The Fund Commentary is provided on a quarterly basis and can be found on www.absainvestmentmanagement.co.za under Unit Trusts Minimum Disclosure Documents. The latest quarterly commentary available is for the quarter ending 30 September 2019.

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 4.9% for the second quarter of 2019 was an outperformance of both the listed property index and the median manager by 0.3% and 2.1% respectively. The fund recorded a strong quarter with the fund remaining the top performing fund over 5 years within the listed property sector. The SA Listed Property Index as a whole delivered a return of 4.5%, outperforming Equities (2.9%), Bonds (3.7%) and Cash (1.8%) over the quarter. Over the longer term, listed property continues to be one of the best performing asset classes returning 13.1% p.a. over the last 10 years, in line with Equities (13.2%) and ahead of Bonds (9.0%) and Cash (6.6%).

The second quarter of 2019, saw a continuation of the global investment themes of the first quarter, with central bank dovishness and declining global yields continuing throughout the quarter as the anticipation for reduced rates continues to grow. This macro environment has historically proved to be positive for REIT returns due to the attractive relative yield that REIT companies provide compared to fixed income yields. The major risk to the global economy remains the potential for a negative outcome on the trade negotiations between the USA and China, which has knock on effects for risk tolerance towards emerging market currencies and equities.

The South African economy continues to face multiple headwinds, with the latest reported quarterly GDP print showing the economy contracted 3.2% YoY for the first quarter of 2019 largely due to the impact of stage 4 load shedding implemented by Eskom. The impact of load shedding was compounded by a continued lack of consumer and business confidence, rising unemployment and continued investment by the government into loss making state owned companies. This has led to further deterioration in the expected growth for 2019 with growth expected to be 1.0% or lower, which is likely to continue to weigh on the growth profile of South African focused property companies in the short term.

In light of the challenging economic environment, reported results continue to show a deterioration in conditions within the listed property sector with a higher number of companies now expecting lower than expected growth in income over the next financial year. We expect the trend of negative reversions, lower escalations and elevated vacancies to continue throughout 2019. Income growth could be further impacted as companies within the sector focus on improving the quality of income distributed and deleveraging to improve the health of balance sheets to be a key focus for management teams at the expense of income growth.

The fund continues to view cash as a key tactical position in the short term. This cash position provides the fund with an attractive risk adjusted yield while providing the opportunity to take advantage of the current volatility within financial markets, where attractive pricing opportunities may arise.

The performance of the fund over both the short and long term provides investors with an example of the robustness and sustainability of our investment process and the ability for the fund to deliver attractive total returns for investors through the cycle. 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 -1.9% for the first quarter of 2019, with the fund delivering 3.7% over a 12-month period, which was an outperformance of both the listed property index and the median manager by 9.4% and 10.4% respectively. The SA Listed Property Index as a whole delivered a return of 1.5% for the quarter, underperforming Equities (8.0%), Bonds (3.8%) and Cash (1.7%). However, over the longer term, listed property continues to be one of the best performing asset classes returning 12.4% p.a. over the last 10 years, behind Equities (14.0%) and ahead of Bonds (8.7%) and Cash (6.6%).

Towards the end of 2018 and the beginning of 2019, rising concerns around slowing global growth were met by a more dovish tone from global central bankers, particularly the US Fed. This saw a strong recovery in the property sector early in the quarter as the "search for yield" investment theme returned to the fore as global bond yields declined on the back of a "lower for longer" expectation of global interest rates. However, this recovery was short lived as domestic issues came to fore, with uncertainty around the potential outcome of the General Election in early May together with Eskom implementing rolling blackouts putting further strain on already soft economic environment. The impacts of the power shortages have already been felt with economic growth expectations already being revised down for the domestic economy in 2019, with further risks to the downside.

Reported results continue to show a deterioration in conditions within the listed property sector with a higher number of companies now expecting lower than expected growth in income over the next financial year. We expect the trend of negative reversions, lower escalations and elevated vacancies to continue throughout
2019. A trend we have seen emerging during the reporting period this quarter has been management teams improving the quality of income distributed together with a focus on de-leveraging and improving the quality of their balance sheets at the expense of distribution growth.

Further impacting the sentiment towards the property sector was the Edcon recapitalisation, which would put additional pressure on what was already a benign growth outlook in 2019. While the potential for rental reductions had already become public knowledge in December 2018, the details over a practical implementation dragged into 2019 with finality only achieved towards the end of the quarter.

The fund continues to view cash as a key tactical position in the short term reducing exposure to select holdings within the fund during the quarter. This cash position provides the fund with the opportunity to take advantage of the current volatility within financial markets, where attractive pricing opportunities may arise.

The sector continues look attractive on a valuation basis, offering a high single digit forward income yield with inflation like growth over the next 12 months, which provides an attractive potential total return profile.

The continued recovery of the performance of the fund on both an absolute and relative basis since the beginning 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 historical success is partly a direct outcome of its active management style which enables the manager to take advantage of opportunities identified during the cycle.

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 -3.23% for the fourth quarter of 2018 was an outperformance of both the listed property index and the median manager by 0.75% and 0.99% respectively. We are pleased to see the recovery in the performance of the fund continue into the fourth quarter with the fund remaining one of the best performing funds over the long-term. The SA Listed Property Index as a whole which had a negative quarter and delivered a return of -3.98%, outperforming Equities (-4.9%), while underperforming Bonds (2.7%) and Cash (1.8%). However, over the longer term, listed property continues to be one of the best performing asset classes returning 12.08% p.a. over the last 10 years, in line with Equities (12.62%) and ahead of Bonds (7.68%) and Cash (6.70%). Per Morningstar data on 31 December 2018.

The fourth quarter of 2018 started with 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. However, in the latter part of the quarter, we saw an improvement in the rand and valuations across the JSE on the back off an interest rate increase by the SARB, trade tensions between the US and China beginning to taper together with a more dovish Fed outlook on interest rates in 2019. Despite this improvement in risk-on sentiment, we continued to see elevated levels of volatility in financial markets in the final quarter of 2018.

The fund took advantage of the attractive valuations within the listed property sector during the quarter where yields in the property sector were trading at a discount to bonds, increasing exposure to SA focused companies which provide a higher degree of sustainable income supported by high quality direct portfolios.

While we had chosen to increase our exposure to select companies during the quarter, reported results continue to show a deterioration in conditions within the listed property sector with a higher number of companies now expecting a decline in income over the next financial year. We expect the trend of negative reversions, lower escalations and elevated vacancies to continue into the first half of 2019. The current outlook for the sector supports our view that a high conviction portfolio with a limited number of holdings provides investors with protection against the current negative operating environment. Due to the above risk factors, the fund continues to maintain an overweight cash position. This cash position provides the fund with the opportunity to take advantage of the current volatility within financial markets, where attractive pricing opportunities may arise.

At the end of the fourth quarter, the sector traded on a projected forward yield of 9.8% with an anticipated growth rate of 5.3% 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 the correct choice for long term investors.