The fund gained 3.4% in dollars during the September quarter and 14.3% during the year to end September. After declining by 20% in dollars from the peak in February to August, the fund's unit price has gained around 14% since the low in August, as property shares attained good valuations and began attracting more buying once again. The big speculators like the hedge funds appear to have been shaken out.

On a valuation basis, US listed property shares (Reits) now stand at a discount to net asset value (NAV) of around 7% compared with a 4.8% average premium to NAV over the past 14 years. Globally, the discount is closer to 10%. As cash generative businesses, growing their cash flow by around 8% this year and 5-6% next year, we think these valuations look attractive.

The recent credit crisis in the US has affected property valuations a little negatively in that the cost of money rose. However, the US Federal Reserve has begun to tackle that problem by lowering the short-term Federal Funds rate from 5.25% to 4.75%, which is positive for property and equities. Broadly speaking, economic growth is continuing, even in the US, as is job creation and this means conditions remain positive for commercial property, even if a little less so than a year ago.

The fund has increased its allocation to Hong Kong property shares to 11% of fund, which is higher than the benchmark's 8.8%. China has been upped to close to 5% recently as demand continues to outstrip supply there. The fund is also very overweight in Canada (5.9% versus 3.5% for the benchmark), while the allocation to the US is now down to 35.9%.

The portfolio continued to struggle during the quarter after its huge run in the past couple of years. In dollar terms the portfolio was down6%(-9.1% in rand terms because of rand strength during the quarter). Over the year to end June, however, the fund was still up a creditable 22.1% in dollars or 20.7% in rands (rand gained 1.6% against the dollar during the year).

Offshore property shares had to deal with a few negatives. Firstly, bond yields shot up sharply in the big economies in acknowledgement that global growth was remaining strong enough to deny the possibility of any rate cuts during 2007, including in the US. So bond yields "normalized" meaning that longer term bonds yield more than shorter term bonds. Secondly, big short-term traders like hedge funds who had bought into property shares because they were so hot, switched out of property into regular equities because of the latter's superior recent performances.

The portfolio is still down about 11% in dollars from its peak in February, although it has regained 3% over the past week. Although the correction may not yet be over (no-one knows this as yet, of course) we still like this asset class in offshore portfolios. The key remains global economic growth and job creation, which is still robust and therefore favourable for property. On the negative side, bond yields may not have peaked yet.

We have witnessed a number of big private equity acquisitions of property shares in the US, Australia and elsewhere during the past few months which seems to lend credence to our view that property shares remain reasonably attractive. In fact we have seen a sharp correction in the UK (20-30% down) to the point where companies there are trading at discounts of 20% to their net asset values, implying that selling may have been overdone. US shares are at 8% discounts.

The portfolio was assisted by the rand's fall of 4.1% against the dollar, 4.6% against the euro and 4.7% against the pound, during the quarter. Therefore, it was still a successful quarter even though returns slowed from the frenetic pace of 2006. Looking ahead, of course one hopes that the portfolio continues to deliver superior returns.

However, the Bostonbased Fidelity fund manager (Steve Buller) prefers to talk about returns of 7-9% in dollar terms as being amore realistic expectation, but he does admit that a big part of the rise in property shares over the past few years has come from a reallocation of assets in portfolios from cash and bonds into property and he thinks this should continue, giving a structural underpin to the listed property market.

Buller notes that only 11% of commercial properties worldwide are in listed form, meaning that 89% are held privately (by insurance companies etc), so the latter are the big driver of returns. All that has happened of late is that listed property shares have merely kept pace with the much bigger private (unlisted) market. In the end, the key to further growth in property is economic growth and job creation (employment gains). So far this is favourable for most countries, even the US.

The portfolio is currently invested in listed property shares in seventeen countries. The biggest country holdings are the US (39% of portfolio), the UK (13.7%), Australia (11.5%), Japan (11.2%) and Hong Kong (7.1%). Most of the holdings are in commercial property, with a smaller percentage (13%) in residential income property (such as a block of flats or apartments). The portfolio is overweight in "diversified" sectors, which includes all the others, ie retail, industrial, offices, hotels etc. This is a more defensive holding. The portfolio is underweight in offices and retail

The fund delivered outstanding US Dollar returns of 3.82% in December 2006, well ahead of the published benchmark return of 2.73% for the samemonth. Returns for the quarter were at 16.39%, ahead of the benchmark return of 14.04%. These exceptional returns saw the fund end 2006 as the 2nd best performing fund in South Africa out of 707 funds. (with returns of 52% for the year in Rand terms). The 2006 performance of the fund, whichway exceeded expectations, was in line with that of Global Real Estate performance, which has seen this asset class finishing the year well ahead of other asset classes, yet again!

The Fund's biggest country holdings as at 31 December 2006 were in the USA (39%), the UK (15%), Japan (11%) and Australia (10%), with the balance spread out in Hong Kong (6%), Continental Europe (9%), Singapore (2%) and other smaller markets (6%), including 3% in Germany. Quarterly returns in dollars were USA (- 2.35% vs benchmark of -1.78%); UK (10.09% vs benchmark 9.00%); Japan (4.22% vs benchmark of 3.65%), Australia (8.40% vs benchmark of 6.9%) and Hong Kong (6.58% vs benchmark of 6.29%). European markets had the best 2006 return (59% in dollars). The fund's investments were spread across different sectorswith the major investments being in Diversified (29%), Offices 23%, Retail (21%), Residential (15%), Industrial (6%) and Hotels (5%) and other (1%). These hot returns have attracted hot money (eg hedge funds), leading to greater volatility for property shares than even Nasdaq-listed shares. So some caution is called for.

Note:All performances and returns in US$, unless otherwise stated