Real estate equities tracked the market lower throughout the second quarter of 2010. Whilst property companies often move in lockstep with banks and financial companies, it is sometimes hard to fathom the logic behind share price movement in banks with direct exposure to the global banking crisis, and soundly capitalised companies holding prime commercial real estate in Washington DC. The answer is that both sectors are, to a greater extent, leveraged against the wider economy for growth and prosperity. It is also true that commercial property businesses are generally highly geared, magnifying swings in the market which have been particularly pronounced in recent weeks. The good news is that, unlike early 2008 when property defaults were increasing and balance sheets were stretched, the financial health of the Real Estate Investment Trust sector is robust and, for those companies which we hold in the Fund, it is very good indeed. We are encouraged by the restoration of cash dividend growths from our equity holdings as well as the number of capital transactions beginning to emerge, as businesses which were able to raise capital in the dark days of the credit crunch begin to put their funds to good use. In the UK, the weakness of sterling is attracting high profile acquisitions of prime real estate by Middle Eastern investors. Similar interest is being expressed in parts of Europe and we expect high quality sites to remain in demand. With the Fund price moving higher in July, we are encouraged by many of the signs associated with a mild economic recovery. We expect second quarter results to support current share prices and would encourage longer term investors to lock in the 5% gross yield currently on offer at these levels.

Real estate equities tracked the market lower throughout the second quarter of 2010. Whilst property companies often move in lockstep with banks and financial companies, it is sometimes hard to fathom the logic behind share price movement in banks with direct exposure to the global banking crisis, and soundly capitalised companies holding prime commercial real estate in Washington DC. The answer is that both sectors are, to a greater extent, leveraged against the wider economy for growth and prosperity. It is also true that commercial property businesses are generally highly geared, magnifying swings in the market which have been particularly pronounced in recent weeks. The good news is that, unlike early 2008 when property defaults were increasing and balance sheets were stretched, the financial health of the Real Estate Investment Trust sector is robust and, for those companies which we hold in the Fund, it is very good indeed. We are encouraged by the restoration of cash dividend growths from our equity holdings as well as the number of capital transactions beginning to emerge, as businesses which were able to raise capital in the dark days of the credit crunch begin to put their funds to good use.

In the UK, the weakness of sterling is attracting high profile acquisitions of prime real estate by Middle Eastern investors. Similar interest is being expressed in parts of Europe and we expect high quality sites to remain in demand. With the Fund price moving higher in July, we are encouraged by many of the signs associated with a mild economic recovery. We expect second quarter results to support current share prices and would encourage longer term investors to lock in the 5% gross yield currently on offer at these levels.

Returns from the quoted real estate sector have settled down to a more consistent trading pattern since the start of the year. Most companies which cut dividends in 2009 in response to the credit crisis have now resumed payouts and the flurry of capital raising activity appears to be coming to an end. Although over half of the Fund is invested into North American REITs, Dollar strength has somewhat diluted performance over the course of the year to date. Property companies tend on the whole to be quite domestically focussed and we are always mindful of the need to be invested in strong economies as well as the top property companies within the sector. Our exposure to Canada and Australia for example, whose currencies have been strong of late, has had a positive impact upon performance. As at the start of March, the Fund was fully invested.

The real estate sector enters 2010 at an interesting junction in its recent history. After performing poorly in 2007/8 as the credit crisis unfolded, real estate bounced back spectacularly in 2009 on the back of improving credit markets and a generally better economic backdrop. Access to capital markets is essential for many real estate companies and the best of these businesses have been able to improve their balance sheets in 2009 providing ample capital for growth moving forward. Ironically, although share prices are still significantly below the highest levels reached in early 2007, many such companies are in far better shape now than they were then. Dividends have been largely restored, tenant defaults are falling and the strongest survivors are actively seeking out distressed sellers in the market. The focus on quality and liquidity within the Fund means that Marriott is able to invest in many of these leading businesses and expect a number of them to initiate modest dividend rises in 2010 as economic conditions continue to improve.