With a 3.61 % return for the quarter the Fund marginally underperformed the benchmark, which returned 4.05%. However, over one year to 31 December 2009, the STANLIB Property Income Fund successfully outperformed the South African Property Index (SAPY) by 2.47% with a total return of 16.54%, which incidentally made it the best performing property collective investment in the country for the 2009 calendar year. The fund will continue to focus exclusively on outperforming the stated benchmark in aid of providing optimal 'property' exposure. While we are happy with our short term performance (1 year number) we must stress that our core focus is on long term results.

The out-performance was purely as a result of stock picking. The first quarter saw a shaky start generating negative returns; however we stuck to our property focus, as many of our peers attempted to time the market into cash instruments. Our conviction in property paid off as we saw a marked improvement in returns from around March, and while several investors were simply trying to get back into the market, we were already holding our preferred stocks.

The nature of our investment strategy does not call for aggressive trading in our portfolio, and thus there was not too much change to our position in the last quarter of 2009. However, our core overweight position in Capital, Pangboume and Hyprop stood out as top performers, while our underweight in Redefine also contributed to our relative success. We lost a bit of ground as SA Corporate had a solid quarter, but we still need more proof of its ability to turn around before we can be comfortable taking a material position in the company.

Our bets from the 2008 year still continued to payoff for the year of 2009. The Capital Property Fund, being our biggest overweight, was once again the darling of the sector with a total return of 28% against the index of 14 %. One of the more recent holdings was Vukile, which also materially beat the benchmark. We continue to hold this position as we believe Vukile is still attractively priced, coupled with the fact that their relationship with Sanlam Properties opens up a wide array of opportunities in acquiring 'workable assets'.

2010 will be a challenging year for listed property as a whole as earnings growth continues to moderate and the potential supply in the bond market could further impact property valuations. With that said we continue our strategy of focusing on quality earnings streams that we believe have the ability to ride out general market

Fund review
The SA listed property sector delivered a strong total retum of 12.15% marginally underperforming equities and comfortably outperforming bonds. Our fund continued to outperform the benchmark. It was aided by the big overweight position in Vukile. Vukile outperformed the sector by almost 20% during the quarter. We built up a big position in the stock after realizing that it was undervalued - trading at a big discount to the market - dispite being one of the most consistent performers in the sector since listing. Nine companies that reported results for the period ended 30th June 2009 grew their distributions by an average of 8.4%. This is impressive growth given the negative GDP numbers reported in the period. The top two performers were Resilient (+15.1%) and Capital (+14.7%). These are our top overweight positions. There were casualties however, I.e. Hospitality B (8.1 %) and SA Corporate (-0.4%) which we have underweight positions in. The sector reported a marginal increase in vacancies save for one counter, Resilient. Most of the vacancies have been driven by speculative developments particularly in the office space. Counters like SA Corporate saw their vacancies increase as a result of holding weaker retail centres. Fortress Property Income Fund will be listing at the end of October 2009. The fund will be split into two units, i.e. A and B. The A units will offer a guaranteed 5% income growth and the B units will get the remainder of the distributions. We expect two or more property companies to list in 2010. This will bring more diversity into the sector.

Looking ahead
At our recent asset allocation meeting, the property call was moved from neutral to overweight. We are looking for the sector to deliver just over 9% income growth over the next year. This results in a forward yield of 9.5% which remains ahead of bonds and cash. Stripping out Redefine's superb 22% income growth, which has been largely driven by the merger, the sector's income growth rate comes down to around 6%. We still believe that this is acceptable growth and we take comfort from the fact that it is in line with inflation. Eskom's electricity hike poses a risk for the sector together with the supply that continues to flood the bond market.