Fund review

The fund outperformed the benchmark by 2.11% with gross total return of 2.56% versus the benchmark total return of 0.45% in the third quarter of 2018. We continue to maintain an overweight position in listed property. Top 5 contributors to performance were underweight position in Growthpoint and Redefine and overweight positions in EPP, Grit and Equities. Top 5 detractors to performance were over-weight position in Oryx, Greenbay New Frontier and underweight positions in Emira and Vukile (SA listed).

Market overview

On a total return basis in 3Q18, listed property (-1.0%) underperformed local bonds (+0.8%) and cash (+1.7%), while outperforming local equities (-2.0%). A 15bps weakening in the SA 10-year bond yield in 3Q18 marginally impacted the sector over the quarter, but a weak outlook from Growthpoint, a sector heavyweight stock, saw it fall -9% in the quarter. Currencies saw marginal shifts as well over the quarter, with the ZAR weakening 3% versus the US$ and 2% versus the EUR over the quarter.

SA Property Index (SAPY) stocks with double-digit positive performance in 3Q18 were limited to three counters, namely EPP (+18%), Fortress-A (+15%) and Equites (+14%). These stocks reflect a preference by investors for certainty in earnings and offshore exposure, with many of the other better performing stocks in 3Q18 also reflected an offshore earnings dynamic. Stocks with a significant SA portfolio element struggled to perform well in a deteriorating SA outlook, with Growthpoint (-9%), Hyprop (-6%) and SA Corporate (-6%) reflecting this dynamic. The quarter was also characterised by weaker outlook statements from many companies with material SA exposure, such as Rebosis (-13%), Attacq (-9%), Accelerate (-11%) and Arrowhead (-6%).

We find the local economic environment remains challenging and we do not expect a material improvement in operating conditions in 2019. Risks could potentially still be to the downside, if GDP growth does not show a market improvement in the medium-term. Earnings from companies with offshore exposure and reasonable GDP growth fundamentals are likely to outstrip growth from SA companies with property portfolios that are largely SA exposed

Fund Overview
The fund achieved gross total return of -15.02% versus the benchmark returns of -9.19% for the first quarter of 2018. We continue to maintain our overweight position in listed property. Top 5 stock contributors to performance were over-weight positions in Echo Polska, Oryx, Accelerate, Vukile (Namibia) and Grit Real Estate. Top 5 stock detractors to performance were over-weight positions in New Frontier, Resilient and Greenbay and under-weight positions in Growthpoint and Redefine.

Market Overview
SA listed property was the worst performing asset class for the first quarter of 2018 (-19.6%) underperforming SA bonds (8.1%), SA cash (1.8%) and SA equities (-6.0%). This unprecedented downward movement in SA property was primarily driven by allegations surrounding the Resilient group of companies. The allegations on the resilient group of companies started to emerge at the beginning of the year and has so far been confined to three concerns (a) interest rate margin charged by Resilient and Fortress to their BEE partners in funding the BEE partner to acquire share in both companies (b) cross-holding between Fortress and Resilient created transparency concerns on the dealings in shares between the two companies and lastly (c) the allegations on share price manipulations in the group of companies by outside parties who may be related to the directors of the company.

Resilient have addressed point (a) by restructuring the BEE trust to eliminate the interest rate margin charged on the loans and also assuming bank loans responsibility for the trust and point (b) by unbundling the Resilient shareholding in Fortress to the Resilient shareholders. Point (c) will be addressed by the results of the ongoing investigation by SA Financial Services Board (“FSB”) in the company share trading activities by all parties involved however Resilient had also commissioned its own independent investigation into the matter, ahead of the FSB investigation results, which has cleared all the directors from the allegation of share price manipulation. While the share prices of the Resilient group of companies have dropped significantly and underperformed the listed property sector, the underlying businesses appear to be conservatively geared and also operationally sound compared to some of the peers in the sector. Given the traditionally low gearing approach adopted by management, the company and its associates haven’t faced a liquidity crisis despite the massive drop in share prices. While we await the results of the FSB investigation to draw a close to all share price manipulation allegations we also take comfort from the fact that the underlying business of Resilient remain in good health.

Outlook
The SAPY currently offers a forward yield of 8.1% with limited spread to the SA 10 year government bond yield. This implies limited income growth expectation by the market however we still see income growth of 6% for the SAPY over the next 12 months.