The Coronation Equity Fund had an excellent quarter amidst a market where many managers were carried out by the rout in the commodity markets. Over a rolling 5-year period the fund outperformed its benchmark by 0.7% p.a. (27.1% vs. 26.4%). The fund remains one of the best performers in its category over all longer term time periods.

Markets remain very challenging. The current environment will go down in history as one of the great crises of the modern era. Credit is the oxygen that feeds economic activity. With the credit crunch as far advanced as it is, there can be no doubt that many countries will go into recession. Even the emerging economies, thought by many to be immune to the woes of the developed world, now appear unlikely to escape unscathed.

To add salt to the wounds, this downturn is unlikely to be short and sharp (as was the case in 1987, the early 1990s, 1998 and the early 2000s). One should not underestimate the impact that deleveraging will have - consumers around the world are geared to overpriced houses and this will take years to correct.

On a more positive note, regulators and governments are now united in their resolve to get 'ahead of the curve' and restore confidence in the system. Ad hoc solutions are no longer working, systemic solutions are required. We therefore expect more deposit guarantees, further recapitalisation initiatives (outside the US) and synchronised rate cuts. The good news is that we think that the crisis will pass. The global economy is much better balanced than it has been for many decades.

In times of crisis, allocators of capital look for opportunity. While many will argue that the current environment calls for a focus on a return of capital (i.e. cash), we think that the opportunity for the long-term investor lies in equities (a return on capital). As we commented in the June quarter, we believe that buying quality assets at low prices is the route to wealth creation. The pendulum has swung from greed to fear. Investors have capitulated - they are now giving equities away with little regard for valuation. We do not expect the macro environment to improve in the near term. We also have no idea when markets will turn. But we do know that equities are cheap. It has been 20 years since global equities traded at such low ratings and the margin of safety is now large.

Equities declined by 21% in the quarter (resources -38%, financials +12%, industrials -4%). It was somewhat of a watershed quarter for Coronation in that it vindicated our longheld view that commodities were overvalued. We had no special insights into what was coming. Our advantage lay in our investment philosophy - an uncompromising commitment to the long term. Commodities are notoriously cyclical. Whenever investors talk of structural change, beware of the cycle! To this day we are amazed at the capital around the globe that poured into commodities 8 years into the biggest commodity bull market in history. That said, the sell-off has now been so severe that we are now seeing good value in selected commodity counters. Billiton has demonstrated over the years the superior quality of its assets (low cost, long life) and its management team. The share has declined by close to 50% as commodities have sold off. The company now trades at 5.5 times current year earnings and 11.4 times our assessment of mid-cycle earnings.

In a single quarter banks have gone from being reviled to being loved. The relative performance of banks to resources in the quarter was a 5 sigma event, comfortably fitting the definition of a fat tail. Once again, we had no special insights - just the broad shoulders to recognise that quality franchises, with excellent management teams trading at 5.5 times their earnings presented an excellent buying opportunity (even with the interest rate cycle against you).

We have seen dramatic moves in domestic counters (Mr Price +48%, Absa +35%, Aspen +33%, Truworths +30%) as investors have come to realise that a lot of the bad news was in the price and that South Africa is one of the few countries that moved early with rate hikes. While we have kept the DNA of the portfolio very much intact, we have taken some profits in domestic counters and invested it in selected resource counters (mainly the diversified miners, whose diversification across commodities and producer currencies is attractive at this point in the cycle).

MTN declined by 8% in the quarter. In the past we have been uncomfortable with the premium one had to pay for its growth prospects. This premium has disappeared in the emerging market sell-off and we have now acquired a substantial position in the stock (top 5 position in the fund). In conclusion, while we acknowledge that it is not easy, we strongly encourage investors to put emotion aside and focus on the opportunity that markets are currently offering the longterm investor.

Karl Leinberger
Portfolio Manager

The Coronation Equity Fund had a reasonable quarter, with the fund returning 30.5% for the rolling five year period compared to 32.0% from the benchmark. Over the last 5 years the fund's unit price is up 3.8 times. This has been an extraordinary period in which investors have made tremendous returns from the biggest commodity cycle in history. The global environment deteriorated significantly over the last quarter. Growth is slowing, inflation is on the rise and central banks are reluctantly responding with interest rate hikes (particularly in emerging markets where monetary policy has been too expansionary). Debt levels are high and the deleveraging process will constrain growth for some years to come. The local environment is just as challenging. The consumer is on the brink of recession after having to absorb 10 interest rate hikes over the last 2 years. Inflation, principally food and energy, is crippling the low end of the market. Finally, to add salt to the wounds, sentiment and confidence has been damaged by the political uncertainty we are experiencing as the ANC transitions itself to a new leadership. We live in an uncertain world in which forecasts have less value than we often like to acknowledge. In Richard Oldfield's book, 'Simple but not easy', he notes that: o Western Union believed in 1876 that the telephone had too many shortcomings to be seriously considered as a means of mass communication. o HM Warner of Warner Brothers asked an audience in 1927 who the hell wanted to hear actors talk. o In 1943 IBM forecasted a world market of no more than 5 computers. Market sentiment has swung from euphoria to despair. The optimistic forecasts of just over a year ago have evaporated as the economic environment has soured. In times like this it is important to remind ourselves of what we do know: o After 5 asset-friendly years (low inflation and strong growth) the environment has deteriorated. o Markets have ruthlessly discounted this information as they have endured wave after wave of selling pressure (Chinese Shanghai Exchange down 54% from its peak, JSE Financial Index 40%, India 37%, Nikkei 29%, Dax 21%, FTSE 20%, S&P 20%). Managing retirement capital in this environment is not easy. We need to preserve the real value of hard-earned savings. But we believe that we also need to take advantage of the long term opportunity that markets are currently presenting. Buying quality assets at low prices is the route to wealth creation. The pendulum has swung from greed to fear. Investors have capitulated - they are now giving equities away with little regard for valuation. We do not expect the macro environment to improve in the near term. We also do not know when markets will turn. What we do know is that equities are cheap. It has been 20 years since global equities traded at such low ratings and the margin of safety is now large. While it is tempting to turn to cash, our highest conviction view is to stay invested in equities - whether it be European, US, Japanese or Emerging Markets. Local equities returned 3.4% for the quarter. This benign number (once again!) masks strongly divergent sector moves. Resources performed strongly, returning 13%. Anglo American, BHP Billiton, Sasol and ArcelorMittal performed strongly as commodities surprised with their resilience in a deteriorating economic environment. We remain underweight resource stocks and overweight industrials and financials, where we are currently finding great long-term value. Gold shares once again performed poorly and we have started to build a position in this sector for the first time in many years. Financials (-15%) and industrials (-3%) had a torrid quarter. Ratings have now declined to levels last seen in early 2003. The selling pressure has been indiscriminate, with many high quality, defensive, companies coming under as much pressure as interest rate-sensitive companies with high levels of operational gearing. We continue to find great quality companies with excellent management teams at very attractive prices (examples include Discovery, AVI, Spar and Reunert). In summary, while it is tempting to 'sit on the sidelines' until markets stabilise and the outlook improves, we believe that current prices are compelling. The cycle will turn. Buy low, sell high.
Karl Leinberger
Portfolio Manager

The Equity Fund had a weak quarter, such that it is now underperforming the benchmark over a rolling 3 year period by 4.4% p.a. (27.1% p.a. vs 31.6% p.a.). The All Share Index returned +2.9% for the quarter. This benign number masks strong moves within the quarter (down 7% by late January) and across sectors (Resources +18%, Industrials -5%, Financials -6%).

For the entire duration of the bull market a 'rising tide lifted all boats' and virtually all sectors produced handsome returns. Over the last 12 months returns have diverged, with commodity stocks continuing their rampant run and domestic stocks coming under heavy selling pressure. Negative headlines have found their way to the pricing of local equities to such an extent that they currently price in a material decline in earnings over the next few years. Many quality companies, with excellent management teams and strong balance sheets trade at 8 times forward earnings and at 7% dividend yields. While there is no doubt that corporate earnings are under pressure, we have been able to find many quality companies with strong franchises and good earnings' prospects at ratings we haven't seen since early 2003 (one of the biggest buying opportunities in history).

The big global trade (wisdom) is to short the dollar and go long commodities. As fundamental, valuation-driven investors we are underweight commodity stocks and overweight domestic stocks and non-resource rand hedge shares (Remgro, Richemont, Liberty International etc.). It is, in our opinion, 'late in the day' to be long commodities - a notoriously cyclical industry. While this has detracted from performance over the last year, we remain convinced that it is the right positioning for the longer term. In the quarter we increased our holding in MTN, a quality company with excellent growth prospects trading at a fair price. We reduced our weighting in Impala, a stock that has contributed strongly to performance over the years but that now trades at our assessment of fair value.

Throughout the late 90s, active managers outperformed benchmarks with such ease that commodity stocks were eventually down-weighted in the benchmarks. The wheel has turned full circle now, with active managers battling to outperform a resources-heavy index. We consider this to be a normal cycle. In a world of collapsing time horizons it is not easy to hold a firm course and make the right long-term decisions. It is essential that investment decisions are evaluated through the course of a full cycle. This cycle will turn and, when it does, we intend to be correctly positioned in the stocks that offer long term value.

Karl Leinberger
Portfolio Manager

The last quarter of 2007 was not a kind one for equities as the global malaise affecting most developed markets made its impact felt locally, and certainly political tensions in the run up to the ANC elections made foreign investors nervous. The situation was further compounded by two interest rate hikes, which have placed the consumer under pressure and impacted the ratings of domestic interest rate sensitive stocks.

The All Share Index lost 3% for the quarter, bringing the total return for 2007 down to 19.2%; still a great return, but one which was achieved by a few specific stocks doing extremely well and a large number under-performing. Despite being underweight resources the fund returned a creditable 17% for the year as some of our specific stock picks paid off in the last quarter, being down only 1%. Our long-term track record remains intact with first quartile performance over 5 years and an annualised return of 32%, some 2% per annum in excess of the All Share return.

During the quarter, we reduced our large exposure to Sasol due to its strong performance and increased our investment into Remgro and Richemont. These two businesses both have strong Rand hedge qualities and are likely to benefit from the unbundling of BAT expected in 2008. With the top of the interest rate cycle being very near (in our estimation), buying some of the banks on forward multiples of less than 8 and dividend yields of 4% looks very attractive, especially as they have avoided the huge write-offs of their developed peers, yet suffered significant de-rating nonetheless.

As noted above, the market return was very narrow in 2007 with 5 stocks accounting for 91% of the total market's return. What this performance masks is that there were a substantial number of shares, which delivered a negative performance in 2007. This was driven by the worsening outlook for the domestic consumer and thus retail and consumer focused businesses came under pressure. As a result, despite the market being positive for the 5th consecutive year we do see a number of companies that are priced extremely attractively. The market often only looks forward for a 12-month period, which we agree will be a difficult period, but beyond that we remain confident on the domestic economy. On that basis we have been adding to our holdings of great SA businesses like Tiger Brands and Bidvest, which should continue to deliver good earnings growth in the medium term.

The portfolio is now constructed with a balance between good rand hedge exposure and reasonably priced defensive SA shares. We remain underweight resource shares, which are still expensive and have started adding to interest rate sensitive companies where valuations are pricing in maximum pessimism. We believe this will enable the fund to continue to deliver excellent returns over the medium to long term.

Neville Chester and Karl Leinberger
Portfolio Managers