Property performed well during the September quarter. Of the three investment categories, Liberty International (+13.2%) performed best during the quarter, followed by property unit trusts (+12.5%) and property loan stocks (+11.5%). Bonds, by comparison, posted a total return of 6.9%.

The main reason for this growth spurt was acknowledgement in the market that ongoing rand strength has constrained imported inflation, and that SA interest rates can remain steady as a result. The MPC surprised in August by cutting the repo rate by 0.5%.

We now expect interest rates to remain flat into 2005, and expect bond yields to remain relatively steady. If this does occur, derating risk will be less than we expected six months ago.

The main risk to this view is rand weakness. We do expect the rand to weaken, but moderately from current strong levels.

Taking these factors into account, we have invested 20% of the Fund in Liberty International to hedge against rand weakness, overweighted the SA portion in retail property (for growth) and industrial property (for yield), and underweighted offices (which are vulnerable to recent over development).

The fund was established as a unit trust during April. It consists of a mix of property companies (Liberty International), property loan stocks, and property unit trusts.

In terms of the Collective Investment Schemes investment guidelines, only investments with market capitalizations greater than R2b may have weightings above 5% of the fund. There are only three property vehicles that qualify - Liberty International, Grayvest and Growthpoint.

Of the three investment categories, property unit trusts (+4,4%) performed the best during the quarter, and Liberty International (- ,9%)
the worst.

The outlook for property in SA is mixed: Cyclically, the yield of listed property will rise as bond yields rise. Structurally, distributions are likely to resume growth as net rentals rise. The first will push prices down, and the second will push prices up. We also expect the rand to weaken from current strong levels.

Taking these factors into account, we have invested a third of the fund in Liberty International to hedge against rand weakness. We have overweighted the SA portion in retail/property (for growth) and industrials (for yield), and underweighted offices (which are vulnerable to recent overdevelopment).

The quarter-end portfolio reflects liquidity of 12%. Of this, 4% is committed to purchases in July, and 2% represents income to be paid out. Our target for liquidity is 5%.

Key characteristics of the portfolio
The fund will invest in JSE-listed property shares, including companies that derive a material portion of their income from property investments, collective investments schemes in property, property loan stock, assets in liquid form, cash and any other security allowed by the Act from time to time, which is in line with the fund's investment objective

In times of property market weakness, the fund may increase its exposure to assets in a in liquid form, fixed interest securities and cash to 50%.

The fixed interest securities in which the fund invests will be of at least investment grade as rated by Moody's, Fitch, CA-ratings, Standard & Poor's, or Global Credit Rating Company, or any other rating agency as allowed by the Act.

The fund will invest in JSE-listed property shares, including companies that derive a material portion of their income from property investments, collective investments schemes in property, property loan stock, assets in liquid form, cash and any other security allowed by the Act from time to time, which is in line with the fund's investment objective

In times of property market weakness, the fund may increase its exposure to assets in a in liquid form, fixed interest securities and cash to 50%.

The fixed interest securities in which the fund invests will be of at least investment grade as rated by Moody's, Fitch, CA-ratings, Standard & Poor's, or Global Credit Rating Company, or any other rating agency as allowed by the Act.