-2.25 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 4.75 4.25 3.75 3.25 2.75 2.25 1.75 4.75 1.25 4.25 0.75 3.75 0.25 3.25 -0.25 2.75 -0.75 2.25 -1.25 1.75 -1.75 1.25 MONTHLY NEWSLETTER | ISSUE 154 June 2011 -2.25 Feb-09 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11 May-11 Jun-11 0.75 0.25 In vogue -0.25 -0.75 -1.25 -1.75 -2.25 Feb-09 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11 May-11 Jun-11 The fortunes of these two capital-intensive Chart 3: UK break-even rates reﬂecting inﬂation Alban Lhonneur sectors have been intertwined since the expectations over the next 5 Years Assistant fund manager Lehman collapse as chart 1 illustrates. The positive correlation collapsed in November 2010 and is now firmly negative. 2.8 So what has been driving this 2.6 Since we last wrote this column (“Reasons to decoupling? % 2.4 be cheerful” – December 2010) European real Property offers attractive returns estate equities have produced a 14% total 2.8 2.800 return which stands 10% ahead of the wider in a negative real interest rate 2.2 equity market (DJ STOXX Europe). This echoes 2.6 environment 2.614 a relative outperformance of 3.5% in 2010. The combined effect of global economic 2.0 % 2.4 slowdown, multi-speed Europe and the Jul Aug Sep Oct 2010 Nov Dec Jan Feb Mar Apr May Jun 2011 2.400 Listed real estate is often regarded as difficulty in quarantining the sovereign balance Source: Bloomberg a ‘hybrid’ equity sector sitting between sheet issues of smaller Eurozone countries financials and physical real estate. So far 2.2 has kept government yields at historically low 2.200 this year real estate has been amongst the 5% surplus between property levels. As shown in chart 2 real interest rates top performing equity sectors in the UK, 2.0 yield and ﬁnancing cost in -2.000 remain ultra-low (Eurozone, Sweden) or firmly Continental 2010 Nov and Jan Feb Mar Apr May Jun Europe Dec the US while at Jul Aug Sep Oct 2011 Jul Aug Sep in negative territory (UK). 2010 Oct Nov Dec real terms Jan Feb Mar 2011 Apr May Jun Hi: 0.9762 the other end of the spectrum banks have In the UK, sterling futures contracts imply 1.00 significantly underperformed. Interestingly, since the beginning of the year that three month LIBOR will increase from the listed property sector has outperformed 0.8% today to around 1.5% by November Chart 1: Correlation between ePRA UK Property in both a rising and falling interest rate 2012 and to 2% by September 2013. The five 0.50 and FTSe Banks environment. year swap (which factors in this interest rate Hi: 0.9762 trajectory) is priced at around 2.4%, implying 1.00 When swap rates began to rise investors Hi: 0.9762 0.00 that a well capitalised UK property company 1.00 Correlation -0.7287 praised the hedging capabilities of the sector ought to be able to finance acquisitions at a against current inflation (above 4%), inflation total debt cost of around 4%. 0.50 expectations over 5 years (approaching 3% -0.50 0.50 - see chart 3), as well as any upside risk to We are of the opinion that property, offering Low: -0.7287 those expectations. yields of Jun Sep Dec Mar Jun Sep Dec averageSep Dec Mar 6% to 6.5% across the Mar Jun 0.00 2008 2009 2010 2011 UK and Europe with the likelihood of further 0.00 Since April, bond yields have receded on income growth to come, remains attractively the back of the recent run of poor economic priced relative to fixed income and other -0.50 data. Likewise we believe this falling rate -0.50 asset classes. Indeed, while the nominal environment has been supportive to the Low: -0.7287 yield surplus (property rental yield less all-in Low: -0.7287 sector given the security and relatively high Dec financing cost) stands currently at 2% in the Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Mar Jun Sep Dec Mar Jun 2008 2009 2010 2011 level of its income stream. 2008 2009 2010 2011 Source: Bloomberg UK, it approaches 5% in real terms. We are particularly positive on prime property Chart 2: 5-year real interest rates in Central London, Paris and Stockholm but 4.75 are more negative on Benelux, Southern Europe and the UK regions. 4.25 UK Euro Sweden 3.75 3.25 2.75 2.25 “If you owe the bank $100 that’s % 1.75 1.25 your problem. If you owe the bank 0.75 0.25 $100 million, that’s the bank’s 0 problem.” John Maynard Keynes -0.25 -0.75 The reasons behind the underperformance -1.25 of the banking sector are plentiful; elevated -1.75 -2.25 levels of sovereign risk, European Banking Authority EU-wide stress test results due Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 shortly, regulatory (Basel III) and Source: Bloomberg www.thamesriver.co.uk +44 (0)20 7360 3550 re-capitalisation concerns. This challenging L&G and Allianz are incentivised under the Our core strategy continues to have a quality environment may further restrict the banks’ Solvency II rules to increase lending secured bias but we make selective tactical allocations lending capacity to the corporate sector in against property as it commands a minimal into more value-add and secondary asset general and to commercial real estate (CRE) capital requirement as opposed to between portfolios where we assess that the inherent in particular. 25% for direct property investment and occupational and asset value risks are above 39% for property equities. Overall we more than priced into the stock valuation. The problem is that a high proportion of the anticipate disintermediation (including private These include leveraged office and industrial outstanding debt is lent against non-prime placements) to accelerate. A lot has been companies in Sweden, Finland and Germany property of the type which is not rising in written and talked about the dire state of UK value, which is seeing increased levels of After more than a year in existence, the banks. An estimated 43% of Lloyds Banking vacancy and therefore losing income with UCITS III Real Estate Securities Fund has Group and RBS property loans are now in which to service the outstanding loans. In returned 28.6% outperforming its benchmark ‘intensive care’. Nevertheless, the recent the UK, which accounts for roughly a third by 6.75% since launch to the end of May £560m loan refinancing by British Land done (£300bn) of the Pan-European CRE debt, 2011. The Fund has outperformed its at attractive margins from a pool of lenders Savills estimates that 19% of UK loan books benchmark in each quarterly period since led by RBS illustrates their appetite to lend are secured against good secondary property, inception and successfully navigated through out to strong covenants. 19% against ‘poor secondary’ and 38% heightened volatility and a series of macro against tertiary which is hardly financeable shocks including Eurozone sovereign debt in current standards. The Irish position is Equity capital waiting on issues, the Japanese disaster and political the worst in Europe with the National Asset the sidelines instability in the Middle East. Management Agency holding €70 billion of Since the market bottomed out in 2009, bad loans and pledging to reduce this by sovereign wealth funds (SWF) have been 25% by the end of 2013. So far opportunistic active net acquirers of physical commercial investors hoping to cash in on the sale real estate. This appetite remains unabated of distressed assets have been largely and has filtered through the listed property disappointed both by the paucity of offerings sector. Indeed the Singaporean GIC fund and by the lack of growth in what they have acquired 6.2% of the recently floated Berlin purchased to date. With overloaded loan residential owner GSW. During Spring 2011 the books, the banks have little appetite for new Norwegian SWF (Norges Bank) sent a strong lending. There is a supply of fresh bank debt signal to the market by building stakes above but this capital doesn’t want to flow to the 3% in seven REITS predominantly in the UK for property sub-sectors and geographies which a combined market value of £750m. are most in need of it. We firmly believe that a large number of companies in which we invest now enjoy the Worries about listed property combination of a portfolio that is exposed reliance on banking sector to markets that will see rental and capital appear to have waned growth over the next 18 months, as well as a In contrast, the listed property companies solid balance sheet that allows them to take started to repair their balance sheets in advantage of investment and development 2009 raising a cumulative €19.3bn of fresh opportunities as they arise. equity through rights issues, optional share dividends and accelerated book buildings Polarisation has only started (Source: Dealogic). With the help of asset and should provide excellent reflation our Pan-European listed property universe now operates under robust leverage investment opportunities The expected divergence in performance ratios with an average Loan-To-Value of 44% across sectors and geographies will shape with only 9% of debt to be refinanced over the the exposure of the portfolios and provide next two years and a healthy interest cover excellent investment opportunities for active ratio of 2.8x. stock pickers like ourselves. Besides this, we regard the asset quality Our judgement is that the polarisation of of the listed property sector as noticeably performance between prime and non-prime superior to most of the bank property assets will take longer than many think to collaterals (asset portfolios) or the national play out. A long list of mezzanine lenders has proxy (e.g. IPD) with an exposure skewed emerged across Europe and the UK since towards the buoyant London and Paris offices the Lehman collapse. However, their return and good quality retail portfolios. targets mean that investment yields of prime As a result, listed real estate companies and good secondary assets are not quite continue to enjoy superior access to capital cheap enough. Financing is available for those markets through equity, plain vanilla and good-quality properties. However, we expect convertible bonds, mezzanine debt, secured that prices of secondary and tertiary assets and unsecured lending from a more diverse will have to be adjusted downwards to attract pool of providers including life insurance funding from these alternative providers groups. Indeed, the likes of Aviva, Axa, of capital. Thames River Capital LLP is authorised and regulated by the Financial Services Authority THAMES RIVER MONTHLY NEWSLETTER | Issue 154 June 2011 2 Important notice – regulatory information and risk warnings This document is issued for information only by Thames River Capital LLP (“Thames River, the “Firm”), the Funds Business of the F&C Group. The Firm is authorised and regulated by the Financial Services Authority (“FSA”). Content relating to unregulated collective investment schemes is only directed at Eligible Counterparties, Professional Clients or investors meeting the FSA’s COBS 4.12 categories. It must not be relied upon by non-qualifying persons. It does not constitute an offer by the Firms to enter into any contract/agreement nor is it a solicitation to buy or sell any investment. Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. 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This document is not aimed at persons who are residents of any country, including the United States of America (“USA”) and South Africa, where the funds referred to herein are not registered or approved for marketing and/or sale or in which the dissemination of information on the funds or services is not permitted. This document should not be distributed to any third party without the express approval of the Firms and has been designed for a professional audience only. Funds referred to herein are neither registered under the Securities Act 1933 of the USA, nor are they registered under the Investment Company Act of 1940. Consequently, they cannot be offered for sale or be sold in the USA, its territories, possessions or protectorates under its jurisdiction, nor to nationals, citizens or residents in any of those areas. This document should be read in conjunction with the Prospectus of the relevant fund that will exclusively form the basis of any application and an investment should not be contemplated until the risks of investment and tax implications have been considered fully. Thames River Hillside Apex Fund SPC, Thames River Isis Fund Limited, Thames River Longstone Fund Limited, Thames River Sentinel Fund, Thames River Warrior Fund, Thames River Warrior II Fund, Thames River Distressed Focus Fund, Thames River Africa Focus Fund, Thames River Property Growth & Income Fund Limited are unregulated collective investment schemes which are not recognised schemes under s.264 of the Financial Services and Markets Act 2000. The Nevsky Fund plc is an unregulated open-ended investment company with variable capital and incorporated with limited liability in Ireland. The fund is a Dublin domiciled Qualifying Investment Fund (QIF) listed on Irish Stock Exchange. Thames River Multi-Select Fund, Thames River Global Boutiques Fund and Thames River Absolute Return Fund are sub funds of Thames River Traditional Multi Funds plc, an open-ended investment company with segregated liability between sub-funds incorporated in Ireland, authorised by the Central Bank of Ireland and listed on the Irish Stock Exchange. This company is a recognised collective investment scheme under s.264 of the Financial Services and Markets Act. Thames River Hedge+ is a cell of Thames River Multi Hedge PCC Limited, listed on the London and Channel Islands Stock Exchanges. The Thames River European Absolute Return Fund, Thames River High Income Fund, Thames River Global Credit Fund, Thames River Credit Select Fund, Thames River Global High Yield Fund ,Eastern European Fund, Thames River Global Emerging Markets Fund, Thames River Global Bond Fund (£), Thames River Global Bond Fund (€), Thames River Global Bond Fund ($), Thames River Emerging Asia Fund, Thames River World Government Bond Fund, Thames River Water and Agriculture Absolute Return Fund, Thames River Real Estate Securities Fund, Thames River Global Emerging Markets Absolute Return Fund and Thames River – BSI Bond Opportunity Fund are sub-funds of Traditional Funds plc, an open-ended investment company with segregated liability between sub-funds incorporated in Ireland, authorised by the Central Bank of Ireland and listed on the Irish Stock Exchange. This company is a recognised collective investment scheme under s.264 of the Financial Services and Markets Act. TR Property Investment Trust plc is a UK investment trust listed on the London Stock Exchange. Many of the protections provided by the United Kingdom regulatory structure may not apply to investments in these funds, including access to the Financial Services Compensation Scheme and the Financial Ombudsman Service. Past performance is not a guide to future performance. Values may fall as well as rise and investors may not get back the amount invested. Income from investments may fluctuate. Changes in rates of exchange may have an adverse effect on the value, price or income of investments. The unregulated collective investment schemes and TR Property Investment Trust plc are permitted to and use gearing as an investment strategy. The effect of such gearing is that movements in the price of the schemes will be more volatile than the movements in the prices of their underlying investments. 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This factor can make it difficult to obtain independent verification of the investment value and the extent of the risks to which they are exposed. (110629) Potential investors should refer to the “Funds” page on http://www.thamesriver.co.uk to view current side letters relating to the schemes. Notice to Investors: Please note Paying Agents/Representatives for the following countries have been appointed by Traditional Funds plc in accordance with local requirements: Germany, Austria, Switzerland, Malta, Luxembourg, Netherlands, Belgium, Sweden, Norway, France, Spain and Italy. Local language versions of the Traditional Funds plc prospectus and simplified prospectus are available from their offices. For a full list of Paying Agents’ details, please follow the following links: http://www.thamesriver.co.uk/Downloads/PayingAgents/UCITSIII-ClosedEnded.aspx Although Thames River Capital LLP has taken all reasonable care to ensure that the information contained in this Newsletter is accurate no representation or warranty (including liability towards third parties), expressed or implied, is made as to its accuracy, reliability or completeness by Thames River Capital LLP. Opinions and any other contents expressed in this newsletter are provided for your personal use and informational purposes only and are subject to change without notice. Updated versions of this Newsletter may be viewed on our website at www.thamesriver.co.uk. Nothing contained in this Newsletter constitutes investment, legal, tax or other advice and is not to be relied on in making an investment or other decision. You should obtain relevant and specific professional advice before making any investment decision. THAMES RIVER MONTHLY NEWSLETTER | Issue 154 June 2011 53 SALeS – UK John Yule Andy Cowe Chris Donnelly Edward Morse (UK Sales Director) (Strategic Partners – South) (Strategic Partners – North) (London Institutional) email@example.com firstname.lastname@example.org email@example.com firstname.lastname@example.org 020 7360 3587 / 0131 718 1385 0131 718 1204 020 7360 1270 07802 819903 Gavin Ingram Graham Finlay Jason Anderson Frank O’Donnell (Insurance /Distributors) (Scotland & N. Ireland – Retail) (London & South – Retail) (Strategic Partners – Retail) email@example.com firstname.lastname@example.org email@example.com frank.o’firstname.lastname@example.org 0131 718 1252 0131 718 1186 07817 555 563 0131 718 1203 / Mark Parry Martin Weisinger Mike Briggs 07850 200 297 (Strategic Partners – Retail) (Midlands, S. England & (Midlands – Retail) Mark Bain email@example.com Channel Islands – Wholesale) firstname.lastname@example.org (Scotland, N.Ireland & N. England – 07730 718 285 email@example.com 07710 398 643 Wholesale) 020 7360 1273 Sarah Ackland Stewart McAndie firstname.lastname@example.org (Investment Partners) Simon King (London – Wholesale) 0131 718 1201 email@example.com (London – Wholesale) firstname.lastname@example.org Paul Moulton 020 7360 1316 email@example.com 020 7360 3597 (North – Retail) 020 7360 1275 firstname.lastname@example.org 07966 789 256 SALeS – INTeRNATIONAL Matthew Sethard-Wright Sarah Ackland Simon King Simon Powell (International Sales Director) (Investment Partners) (Middle East) (Asia – Peak Capital Ltd) email@example.com firstname.lastname@example.org email@example.com firstname.lastname@example.org +44 (0)20 7360 1271 +44 (0)20 7360 1316 +44 (0)20 7360 1275 +852 2526 9086 Javier Garcia Diaz James Beddall James Young Cora Pfab (Spain) (Benelux & France) (Switz., Germany, Austria) (Germany) email@example.com firstname.lastname@example.org email@example.com firstname.lastname@example.org +44 (0)20 7360 3585 +352 2630 2133 +44 (0)20 7360 1276 +49 170 780 1048 Andres Lagos G. Tom Ormrod (LATAM) (UK – Wholesale) email@example.com firstname.lastname@example.org +44 (0)20 7360 3576 020 7360 1371 SALeS SUPPORT Vanessa Lawley Gemma Nunn Laura McBride Sinead Aitken (Head of Sales Support) (Senior Sales Support) (Business Development – Europe) (UK – Retail) email@example.com firstname.lastname@example.org email@example.com firstname.lastname@example.org +44 (0)20 7360 1272 +44 (0)20 7360 3500 +44 (0)20 7360 3513 0800 085 0383 Nicki Elliott Fergus Ramsay Afssane Nilipour (International) (UK – Retail) (International) email@example.com firstname.lastname@example.org email@example.com +44 (0)20 7360 3512 0800 085 0383 +44 (0)20 7360 1323 Max Harper Diane Bowden (UK – Wholesale) (UK – Wholesale) firstname.lastname@example.org email@example.com +44 (0)20 7360 3557 0800 085 0383 ADMINISTRATOR DeALING Northern Trust International Northern Trust International Contact: Fund Administration Fund Administration Ann-Marie Ferguson Services (Ireland) Ltd Services (Guernsey) Ltd Email: firstname.lastname@example.org or Georges Court PO Box 255 email@example.com 54-62 Townsend Street Trafalgar Court, Les Banques Traditional Funds Tel +353 (0)1 542 2216 Dublin 2, Ireland St Peter Port, Guernsey, Hedge Funds Tel +353 (0)1 434 5059 GY1 3QL Fax +353 (0)1 670 1185 Thames River Capital LLP 51 Berkeley Square London W1J 5BB Tel: +44 (0)20 7360 1200 Fax: +44 (0)20 7360 1300 firstname.lastname@example.org www.thamesriver.co.uk Thames River Capital LLP is authorised and regulated by the Financial Services Authority. 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