Portfolio Management (Final Yr Presentation)

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Presented by: Mothusi Lekgowe ∙ Shaun Amendra ∙ Kevin Nealis

PENSION FUND PORTFOLIO MANAGEMENTPresented to Trustees and Investment Consultants

15 December 2009

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AGENDA

• Economic and Property Market Overview

• Expected Performance

• Client Investment Strategy

• Composition Strategy

• Property Proposals

• Risk Analysis

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TRUSTEE'S OBJECTIVES

1. To generate a cash yield in excess of the gross redemption yield on Gilts.

2. Concentrate on covenant strength .3. To obtain a secure cash flow.

FUND MANAGER'S STRATEGY

1. Reweighting Property Sectors.2. Investing in Indirect Property Vehicles.3. Using Third Party Debt.

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ECONOMIC OVERVIEW

• Interest Rates• Inflation• Employment• Other

GDP Growth: Economy contracts by 0.3% in Q3 2009

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CURRENT PROPERTY MARKET OVERVIEW

• Decline of rents are decelerating.• Capital values are rising.• All property yield is 7.48%.• 5-15 year gilt yield is 3.98%.

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MEDIUM TERM OUTLOOK FOR PROPERTY MARKETAll Property Rental Value Growth Forecasts All Property Total Return Forecasts

Source: IPF Report, November 2009

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INVESTMENT STRATEGY

• Achieve secure income stream – addressing volatility. • Quality of covenants – must be of an A1, AAA covenant• Growth expectation – direct property market upturn in Q3. • Target Returns – above gross redemption yield on Gilts

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CASE FOR PROPERTY INVESTMENT

• Income streams – more stable than dividend payments.• Institutional leases – ‘upward only’.• Income stream – unaffected by fluctuating interest rates.• Diversification – spreading exposure.

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COMPOSITION STRATEGY

• Type: Direct or Indirect Investments? Which Property Sector? Property Investment Funds or Property Shares?

• Tenure: Leasehold or Freehold?

• Location: Provide realistic tenant demand and future potential growth.

• Management: Active or Passive Management?

ACQUISITION:DIRECT PROPERTY (Retail)146-152 Clarence Street & 21-25 London Road, Kingston upon Thames, Surrey.

• Lot Size 5,103 sq m• Term Unexpired 14.25 years• Net Passing Rent £690,000 pa• Asking Price £9.325m• Net Initial Yield 7%

• Target Rate 10%• Growth Rate 3.42%• Worth £9.366m• NPV £1.2m• IRR 10.55%

ACQUISITION:DIRECT PROPERTY (Retail + Office)Bracton House, 34 36 High Holborn, WC1V 6AE, London, UK.

• Royal & Sun Alliance Insurance plc • Rental Income £884k • Term Unexpired 4yrs• Asking Price £9m • Initial Yield 9.30%

• Target Rate 12%• Growth Rate 3.08%• Worth £11m • NPV £ 2.7m• IRR 17%

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CURRENT AND REVISED PROPERTY PORTFOLIOProperty Portfolio Index Sector Allocation

Retail 47.4%

Offices 31.4%

Industrial 16.5%

Other Property 4.7%

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INDIRECT PROPERTY INVESTMENT

Reasons for Indirect Property Investment:

1. Access to certain sectors2. Tax3. Liquidity 4. Entry Costs

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AVIVA PROPERTY INVESTMENT FUND

• Launched on March 24th 2003. • Objective is to obtain a secure

income return with some capital appreciation.

• Investment principally in real property but with exposure to other investment types.

Portfolio Sector Weighting

Performance as at 30th October 2009

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AVIVA PROPERTY INVESTMENT FUND

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RISK ANALYSIS

• Risks Associated With Strategy:• Risk can be defined as the degree of likelihood that an

expected outcome will not happen (Sayce et al). Fundamentally, there are two types of risk that affect assets:

1. Systematic (market-related) risk2. Non-systematic (specific) risk

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RECOMMENDED FUTURE INVESTMENT

• Retail Warehouses gained 4.0%.• The industrial sector saw a 1.5% increase

in capital values• The industrial sector saw a 3.5% total

return• Appeals to a variety of investors and has

experienced low tenant failure.• Use of Risk Hedging Instruments

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CONCLUSION• Economic prospects are improving.• Capital values are returning to growth.• Direct property proposals represent medium risk

investments and comply with the Trustee’s objectives.• Indirect Vehicles increase exposure to the property

market.• Diversification remains the most common reason for

moving into commercial property.

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Thank you for listening

Any Questions??

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Thank you for listening

Any Questions??