Property shares have had a disappointing quarter relative to the wider equity market. The cause has been the performance of bond markets where yields have risen in anticipation (prematurely, as things turned out) of the tapering of Quantitative Easing. In theory, this pushes up borrowing costs for real estate businesses and puts pressure on rental yields which are often set with reference to prevailing government bond yields.

In practice, most of the companies in the Fund have extremely solid balance sheets and high occupancy rates. Many tenants are locked into fixed or even rising rental agreements, so the impact of higher bond yields is not felt immediately, if at all. A more likely issue for property companies has been the greater attraction of government bonds, from a yield perspective, after the latest setback. With both UK and US benchmark government bond yields flirting with the 3% level, net yields offered by many major US property companies are only fractionally higher but with a greater element of risk.

On the other hand, bonds (other than pricey inflation proofed issues where yields are really low) neither offer a rising income stream nor the potential for growth. Nor do they offer diversification. The only real candidates for such investments right now are pension funds, who have a strict mandate to match future liabilities with known income streams today. In almost every other regard, property shares are the more attractive asset class for the medium and long term, if one can live with the added volatility of equity ownership.

After the recent setback, prices and yields in this sector are looking attractive once again. Companies have been steadily increasing dividend payouts whilst few are reporting significant, if any, distress patterns from their underlying tenant base. Central London has remained especially strong thanks to a shortage of space and opportunities for redevelopment. Improving retail sales on both sides of the Atlantic will help the major shopping malls in the portfolio whilst companies providing ancillary services such as the industrial major Prologis should also benefit from the ongoing economic and corporate recovery. Once the market has come to terms with the world post QE, we expect some form of upward re-rating to the property sector as investors recognise and return to the yield and inflation proofed qualities offered by those companies typical of the sort held by this Fund.

The Marriott International Real Estate Fund fell by 4.1% in dollar terms in June bringing the fall over the course of 2013 to date to 0.1%. The industry benchmark Global Property Research 250 Index fell by 2.4% in Dollar terms during the month, losing some of the momentum built up earlier in the year and leaving year-to-date gains at 3%. The Fund remained consistently above its yield benchmark throughout the period, ending the quarter with a gross yield of 4% ahead of the 2.2% composite benchmark drawn from the JP Morgan Global Government Bond Index.

US Real Estate Investment Trusts (REITs) weakened during the month as US Treasury yields rose on worries that the Federal Reserve Bank was considering tapering off its programme of Quantitative Easing, buying bonds in exchange for improved liquidity in the banking system. By the end of June, US 10 year Treasury yields had risen to 2.5% from a low point of 1.6% just a few weeks earlier. This led to a sell off across the investable universe, from bonds to equities, commodities and even gold as investors reined in borrowing in anticipation of higher interest rates and shifted into short-term risk free assets (cash).

Whilst we remain wary of bond markets, we believe that equity markets will quickly regain upwards momentum once the shock of the possible tapering of QE has been fully absorbed. REITs and property companies in general have a closer correlation to lending rates than other equity sectors, hence the initial reaction to the possibility of higher interest rates in the US by the sector, which underperformed the broad equity market by 1%, peak to trough during the recent correction. However, the lengthy period of low rates in the wake of the banking crisis gave many REITs the opportunity to restructure their balance sheets and reduce their interest payments. For the best companies in the sector, any upturn in rates in the near term will not have the impact it might have had in previous rate cycles.

Elsewhere, commercial property markets are showing signs of improvement, in line with the broader economy. Vacancy rates continue to fall and in most of the major central business districts around the world, demand for high quality property remains good with the exception of the Eurozone (ex-Germany) where high unemployment rates and falling GDP continue to take their toll on most areas of the market.

Excellent results from our central London specialists British Land and Land Securities in May underlined the strength of the commercial property market in the city. The supply of good quality office and retail space in this area remains close to all-time lows and is severely restricted by planning conditions preventing easy development. As yet, such strength has yet to reach the rest of the UK which remains lacklustre at best. As we reported in May, there has been a notable increase in activity in the industrial sub-sector of the market where operators such as Prologis and Segro are well positioned to take advantage of growing demand for their warehouse space which is typically strategically positioned near to major airport and other transport hubs.

We expect equity markets to stabilise quite quickly following the recent sell off. Nothing has really changed other than the realisation that lending rates cannot remain low forever. The Fed has now put a draft timetable on the course of action over the next couple of years which is probably not good news for long term bond investors but bodes well for equity investors if world GDP growth can continue to accelerate from current levels.

The Marriott International Real Estate Fund gained 1.1% in dollar terms during the first quarter of 2013. This performance reflected a generally strong period for global equity markets whilst a number of other asset classes, notably government bonds, lost ground. Performance was distorted to some extent by currency movements, in particular, the strength of the US Dollar which gained nearly 7% against sterling since the start of the year flattering returns from internationally diversified portfolios measured in sterling but having the opposite effect on dollar denominated accounts. Global equities rose by 14% during the quarter led by the US and Japan. Once again, emerging markets were relative laggards gaining just 4.8% in sterling terms over the same period.

The Fund remained consistently above its yield benchmark throughout the period ending the quarter with a gross yield of 3.7%, ahead of the 1.7% composite benchmark drawn from the JP Morgan Global Government Bond Index.

Quoted real estate generally underperformed the wider market in the first quarter of 2013. As far as the Fund is concerned, some of this can be attributed to currency movements - many of the underlying Fund holdings are quite domestic in their nature, in contrast to the growing international sales base of other non-property market constituents. Property is also typically a late cyclical asset class and we expect some catch up in the second quarter of 2013 if, as we anticipate, global equities extend their recent strong run.

Individual company news has been good during the last few weeks. Numbers from some of our core holdings in the likes of Unibail-Rodamco and British Land have underscored our desire to expose the fund exclusively to leading management teams in their respective sectors. This emphases our belief that the pause in the property sector rally is temporary and expect it to resume, especially as investors rotate out of those sectors which have out-performed during the latest rally.

The strength of the equity market was at odds with the disappointing economic news from the UK and, in particular, the Eurozone. China, too, is struggling to make the transformation from a rapidly growing emerging market to a world superpower, a problem reflected in the relatively disappointing returns from Asia during the quarter.

On the other hand, the US economy continues to gain momentum. Whilst the pace of growth is subdued by historic standards, it is growth nonetheless and much of the stockmarket's recent strength has been based on the assumption that US growth will eventually lead to a global recovery. Certainly, despite the problems in Cyprus, the Eurozone crisis feels very much like yesterday's story even if the core problems still remain.