The Absa Property Equity fund is an active, pragmatic value fund within the property sector. The fund's remarkable historical success is in part attributed to the unconstrained nature of the portfolio which is benchmark aware but not benchmark cognizant. In practice this means that the fund can deviate significantly from the benchmark through the cycle, where opportunities are identified.

Our primary objective is to be invested in the highest quality companies for the long term. The deliberate and active way in which the fund is managed can result in periods of higher volatility relative to the benchmark, to deliver results that are driven by the robust process, and portfolio manager's conviction.

The fund's total return of 4.76% for the third quarter of 2018 was an outperformance of both the listed property index and the median manager by 5.77% and 5.47% respectively. We are pleased to see the recovery in the performance of the fund continue into the third quarter with the fund remaining one of the best performing funds over the long-term. The positive performance achieved by the fund was in contrast to The SA Listed Property sector as a whole which had another negative quarter and delivered a return of -1.1%, outperforming Equities (-2.2%), while underperforming Bonds (0.8%) and Cash (1.7%). However, over the longer term, listed property continues to be one of the best performing asset classes returning 13.45% p.a. over the last 10 years, ahead of Equities (12.10%), Bonds (8.55%) and Cash (6.82%).

The third quarter of 2018 saw a continued deterioration in sentiment within the local economy together with a heightened emerging market risk premium on the back of a strengthening US dollar through rising bond yields and interest rates together with specific risk factors around vulnerable emerging economies with double deficits and large foreign currency debt commitments. Heightened tensions in the global economy through what has been termed "trade wars" between the USA and China weighed further on emerging market currencies during the quarter.

In light of the aforementioned factors together with the difficult on the ground conditions within the domestic property sector due to the onset of a technical recession, political uncertainty together with weakening business and consumer confidence, the fund had an overweight offshore and cash position going into the third quarter of 2018.

The combination of these factors together with lower than expected growth expectations post the release of results throughout the quarter weighed heavily on valuations across the JSE and in particular the listed property sector where many of the domestic focused companies came under pressure with Growthpoint (-11%), Redefine (-3.8%) and Hyprop (-9.5%) which account for ~44% of the SAPY, reporting negative capital returns during the quarter.

The performance of fund over the quarter benefitted from its limited exposure to domestic focused companies together with the positive performance of direct offshore companies and cash.

At the end of the third quarter, the sector traded on a projected forward yield of 9.9% with an anticipated growth rate of 5.0% over the next 12 months.

The continued recovery of the performance of the fund on both an absolute and relative basis since the end of the first quarter of 2018 provides investors with an example of the robustness and sustainability of our investment process, which provides us with the confidence to remain invested in attractive investment opportunities through periods of significant market volatility. We remain confident that our fund is able to withstand market shocks and is still the correct choice for long term investors.

The Absa Property Equity fund is an active, pragmatic value fund within the property sector. The fund's remarkable historical success is in part attributed to the unconstrained nature of the portfolio which is benchmark aware but not benchmark cognizant. In practice this means that the fund can deviate significantly from the benchmark through the cycle, where opportunities are identified.

Our primary objective is to be invested in the highest quality companies for the long term. The deliberate and active way in which the fund is managed can result in periods of higher volatility relative to the benchmark, to deliver results that are driven by the robust process, and portfolio manager's conviction.

The fund's total return of 4.24% for the second quarter of 2018 was an outperformance of both the listed property index and the median manager by 6.43% and
6.57% respectively. We were pleased to see the recovery in the performance of the fund after a disappointing first quarter with the fund continuing to be one of the
best performing funds over the long-term. The positive performance achieved by the fund was in contrast to The SA Listed Property sector as a whole which had
another negative quarter and delivered a return of -2.2%, underperforming Equities (4.5%) and Cash (1.8%), while outperforming Bonds (-3.8%). However, over the
longer period, listed property continues to be one of the best performing asset classes returning 15.95% p.a. over the last 10 years, ahead of Equities (9.79%), Bonds
(9.75%) and Cash (6.94%).

The second quarter of 2018 could be characterised by a reversal in the positive sentiment post the ANC elective conference in December 2017, which saw a strengthening in bond yields together with improvements in both business and consumer confidence during the first quarter of 2018. We saw the yield on the R186 bond softened during the quarter from 8.0% to 8.8%, which resulted in downward pressure on the valuations of South African focused property companies during the quarter.

The inability of the increases in both business and consumer confidence to translate into improved on the ground activity within the property sector and the overall economy as a whole, is likely to result in a further deterioration of the bottom up fundamentals for the South African focused companies in 2018. This is further supported by the capital allocation decisions of companies within the listed property sector who continue to invest more capital into offshore markets as opposed to the domestic sector.
At the end of the second quarter, the sector traded on a projected forward yield of 9.0% with an anticipated growth rate of 6.7% over the next 12 months. However, a positive development during the quarter was the recovery in the share prices of Resilient REIT Ltd (RES) and its associated companies. The share price
performance of these companies supported the outperformance of the fund over the quarter with RES (9.2%), Fortress REIT B units (23.5%), Greenbay Properties
(24.5%) and Nepi Rockcastle (6.0%) all outperforming the SAPY. The fund remains invested in the group of companies due to the current valuations of the companies
relative to the quality of its underlying physical property assets and the sustainable distribution growth outlook over the longer term.

Despite the positive share price appreciation experienced during the second quarter, we see the next set of financial results reported by the group of companies and the broader property sector to be a short term driver of improved confidence in the sector while the regulator continues its investigation of the allegations made against the Resilient group of companies.

The recovery of the performance of the fund on both an absolute and relative basis during the second quarter of 2018 provides investors with an example of the robustness and sustainability of our investment process, which provides us with the confidence to remain invested in attractive investment opportunities through periods of significant market volatility. We remain confident that our fund is able to withstand market shocks and is still the correct choice for long term investors as the numbers show.

The Absa Property Equity fund is an active, pragmatic value fund within the property sector. The fund's remarkable historical success is in part attributed to the unconstrained nature of the portfolio which is benchmark aware but not benchmark cognizant. In practice this means that the fund can deviate significantly from the benchmark through the cycle, where opportunities are identified.

Our primary objective is to be invested in the highest quality companies for the long term. The deliberate and active way in which the fund is managed can result in periods of higher volatility relative to the benchmark, to deliver results that are driven by the robust process, and portfolio managers conviction.

The fund's total return of -34.54% for the first quarter of 2018 was an underperformance of both the listed property index and the median manager by 14.93% and 16.19% respectively. While this is disappointing to us in the short-term, the fund still continues to be one of the best performing funds over the long-term. The SA Listed Property sector as a whole had a torrid first quarter and delivered a negative return of -19.61%, underperforming Equities (6%), Bonds (8.1%) and Cash (1.8%). However over the longer period, listed property continues to be one of the best performing asset classes returning 13.81% p.a. over the last 10 years, ahead of Equities (10.14%), Bonds (9.41%) and Cash (6.98%).

Looking at the situation before the de-rating in the sector at the end of the 2017, the listed property sector traded on a historical yield of 6.26% and a projected forward yield of 6.73%. At this time the outlook for the sector on the domestic front was negative with a subdued economic backdrop and political uncertainty. The ruling party's December elective conference however marked a change in sentiment towards South Africa.

Going into the first quarter of 2018, the property sector de-rated with the bulk of the downward price pressure being focused on Resilient REIT Ltd and its associated companies. The Steinhoff failure was still weighing heavily on the market and rumours around a report by Viceroy on Resilient and its associates impacted them negatively.

This group of companies made up 42.3% of the property sector at the end of 2017. Our fund's exposure to these counters at the end of December 2017 was 44.4%. The fund was in the process of reducing its holdings in both Nepi Rockcastle (NRP) and Greenbay Properties (GRP) on the back of valuations. Nepi was reduced from a peak of over 20% to a 13.3% exposure at the end of December (3% underweight relative to the benchmark). The Greenbay position was cut from 10% to 7.7%. We continued to hold the 2% overweight position in Resilient (RES) for tactical reasons as it had just been included in the FTSE/JSE ALSI40 index. The intention was to reduce this position as the index funds pushed the prices higher. We continued to hold close to 10% in Fortress (as we have done for a number of years) as we believe the long-term prospects for this company are one of the best on offer.
On 12 April 2018 we issued an investor update to certain of our clients, in which we expressed a view on the allegations against the Resilient Group of Companies and how the reaction thereto, has impacted on the healthy price determining ability for these property instruments. We do note and respect however, that certain market participants may not agree with our views which is well allowed; We believe that certainty in the property sector will return once the regulator has finalised its investigation of the allegations made against the Resilient group.

Q1 2018 was clearly an interesting time for all market participants, extreme market stress and volatility offer opportunities for fund managers to test whether their processes are sound and sustainable. We are confident that our fund is able to withstand market shocks and is still the correct choice for long term investors as the numbers show.

The fund delivered a total return of 26.79% for the 2017 year. This equates to an outperformance of both the listed property index by 9.64% and the median manager by 11.70%.

In terms of relative asset class performance, the SA Listed Property sector delivered positive growth in 2017 with a 17.15% total return performance, underperforming Equities (20.95%) but outperforming Bonds (10.19%) and Cash (7.52%). However, over the longer period, listed property has continued to be one of the best performing asset classes, returning 14.87% p.a. over the last 10 years, beating the returns on Equities (10.67%), Bonds (8.57%) and Cash (7.13%).

As at the end of the 2017, the listed property sector traded on a historical yield of 6.26% and a projected forward yield of 6.73%. The sector is expected to deliver between 8% and 9% distribution growth over the next twelve months. This growth outlook against a subdued economic backdrop, political instability and market uncertainty results in the SA listed property sector remaining as an attractive investment choice.