The tapering talk-induced fear that gripped global financial markets during the second quarter of 2013 started to lift during the third quarter. This culminated in a relief rally during September following the announcement by the US Federal Reserve that they intend to continue with their current quantitative easing programme in place (QE3). At the same time many asset classes have been significantly impacted. Gold lost nearly 5% of its value over September, although it still strengthened by nearly 10% over the quarter; Brent crude oil performed similarly. The US dollar weakened by 3.5% against the euro over the last three months, while emerging market currencies in countries that struggle with large current account deficits (like South Africa, India, Indonesia and Turkey) suffered significant devaluations. Equity markets performed well, with the bellwether MSCI World Index returning 8.3% for the quarter, taking the lagging 12-month return to 20.9%. Developed markets continued to outperform emerging markets, taking the outperformance to almost 22% over the last 12 months. Global bonds mirrored the see-saw behaviour in other asset classes, with the US 10-year Treasury yield moving between a low of 2.5% and a high of 3.0% over the quarter. Year-to-date, global bonds still produced a negative 3.3% return though. South African equities yielded 11.2% over the three months, bringing the 12-month number to 25.3% (SWIX). Within equities, resource shares outperformed other sectors for the first quarter in a long time. Property stocks returned -1.3% for the quarter, and continued to lag equities. Local bonds struggled against the backdrop of a weakening currency, weak current account, large fiscal deficit and alarming labour market disruptions. The All Bond Index returned 1.9% over the quarter, taking the 12-month return to a paltry 3.1%. Inflation-linked bonds did even worse, and preference shares continued to lag other income asset classes. The rand again lost value against both the US dollar and the euro, with the 12-month number now indicating devaluation of more than 17% against the US dollar and of more than 21% against the euro. The fund returned 6.6% (net of all fees) over the quarter, and a very satisfactory 18.6% over the last year. The five- and 10- year numbers are now 13.7% and 15.4% p.a. respectively, both convincingly outperforming our targeted return of inflation plus 4% per annum. Predictably the bulk of the past year's returns came from risky asset classes such as domestic and international equity and property. Our domestic equity selection marginally outperformed the index (a good performance in a strong market), while our offshore equity selection also beat the indices in US dollar terms. The weak rand further enhanced returns, while our offshore property selection also contributed positively. Within the income asset classes our nominal bond selection was good, while our preference shares detracted. The inflation linkers in the portfolio performed in line with expectations. Stock contributors in the domestic equity space over the last year included Mondi, Naspers, Pioneer, Zeder, Trencor and Times Media Group, while resource shares like Anglo American and Sentula detracted. Arcelor Mittal and Aveng were two other big disappointments. We continue to buy protection in a rising market, with many of the previously bought puts expiring out the money. In addition, we are reducing the position sizes of many of our larger positions that have done well in order to reduce the overall risk profile of the portfolio. We remain of the view though that in order to achieve the targeted 4% real returns, we need to maintain a significant exposure to risky assets. We have, for example, supported a few of our domestic property holdings where they have placed shares for acquisitions in order to grow their property portfolio. While we remain cautious on the prospects for property, we trust our management teams' abilities to acquire wisely and then manage these properties well to extract efficiencies.

Coronation SA Capital Plus Fund has closed and amalgamated into Coronation Capital Plus Fund on the 01 October 2013.

The second quarter of 2013 saw a continuation of volatility in global asset markets. The comments by US Federal Reserve chairman, Ben Bernanke, regarding a slowdown in quantitative easing sent markets into a 'taper tantrum' and affected global markets significantly. While the comment that quantitative easing cannot continue indefinitely should not have come as a large surprise to investors, it translated into a significant repricing in global and domestic bond markets. The US and South African 10- year government bond yields increased by 64 and 78 basis points respectively, and led to a capital loss for investors in this supposedly low risk asset class. The reassessment of risk also triggered sell-offs in perceived riskier assets such as emerging market bonds, equities, currencies and commodities. The only asset class that was up over the quarter was developed world equities. The FTSE/JSE All Share Index delivered a negative total return of 0.2%, the All Bond Index -2.3%, inflation-linked bonds -4.9%, preference shares -1.9%, listed property -0.4% and emerging markets -8% (in US dollars). The rand weakened by a further 6.9% against the US dollar to R9.87/$ at the end of the quarter. In this environment, the fund did well to eke out a barely positive return for the quarter, mainly due to its international exposure. We remind investors that the best we can do in the face of declining asset markets is to try and protect the assets entrusted to us, and we take our responsibilities in this regard very seriously. Returns of 16.6% over the last year are still good in absolute terms, and more importantly the fund has delivered returns above its benchmark of inflation + 4% over all meaningful periods. Within the local equity market, the resource sector continues to lose value, underperforming the All Share by 28% over the last 12 months. Gold and platinum miners declined by 33% and 24% respectively over the last 3 months as commodity price declines added to the woes of the labour situation in South Africa's deep underground mines. We see opportunity in the resource sector, using the weakness to add Exxaro and Anglo American. Anglo American remains the largest holding in the fund, a position that has hurt performance to date. We remain convinced of the long-term value in the company, despite uncertainty regarding the commodity cycle. After their significant price declines, we bought positions in both the gold and platinum ETF. We regard the downside from current prices to be limited and like the diversification offered by these instruments. Domestic clothing retailers, which have been the darlings of the market, have underperformed significantly in the first 6 months of the year. These businesses have been operating in favourable conditions over the last five years and we expect the consumer environment to weaken going forward due to rising inflation, potential job losses and a reduction in unsecured lending volumes. Foreign ownership of these shares has only reduced slightly and most are still very expensive and trade on high multiples. We do, however, think there is some selective value and have started buying positions in Foschini and Truworths. Our fixed interest position had a small negative return over the period due to our holding in inflation-linked bonds, but fared significantly better than bond indices due to our defensive positioning. We continue to be cautiously positioned in this space as we believe the potential for further capital loss remains despite the significant rerating in this asset class. The negative return by the property sector was driven by the increase in bond yields. We are very conservatively positioned in the property space, and our holdings in the sector still delivered a positive return over the quarter. We remain cautious on the sector given our view on local bonds. Our international exposure contributed significantly to performance over the quarter, due to the weakening of the rand. We have reduced our exposure to international assets to slightly below the maximum allowed limit of 25% on a tactical basis. We believe this limit now gives fund managers more freedom to actively manage offshore exposure, and will continue to apply our minds to the appropriate level of exposure at different currency levels. Our domestic equity exposure increased over the quarter, as we took advantage of market movements to buy shares that fell to attractive levels. We remain cautiously positioned, and well below our maximum risk asset limit. While volatile markets are often uncomfortable, we believe they offer opportunities for disciplined investors to take advantage of the mood swings of Mr. Market. We remain committed to our dual targets of delivering returns of inflation + 4% and recording no negative returns over a rolling 12- month period.

Portfolio managers
Henk Groenewald, Louis Stassen and Duane Cable

The performance of developed market risk assets has generally been very positive in the first quarter of 2013. The Nikkei (+20.1% in local currency) spearheaded the total return performance charts on the back of Japan's rhetoric on inflation targeting and monetary policy. Other equity market indices in core developed markets also performed well during the quarter in local currency terms, with the S&P 500, FTSE 100 and DAX up 10.6%, 10.0% and 2.4% respectively. However, given the large moves in currencies so far this year, it is also interesting to note that, despite the substantial nominal returns, the year-to-date performance of the Nikkei and FTSE 100 indices are a much more subdued +9.7% and +2.6% respectively when translated into US dollars. Turning to the other end of the performance spectrum, peripheral European and emerging market equities as well as selected commodities have been the relative underperformers. March proved to be a negative month for European financials as the latest bail-in strategies for Cyprus did not only raise discussions around the future template for resolving future euro area banking crises, it also prompted questions around the prospects for oversized financial institutions in Europe. In aggregate, equity markets, as summarised by the MSCI World Index, rose by 7.9% in the first three months of the year. Commodities were also mostly down during the quarter as illustrated by the gold price, which fell by 4%. Some of the industrial metals performed even worse, with aluminium, lead and zinc all down around 8% - 10% on the back of more concerns regarding sustainable demand. Globally listed property continued to perform well over the past quarter, producing another 'almost equity-beating' return of 7.0% in US dollars, which resulted in a one-year return of 19.9%. Japanese property REITs stood out with stellar performances, both in local currency and US dollar terms. Listed property in the US and the rest of Asia also performed well, while Europe was the laggard in the short term given the financial turbulence experienced by the region. Turning to fixed interest assets, the total return performance of credit, while still positive, has been subdued when compared with equities. Core interest rates benefited from the renewed European wobbles in the final two weeks of the quarter, which helped offset some of the weakness at the beginning of the year. After a strong start to the year, the JSE lost momentum and ended the first quarter up 2.5%, with the 12-month lagging number a strong 22.5%. Resources remained under pressure given the above-mentioned backdrop and produced a negative 6.0% return, while the financial and industrial index returned 6.2% over the three months. These numbers hide some of the severe sector rotational activity that hit retailers particularly hard. As an example, the total return of the food and drug retailers index was negative 10.4%. South African listed property continued to defy our cautious stance, producing a return of 9.1% for the quarter, but the bond market was very subdued with returns of only 1.0% for the nominal bond index, and 1.8% for the inflation-linked bond index. The rand was weaker against most currencies, but lost 9.0% against the US dollar and 6.4% against the euro. We consider the fund's return of 4.92% over the 3-month period as highly satisfactorily given the poor potential return outlook described earlier. The 12-month lagging number of 16.7% again surpassed our expectations, leaving the fund with a 15.7% p.a. return over the last 10 years; an enviable track record against the targeted return of around 10% p.a. Areas of positive contribution to overall returns included equity selection (where we outperformed both the All Share and SWIX indices by a reasonable margin) and by maintaining a maximum exposure to offshore assets. Among the good stock selections Remgro, MediClinic, Trencor and British American Tobacco stood out, while Anglo American, Impala Platinum and ArcelorMittal disappointed. Within the offshore component stock selection was good (again), and the listed properties also contributed handsomely. Preference shares continued to perform slightly below expectations, and it has already been mentioned that we limited the fund's exposure to listed property too early. Our hedging activity continued to cost the fund some performance in the form of spent premiums. Over the last three months this figure amounted to about 20 basis points. During the quarter we continued to reduce equity exposure, both by selling physical equity and by continuing to buy put protection. We are mindful of the fact that equity markets are discounting more good news now than a year ago, and the cost of protection has actually declined over that time. We continued to keep the offshore exposure at the maximum level of 25%, given our concerns about the medium-term outlook for the rand in light of the poor current account situation. We remain mindful of the conservative risk budget embedded in the mandate, and will therefore continue to be cautious in our exposure to risk assets. During the quarter we also announced proposed changes in fund manager responsibility that will be implemented at the beginning of 2014. Louis Stassen will move into a new role within Coronation by resuming responsibility with the rest of the research team for a developed market equity capability. Charles de Kock will join Henk Groenewald as senior manager of this fund and the other funds in the absolute product range. He will retain responsibility for managing the Coronation Balanced Defensive Fund. More detail will be provided to clients closer to the implementation date of 1 January 2014. Until such time, the day-to-day management of these funds remain unchanged.

Portfolio managers
Henk Groenewald, Louis Stassen and Duane Cable

The 2012 calendar year turned out to be a very good year for most asset classes worldwide. Locally, the JSE All Share Index surged to new all-time highs in December, returning 26.7% for the 12-month period (10.3% in the final quarter). Other domestic asset classes also performed well over the year, with the All Bond Index returning 16.0% and the property sector 35.9%. Globally, both the MSCI World Index and MSCI Emerging Markets Index delivered strong returns for the year of 16.5% and 18.6% respectively in US dollars. These returns were even better for South African investors, who benefited from a 4.1% weakening in the rand, but lagged the returns available from local assets. The strong returns across asset classes were generated despite the deepening fiscal crisis in Europe, concerns around the looming fiscal cliff in the US and generally anaemic economic growth. In the face of another year of strong returns generated by local assets, our warnings of lower future returns seem premature. Over the long term, the majority of equity market returns stems from dividends and earnings growth. The returns generated in 2012 were mainly derived from a re-rating of equities (also seen in bonds and property) and not from a growth in earnings, which only grew by an aggregate of less than 6%. This has pushed the ratings of some stocks to high levels. We remain very cautious on the outlook for longer-term real returns, which will be made even more challenging by current levels in asset markets. Helped by the strong asset class returns, the fund returned 16.4% for the year, a very gratifying absolute return and well above our benchmark of inflation +4%. Over the final quarter of the year, the fund returned 5.2%. More importantly, longer-term returns remain satisfactory, with the fund delivering above benchmark returns of 12.2% and 10.4% over 3 and 5 years respectively. Foreign assets contributed greatly to the fund's returns over the year, contributing roughly a third of the absolute returns. Our foreign holdings performed strongly and outperformed the major indices, with our foreign bond holdings a notable contributor. Due to strong equity markets, this asset class made a significant contribution to the returns generated. Within the domestic equity market, performance varied a great deal, with the financial and industrial indices delivering returns for the year of 38.1% and 40.7% respectively, while the resource sector eked out a barely positive return. The funds' equity portion however, lagged the strong returns generated by the market. We chose to avoid what we consider to be relatively expensive domestic oriented stocks, many of which performed exceptionally well through 2012. In hindsight, our exposure to unloved sectors like construction and mining was premature. Trading conditions for these sectors remain tough, but we remain convinced that our investment theses will play out, albeit in a slightly longer time period than initially envisaged. We continued to buy put protection on our local equity holdings, and are maintaining the high levels of protection that have been in place throughout most of 2012. This impacts the returns of the fund, but we believe it is the right strategy to ensure the protection of the fund's capital base. Risk management forms a critical part in the management of the fund, and we remain committed to avoiding negative returns over any rolling 12-month period. The fixed interest portion of the fund performed well, largely due to our corporate inflation-linked bond holdings. We remain concerned about the low yields currently available in the market, with a 10-year government bond yielding around 7% (in nominal terms) and a 10-year inflation-linked bond below 1% (in real terms). If these bonds are held to maturity, investors will earn the aforementioned returns, which we believe to be inadequate given the risk of capital loss. The low yields (driven by the global search for yield) will make meeting our real return targets much more challenging over the next number of years. Going into 2013, the fund is cautiously positioned. Equity exposure is relatively low, focused on where we see value in the market and protected by put options. We are close to the maximum allowed offshore exposure, as we see more value in international asset classes. Our fixed interest portion is concentrated mainly in strong corporate credit, with relatively little interest rate risk.

Portfolio managers
Henk Groenewald, Louis Stassen and Duane Cable