The domestic listed property index performed exceptionally well over the past quarter, returning 9.5%. The strong performance was driven by declining bond rates, and continued strong growth in underlying distributions. In this context the performance of the fund was disappointing, returning 5% for the quarter. This brings the return for the year-to-date to 18.7%, and to 38,6% for the year.

The fund remains more cautiously positioned, with 15.4% invested outside domestic listed property shares. This caused fund performance to lag that of the index.

We have also continued to build the position in Liberty International, which is now at the maximum permissible level of 10%. The share performance was flat over the quarter, thus detracting from performance relative to domestic shares. We do however believe that nervousness in the UK listed property environment has created a great buying opportunity in a quality company, and that patience here will be rewarded with good returns over time.

Within the local property environment, we continue to expect good distribution growth, but believe that a large portion of this is already priced into the market. Our focus is also on the quality counters with sustainable rental streams through the cycle.

As such, the fund holdings remain concentrated in a few shares such as Hyprop, Fountainhead, Acucap, ApexHi A and Liberty International. During the quarter we purchased more Sycom into a weak share price. Our position in Acucap was also substantially increased as Atlas shares were swapped into Acucap with the take-out transaction.

We remain committed to a more cautious positioning in the fund, as driven by our fundamental analysis of underlying shares, and believe that this will benefit unitholders in the longer term.

Edwin Schultz
Portfolio Manager

The domestic listed property index was flat for the quarter, returning 0.3%. This figure hides significant volatility, as the index rose significantly during April, and then experienced a very sharp sell-off towards the end of May and early June. The return for the index year-to-date is still healthy at 16.1%, and for the past year at 51%. The return for the quarter was driven by a continued tightening in the spread of listed property to bond yields, as the All Bond Index declined by 1.7% over the past quarter. Distribution growth from the listed companies also remains very strong.

The fund had a disappointing quarter, declining by 0.4%. This was caused mainly by the investment in Liberty International, which was increased to 5% of fund by the end of the last quarter. The share declined by around 7% over the past three months. The return for the fund over the past year now stands at 45.6%.

The strategy followed remains one of reducing property exposure into a rising market. The fund now has approximately 78% invested in domestic listed property, which is down from 84% at the end of the previous quarter. While we believe there are still three good years of distribution growth in the sector, current prices are discounting too much good news in our opinion. Sales during the quarter include Growthpoint and Sycom where we reduced exposure, and Madison where we have sold out our position. We are extremely disappointed with the proposed transaction announced by Growthpoint where the fund will be buying the management contract from Investec Property Group. While we are strongly in favour of the principle of internal management companies, as this aligns the companies interests with those of shareholders and international best practice, we believe Growthpoint shareholders will be significantly overpaying for this privilege at a price tag of R1.57 billion. The existing contract was not an evergreen one, and had a duration of around five years to run. The price represents around 9% of the current market capitalisation of the company.

In addition the fund will be granting share options to the management team, further diluting existing shareholders in the fund, with no downside risk to the beneficiaries. In our mind this proposed transaction crystallises the risk of conflict of interest represented by an external management company or agreement. To the extent of our shareholding as a company we will be opposing the transaction.

We also made a number of purchases during the quarter. The sell-off provided an opportunity to re-establish a position in Redefine, and also further build our position in Acucap. A portion of the cash holding was deployed into the new Absa preference share issue, which we believe was very attractively priced at 75% of prime. We have also further increased the holding in Liberty International to the current level around 8%. The UK property market is currently very skittish due to rising interest rates and fears of a slowdown in the physical property market. There is indeed evidence of prices falling in secondary shopping centres. We have long maintained though that the Liberty centres are more robust, and that the price differential between secondary and primary centres is too low. To date this has proven to be the case, and we believe that the falling share price is providing an attractive buying opportunity.

Edwin Schultz
Portfolio Manager

Domestic listed property had another very strong quarter returning 15.7%, which brings the return for the past year to 21.9%. This return was driven largely by a significant tightening of the spread compared to long bonds. The all bond index posted a mediocre 1.6% return over the quarter and 5.6% over the past year, which is well below cash. Distribution growth has continued to come through strongly among the listed property companies reporting as expected.

The fund returned 13.6% over the quarter, bringing the return for the past year to 22.5%.

The strategy for the fund remains unchanged. Whilst fundamentals for domestic listed property remain very strong, we have factored this into our forecasts and valuations, and believe that valuations are becoming stretched again. The average listed property company now trades at a one year forward yield of 7.2% and a premium to NAV of around 40%. On this basis we will continue to reduce exposure as prices rise, and have done so in the past quarter.

Domestic listed property now represents 84% of the fund compared to 88% in the previous quarter. We will also continue to focus on property companies with high quality properties that will be able show good distribution growth through the cycle. This strategy has lead to a very focussed portfolio currently.

The only purchase over the past quarter was Liberty International, where we have increased the fund weighting from 3.2% to 5%, on the back of a price decline from around 1400 pence to 1250 pence.

Going forward, our challenge remains to stay close to all the companies in our investable universe, and through good stock-picking and a flexible approach to asset allocation continue to deliver good returns to unit holders.

Edwin Schultz
Portfolio Manager

Domestic listed property performed very strongly over the quarter, posting a return of 19.0%. This brings the return for the sector to 28.4% for the year. The performance for the quarter was on the back of stronger bond rates, with the All Bond Index returning 5.6%, but also continued strong distribution growth from the listed property companies.

The fund returned 16.8% over the quarter, which brings the return for the year to 28.4%, which interestingly is exactly in line with the return of the sector. Given that we consistently ran the fund at a less than fully invested position, this implies that returns were predominantly driven by good tactical asset allocation and good share selection over the past year.

The fund also benefited from the position in Liberty International, which returned 6.9% for the quarter, and a whopping 83.3% for the year. Given that the rand depreciated by around 20% against sterling over the past year, the major part of this return was driven by a re-rating in sterling terms. Given the introduction of REIT legislation in the UK budget this year, and Liberty's intention to convert to a REIT structure, there have been large institutional capital flows into UK property in the past year. We believe that the share price in pence is overvalued at the current 1400p level, and have subsequently reduced exposure in the fund from a maximum permissible level of 10% to around 3% currently. Given the important diversification benefits within the fund we are hesitant to sell the position out completely, but will do so at the right price.

Going forward we believe that listed property on aggregate has become fully valued again. On aggregate we are expecting an annualised return around 8% over the next three years for the sector, which is in line with or below the expected return on cash. This is based on an assumption of fair value around 9.1% for RSA long bond rates, which is still around 140bp above current bond rate levels. This figure however hides large divergence between the individual expected returns on the various property stocks. We believe that there are still some good opportunities in the market, and continue to believe that stock picking will be very important in the next year or two. One opportunity we believe is Acucap, where we have increased exposure during a capital raising exercise over the past quarter.

We are however reducing exposure to stocks we believe are overvalued and of poorer quality, and thus again raising liquidity levels in the fund. The average property stock is now trading at a clean forward yield around 8%, and premium to NAV of around 30%. Fundamentals for the sector remain good. Growth expectations for the sector have again increased to 12.3% and 10.4% for the next two years respectively. Importantly though, given our interest rate expectations, we do not see a material negative change to medium term fundamentals for the sector.

We are sticking to our view of positioning the fund in the quality counters with more robust rental streams through the cycle. Despite the anticipated recovery in the office sector, our preference is still for retail. Our view (and international experience has borne this out) is that big regional malls are both more defensive and provide better rental growth over the long term compared to the office and industrial sectors.

Major transactions during the quarter include selling out of Redefine, SA Corporate Real Estate and Apexhi "C" units, and reducing our exposure to Growthpoint and Liberty International.

In summary we see reasonable opportunities within listed property currently, and believe that a focus on quality will pay off in the long term. We believe stock-picking in the fund will become increasingly important, and will continue to use the asset allocation flexibility mandated within the fund.

Edwin Schultz
Portfolio Manager