Quarterly Comments

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.