Emerging markets continued their excellent performance during 2009, a relief for investors after the events of last year. Year to date these markets returned 64.9% in dollars compared to the 22.5% returned by world markets. The fund return of 31% year to date is in line with its benchmark, with good stock selection being somewhat offset by our equity exposure of 85% to 90% over the period. The 30% recovery in the rand since the start of 2009 has offset half the dollar return of emerging markets. Since inception almost two years ago the fund has outperformed its benchmark by just under 10% annualised.

With markets rallying, many stocks have reached or exceeded what we believe they are worth. Since we are disciplined about selling stocks with little upside, we reduced exposure in many holdings. One example is Ports Design, a high end fashion retailer that has become one of China's leading brands. The flagship 'Ports International' and 'Ports 1961' labels rank in the top ten brands amongst Chinese women - below super-premium brands like Chanel and Gucci, but alongside Versace, Valentino and Givenchy. Although long-term prospects for this company remain very good, the share is up over 240% since we bought it, outperforming others with similar earnings prospects whose shares have not performed as well.

The beverage industry remains very attractive and represents about 18% of the fund's holdings, with Coca Cola (Coke) bottlers accounting for 7% alone. We like Coke bottlers due to the strong global brand, simple business model and high cash generation. Compared to developed markets, per capita consumption of sparkling beverages is much lower, which means that sales can grow substantially as income levels rise. In emerging markets, volumes mostly comprise of multiple serving formats (think of the 2-litre bottles found in SA) sold on shelf in retail outlets and taken home to consume over several days. Much growth is now in single serve formats (like our 340ml cans) sold refrigerated and ready to drink by 'mom and pop' stores and small cafes. Margins on these are several times higher than multi-serve packages, so small increases in volumes have a disproportionate effect on profits. Coke bottlers capture the single serve market by installing fridges at the final selling point. In return, the shopkeeper must maintain the fridge and only stock their products. For the company this is a small initial capital outlay that guarantees an exclusive selling point.

One of the first holdings in the fund was Embotelladora Andina, a Chilean bottler also operating in parts of Argentina and Brazil. This share has done little since fund inception making it more attractive relative to other shares, so we have increased the position size. Coca Cola Icecek, has been added after previously having only indirect exposure through the brewery group Anadolu Efes. Icecek is the sole Coke bottler in Turkey and has operations in Central Asia, the Middle East and Pakistan. In most of these regions the majority of the population do not drink alcoholic beverages, the main competitor to soft drinks amongst adult consumers. Icecek has established itself as the main Coke bottler for this region in much the same way as another holding, Coca Cola Hellenic (CCH), has done in Eastern Europe. CCH also bottles Coke in Nigeria, a very attractive market with a young population where half the 150 million people also do not consume alcohol. The fund's largest bottler remains Coca Cola Femsa (held directly and indirectly though the brewer Femsa), which has licenses for most of Mexico, parts of Central America and the wealthiest regions of Argentina and Brazil. We have increased the stake in the Brazilian education company Anhanguera. Private institutions represent the majority of the Brazilian market as state-owned universities cannot deal with the volume of annual school graduates. Content is regulated by Government, but the market is fragmented as hundreds of small independent colleges cater to a few thousand students each. This results in varying standards of education and poor degree recognition. Anhanguera and a few other large players are moving to consolidate the market. This should boost profits for education providers as curriculums are standardised and costs like student administration, billing and collection are centralised. It will also lead to greater recognition for students who will now hold certificates from large, recognised national players. Anhanguera specialises in 'flexitime' education for young working adults wanting a degree to raise their earning power, but lacking the finances to afford full-time study. They are also pioneering a distance learning model - broadcasting lectures via satellite to campuses set up in small cities where education options are very limited. Once all the infrastructure is in place and the business matures, Anhanguera will earn high margins and convert most accounting profits to cash. In the meantime, it generates adequate cash and has more than enough resources available to finance its expansion without stretching the balance sheet.

Other notable changes include the shift in exposure within commodities away from metals and materials, which we believe are expensive, toward oil and gas. The metals and material exposure of the fund is now less than 1% and comprises mostly of holdings in Usiminas, a Brazilian steel maker specialising in value added products sold domestically at a premium, and Semirara, a Philippines thermal coal miner that has ramped up production to meet rising demand from nearby China and countries in South Asia. We increased the exposure to oil and gas stocks through higher stakes in Gazprom (Russia) and Petrobras (Brazil) and added ENI to the portfolio. ENI is an Italian-listed energy giant, with the bulk of its reserves in Africa and Central Asia. Oil and gas exploration and production is the largest contributor to group profits. It owns substantial fuel retail assets in Italy and controls the natural gas infrastructure backbone for the country. Profitability of the refining and marketing operations has suffered in the last two years due the huge swings in the oil price, but by our estimate the company trades on just eight times normal free cash flow.

In Coronation's GEM funds we aim for investors to benefit from the opportunities and good developments in emerging markets, so whilst the fund is primarily invested in companies who generate all or most of their earnings from emerging markets, we will also invest in developed market companies that generate a significant portion of their earnings from emerging markets (at least 40%-50% of earnings). One such recent addition to the fund that fits this profile is YUM! Brands. YUM! owns KFC, one of the most successful fast-food concepts globally, along with two other strong brands, Pizza Hut and Taco Bell. Almost half of its earnings come from fastgrowing emerging markets - 32% from China alone, where they have established a powerful presence and were one of the first movers in aggressively rolling out stores. In doing so they created high barriers to entry for other brands that lagged entry into China.

Their US and West European operations are more mature, but returns in these markets will be raised over time through their strategy of refranchising stores. The company has excellent free cash flow generation and very high return on equity (above 50%). Returns from emerging market stores are even higher and the compounding effect of this over long periods of time is significant.

Portfolio managers
Gavin Joubert, Mark Butler & Suhail Suleman

The fund has had a good start to 2009 in both absolute and relative terms. In the 6 months to end June, the fund appreciated by 14.3% against the backdrop of a 10.3% increase in the MSCI Emerging Markets Index. Since the fund launched in late December 2007, it has outperformed the index by over 10%.

Whilst there has been a significant upward move in global emerging markets over the past several months, we remain excited about the long-term prospects for emerging markets and the returns that are available from careful investment in these markets. The investment case for emerging markets today is the same as it was when we launched the fund a year and a half ago - we simply believe that emerging markets (and the companies that operate in these markets) will grow significantly faster than the first world over the next five to 10 years and therefore become more and more important in the global economy. This growth will be driven by commodities and exports (over the long term) as well as a significant increase in domestic consumption as urbanisation increases and disposable incomes continue to rise (over both the short and long term). Importantly, the low levels of debt at country, corporate and consumer levels in most emerging markets (compared to the heavily indebted first world) provide a favourable environment for the generation of superior growth from emerging markets.

The sharp rally in emerging markets over the past several months has been led by the more cyclical, lower quality stocks (commodities and financials), with the higher quality stocks (mobile telecommunications, media, beverages, food retailers and education companies) typically lagging. The fund is invested mainly in the latter area meaning that we still see significant upside to most of the fund's holdings. As a reference point, the one year forward P/E of the portfolio, weighted by position size, is currently around 12, which we believe is very attractive given the quality of the businesses that the fund owns and given what we believe these businesses will be able to grow their earnings at over the next five years. The equity exposure of the fund is currently around 88%, which gives some idea of the amount of value we are still finding today. Although the equity exposure of the fund has been as high as 94%, it must be remembered that in early 2008 we had 50% in cash as we couldn't find enough decent value.

The largest position by industry is still in the GEM mobile telecommunications companies (25% of fund). We are invested in several mobile operators and find the low penetration rates in emerging markets combined with P/E multiples around 10 very attractive. The other area that we find particularly attractive is beverages (both beer and Coca- Cola bottlers which make up around 20% of the fund). The fund owns both pure GEM beer/Coke companies (like Femsa in Mexico and Anadolu Efes in Turkey) but also owns stakes in many of the global beer companies, who have operations in both emerging markets and the first world. The three that we particularly like are Carlsberg, Heineken Holdings and Anheuser-Busch Inbev - all have large emerging market businesses and are trading on P/E or Free Cash Flow multiples in the 10 to 12 range one year out. Carlsberg may be headquartered in Denmark, Heineken in the Netherlands and AB Inbev in Belgium, but all three generate a large portion of their profits from emerging markets, ranging from 45% to 65% of earnings. We are interested in accessing all the good things that happen in emerging markets over time (like rising disposable income and increased beer consumption in this case) and are less concerned about where a particular company may be headquartered.

Over the past few months we have continued to add to the fund's holding in Gazprom, a Russian gas company and owner of the largest gas reserves in the world; a large part of which is supplied to Western Europe. Gazprom is, in our view, one of the cheapest stocks in the world and worth at least double the current share price. With a long-term oil price of $70 Gazprom is currently trading on a P/E of 4. Russia undoubtedly has risks, but we find this valuation level incredibly attractive. In Russia we also like the supermarket food retailers, Magnit and X5 Retail. Magnit in particular is very interesting - the company focuses on small, rural towns in Russia (where the only existing supermarket is a drab soviet-style shop) and has grown their store base from 600 to almost 3 000 over the past five years. Needless to say, once Magnit enter a new town, with their new bright supermarkets and attractive pricing due to economies of scale, the days of the soviet-style store in that town are numbered.

We also continue to find good value in Brazil, of which Anhanguera is but one example. Anhanguera is a Brazilian private education company which is rapidly consolidating what is a fragmented industry. Like many other emerging markets, the Brazilians regard high quality education as a priority and as a result the industry is growing at a rapid rate. We believe that Anhanguera, through both organic and acquisitive growth, can maintain 25%+ growth rates for some years to come.

Whilst the re-rating of emerging markets has been sharp we remain very excited about the fund's holdings, as we have hopefully illustrated through using a handful of examples. Emerging Markets, in our view, are not a one year story but a five to 10-year story and the journey is still in its infancy.

Portfolio managers
Gavin Joubert, Mark Butler and Suhail Suleman

The global market volatility of 2008 continued during the first quarter of this year, as did concerns over a rapidly worsening global recession. Economists who argued for the 'decoupling' of emerging markets from the woes of developed markets were proved wrong as these suffered from large declines in exports due to sharply lower demand for their products in Europe and North America. One of the key questions to ask in the midst of this is: How much negative news is already priced into shares? and When will the cycle turn? The honest answer is that no-one can be certain when markets and economies will turn but patient investors should realise above-average returns over time from current levels. As an example, within our investment universe there are companies with significant net cash balances and strong operating businesses. Valuations are so depressed that one can invest in some of these for the value of cash on the balance sheet, thereby purchasing the underlying operations almost for 'free'. The caveat is that one cannot tell how long it will take for the market to realise the true value of these companies as it depends on whether they deploy their cash wisely. One such company in which the fund has recently invested is ChinaCast Education with a net cash equivalent to 70% of its market value. The company is a provider of distance education in China, a chronically underserviced market with a strong cultural bias towards furthering education.

Looking at economic data releases is rather depressing and comparing GDP forecasts for this year (issued in August 2008) to current forecasts shows just how quickly the world has changed. However, global leaders have rallied together in an attempt to stimulate the global economy - the patient is alive but still in ICU. In an extremely simplistic form the fiscal stimulus packages, announced by most Western governments, amount to nothing more than printing money to purchase/underwrite the 'toxic loans' advanced by their banks during the bubble years in an effort to get them to start lending again. Most central banks have taken a similar view to their governments and reduced interest rates to their lowest levels ever - showing a willingness to focus on getting the patient out of ICU instead of worrying about a potential surge in inflation from increasing money supply. Two central banks bucking this trend are Hungary and Russia where the economies have deeper structural issues that could be worsened by lower rates. At the recent G20 meeting in London US$250 billion was earmarked for the IMF to lend to emerging economies. Mexico was the first country to make use of this facility signing up for US$47 billion.

There is never a dull day in emerging markets; confidence in the Indian IT sector was rocked when the chairman of Satyam, the fourth largest provider of software services in India's renowned IT industry, resigned after he admitted to falsifying the company's accounts by adding fictitious cash of US$1bn to the balance sheet. The irony that Santyam means 'truth' in Sanskrit was lost to many investors. We did not hold any Santyam stock.

Mergers and acquisitions slowed during the first quarter but some global corporates are making use of the lower prices to expand their footprint. US department store Walmart, for example, is expanding its presence in Latin America with an offer for Chilean department store DYS. In contrast, Austria's OMV (chemical and energy) abandoned their ambitions to take over neighbouring Hungary's MOL and instead sold their 21.2% MOL stake to a Kremlin-friendly oil and gas company Surgutneftegaz. This took EU officials by surprise, given their stated desire to reduce dependence on Russia for energy supplies, and also signaled Russia's determination to improve its standing in the EU's energy market. In keeping with the Russian theme, numerous oligarchs, who had pledged their listed shares as collateral for bank loans, are struggling to keep control of their key assets as the value of their businesses collapse and banks ask for replacement collateral.

Corporate earnings released during the quarter have been mixed, with Asian airline Cathay Pacific reporting its first loss in ten years on the back of fuel hedging losses and lower seat yields. In addition, Brazilian iron ore giant CVRD's profits were down 47% due to lower commodity prices and asset write-downs. We do not hold either of these companies in our portfolio. Some retailers (which we do own) showed resilience; net income for Russia's Magnit, a growing food convenience store, rose 95% in 2008 and China's casual sportswear company China Dongxiang, which owns the brand Kappa in China and Japan, reported profits up 86%.

Emerging markets are trading at a discount to developed markets, using the MSCI indices as a reference point. The market PE ratios are 11 times and 13 times respectively, yet the long-term growth prospects for emerging markets are far superior to those in the developed world.

Members of the team braved a chilly Beijing in January to meet with various companies resulting in, amongst other things, the investment in China Dongxiang. Other portfolio movements during the quarter included the following new stocks: Brazilian education provider Anhangeura; Chinese internet stocks Baidu, Netease and Sohu; multi-format food retailer in Eastern China, Lianhua Supermarkets; VisonChina Media, a group offering outdoor advertising in China; and Indian banking giant ICICI. Stocks sold during the period were Estonian retailer Baltika, the Mexican bank Banorte, media group Televisa, Brazil's on-line e-commerce portal Mercadolibre and China's Focus Media.

Outlook
We do not know how long the global recession will last but we are certain that with the right policies, economies will eventually recover and resume a path to increasing global prosperity. Equity markets have historically priced in a recovery before all economic indicators signal a sustained upturn. The current environment provides investors with a long-term horizon a good opportunity to invest in emerging markets and we will continue to look for opportunities within them.

The last quarter of 2008 will be remembered as one of the most newsworthy periods in recent years, with the victory of Barack Obama in the US presidential election stealing the limelight. Governments, policymakers and investors spent most of this period fretting about the state of the banking system, particularly the lack of credit extension to businesses and individuals in the face of a potential collapse in economic output in the developed world. We also saw sentiment towards Emerging Markets sour due to the dimming of expectations that the big economies within this group would escape the worst of the economic malaise afflicting the developed world. It is primarily for these reasons that global stock markets performed atrociously in 2008, wiping out several years of gains and perpetuating the gloom felt by all. In its inaugural year, the fund declined by 22.9% and while this is naturally disappointing, it outperformed the 34.5% decline in the MSCI Emerging Markets Index by a substantial margin of 11.5%.

We recently spoke of the effect of falling markets on the case for investing in equities, particularly in the markets of Brazil, Russia, India and China (the "BRIC" countries), which we found to be very expensive relative to other markets prior to their 50% plus declines. During the quarter we continued to selectively invest in new stocks or add to our existing positions within these markets.

Brazil had a tumultuous year due its position as a large producer of several hard and soft commodities. When prices of these were high the effects were palpable, with the currency at a seven-year high and company valuations were elevated. Falling commodity prices caused the currency and stock market to fall sharply making many companies attractive. One new investment was in Grendene, who makes a variety of fashionable sandals and flops with strong branding in Brazil. Their "Ipanema" range is marketed by supermodel Giselle Bündchen and is sold worldwide, even recently finding its way onto South African shelves via Woolworths. In recent years, Grendene was able to maintain its domestic market share and generate decent cash flows despite an exchange rate that forced several smaller manufacturers out of the industry as Chinese imports undercut them. With the currency having fallen well over 50% since mid-2008, Grendene's position is very strong as imports are priced out and the domestic market has consolidated. Despite this improvement in outlook, the share price has fallen to less than 5 times earnings for 2009, with substantial upside in these earnings since 20% of production is exported.

Elsewhere, Russia has fallen completely out of favour with investors. The war with Georgia and Vladimir Putin's belligerent comments about a coking coal producer alerted investors to the level of state interference and corporate governance failures common in many Russian firms. Yet, as is typical in cases of panic, valuations in Russia have plunged to ridiculously low levels with energy giant Gazprom (a monopoly supplier of gas within Russia and largest single supplier to Western Europe) falling 75% to less than 3 times earnings. These earnings will not follow oil prices downward as gas prices are regulated below market levels and did not follow oil prices up when they increased. We recently purchased X5 Retail Group and Magnit, two food retailers that have enjoyed phenomenal store growth in recent years and, in our view, still have many of years of likefor- like sales growth ahead. The Russian retail market is fragmented with no dominant retail chains and X5 and Magnit are the first serious retail groups to emerge in Russia, where there is still room for large-scale store growth for several years. Magnit in particular is rolling out stores throughout rural Russia, a country fourteen times larger than South Africa, giving rural Russians their first smart hypermarket in towns still dominated by Soviet-style service options. These companies trade at multiples more appropriate for retailers in mature markets.

In India the positive effects of a decade of 7% to 8% average growth are apparent with a visible improvement in living standards for many people. Their market was perhaps the most expensive of the BRIC countries so we anticipated that the 50%- plus fall from peak levels prior to our visit in early November would mean there are many undervalued Indian shares. Unfortunately the market remains overvalued, mostly because it is dominated by poor quality companies such as construction, chemicals and property, which trade at valuations more appropriate for quality businesses. Those businesses we liked, such as telecoms and consumer goods, trade at valuations well above other Emerging Market peers with similar growth prospects. One exception was Infosys, a worldwide provider of IT consulting and software solutions to companies and governments. The client base is primarily located in developed markets and pay in hard currency, whereas the cost base is rupee-dominated. This gives Infosys a substantial competitive edge over its rivals such as Accenture and a good hedge against the currency weakness India is currently experiencing.

China has not escaped the contagion - a few months ago investors were willing to pay 30 to 40 times earnings for companies, now many have dropped to single digit multiples. For the first time in many years we are seeing Chinese shares offering compelling value and have increased our China exposure significantly. One recent purchase is Ports Design, a high end garment retailer with a strong brand that was recently rated second only to Chanel amongst Chinese women in a fashion survey. The expected economic slowdown in China is having little effect on the company's store rollout plans as sales in existing stores are still growing at double digits, yet the share fell from a peak of HK$30 to as low as HK$6 to trade at single digit multiples.

We remain committed to our view that the long-term returns offered by Emerging Market equities are compelling and are particularly excited given that current valuations (at 20 year lows in emerging markets) allow one to buy equities with exposure to this growth at very low multiples. Gavin Joubert, Mark Butler and Suhail Suleman Portfolio Managers