using a conservative, long-term oil price of around US$30 which is well below the current oil price of almost US$50. Every day, week and year that passes with an oil price above US$30 adds incrementally to this conservative valuation of Sasol and further strengthens our investment case.
With Impala Platinum, over and above the view that we like the long-term fundamentals of platinum and the current valuation of Impala (10 PE multiple with a normalised platinum price of US$650 and ZAR/US$ of 7.50), we believe that at the current share price we are paying nothing for Impala's substantial platinum reserves in Zimbabwe. We still like Telkom for the reasons we have always liked it: free cash flow generation and valuation. Telkom generates around R16 to R17 of free cash flow a year and we believe that a significant amount of this will be returned to shareholders over the years to come. At the current share price of R108, Telkom is trading on a price/free cash flow multiple of 6.5 which, in our view, is very attractive for a group that generates over one-third of its free cash flow from Vodacom which, in turn, is one of the best businesses in South Africa.
The last few months also provided an opportunity to establish positions in both Richemont and SABMiller at reasonably attractive prices. The share price declines came at a time when we were looking to increase the fund's rand hedge exposure. In addition to a general negative move in global markets, Richemont declined as a result of quarterly luxury goods' sales figures that were below market expectations. We believe that the value of a business is determined by prospects over the next 10 and 20 years, not one quarter's sales numbers. Richemont declined to the extent where we were able to buy the share (at a price of around R18 a share) on a PE multiple of 13 on normalised earnings for the luxury business, which we consider to be attractive for a global business that owns some of the best brands in the luxury market, including Cartier, Montblanc and Panerai.
In a similar vein, SABMiller was impacted by the decline in global stock markets as well as a negative trading statement by Coors (a competitor to SAB's Miller brand in the US). Once again, it was our view that this short-term news flow had no impact on our long-term assessment of SABMiller's business value and the resultant widening gap between SABMiller's share price (at R90 when we bought the share) and our estimation of its business value (of over R130 a share), presented a buying opportunity.
Over the period the fund invested in two instruments which we believe provide attractive risk-adjusted returns relative to cash, which is currently returning less than 7%. The first instrument, BidBEE, is an employment equity financing vehicle for the Bidvest BEE transaction. The unit currently trades at around R49 a share. In 18 months time, if the Bidvest share price is above R60 then holders of BidBEE units will receive R60 a share. The upside is therefore capped at R60, which means that the share is a rather unique instrument, with part equity characteristics and part bond characteristics. The Bidvest share price is currently R73 and at this level we believe it is undervalued. In addition, Bidvest is growing its business value. As a result, we hold the view that there is a very high probability that the Bidvest share price will be above R60 in 18 months time and as holders of BidBEE shares, the fund will therefore receive R60 in cash. This results in an annualised expected return of over 14% per annum on the R49 investment made today. In an environment of low interest rates and low cash returns we find this return very appealing, particularly given the relatively low risk nature of the investment.
The fund also participated in the listing of Makalani, a company that provides mezzanine financing to BEE deals and has qualities that are closer to a debt instrument than to those of equity. We expect to receive a return of over 10% per annum from Makalani over the next few years, which again makes it a very attractive alternative to cash from an expected return/risk perspective.
The equity exposure of the fund was reduced slightly over the past few months and is currently around 40%; approximately 15% of which is protected through market put options. The fund has utilised its full international capacity (15% of total fund) as a result of our view that the rand will continue to depreciate over longer periods of time. We continue to believe that bonds are overvalued and that the opportunities in listed property stocks are decreasing. As a result, the fund has a negligible position in government bonds (2% of total fund) and only 5% of the fund is invested in property. The fund also has 3.5% of the portfolio invested in inflation-linked bonds. This investment has been very successful, having returned 10% year to date. As a result of these views, the fund currently has a cash position of close to 30% of the total portfolio and we will wait patiently before deploying this cash rather than put capital at risk by investing in overvalued assets.
Given the current structure of the fund, we believe that it is well positioned to generate its target return of inflation plus 4%, whilst at the same time having a very low probability of losing capital over any rolling 12-month period.

For the first quarter of 2005 the Coronation Capital Plus Fund appreciated by 2.47%, and for the one year ended 31 March 2005, the fund has returned 22.4%, which is some 15% ahead of its return objective of inflation plus 4% (which has been 7.7% for the period, with CPIX running at 3.7%).
A significant contributor to the fund's performance has been the equity selection, with several of the fund's holdings producing total returns over the past 12 months of more than 50%. These include Metropolitan Holdings (+67%), Absa (+67%), Naspers (+63%), Standard Bank (+55%), Sasol (+54%) and Primedia (+50%). The fund has slowly been reducing equity exposure as a result of continued appreciation of the equity market. Although equities remain to be the most attractive asset class in our view, the risks have undoubtedly increased as valuation multiples have expanded. Equity exposure is currently at around 40% and we are comfortable with this level, particularly given that 20% of the equity exposure is hedged. Over the past few months, we bought additional FINDI (Financial & Industrial Index) put options and the fund is now in the situation where half of the hedge position is in FINDI put options and the other half in ALSI put options. As the fund's long equity exposure is predominantly in financial and industrial stocks, the FINDI instruments provide a more appropriate hedge to the fund's long position. Over and above this protection, we feel that all of the stocks that are held by the fund are still undervalued and offer good downside protection.
Very few changes were made to the portfolio over the past few months. On the equity side, we sold the fund's entire holding in Aspen after enjoying close to a doubling in the share price since the fund bought its stake. Aspen is a good business and its superior earnings growth may well continue some time into the future. However, as always, valuation is as important to us as the nature of the business and, in the case of Aspen, the share is now valued on a one-year forward P/E multiple of around 14 and we feel that this valuation more than captures future growth prospects. When a share is trading on a multiple at these levels any disappointment will result in a significant de-rating and corresponding loss of capital.
We also continued to reduce the fund's life assurance holdings in the form of African Life, Metropolitan and Sanlam. The life assurance sector has enjoyed a significant re-rating since we started buying these stocks over two years ago and whilst we believe that the sector is still undervalued, they are getting closer to our estimation of fair value.
On the buying side, we added slightly to three of the fund's core holdings: Naspers, Remgro and Sasol, all of which we believe are still significantly undervalued. The only new purchases were relatively small positions in Johnnic Communications, Johnnic Holdings and Mvelaphanda Group. We continue to believe that media assets are great assets and that the sector offers some of the most undervalued opportunities in the domestic equity market and the Johnnic Communications (JCM) purchase reflects this view. JCM holds stakes in M-Net SuperSport and Caxton and also owns several other smaller media assets including The Sunday Times and Exclusive Books. We hold the view that this basket of media assets is of above-average quality and are worth around R50, yet the fund was able to buy these shares at around R35. Media holdings now make up 6% of the total fund in the form of positions in Naspers, Primedia, Kagiso Media and Johnnic Communications.
The fund's property weighting was maintained at around 6% of the total fund. We still have a preference for listed property stocks over bonds, but hold the view that it has become very important to be selective with regards to individual property stocks given that several stocks are now trading on yields of less than 9.5%. We added slightly to our bond position, purchasing some R157's as the domestic bond market experienced a de-rating in the month of March. We still hold the view that government bonds are overvalued and, as such, will wait patiently for the opportunity to increase this exposure rather than put capital at risk. Given our view that the rand is overvalued and will depreciate over time, we also took additional cash offshore and the fund's international weighting is now at the maximum level of 15% of the total fund.
Given the current structure of the fund, we believe that it is well positioned to generate its target return of inflation plus 4%, whilst at the same time having a very low probability of losing capital over any rolling 12-month period.

For the one year ended December 2004, the Capital Plus Fund has returned 22.5%, which is some 14% ahead of its hurdle rate of inflation plus 4% (which has been 8.6% for the period, with CPIX running at 4.6%).
As a result of very attractive equity valuations, the equity component of the fund was maintained at around 50% during most of the period. This is the maximum equity weighting that the fund is permitted to hold and this view has been justified, with the JSE All Share Index having appreciated by 25% over the past year. In addition, the poor performance of resource stocks for the year mask the exceptional returns from industrial and financial stocks, many of which have appreciated by 50% or more. The Capital Plus Fund has been predominantly invested in the industrial and financial sectors and some of the outstanding contributors over the past 12 months include the media stocks Naspers (+81%) and Primedia (+77%), and the banking stocks Absa (+80%) and Standard Bank (+68%).
In addition, the fund had 10% of the portfolio invested in listed property stocks throughout most of the year. This was also a significant contributor to performance with many of these stocks generating total returns of around 40% for the year, with 12% coming from distributions and the remaining 28% from capital appreciation. 2004 was another good year for bonds, with the All Bond Index returning 15%. We have been negative on bonds throughout most of the year and held only a small, short duration bond position. As a result, we did not fully capture this performance. The international component of the portfolio also detracted from performance (+15% in US$, but -3% in ZAR) as a result of a continually strengthening rand throughout the year.
Although equity exposure was reduced in the last few months of the year, we added a few new ideas to the portfolio as well as built on some existing positions. The fund received Spar shares from the Tiger Brands unbundling and we continued to buy shares in the open market. We believe that Spar is a good business that is well-run by a conservative management team: it has a strong brand, growth opportunity from continued store roll-out and market share gains, it generates a very high return on equity and converts all of it's accounting earnings into cash flow. Yet, we were able to buy this business on a one-year forward P/E of below 10 and a dividend yield of over 4%. The fund also added to rand hedge positions, where we believe that we have an option on rand depreciation beyond inflation differentials. The most notable continued purchases in this regard were Sasol and Delta, both of which are on single digit multiples assuming a normalised ZAR/US$ exchange rate of around 7.
We still hold the view that equities are the most attractive asset class and that the fund holds a portfolio of equities that are fundamentally undervalued. However, given the strong performance of equities over the past year, we believe that the risks have increased. As a result, towards the end of the calendar year we started reducing the fund's equity exposure to below 45% of the total portfolio. We also bought put options that resulted in approximately 20% of the equity portion of the portfolio being hedged.
The fund's listed property exposure was reduced from 10% of the total portfolio to around 7% towards the end of the year as a result of our view that valuations are now becoming stretched in certain property stocks. The fund substantially reduced its positions in Grayprop and Martprop. Whilst we hold the view that Grayprop owns an above-average portfolio of properties and that management has the ability to create value out of this portfolio, with a yield of 9%, this is being more than priced into the stock. At the same time, the fund took advantage of a unique opportunity, as a result of a share overhang, to build a significant position in Growthpoint. This company owns very attractive regional shopping centres and the fund was able to buy the position at a yield of 12% and at a reasonably small premium to an understated NAV. Whilst being cognisant of the interest rate risk in listed property shares (due to the historical high correlation with bonds, which is around 85%), we still prefer property over bonds as a result of the continued strong fundamentals within the property sector and our expectation of growth in distributions of 3% - 6% per annum.
The fund also continued to buy inflation-linked bonds during the last quarter of the year and these bonds now make up 4% of the total portfolio. Based on our inflation forecasts, we believe that these bonds will ultimately generate a return of over 9% and are thus more attractive than cash (at 7%). They are also attractive given the fund's benchmark target of inflation plus 4%. The fund continues to hold only a negligible position in government bonds (1.5% of the total portfolio) given our view that the probability of capital risk in these bonds is high.
We believe that the fund is well positioned to generate its target return of inflation plus 4%, whilst at the same time having a very low probability of losing capital over any 12-month period.