The reduction in property exposure (Dec2005) to the lowest limits allowed by the fund's respective mandates has helped to protect capital values in the recent downturn. This has had no impact on the quarterly income, which remains predictable and reliable. (Please note: The income from the Marriott Income Fund is affected by interest rate movements.)
With an expectation of further interest rate hikes over the next 6 months, it is likely that we will continue to avoid any long bond exposure and keep property to the minimum levels. In light of this we have further reduced the property exposure in the Core Income Fund from 9% to 3%.
It is difficult to predict the likely impact of further rate hikes on the property market, however we would recommend a conservative asset allocation as negative sentiment could continue to drive prices down. Should this happen, it would give us the opportunity to reinvest a portion of the cash back into property and long bonds at more appropriate prices. In doing so we would be purchasing higher yields (cheaper income streams), which would translate into income growth for investors.

The reduction in property exposure (Dec2005) to the lowest limits allowed by the fund's respective mandates has helped to protect capital values in the recent downturn. This has had no impact on the quarterly income, which remains predictable and reliable. (Please note: The income from the Marriott Income Fund remains dependent on interest rate movement.

With an expectation of further interest rate hikes over the next 6 months, it is likely that we will continue to avoid any long bond exposure and keep property to the minimum levels.

It is difficult to predict the likely impact of further rate hikes on the property market, however we would recommend a conservative asset allocation as negative sentiment could continue to drive prices down. Should this happen, it would give us the opportunity to reinvest a portion of the cash back into property and long bonds at more appropriate prices. In doing so we would be purchasing higher yields (cheaper income streams), which would translate into income growth for investors.

1. During December 2005, we reduced the property exposure in the Marriott Property Income Fund to 85% and the Marriott Property Equity Fund to 50%. This was done in order to give investors the flexibility to choose an appropriate level of property exposure in the light of uncertainty around the future direction of interest rates. The income produced by the funds has remained unaffected as property yields are now below that of cash yields.

2. During the first quarter of 2006, the market prices of the underlying property securities have continued to rise and in doing so, has reduced the yields to below 6% for many of them. Sentiment towards property remains positive and the boom in this sector of the economy continues.

3. There is no doubt in our minds that the asset class is now extremely overvalued, regardless of the income growth expectations.

4. In an environment of high oil prices, high commodity prices, a strong demand-driven economy, low interest rates and a strong rand, we feel something has to give at some stage. The commodity boom, sustaining a strong currency and low inflation has continued beyond our expectations, as has the property boom.

5. We feel more strongly than ever that a rise in interest rates will demonstrate just how overvalued this market really is.

6. Property yields 2% below bond yields is an extraordinary situation and has seldom been seen in any of the global property markets.

7. Should you have the same concerns or sentiment as us, we would strongly recommend you consider a switch into a fund with lower exposure to property in order to preserve capital. In doing so, advantage may be taken when interest rates rise, ensuring income growth and an opportunity to invest back into property at more attractive (acceptable) yields, securing additional income growth and capital preservat

Two years ago Marriott began steadily raising Marriott Property Equity's (MPE) liquidity in anticipation of rising interest rates and a weaker property sector. But neither interest rate movements nor property stock prices have gone according to plan, leaving MPE's capital appreciation trailing the average property fund by 25 percentage points over two years. MPE manager Simon Pearse is adamant that risks remain high. He may be right, but if he is it will have been a long wait.

Financial Mail - 24 March 2006