Domestic listed property performed very strongly over the quarter, with the index returning 11.7%. Property trust shares returned 11.4%, and property loan stocks 12.5%. This performance was driven by a stronger bond market and continued good distribution growth from the listed companies. The spread between property yields and bond yields ended the quarter at very much the same level where it began. The All Bond Index returned 4.7% over the quarter, and cash 1.9%.
The Coronation Property Equity Fund returned 9% over the quarter, bringing the return for the year to date to 15.4%, and past year to 51.7%.
The holdings added during the first quarter performed well and contributed positively to the fund.
During the past quarter we did not change overall exposure to property significantly, but continued recycling the portfolio as opportunities arose. Holdings in Growthpoint, Martprop and Capital were reduced, while we added to positions in Grayprop, Pangbourne and ApexHi A.
We introduced Makalani, a mezzanine finance provider as an alternative to cash, where returns below 7% remain unattractive. This investment is expected to yield in excess of 11% going forward. This holding replaces a holding in Investec preference shares, which we have sold as we believe they have reached our full value.
The fund's exposure of around 4% to inflation-linked bonds continued to perform well as an alternative to cash, with this asset class returning 7.4% over the past quarter.
Liberty International produced a good return over the quarter, and we have tactically reduced this holding from 10% to 7% on the back of a strong run in price. While this counter has underperformed domestic listed property in the year to date, we continue to believe that the diversification benefits added to the fund are huge, and the return in absolute terms has been very strong.
The current exposure in the fund to domestic listed property is around 78%. Given the strong run in share prices over the past quarter, we believe that some of the counters have reached and even exceeded our fair values. We expect that strong distribution growth will continue, but is now factored into many of the share prices. While we are forecasting that current excellent growth in property distribution will continue for the next three years, we do think that it would be incorrect to extrapolate this growth rate into perpetuity. We are currently in a very positive earnings cycle buoyed by strong consumer spending and economic fundamentals. Long-term growth expectations for valuation purposes need to reflect a normal, through the cycle growth rate after the current positive cycle, as opposed to an extrapolation of the current high growth rates. Coupled with local bond rates that we believe have again reached very expensive levels (largely on the back of declining US bond rates), we believe that the risks in some property shares have increased.
Given this fact we are likely to further utilise the flexibility in the fund mandate to reduce exposure to these counters and hence overall fund exposure. While returns on cash are currently low, we would rather sit on cash on a temporary basis than own overvalued assets that put fund capital at risk. We will also keep looking at ways to maximise returns on cash holdings in the fund.
Given the flexibility offered by the fund's mandate, we believe we are in a good position to protect fund capital, while participating in the upside in the selected property shares which still offer reasonable value.

The Coronation Property Equity Fund had another good quarter, with a return of 5.90% in an environment where property trust shares returned 2.7% and property loan stocks returned 6.3%.
The overall good return for the sector hides significant volatility during the quarter though, with a very strong performance to mid-March, and a decline of 6% - 7% of this peak to the end of March. This decline was driven mainly by an upward move in bond rates during March, with the government R157 moving from a low of approximately 7.7% to 8.6% at month-end. This move resulted in a negative return from the All Bond Index of - 0.3% over the quarter. This move in the bond market was driven by higher global bond rates, a worsening in the global emerging market bond spread, and a subsequent weakening in the local currency.
We have for some time now highlighted our view of overvaluation in the bond market, and the potential risk to the property market, as property and bond yields are highly correlated over the longer term. As a result, the fund was more defensively positioned, and thus the negative effect of the decline in property prices toward month-end was significantly mitigated.
During the quarter, domestic listed property exposure averages around 75%, with the remainder of the assets in cash, preference shares, inflation-linked bonds and Liberty International. These assets softened the impact of declining property prices, and the preference shares and inflation-linked bonds performed well over the quarter.
The benefits of the holding in Liberty International in an environment of rising local bond rates and a weakening currency where clearly highlighted. The company reported good results during the quarter, with strong growth in NAV and further details on an exciting development pipeline in the UK. Further asset-backed debt refinancing has resulted in significant interest savings going forward. The purchase of stakes in two other major regional shopping centres in the UK with Prudential were also announced, and should result in enhancement of shareholder value over the longer term. While we believe this asset to be fully valued in pound terms, it is an attractive and defensive asset, adding currency diversification to the fund.
During the quarter we further increased exposure to quality counters such as Hyprop and Grayprop, and also participated in a placing for South African retail units at an attractive price.
Hyprop surprised the market with excellent results, on the back of very strong consumer spending, and a very strong performance from Canal Walk shopping centre, the largest asset in the company. This performance was achieved through good cost management and changes in tenant mix improving the product offering and resulting in reduced vacancies in the centre, which is now practically fully let.
We continue to see very good fundamentals for property shares, which are expected to result in continued strong distribution growth for the foreseeable future. While we continue to believe that bonds are overvalued, some of this overvaluation has been corrected during the past month. On balance we believe that listed property will continue to deliver a stable real return on a longer term view.
We will however continue to utilise the flexibility in the fund to protect capital, hence enhancing longer term returns.

The Coronation Property Equity Fund will be re-opened for investment as from Monday, 11 April 2005. The fund was previously capped in order to ensure that the portfolio could be efficiently managed within the capacity-constrained listed property category. Since our initial analysis, capacity within the sector has increased as a result of the increase in its market capitalisation.
Investors should however be aware that valuations on listed property stocks are not as attractive as they were two years ago. Investors in the sector have already experienced exceptional capital gains and should not expect this to be repeated over the next few years. In addition, Coronation is negative on the interest rate cycle and prefers cash to property and bonds. However, due to the increased entry yields and strong rental fundamentals, we prefer property to bonds over both the shorter and longer terms. Our managed funds, such as the Strategic Income Fund, Capital Plus Fund and Market Plus Fund therefore still contain listed property exposure.
The Coronation Property Equity fund will be available through Linked Investment platforms and directly from Coronation Management Company. Should we believe that the fund is getting to a point where capacity constraints affect our ability to efficiently manage the portfolio, the fund will once again be capped.

The Property Equity Fund had a fantastic quarter, returning 17.90%, well in excess of the 1.90% return on cash and 7.50% return on the All Bond Index. For the 2004 calendar year the fund returned a credible performance of 35.30%.
The listed property sector performed very strongly, partially on the back of stronger bond rates, but more significantly due to a re-rating of listed property relative to bonds. We have for some time been advocating investing in listed property in preference to bonds, and will continue do so. We do however believe that a large part of the re-rating relative to bonds has occurred, and that this driver will be less material going forward. Listed property companies will probably record peak distribution growth for the cycle in the coming year on the back of favourable funding costs, declining vacancies, redevelopments and rising real rentals, which should drive continued out-performance relative to bonds.
During the past quarter we have been aggressively repositioning the fund. The aim has been to improve the quality of the underlying property portfolio, and also to improve the liquidity within the fund. We have significantly increased our investment in Growthpoint Properties at an attractive valuation on the back of what we believe to be a unique opportunity created by market dynamics. This position added significantly to performance over the past quarter. The position in Liberty International has also been increased in line with the strengthening rand. This counter has performed very strongly in British sterling terms, and is probably fairly fully valued in that currency. However, given the strength of the rand, we still believed it to be attractive at the prices we purchased. Positions in Redefine, Metprol, Emira and Ambit were sold during the past quarter.
The fund has also taken a position in inflation-linked bonds as an alternative to cash, on the basis that we expect them to perform at least in line with cash in the medium term, and also add significant diversification benefits to the fund.
Going forward, our greatest concern for listed property remains the level of bond rates. While we do agree that the high correlation between listed property yields and bond yields may break down during periods of high distribution growth, such as we are currently experiencing, we believe that there is good reason for the correlation to remain high in the medium to longer term. The value of a property is ultimately determined as a discounted cash-flow stream of a series of net rental receipts, discounted at the applicable long-term interest rate, represented by the appropriate bond rate.
We remain negative on the local bond market, and feel that it has overshot sustainable fair value. On this basis we have further increased cash levels within the fund. The non-SA listed component of the fund (invested in cash, Liberty International and inflation-linked bonds) now represents approximately 25% of the total fund. We believe this to be the most prudent approach to maximising total return, and thus also income within the fund in the long term. In this regard, bear in mind that the fund mandate allows for a cash exposure of up to 50% of fund value under the appropriate market conditions.
We have reached a position where we will soon be closing the Coronation Property Equity Fund to new investors. During the past quarter we have decided that the fund will be capped at R900m. While we could close the fund at a much higher value without running into legislative constraints, we have chosen to close it earlier to allow the fund greater flexibility within its investment universe. This will allow us to continue to focus on superior stock picking within the fund and ultimately lead to better returns to investors in the long term.
On this basis we remain optimistic on the prospects for the fund going forward, and while the high returns of the past two years may not be repeatable, we aim to continue generating positive real returns on a three year horizon.

Coronation Property Equity Fund will close for all new investments with effect from 14 January 2005. Coronation believe the fund has reached the maximum size which still allows for effectively managing it according to its mandate.
No new recurring investments will be allowed into the fund.