Fund Overview

The fund achieved gross total returns of 2.8% for the first half of 2017 versus the benchmark returns of 3.28% for the same period. For the second quarter of 2017 the fund achieved -1.1% return versus the benchmark of 1.48%. We continue to maintain our overweight position in listed property. Our over-weights in Sirius Real Estate, New Frontier Properties, Equites, MAS Real Estate and Rebosis A were the top 5 contributors to performance for the first half of 2017. Top detractors for the first half of 2017 mainly came from Redefine, Mara Delta, Echo Polska Properties, Liberty Two Degrees and Accelerate Property Fund.

Market Overview

On a total return basis, listed property delivered 0.91% in the quarter, outperforming local equities (-0.39%) and underperforming cash (+1.85%) and local bonds (+1.49%). While bond yields showed no material shift from 8.9% over the quarter, continued concerns around retail spend, a weakening SA economy and political uncertainty continued to weigh on the sector performance. Year-to-date, listed property was the worst performing asset class (2.29% total return), underperforming equities (3.37%), cash (3.72%) and bonds (3.99%). We continue to position the fund into stocks which are defensive and which show signs of delivering above average income growth than the sector. As would be anticipated in a weakening SA environment, the preference of investors for the quarter were stocks with offshore exposure that offered increased defensiveness to a weakening SA environment. Unsurprisingly most of offshore stocks recorded double-digit total returns for the quarter with share prices running ahead of earnings growth in some cases. The fund does have exposure to some of the offshore names, as can be seen from our top contributors in the first half of 2017, however we remain disciplined to our approach of looking for stocks which are reasonably valued and which shows good income growth potential for both offshore market and the SA market. Results reported during the quarter confirmed that the local economic environment remains challenging. Management discussions close to quarter end highlighted rental growth is increasingly under pressure, with rental negotiations becoming increasingly difficult. We believe the trend will be evident sectorwide and anticipate companies will provide increasingly conservative guidance.

Outlook
Over the next 12 months, we anticipate 8% distribution growth for the sector’s dividend paying companies. A weakening bias has emerged in the ZAR versus EUR and GBP in the past quarter, reflected in those stocks that have outperformed and continue to outperform. We continue to expect some SA companies with significant offshore exposure to exhibit double-digit distribution growth in ZAR, over the next 12 months.