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APN AREIT FundINDEPENDENT ASSESSMENT
This report has been prepared for financial advisers only
*
ScopeAdviser Edge independent assessments are conducted by Barik Pty Ltd trading as Adviser Edge Investment Research (Adviser Edge) which has developed a key industry sector review process that follows a methodology developed specifically for this asset class.
Key PrinciplesThe underlying principles of the assessment process are to:
– identify the long term commercial potential of the Responsible Entity;
– evaluate management’s capabilities, previous performance in the specific industry and the stability of the organisation;
– evaluate identified markets (domestic and international – existence, stability and growth potential);
– benchmark key performance assumptions and variables against industry peers;
– weigh up the relevant risks of the Responsible Entity;
– assess structure and ownership;
– determine if the Responsible Entity is structured in such a way as to protect investor’s interests; and
– allow an opinion to be formed regarding the investment quality of the Responsible Entity.
Site AssessmentAdviser Edge conducts a detailed site inspection of the projects/properties within the Responsible Entity’s managed funds.
The site assessment considers the following areas:
– suitability of the site for the purpose intended;
– management skills, qualifications, capabilities and experience; and
– associated property risks and their management.
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DisclosureAdviser Edge has no involvement in this fund or any of the organisations contained in the product disclosure statement. This assessment has been undertaken by Adviser Edge on an independent basis and does not constitute an investment recommendation. It is designed to provide investment advisers with a third party view of the quality of this fund, as an investment option. Adviser Edge charge a standard and fixed fee for the third party review. This fee has been paid under the normal commercial terms of Adviser Edge.
Report Date15 June 2009
INTRODUCTION
CONTENTS
Summary 2Market Overview 6 Corporate Governance 9 Management & People 11 Fees & Commissions 13 Investment Analysis 14 Asset Allocations 18 Process Analysis 20
SUMMARY 2
Domestic Property Securities Fund Details
Fund Name APN AREIT Fund
APIR Code APN0008AU
Managers APN Funds Management Limited
Location Melbourne, Victoria
Responsible Entity APN Funds Management Limited
Custodian RBC Dexia Investor Services
Investment Details
Fund Inception 19 January 2009
Fund Size at 28 February 2008
$540,000
Fund Type Unlisted Trust, Open Ended
Return Objective 110% of the average yield of the S&P/ASX 200 Property Trusts Dividend Yield
Benchmark S&P/ASX 200 Property Trusts Dividend Yield1
Number of stocks in portfolio at 28 February 2009
17
Gearing (Fund/Underlying) 0%/39% (based on top-ten holdings)2
Investment Specifications Summary
Minimum Application $1,000
Minimum Withdrawal $1,000
Contribution Fee Nil
Management Expense Ratio Wholesale: 0.85%, Retail: 1.05%
Buy/Sell Spread +0.25%/-0.25%
Property Sector Diversified
Distributions Frequency Monthly
Tax Deferral Rate PDS target greater than 20%
Loan Facility N/A 1 For the purposes of benchmark performance calculation, data for the ASX Property Trust Accumulation
Index was used for the period prior to the official inception of the S&P/ASX 200 Property Trust
Accumulation Index in March 2000. This index was later renamed the S&P/ASX 200 A-REIT Accumulation
Index to be in line with international convention. The three series mentioned are collectively referred to as
the S&P/ASX 200 A-REIT Accumulation Index throughout the review.
2 Underlying liabilities to tangible assets as at most recent reporting period.
Adviser Edge Rating
SUMMARY 3
Investment Summary
The APN AREIT Fund (the Fund) is an open ended unlisted registered managed investment scheme. It is aimed at investors seeking exposure to a diversified property portfolio by investing into Real Estate Investment Trusts (REITs) across the Retail, Residential, Commercial, Industrial and Hotel sectors. Through the Fund’s underlying assets to REITs, the Fund’s geographic exposures are spread across Australia, North America, Europe and the Asia Pacific region. The Fund does not directly invest in real property, mortgages or unlisted property securities.
Investment Philosophy Underlying this Product
The Fund seeks to differentiate itself by focusing on providing investors with a consistent, relatively high level of income, combined with some capital growth. The Fund pays distributions on a monthly basis, distinct to peers which generally pay distributions on a quarterly basis. The Fund’s income focus combined with an active management approach and emphasis on property fundamentals underlies the Fund’s investment philosophy.
The stated investment objectives are to achieve a gross annual income yield (before management fees and expenses) that equates to 110% of the average yield of the S&P/ASX 200 Property Trusts Dividend Yield series, with a tax-advantaged income component. In addition, the Fund aims to maintain the real value of capital by achieving capital growth that matches CPI growth over a five to seven-year time horizon, and to minimise volatility.
The Fund has received a 4-star rating.
Recent Changes
While the Fund is a relatively new investment vehicle, at the end of April 2009, the Fund achieved a three-month return of -2.5%, in comparison to the benchmark return of -11.2% for the corresponding period.
Adviser Edge’s Review
The rating achieved by the Fund has been positively influenced by the experience of the senior management in place. Michael Doble, who is ultimately responsible for the management of the Fund, works closely alongside Portfolio Managers Andrew Smith, Pete Morrissey, Damian Diamantopoulos and analyst Cheng Yeoh. The Portfolio Managers work together to combine their research efforts, and are supported by the analyst. Howard Brenchley is the Chief Investment Officer, and while his position
is largely strategic he maintains an operational role by chairing the weekly investment committee meetings. The team together possesses over 90 years’ investment experience across all stages of the property and business life cycle, and have worked in both the direct and listed property fields. Overall, the quality of the investment team is expected to be a key positive factor in the Fund’s ongoing performance.
Adviser Edge has undertaken a review of the proprietary modelling in place, and believes that it incorporates a high level of detail in a consistent framework. The Fund utilises a Beta Matrix, calculated on an asset-by-asset basis, which is used as a driver in the Fund’s discounted cash flow models. The Beta output may be geared to reflect APN’s view on factors such as management quality, gearing and corporation-style earnings. The Fund’s ability to formally assess both qualitative and quantitative aspects within the Betas provides a solid platform for stock selection. This has had a positive impact on the Fund’s rating.
Adviser Edge believes that the ability of the Fund to utilise staff resources and operating systems across the broader APN Property Group provides the Fund with a clear advantage over other market competitors. The Fund’s ability to draw from the resources of APN’s broader property business enhances strategic decision-making and operational capacity.
It should be noted the Fund maintains a relatively active approach to both stock selection, and portfolio construction at the asset class allocation level, in comparison to peers. Unless approved by the investment committee, the Fund’s mandate restricts it from investing no more than 20% of the portfolio into an individual stock. As a result the Fund’s portfolio holdings will demonstrate greater divergence from the benchmark, which has a weighting of over 50% to Westfield Group as at the end of May 2009.
Adviser Edge has reviewed the corporate governance system in place at APN, and believes that they are slightly below best practice standards. This assessment rests on the fact that the majority of board members are not independent. It is believed that independent representation would enhance the effectiveness of the board in reviewing and challenging the performance of management. APN has advised Adviser Edge that they are in the process of reviewing this issue. Adviser Edge will closely monitor developments going forward.
The Fund’s parent entity, APN Property Group Limited has experienced significant declines in revenue and profit in the financial year 2008. Adviser Edge believes this is an issue that needs to be monitored in the current market environment. It is important to note however the Group has continued to be profitable and holds a small proportion of liabilities.
Overall fees are in line with the peer average. The buy/sell spread and the annual management expense ratio of 0.50% and 0.85% respectively fell in line with the 0.50% and 0.81% recorded by the peer group.
Although the Fund under review is a relatively new investment vehicle, APN has advised that the Fund will be managed with the same investment philosophy, investment team and mandate as the APN Property for Income Fund, excluding the unlisted property trust. Adviser Edge believes that the quantitative analysis of the listed property trust component of the APN Property for Income Fund No. 1 provides insights into the effectiveness of active management and the Fund’s investment approach.
The returns of the listed property trust component of the APN Property for Income Fund No. 1 have outperformed the benchmark index and peers on an annualised one and three-year basis. Despite a fundamentally benchmark-unaware approach, the listed property trust component of the APN Property for Income Fund No. 1 was still able to produce returns above peers during most of 2008.
Readers should keep in mind that the performance figures provided relate to the APN Property for Income Fund No .1 after stripping out the unlisted property trust component and not the actual APN AREIT Fund.
SUMMARY 4
Fund Performance to 28 February 20091
3-Month 6-Month 1-Year 3-Year
Fund -31.1% -53.0% -56.7% -24.8%
Benchmark2 -32.3% -52.2% -57.4% -25.2%
Peer Average -28.8% -51.0% -57.8% -26.1%1 Total return net of fees assuming dividend re-investment, three-year returns annualised. 2 Benchmark S&P/ASX 200 A-REIT Accumulation Index.
Chart One: Growth of $10,0001
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
$18,000
Aug
05
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Feb
06
May
06
Aug
06
Nov
06
Feb
07
May
07
Aug
07
Nov
07
Feb
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May
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Aug
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Feb
09
Fund Benchmark
Chart Two: Comparative one-year returns1
-57%
-25%
32%
-60%
-40%
-20%
0%
20%
40%
Feb 09Feb 08Feb 07Feb 06Feb 05
Fund Benchmark Peer Average
Chart Three: Excess returns1
-10%
-5%
0%
5%
10%
Feb
09
Nov
08
Aug
08
May
08
Feb
08
Nov
07
Aug
07
May
07
Feb
07
Nov
06
Aug
06
May
06
Feb
06
Nov
05
1 Month Excess Return Accumulated Excess
1 Note: Figures relate to the comparable listed property trust component of the APN
Property for Income Fund No .1 and not the actual Fund.
Strengths of the Fund• APN’s senior management personnel are highly experienced
property professionals
• The Fund has access to support and input from the broader APN property group
• Detailed and consistent proprietary modelling procedures are utilised as part of the analysis process
• The listed property trust component of the APN Property for Income Fund No. 1 has out-performed both peers and the benchmark on an annualised one and three-year basis
Weaknesses of the Fund• APN’s corporate governance is slightly below best practice,
as the board of directors does not have a majority of independent members
Other Considerations• The Fund adopts a relatively benchmark-unaware approach
• APN Property Group Limited experienced significant declines in revenue and profit for financial year 2008
• Being a new Fund, there is currently no historical returns on the Fund itself to measure
• The overall fee structure is in line with peers
SUMMARY 5
The A-REIT Market in Summary
Despite the dramatic A-REIT price slides through to June 2008, Adviser Edge believed at this time that there still existed substantial risk in short-term investment. This short-term risk was noted with particular regard to the June 2008 reporting period, where it appeared likely that many A-REITs would fall short of investor and analyst expectations on earnings and distribution payments.
Through to April 2009 the market declined a further 47.1% from its June 2008 low, with some stocks underlying the index suffering price decimations of over 90%.
Both economic and direct property fundamentals have continued to deteriorate through that latter half of 2008 and the first quarter of 2009. Underlying asset capitalisation rates have deteriorated during the December 2008 reporting period, with many listed entities reporting softening of approximately 1% of these rates on their direct property holdings. However, Adviser Edge believes that these revaluations have not been representative of the full extent of market movements.
On aggregate, it appears as though the market has priced in a far stronger softening of capitalisation rates, in the order of 2% to 3% from the direct market’s strongest valuations. Despite these signals from investors, pressure from creditor covenants relating to debt as a proportion of the value of real estate on most A-REITs balance sheets is a strong deterrent for A-REIT managers looking to recognise write-downs of their properties.
This pressure is perhaps most noted in the actions that many A-REITs have taken to suspend, or greatly reduce, dividend payments. Earnings are being retained en masse in an attempt to assuage creditor concerns, often by voluntarily paying off portions of drawn debt and thereby reducing gearing ratios.
Forward Yield by Sector
0%
5%
10%
15%
20%
25%
30%
35%
Div
ersi
fied
REIT
s
Indu
stria
lRE
ITs
Off
ice
REIT
s
Resi
dent
ial
REIT
s
Reta
il RE
ITs
Spec
ialis
edRE
ITs
Ana
lyst
Est
imat
ed F
orw
ard
Yie
ld
Median Weighted Average
Source: Adviser Edge, Bloomberg.
Given the dramatic stock price falls within the A-REIT market during the current downturn, yields have become increasingly
more attractive. The median current yield of A-REITs, calculated as dividend payments over the last 12 months over the current price, has been recorded as well over 20%. What such analysis doesn’t take into account however is the heavy distribution cuts that have been taking place and the effect this will have on yields in the coming year. On a 12-month forward basis, with respect to analyst consensus, the weighted average figure is closer to 12%. While a yield of 12% does remain quite attractive relative to regular equities, Adviser Edge notes that the analyst consensus figures used will likely be subject to heavy revision as cash flow pressures further reduce distribution payments.
Westfield member weighting within A-REIT indices
51%
47%
36%
29%
33%
34%
20%
30%
40%
50%
60%
Apr 09Dec 08Dec 07Dec 06Dec 05Dec 04
Perc
ent
of In
dex
by M
arke
t C
apAgainst ASX 300 A-REIT Against ASX 200 A-REIT
Source: Adviser Edge, Bloomberg.
The collapse of many stocks within the tail of the S&P/ASX 300 A-REIT Index has been reflected in the burgeoning weight of Westfield Group (ASX: WDC) as a member of the index. Westfield’s persistent historic under-performance in rolling periods to December 2006 resulted in a diminishing influence within the capitalisation weighted index at a member weighting of 29%.Ballooning to 51% of the S&P/ASX 300 A-REIT Index as at April 2009, an overwhelming exposure to a single retail-property stock is now evident. Now more than ever, popular risk-management mandates of +/-5% to an index weighting may ironically be a rigid barrier to such funds achieving risk-optimised or risk-reduced A-REIT portfolios.
Adviser Edge’s fundamental concerns regarding the A-REIT market are the identified issues of high leverage, the omission of dividend payments, and the fact that index member diversification has reached a historical low. While Adviser Edge’s view is that downside risk is far lower than at the June 2008 assessment, it is also believed that high volatility will persist over the medium-term. Adviser Edge’s preferences in a declining market remain for the strong use of active management, and those mandates which provide the greatest flexibility to portfolio managers.
MARKET OVERVIEW 6
The following market overview represents the views of Adviser Edge at the time of writing the report.
Historic Market Performance
Rolling one-year returns
-60%
-30%
0%
30%
60%
Apr 93 Apr 95 Apr 97 Apr 99 Apr 01 Apr 03 Apr 05 Apr 07 Apr 09
ASX 300 A-REIT Accumulation Index ASX 300 Accumulation Index
Source: Adviser Edge, Bloomberg.
Rolling A-REIT returns on a 12-month basis have continued to plunge downwards in a seemingly inexorable deterioration of confidence and conditions. As at June 2008 the S&P/ASX 300 A-REIT Accumulation Index had recorded an annual fall of 37.7%. With the market appearing roughly in line with perceived fundamental softening of direct property assets at June 2008, a further fall of 47.1% to April 2009 has severely punished those looking for a short-term recovery.
As at April 2009 the S&P/ASX 300 A-REIT Accumulation index was down 68.7% from its value in September 2007, and down 57.2% year-on-year. This compares to -38.3% and -29.0% respectively for the general equities in the S&P/ASX 300 Accumulation Index.
90-day rolling volatility
0%
1%
2%
3%
4%
5%
Apr 93 Apr 95 Apr 97 Apr 99 Apr 01 Apr 03 Apr 05 Apr 07 Apr 09
Dai
ly S
tand
ard
Dev
iatio
n
ASX 300 A -REIT Index ASX 300 Index
Source: Adviser Edge, Bloomberg.
Historic daily volatility of the S&P/ASX 300 A-REIT Index has been just 0.6% in the period spanning June 1992 through to April 2006, comparing favourably to the daily volatility of the broader equities index, recorded at 0.8%. However, in the three years to April 2009, daily volatility of both indices has surged, with A-REITs recorded at 2.2% and equities reaching 1.5%.
Rolling 90-day volatility is observed to have hit a high of 4.1% for A-REITs, over six times the historical measurement. General equities hit a rolling 90-day high of 2.9%, sedate by comparison but nevertheless over three and a half times the historical rate.
90-day rolling correlation and beta to equities
0.0
0.3
0.5
0.8
1.0
1.3
1.5
Apr 93 Apr 95 Apr 97 Apr 99 Apr 01 Apr 03 Apr 05 Apr 07 Apr 09
Coe
ffic
ient
Correlation Beta
Source: Adviser Edge, Bloomberg.
Historically, the S&P/ASX 300 A-REIT Index has tracked in moderate sync with the broader S&P/ASX 300 Index, with a correlation of 0.52 for the period spanning June 1993 to April 2006. Correlation for the three years to April 2009 was recorded at 0.67. The Beta of the A-REIT index to its broader counterpart has been volatile over time, although it has generally oscillated around 0.50. Through to the most recent 90-day rolling periods a sharp increase has been evident in the Beta of A-REIT stocks versus equities, spiking well above 1.0.
Weighted market discount to net tangible assets
-80%
-40%
0%
40%
80%
120%
Apr
02
Oct
02
Apr
03
Oct
03
Apr
04
Oct
04
Apr
05
Oct
05
Apr
06
Oct
06
Apr
07
Oct
07
Apr
08
Oct
08
Apr
09
ASX 300 A-REIT Stapled A-REITs Unstapled A-REITs
Source: Adviser Edge, Bloomberg.
Through the ongoing collapse of REIT markets there has been no shortage of attention paid to their value attractiveness on a discount to net tangible asset basis. At the height of the A-REIT boom the index was trading at a record premium of 88%, with significant future capital growth, rental growth, development profit, and fund management income being booked into prices at the time. As at April 2009 the index was at a 40% discount to NTA.
MARKET OVERVIEW 7
Parent Company
APN Property Group Limited (APN) is a property funds management company based in Melbourne. As at 31 December 2008, through its funds management subsidiary, the group manages 17 property funds representing $3.3 billion in funds under management (down 29.8% from 2007). The funds are distributed in the Retail (60%), Listed (36%) and Wholesale (4%) markets.
APN has been listed in the Australian Stock Exchange (ASX) since June 2005 (code: APD). As at September 2008, its shares were held by almost 1,800 individual shareholders, including four substantial shareholders that represent 62% of the capital. APN had a market capitalisation of $32 million at 31 December 2008.
Recent developments APN suffered a 90% stock decline during 2008. During the same period, the S&P/ASX A-REIT Index declined 57%.
Board of Directors The board is comprised of four executive directors and three non-executive directors, two of whom are also independent directors. The executive directors play a hands-on role within the business, and are involved in the day-to-day activities of the company. The chairperson is an independent director.
Directors are qualified in economics, law, and other business-related disciplines, and have appropriate experience in the financial services, property and funds management industries. The board met 11 times during FY2008, with regular attendance by all board members.
Adviser Edge believes that the majority of the board members should be independent. This will improve the effectiveness of the board in reviewing and challenging the performance of management.
Corporate governance and complianceAPN’s governance system follows very closely the ASX Principles of Good Corporate Governance.
• The company has implemented a Charter which clarifies the role and responsibilities of the board
• A Code of Conduct and policy concerning staff trading in company securities are in place
• The board has established independent Audit and Remuneration Committees
• There is a written disclosure policy to ensure compliance with ASX disclosure requirements
• There is a communications policy for promoting effective communication with shareholders
• There is a system of risk oversight and management and internal control
However, APN does not follow recommendation 2.1, which states that a majority of the board should be independent directors.
The external auditor is Deloitte.
Adviser Edge has reviewed the corporate governance practices in place at APN and believes that they are slightly below those of its publicly-traded peers. This assessment rests on the fact that the company does not
CORPORATE GOVERNANCE 8
Key Counterparties
Investors
APN AREIT FundTrust Under Review
APN Property Group LimitedParent Company
APN Funds Management LimitedResponsible Entity and Fund Manager
Distributions Capital
have a board with a majority of independent members. APN has advised Adviser Edge that they are in the process of reviewing this issue.
Parent company’s financial performance
Key Financial Data Half year ended 31 December
Financial Profitability 2008 2007
Revenue ($m) 15.8 26.7
Net profit ($m) 1.3 10.0
Profit margin (%) 8.2 37.6
ROE (%)* 2.1 30.7
Market measures 2008 2007
EPS (basic/cents) 1.1 8.1
P/E ratio* 32.0 14.8
DPS (cents) 0 4.5
Dividend yield (%)* 12.5 4.2
Dividend payout ratio (%)* 400 61.7
Financial Liquidity/Solvency 2008 2007
Net working capital ($m) 27.3 33.7
Current ratio 4.7 4.2
Quick ratio 3.5 2.9
Liabilities to assets (%) 10.8 14.3
Liabilities to equity (%) 12.2 16.7
Source: APN Property Group Limited. Consolidated Financial Statements. Past performance
should not be used as a guide for future performance * Annualised.
Adviser Edge has reviewed the consolidated financial statements of APN Property Group and has noted that it has good levels of liquidity and low gearing. However, the company experienced significant declines in revenue and profit in FY2008. Overall, Adviser Edge believes that APN’s financial performance is an issue to be monitored in the current market environment.
Responsible Entity and Fund Manager
APN Funds Management (APN FM) is the responsible entity. APN FM is a specialist property funds management company, established in 1998 as a wholly owned subsidiary of APN Property Group. The business focus is to invest in property and property securities both in Australia and overseas. APN FM has more than 65 staff based in its Melbourne and London offices.
Board of DirectorsThe board of APN FM is comprised of the same directors as the board of APN Property Group Limited.
Management Risk
Funds management encompasses not only the operational capabilities of project counterparties but also the corporate abilities of the responsible entity to monitor operational performance and to meet the regulatory and statutory responsibilities required. For all property funds there is a risk that financial position and the deterioration of management performance may temporarily or permanently compromise financial or regulatory outcomes.
Adviser Edge believes that APN and associated key counterparties are appropriately qualified to carry out their assigned responsibilities. Based on this assessment, Adviser Edge rates management risk as being in line with its peers.
CORPORATE GOVERNANCE 9
The investment team displays a strong set of skills in both the direct and listed property markets. Together the team members boast over 90 year’s investment experience across all stages of the property and business cycle. The team members are highly qualified in finance, accounting and property-related disciplines, in addition the majority of the team have post-graduate qualifications. Adviser Edge believes that the team’s competence may be one of the Fund’s key sources of competitive advantage.
Key Staffing Changes
Over the last year, there were three departures from the team. Peter Cumming, responsible for Research and Strategy, left in 2008. Portfolio Manager Laurence Parisi and analyst James Bell also departed, and were replaced by Portfolio Manager Andrew Smith and analyst Cheng Yeoh.
The investment team has undergone major changes in the last year. Although the team departures have resulted in team instability, Adviser Edge believes the addition of Andrew Smith and Cheng Yeoh will help to alleviate any residual problems, as both individuals are highly experienced and qualified. The addition of Andrew Smith should add value to the Fund. Andrew brings significant industry knowledge to the team, having worked as a Portfolio Manager at Goldman Sachs JBWERE.
Staff Incentives
Compensation has three main elements: (i) base salary, (ii) discretionary bonus, and (iii) employee shares. A large portion of remuneration is sourced from a base salary. Annual bonuses are
based on a matrix of both company and individual performance. Where the company makes a loss, no bonuses are rewarded regardless of individual or fund performance. Individual KPI’s are based on both qualitative and quantitative measures. Qualitative measures include compliance, teamwork, mentoring, and sales and marketing support. Quantitative measures include performance against the benchmark index and performance within mandate constraints.
APN encourages and supports ongoing training and professional development. Additionally, the company has an active graduate program whereby candidates have the opportunity to prove their abilities in support roles before moving onto more specialised areas.
Adviser Edge has reviewed staff incentive and remuneration policies, and feels that they are in line with industry peers. Incentives appear to be providing an effective way to align staff performance with the ongoing performance of the Fund under review.
Investment Committee/Asset AllocationCommittee Member Position
Howard Brenchley Chairman
Michael Doble Voting Member
John Freemantle Voting Member
Ron Palermo Voting Member
Pete Morrissey Voting Member
Damian Diamantopoulos Voting Member
Andrew Smith Voting Member
Steve Lawford Voting Member
MANAGEMENT & PEOPLE 10
Key Investment StaffResponsibility Qualifications Years with
FundInvestment Experience
Previous Employment
Howard Brenchley Director and Chief Investment Officer
BEcon 11 24 PIR
Michael Doble Deputy Chief Investment Officer
BBus (Prop Valuation), G.Dip App Fin
6 23 ANZ Funds Management
Pete Morrissey Portfolio Manager BCom, M. Valuation & Prop Mgmt, M App Fin
2 12 Lonsec, ING Barings, Nomura
Andrew Smith Portfolio Manager BCom, BSc, G.Dip App Fin, Ffin
– 14 Goldman Sachs JB Were, Portfolio Partners
Damian Diamantopoulos Portfolio Manager BCom, G.Dip App Fin 5 9 Catholic Church Insurances
Cheng Yeoh Analyst CPA, CFA 2 12 AM Merchant Bank
Location of Team Melbourne Portfolio Managers 4
Investment Offices 1 Analysts 1
Asset allocation is determined by the Investment Committee, which meets on a weekly basis. The committee determines the level of investment permitted in listed trusts and property debt or hybrid instruments, as well as providing the Fund Manager with sector allocation guidelines based on return expectations. Additional tasks include compliance, record keeping, voting member approval for investments and strategy discussion.
Team Summary
The APN property securities team is built around a team of experienced property professionals. The team consists of six key investment staff, all of whom are based in Melbourne.
Howard Brenchley is the Chief Investment officer of the APN Property group, and oversees the portfolio management of APN’s property securities funds. Howard’s role is largely strategic, although he maintains an operational role by chairing the weekly investment committee meetings.
Michael Doble, APN’s Head of Investments, is ultimately responsible for stock selection and management of the Fund on an ongoing basis. Michael reports to Howard, and will collaborate with him on key decisions.
While Michael ultimately makes the key decisions in relation to the Fund, other investment personnel contribute to the Fund including Portfolio Managers Andrew Smith (International Property for Income Fund), Peter Morrissey (Property for Income Fund No. 2), Damian Diamantopoulos (Property for Income Fund No. 1) and Analyst Cheng Yeoh. The Portfolio Managers are responsible for researching individual stocks as well as managing their respective funds, while Cheng Yeoh is responsible for performance reporting and providing analytical support to the Funds Management team.
Individual stocks within the Fund’s investible universe are assigned to the Portfolio Managers on a primary and secondary basis. The Portfolio Managers assigned to the primary role regarding a stock are responsible for researching that stock, whereas the Portfolio Managers assigned to the secondary role are used as a backup to the stock. Each team member will be researching at least five stocks at one time, with the individual stock allocations rotated through the team. The rotation of stocks is a deliberate approach to prevent analysts being pigeonholed in just one fund, and avoids serial correlations in the research process. The practice also builds a strong knowledge base for all involved and will facilitate greater continuity if a member leaves the team. This reduction in key person risk is a significant advantage of the Fund. As well as stocks being assigned to certain Portfolio Managers, brokers are also split between the Portfolio Managers.
The team’s investment experience is supplemented by the analytical support and input from the broader APN property group, providing an extensive knowledge base for investment decisions. The team occupies a prominent position within the group’s corporate structure, and benefits from the company’s commitment to ensuring that investment teams are appropriately resourced.
The team’s formal contact consists of twice-weekly stock meetings, held each Tuesday and Thursday. These meetings provide a forum for discussing the research efforts, market conditions and outlooks. In addition to this, those members of the team who sit on the investment committee attend an investment committee meeting every Monday to discuss portfolio positioning and stock allocations. However, outside of this formal structure the team is in constant contact. This ad hoc communication is facilitated by the team’s proximity and open-plan office space.
In researching a stock, the analyst will initially focus on the base modelling and valuation. This process will include meeting with the Trust manager and inspecting the assets. The qualitative aspects of each stock are brought to the team meeting for discussion and review. This is an important aspect, as by discussing the intangible aspects in a group environment, the chances of individual interpretation influencing the research are reduced.
Implementation of trading will depend on the size of the position. Michael Doble and his team have the authority to make asset allocation decisions within the current investment constraints as required. However, investment decisions outside the current parameters will require the Investment Committee to review the impact on the portfolio. This approach has the advantage of combining accountability with the ability to react quickly to a changing market.
The Fund employs an active, bottom-up approach to stock selection. There is a clear income focus, with the Fund manager concentrating on the fundamentals of property stock to achieve sustainable long-term distributions to investors. Going forward, the Fund’s research effort will continue to focus on domestic rents and small and mid-cap securities.
MANAGEMENT & PEOPLE 11
Fee Structure
Entry/Exit Fees APN Peer Standard1
Establishment Fee nil nil
Contribution Fee nil nil
Buy Spread 0.25% 0.25%
Sell Spread 0.25% 0.25%
Withdrawal Fee nil nil
Ongoing Fees
Management Fee 0.85% 0.81%
MER2 0.85% 0.81%1 Median fee level within peer group of wholesale global property funds as defined by
Adviser Edge.2 Management expense ratio, inclusive of expected normal expenses, may vary.
Contribution Fee
No contribution fee is required for direct investments into the Fund.
Management Expense Ratio
The Fund’s annual management fee is expected to be 0.85% of the Fund’s Net asset value, and is in line with the sector average of 0.81%. This fee is deducted directly from the assets of the Fund (paid monthly to managers in arrears) and is reflected in the daily unit price. The management expense ratio includes normal expenses, but does not take into account abnormal expenses that may also be payable from the assets of the Fund, including costs of unit holder meetings, changes to the constitution and defending or pursuing legal proceedings.
A trail commission payment of up to 0.20% p.a. may be payable when investing through a financial adviser.
Buy/Sell Spread Transaction Costs
A buy/sell spread of 0.50% is applicable, and is payable at 0.25% when investors seek to purchase their units and 0.25% when sold. The buy/sell spread is the difference between the current unit price and the transfer price, and represents an allowance for expected transaction costs. The spread is in line with the peer standard of 0.50%, which is based on a median buy spread of 0.25% and a median sell spread of 0.25%.
Overall Fees
If held and sold within the past 12 months, the total transaction costs would have been 1.35% of the initial investment. This is in line with the peer standard fee level of 1.30%. Over a 36-month period these figures are 1.02% p.a. and 0.98% p.a. for the Fund and peers respectively.
Annualised overall fees 1 to 10-year hold
0.5%
0.6%
0.7%
0.8%
0.9%
1.0%
1.1%
1.2%
1.3%
1.4%
1 2 3 4 5 6 7 8 9 10
Years
APN Peer Average
Adviser Edge considers the total transaction holding costs over a 36-month period to be slightly above peers, due to a higher management expense ratio.
As an additional comparison, the approximate cost of purchasing, holding and selling the average stock portfolio held by funds within the domestic property securities review would have been 2.0% for a $50,000 investment over a 12-month period.
It should be noted that a minimum investment timeframe of five to seven years is suggested by APN.
FEES & COMMISSIONS 12
The Fund is a relatively new investment vehicle. As a result, no meaningful quantitative analysis can be drawn. However, APN has operated a number of domestic property securities Funds, and an assessment of the performance of the listed property trust component of the APN Property Income Fund No.1 (The Portfolio) has been conducted. For the purposes of comparability, fees have been subtracted from the returns of the Portfolio. APN has advised that the APN AREIT Fund will be managed with the same investment philosophy, investment team and mandate as the APN Property for Income Fund, excluding the unlisted property trust.
Please note the investment analysis below relates to the returns of APN Property for Income Fund No. 1 after stripping out the unlisted property trust component. While not a completely precise comparison, Adviser Edge believes this analysis will provide insights into the effectiveness of active management and the investment approach.
Quantitative Insight
Statistical Overview of the Portfolio (over a 42-month history)
Portfolio Benchmark
Total Return1 -19.5% -20.1%
Standard Deviation 24.4% 24.4%
Sharpe Ratio -1.02 -1.051 Annual compounded return
Highest/Lowest 12-Month Returns
Portfolio Date
High 40.8% 31 May 07
Low -56.7% 28 Feb 09
12-Month Detailed Statistics
Portfolio Peer Avg. Rank /28
Total Return -56.7% -57.8% 12
Benchmark Tracking
Excess Return 0.8% 0.0% 13
Tracking Error 6.9% 8.1% 16
Information Ratio 0.11 0.11 14
Risk Measures
Sharpe Ratio -1.95 -2.15 3
Standard Deviation 31.8% 29.8% 23
Sortino Ratio 0.21 2.24 14
Semi Deviation 3.8% 5.6% 12
12-Month Detailed Statistics
CAPM Statistics
Beta 0.99 0.92 22
Expected Return -56.7% -53.3% 21
Alpha 0.0% -4.8% 3
Since August 2005, the Portfolio has recorded an annual net return of -19.5%, above the -20.1% delivered by its benchmark, the S&P/ASX 200 Property Trust Accumulation Index. Returns are also above the benchmark for the one-year and three-year periods. In addition to this, the Portfolio has been relatively stable, recording a standard deviation of 24.4%, which is in line with the 24.4% experienced by the benchmark.
The Portfolio’s one year rolling returns have generally tracked the benchmark index and peers over the last three years. However, in the most recent three month period to February 2009, there has been a shift towards out-performance. While the Portfolio’s out-performance of the benchmark index has predominantly occurred in recent periods, compared to peers, the Portfolio has out-performed during most of 2008 and early 2009.
It is important to note that while the Portfolio has not significantly out-performed the benchmark or peers over the last year, the Portfolio’s returns have been affected by its mandate restrictions, which limit the amount of exposure to a single security. As a result the Portfolio was largely underweight to Westfield Group during 2008, a stock which out-performed most stocks during 2008. Despite the relatively detracting returns from its holdings in Westfield, the Portfolio has been able to perform slightly above the benchmark and peers during 2008 on a one-year rolling returns basis.
Monthly excess returns over the last three years have been volatile, recording both positive and negative excess returns in the +5% to -3% range. The latter part of 2008 saw the Portfolio experience predominately more negative excess returns, which has translated into a decline in cumulative returns. On a risk-return basis, as represented in the Snail Trail, the Portfolio has spent time in all quadrants before moving into the upper right sub-optimal quadrant. In this location the Portfolio has delivered higher returns at higher levels of volatility in relation to its benchmark.
INVESTMENT ANALYSIS 13
Returns
Chart One: One-year rolling returns
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Fund Benchmark Peer Average
The one-year rolling return chart shows the compounded yearly return of the Portfolio over rolling 12-month periods.
Since August 2005, the Portfolio performed largely in line with the benchmark index. In the most recent three months, there has been a slight shift towards out-performance on a one-year rolling returns basis. In comparison to peers, the one-year rolling returns have out-performed the peer group since August 2007.
Despite the recent relatively steady performance, the current one-year return has fallen to a historic low of -56.7% at February 2009, following the strong downturn of the Australian property securities market to which the Portfolio is exposed. While this is a very weak return, the Portfolio remains ahead of peers and the benchmark, which recorded one-year rolling returns of -57.8% and -57.4% respectively. These returns are noted as being well below that of the risk-free rate.
Chart Two: Growth of $10,000
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Fund Benchmark
An investment of $10,000 made at the Portfolio’s inception would have reached its peak value of $15,376 during May 2007. However, due to recent periods of negative market performance the value of such an investment would have since fallen to
$4,690 at 28 February 2009. However, this value is slightly higher than that of the benchmark index, which has followed a similar downward trajectory to $4,563.
Chart Three: Excess returns
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1 Month Excess Return Accumulated Excess
Chart Three graphs the monthly excess returns of the Portfolio since its inception, as well as the accumulated growth differential, to the benchmark. Over time, the cumulative excess is expected to become increasingly volatile due to the compounding effect of growth.
Monthly excess returns over the last three years have been volatile, recording both positive and negative excess returns in the +5% to -3% range. Despite increasing volatility in 2008, monthly excess returns during the last three years have largely fallen within a range of +/-2% of the benchmark index.
The Fund’s cumulative returns have decreased over the latter half of 2008, declining from 5.5% to 1.3%. Despite the fall the Fund has returned positive accumulated excess returns since May 2008.
INVESTMENT ANALYSIS 14
Efficiency
Chart One: One-year rolling tracking error
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Feb
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Fund Peer Average
The tracking error measures the volatility of monthly positive and negative excess returns between a portfolio and its benchmark index. A tracking error above the peer average generally indicates a relatively strong application of active management strategies, and does not necessarily indicate a high volatility of absolute returns.
The Portfolio’s tracking error has trended upwards since August 2005, although the most recent six month period has demonstrated a slight drop in the tracking error. Historically, the Portfolio’s tracking error has been above peers, although the drop in the tracking error during the latter half of 2008 saw it fall below peers. The decline in the tracking error has coincided with the decline in the cumulative excess returns. During this time the tracking error moved from 7.5% to 6.9%, while the peer group moved from 5.4% to 8.1%.
The Portfolio’s historically higher tracking error is reflective of the Fund’s benchmark-unaware approach. As a result, the Fund’s Portfolio Managers do not target a tracking error range.
Chart Two: One-year rolling Information Ratio
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Fund Peer Average
The Information Ratio measures the return achieved by the Fund in excess of its benchmark index, divided by the tracking error. The Ratio provides insight into how efficiently active management is being used to generate excess returns.
Across the Portfolio’s available performance history, its Information Ratio has recorded volatility on a rolling one-year basis, oscillating between under- and out-performance of peers. Recent periods have demonstrated better performance, with the one-year rolling returns outstripping those of the peers.
Chart Three: One-year rolling Beta
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Fund Peer Average Correlation
The Beta coefficient shows the historical strength and extent of the Portfolio’s relationship with the benchmark. A higher or lower Beta indicates the expectation of correspondingly increased or decreased fluctuations in returns relative to the benchmark index.
The Beta coefficient can be viewed as a progression of the correlation between the Portfolio and its benchmark index, adjusting for the risk differential between them. While the correlation of the Fund’s monthly returns with those of the benchmark index has remained relatively stable, the Beta has displayed greater volatility and has been neither consistently above nor below the peer average. While the Fund’s Beta of 0.99 is slightly higher than the peer’s current Beta of 0.92, indicating a higher level of risk than peers, Adviser Edge notes that the Fund’s mandate restricts the Fund from investing no more 20% of the portfolio into a stock. Although this constraint will likely result in the Fund having a higher Beta, Adviser Edge believes this constraint is a positive feature of the Fund.
INVESTMENT ANALYSIS 15
Risk – Return Measures
Chart One: One-year Snail Trail
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Excess Volatility
Start
Feb 09
The Snail Trail provides a visual representation of the Portfolio’s excess risk and return profile over rolling periods since inception. Optimal positioning occurs in the upper left-hand quadrant, which indicates periods where a fund manager has provided both positive excess returns and lower volatility when compared to the benchmark index.
Initially occupying the optimal upper left quadrant, representing increased returns accompanied with decreased volatility, the Fund’s position has deteriorated over time, spending time in the lower left sub-optimal position and least optimal position before moving into the upper right sub-optimal position. Given the recent out-performance in rolling returns and higher levels of volatility, the Fund’s current one-year performance is recorded as sub-optimal on a risk-return basis.
Chart Two: One-year rolling Sharpe Ratio
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Fund Peer Average
The Sharpe Ratio provides a measure of a fund’s returns in excess of the risk-free rate, divided by the volatility of returns. This gives what is most commonly known as the ‘risk-adjusted return’ of the Portfolio.
The Fund has closely tracked the movements of the peer average Sharpe Ratio throughout its history, with a move towards out-performance in 2008. Until October 2007, the Fund delivered superior risk-adjusted returns as demonstrated by a Sharpe ratio in excess of 1, reaching a high of 3.7 in January 2007. Since then, the Sharpe Ratio has weakened significantly, in line with general market conditions. The Ratio turned negative in mid-2008, indicating that returns have dropped below the risk-free rate.
Negative Ratios are provided as an indicator of under-performance on a risk-adjusted basis, not as a statistical measure.
Chart Three: One-year rolling Sortino Ratio
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Semi-deviationSo
rtin
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tioFund Peer Average Semi-deviation
The Sortino Ratio is a development of the Sharpe Ratio that allows for differentiation between upside and downside volatility. The Ratio is calculated as the rolling excess return of the Portfolio over the benchmark, divided by the semi-deviation of negative monthly excess returns.
The Portfolio’s Sortino Ratio under-performed through late 2007 to February 2009. Deterioration in the Sortino Ratio has been evident, falling from a peak of 2.4 in July 2007 to a current ratio of 0.2. The sharp decline in the ratio coincides with the drop in excess returns on a one-year basis.
Semi-deviation of the Fund’s returns below the benchmark has increased. This has been affected predominately by the Fund’s position in Westfield. With the Portfolio’s restriction on the stock and the declining market, the Fund’s underweight to the stock has resulted in greater negative volatility.
INVESTMENT ANALYSIS 16
Asset allocation as at 28 February 2009
Index Holdings89.9%
Ex- Index Holdings
7.8%
Cash2.3%
Summary
The Fund held a stock portfolio of 17 individual securities at the end of February 2009, representing a level of diversity in line with peers. The total value of funds under management at this time was $538,200. The proportion of ex-index stocks is 7.8%, a relatively large allocation when compared to peers. The Fund’s cash exposure is currently 2.3%.
Although the Fund is relatively new, having been in operation since January 2009, the Fund’s current underlying geographical exposure, sector exposure, bottom-up approach and mandate restrictions support the use of active portfolio management strategies.
Consistent with the Fund’s investment strategy of favouring domestic rents, as of 28 February 2009 the Fund held a substantial overweight position to Australia relative to the benchmark index, while holding large underweight positions to North America and Europe. Sector exposures were more balanced, although the Fund was notably underweight to the Diversified sector and overweight to the Office sector.
Active management is clearly demonstrated through the Fund’s mandate restrictions. The Fund’s mandate restricts it from investing more than 20% of the Portfolio in a single stock,
unless approved by the Investment Committee. As a result, the Fund is less concentrated than the index, which had over a 50% weighting to Westfield Group at February 2009. At 28 February 2009, the Fund had a 22.6% underweight to Westfield Group, one of the larger underweight positions when compared to peers.
The use of active portfolio management strategies is also supported by the Fund’s bottom-up approach. Consequently this approach has allowed the Fund to adopt a more benchmark-unaware style of management.
ASSET ALLOCATIONS 17
Underlying Asset Allocations1
Value ($’000) Current Target Maximum Minimum
Stock Holdings (17) 525.9 97.7% 98% 100% 90%
Index Holdings 483.9 89.9%
Ex-Index Holdings 42.0 7.8%
Cash 12.3 2.3% 2% 10% 0%
Total Fund Value 538.21 As at 28 February 2009.
Geographical Asset Allocation1
Geographic allocation, 28 February 2009
Cash and Other2.3%
North America15.9%
Europe including the
United Kingdom
4.6%
Australia73.8%
Asia Pacific ex-Australia
3.4%
At 28 February 2009 the Fund’s geographical exposures were dominated by domestic allocations of 73.8%. This was followed by an exposure of 15.9% to North America, and a 4.6% exposure to Europe. The Fund’s exposure to the Asia Pacific and Cash and Other comprised 3.4% and 2.3% of the portfolio respectively.
Geographic bias trend excluding cash, 28 February 2009
-10.5%
-6.3%
18.9%
-2.1%
-15.0%
-10.0%
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0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
North America Europe ex-United Kingdom
Australia Asia Pacific ex-Australia
Compared to the benchmark index, the Fund is heavily underweight in North America, and conversely heavily overweight in Australia. Also observed are underweight positions in both Europe and the Asia Pacific.
Geographic allocation trend
As the Fund is relatively new, no historical data is available for Adviser Edge to analyse historical trends.
1 Please note that Europe includes the United Kingdom and the Asia Pacific excludes
Australia for this section of the report.
Sector Allocation
Sector allocation, 28 February 2009
Cash and Other, 2.3%
Office, 29.1%
Retail, 57.0%
Industrial, 10.8%
Diversified, 0.8%
At 28 February 2009 the Fund’s sector allocations were dominated by Retail exposures at 57.0%. This was followed by an exposure of 29.1% to Office, and a 10.8% exposure to Industrial. The Fund’s exposure to Diversified and Cash and Other comprised 0.8% and 2.3% of the portfolio respectively.
Sector bias trend excluding Cash, 28 February 2009
4.0%
1.1%
-1.5%
-3.6%-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
Office Retail Industrial Diversified
Relative to the benchmark index, the Fund’s portfolio is notably overweight to the Office and Retail sector by 4.0% and 1.1% respectively, after adjusting for the allocation to Cash. Conversely, the Industrial and Diversified sectors are notably underweight.
Sector allocation trend
As the Fund is relatively new, no historical data is available for Adviser Edge to analyse historical trends.
ASSET ALLOCATIONS 18
Process Diagram
INPUTS
• Property data• Management
meetings• Property
inspections• Select broker
data• Economic and
Financial data
ANALYSIS
• Income Stream
• Property Fundamentals
• Management Quality
OptimalPortfolio
Allocation
PORTFOLIO CONSTRUCTION
• Yield Benchmark
• Fair Value
• Strategic Value
• Security Type
• Sector
Process Descriptions
Portfolio Manager/Analyst Interaction
Number of analysts Although Cheng Yeoh is the only dedicated analyst, all members of the Property Securities and Hybrids team are involved in research, and have direct responsibility for stock research. The team can also draw on the research conducted by the Direct Property team. The individual team members will generally be responsible for the base modelling and valuation work of at least five stocks.
Communication and meetings
APN has a process and structure in place that encourages communication. All members of the team participate in twice-weekly stock review meetings. In addition to this formal interaction, the team is constantly involved in discussion and debate. The team’s central location and open-plan office environment also contributes to informal discussion and interaction.
Initial Screens
Benchmark The Fund adheres to the following performance benchmarks:
• A gross annual yield that equates to at least 110% of the S&P/ASX 200 Property Trusts Dividend Yield series’ average yield
• A tax advantaged income component
• Capital growth of investments to at least match increases in CPI over a five to seven-year horizon
Investible universe The Fund has a broad investable universe, comprising all constituents of the ASX S&P 300 Listed Property Index, including those wholly invested in foreign assets. The Fund is also able to invest in A-REITs outside the Index.
Screening process From the broader universe, the Fund will exclude securities with the following characteristics:
• More than 20% of earnings derived from business activities, (unless 50% or more of the earnings are annuity type, in which case the limit is 30%)
• Speculative development or business risk funds
In addition to these, APN generally avoids Tourism-, Leisure-, and Entertainment-based LPTs, unless the income is substantially insulated from the business risk of the property or trust operators. The Fund will also not invest in companies when there is doubt regarding the quality of management.
PROCESS ANALYSIS 19
Company Research and Analysis
Top-down or bottom-up? The investment style is bottom-up value investment, focused on sustainability and the growth potential of income streams. While top-down characteristics are monitored in the portfolio construction stage, this is a secondary consideration.
Research methods APN’s research effort is a bottom-up process, focused on identifying property securities with sustainable growth in income streams over a five to seven-year period. The fundamentals of the underlying property assets and the quality of management are integral in ensuring a sound income stream. Information is drawn from a range of sources, including meetings with company and trust executives, property inspections, and analysis of trust and industry data.
Income streamAPN relies on brokers to determine five-year distribution and earnings forecasts for each security, and believes that no value is added by conducting the forecast internally. Instead, APN meets with the brokers regularly to test out the assumptions used. After collating and removing broker forecast that APN has a lack of conviction in, a median is determined and used in conjunction with the APN-derived geared Beta to derive a present value of the stock’s income stream. In addition to this, the distribution forecasts are also fed into a replication of the LPT Index to forecast index yields.
Property fundamentalsThe quality of the underlying property assets is assessed through site visits, meetings with asset managers, and industry contacts. The factors considered include:
• The quality and location of the properties
• The financial strength of major tenants
• The quality and duration of lease documents
• The skills and commitment of the asset management team
• Management Expertise and Experience
Management Quality is assessed through regular meetings with the key management of each stock. Information is also sourced from competitors, and from other key counterparties. The factors considered include:
• Information disclosure
• The alignment of interest with shareholder interests
• Property skills and experience
Number of company meetings annually
APN meets at least twice annually with management of the property companies in which the Fund has invested. This will include visits to both domestic and international assets. APN aims to meet with operational executives as well as fund managers.
Valuation and Modelling
Proprietary modelling APN’s proprietary Beta Matrix provides an underlying consistency to the Fund’s modelling of the quantitative and qualitative aspects of stocks. Although not a valuation tool in its own right, the output of the Beta Matrix is a driver of the Fund’s main discounted cash flow models.
The Beta Matrix is used to adjust the property fundamentals of a stock. This will often occur on an asset-by-asset basis, with a weighted average Beta generated for the Portfolio. The matrix structure ensures that this is a uniform process.
As a further adjustment, the Beta output from the matrix may then be geared to reflect APN’s view on factors such as management quality, gearing and corporation-style earnings.
It is important to note that Beta adjustments are the point at which APN applies its own assessments of a company’s quality and prospects. No adjustments are made to the consensus broker estimates of cash flow, which are fed directly into the discounted cash flow models. Therefore, the consistency provided by the matrix structure is a key advantage to the Fund.
PROCESS ANALYSIS 20
Valuation methodology The Capital Asset Pricing Model (CAPM) is the foundation of APN’s valuation process. The CAPM utilises the proprietary Beta Matrix to determine an appropriate discount rate. This is then applied to consensus broker cash flow estimates in the Fund’s discounted cash flow models. The Fund utilises two discount cash flow models, the Dividend Discount Model (DDM) and the Adjusted Funds From Operations Net Present Values (AFFO NPVs). The AFFO NPVs model is a recent addition to the Fund’s valuation process.
Sum of the parts (SOTP) valuations is also used to enable a more accurate valuation of trusts with significant and diverse earnings. The Fund recently introduced Net Asset Value (NAV) to apply current market capitalisation rates and corporation multiples, so as to better understand market values.
• Capital Asset Pricing Model (CAPM) – The CAPM is used to determine a discount rate. This is derived from Australian Government 10-year bond rate (risk free rate) and an Equity Risk Premium
• Dividend Discount Models (DDM) – The DDM is used to derive Net Present Value (NPV) based valuations
• Adjusted Funds From Operations Net Present Values (AFFO NPVs) – The AFFO NPVs is another tool used to derive Net Present Value (NPV) based valuations
• Sum of the Parts (SOTP) – SOTP valuations compliment the NPV-based valuations
• Net Asset Value (NAV) – The NAV is used to value stocks
Stock selections will be based on the securities that provide the optimal income and value returns, as determined during the valuation process, while remaining within the top-down guidelines. There are three steps to stock selection:
• From the universe of available investments, the stock selection model identifies those funds that satisfy the yield benchmark (index yield multiplied by 110%) over the next five years
• The second step of the stock selection process is to remove those trusts that satisfy the yield benchmark, but are currently trading at a price in excess of the valuations determined. This provides a group of trusts from which to establish the Portfolio. The successful trusts will both satisfy the benchmark yield and display a purchase price less than their valuation
• The Portfolio can then be expanded using the excess yield capacity to select lower-yielding stocks that may represent excellent value, or that may be required to fulfil top-down asset allocation requirements
Portfolio Construction
Stock selection Portfolio construction is determined by the team during the Wednesday and Thursday meetings. From the list of stocks that satisfy the income and value requirements, a top-down overlay will be applied to determine the final Portfolio allocation. There are two levels to this process.
Security Type: The committee determines the level of investment permitted in listed trust, unlisted funds, and property debt or hybrid instruments. This decision is based on recommendations from the Fund Manager’s analysis of dividend yield, value, and the total returns of individual stocks and the property sector as a whole.
Property Sector: The Committee also provides the Fund Manager with sector allocation guidelines based on return expectations.
The stock selection process and performance benchmarks should not be compromised to satisfy short-term portfolio construction goals.
PROCESS ANALYSIS 21
Rules The major metrics and guidelines underpinning intended asset allocation are as follows:
• Units in listed property trusts or property companies must comprise 90%–100% of the Portfolio
• A maximum of 50% of the S&P ASX 300 Property Index exposure to non-Australian-based earnings
• A maximum of 20% of property trust or company earnings may be derived from corporate or business sources such as property development and property management
• A maximum of 15% of the total income derived from the Fund is to come from investments in companies or trusts with returns that are principally sourced from corporate or business-type earnings
• The maximum weighting to one stock is 20%, unless approval is given by the Investment Committee to exceed that level
• Portfolios should be fully invested, holding a maximum of 10% in Cash or fixed interest
• The Fund must be able to sell its holdings in listed investments within 20 normal trading days
• A maximum allowable exposure of 5% to APN-related vehicles
• A maximum manager exposure of 10%
In addition to this, sector and geographic allocations are monitored to prevent significant overexposure, although no specific limits are in place.
Sell Discipline
Decision process The following key factors across all regions are taken into account when selling down exposures to individual stocks.
• The level of the premium above ‘fair value’, as determined by the proprietary modelling process
• Overall top-down views on asset allocations
• The cost of disposal (transaction and taxation)
PROCESS ANALYSIS 22
DISCLAIMER
Although all reasonable care has been taken to ensure that the information contained in this document is accurate, neither Adviser Edge nor its respective officers, advisers or agents makes any representation or warranty, express or implied as to the accuracy, completeness, currency or reliability of such information or any other information provided whether in writing or orally to any recipient or its officers, advisers or agents.
Adviser Edge and its respective officers, advisers, or agents do not accept:
– any responsibility arising in any way for any errors in or omissions from any information contained in this document or for any lack of accuracy, completeness, currency or reliability of any information made available to any recipient, its officers, advisers, or agents; or
– any liability for any direct or consequential loss, damage or injury suffered or incurred by the recipient, or any other person as a result of or arising out of that person placing any reliance on the information or its accuracy, completeness, currency or reliability.
This document contains statements which reflect current views and opinions of management and information which is current at the time of its release but which may relate to intended or anticipated future performance or activities. Such statements and financial information provided have been estimated only and are based on certain assumptions and management’s analysis of the information available at the time this document was prepared and are subject to risk and uncertainties given their anticipatory nature. Actual results may differ materially from current indications due to the variety of factors.
Accordingly, nothing in the document is or should be relied upon as a promise or representation as to the future or any event or activity in the future and there is no representation, warranty or other assurance that any projections or estimations will be realised.
By accepting the opportunity to review this document the recipient of this information acknowledges that:
– it will conduct its own investigation and analysis regarding any information, representation or statement contained in this or any other written or oral information made available to it and will rely on its own inquiries and seek appropriate professional advice in deciding whether to further investigate the business, operations and assets of the business; and
– to the extent that this document includes forecasts, qualitative statements and associated commentary, including estimates in relation to future or anticipated performance, no representation is made that any forecast, statement or estimate will be achieved or is accurate, and it is acknowledged that actual future operations may vary significantly from the estimates and forecasts and accordingly, all recipients will make their own investigations and inquiries regarding all assumptions, uncertainties and contingencies which may effect the future operations of the business.
In providing this document, Adviser Edge reserves the right to amend, replace or withdraw the document at any time. Adviser Edge has no obligation to provide the recipient with any access to additional information or to release the results of or update any information or opinion contained in this document.
* van Eyk Research Limited (ABN: 99 010 664 632, AFSL: 237 917) (van Eyk) has conducted a review of, the processes undertaken by Barik Pty Limited, trading as Adviser Edge Investment Research (ABN 95 094 329 110, AFSL 236 783) (Adviser Edge) in preparing their research reports on the property sector.
van Eyk, in marking this report ‘endorsed’, generally speaking confirms the investment recommendation outlined in the report on this product having regard to the contents of the report only.
Adviser Edge’s rating and van Eyk’s endorsement could change or cease at anytime and should not be relied upon without referring to the meaning of the rating as well as the full report available to subscribers at www.iRate.vaneyk.com.au.
van Eyk has not reviewed the accuracy of this research or information nor whether the report may have material omissions or misstatements.
This review and van Eyk’s recommendation does not take into account an individual’s financial situation, needs or objectives.
The recommendation is intended for professional financial advisers only and should not, and is not intended to be relied upon by investors in making an investment decision.
van Eyk may from time to time receive fees from Adviser Edge for distributing its reports, however, no fee has been paid by Adviser Edge to van Eyk for it to endorse this report.
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