SEPTEMBER QUARTER 2017 The Newgate Real Estate and Infrastructure Fund takes long and short positions in listed securities exposed to assets such as office and industrial real estate, residential development, retail shopping centres, healthcare, airports, ports, toll roads, rail and utilities. QUARTERLY PERFORMANCE - FINANCIAL YEAR 2018 SEPTEMBER QTR DECEMBER QTR MARCH QTR JUNE QTR Total FY Return 2018FY 7.87% - - - 7.87% The Newgate Real Estate and Infrastructure Fund performed well over the September quarter 2017, delivering a +7.9% return. By way of reference the real estate securities market finished the quarter with a 1.7% gain. Over the 12 months to September 2017, the Fund delivered a +13.5% return, versus the real estate market down -2.8%. The Fund s positive performance in this weak backdrop highlights its ability to generate returns not correlated to the equity and credit markets. Reviewing Fund performance over a longer-term time profile, the strategy has met its medium to long term return objectives, providing a +12.4% per annum return since Fund inception. This has resulted in a cumulative +65.4% return for investors. FUND PERFORMANCE TIME PERIOD RETURN Rolling Quarter 7.87% Rolling 12 Months 13.53% Rolling 3 Year 9.50% p.a Since Inception 12.44% p.a Since Inception (Total) 65.43% Observed Volatility 5.92% AVERAGE FUND STATISTICS STATUS MOVEMENT Number of Positions: 13 positions + Cash Net Position: 36% (longs less shorts) 70.0% 60.0% Newgate Real Estate and Infrastructure Fund - Returns Since June 30th 2013 Total Long Positions: 76% Total Short Positions: 40% Gross Exposure: 116% (longs plus shorts) 50.0% 40.0% NOTABLE STOCK CONTRIBUTIONS POSITIVE CONTRIBUTORS NEGATIVE CONTRIBUTORS 30.0% 20.0% 10.0% 0.0% 2013 2014 2015 2016 2017 Centuria Capital (CNI) Vicinity Centres (VCX) Charter Hall Group (CHC) Dexus Property (DXS) Aveo Group (AOG) Viva Energy Reit (VVR) Windlab (WND)
The major contributor to Fund performance was real estate owner and fund manager, Centuria Capital (CNI). CNI released a full year result that highlights its continued progress in growing funds under management. The market responded positively to the progress, with the stock rallying nearly 12% over the September quarter. CNI remains a long-term Fund holding. CNI has a highly regarded management team and an established platform in place that will allow continued growth in funds under management. $1.50 Centuria Capital (CNI) $1.40 $1.30 $1.20 $1.10 $1.00 The Fund also benefited from its exposure to real estate technology company, Updater (UPD). UPD provides a real estate platform to facilitate the logistics of residential moves in the USA. The company continues to deliver on its target market share and the market responded positively to this momentum, driving the share price up over 36% over the quarter. We have significantly trimmed the UPD position in the Fund to reflect the reduced valuation support as well as maintaining an appropriate position size given the company s higher than average risk profile. Updater Inc (UPD) $1.50 $1.40 $1.30 $1.20 $1.10 $1.00 $0.90 $0.80 $0.70 $0.60
Short position in retail landlords We are currently short retail landlords, which we assess will be negatively impacted by the entry of Amazon into Australia. We are aware that Amazon s entry into Australia is well known, but we do not think the market fully appreciates the degree incumbent retailers are at a competitive disadvantage. The primary source for our concerns is the very high cost structure of Australian retailers. This cost structure is a product of that fact Australian retail shopping centre rents and labour rates are a multiple of US and UK levels. The higher relative costs mean Australian shoppers pay much more for goods and services than in other developed economies. Amazon does not have the cost structure of incumbent retailers it can therefore beat them on price. Unfortunately for retailers, this is only one component of Amazon s competitive advantage: Amazon will not just compete on price: It provides a highly competitive bundled offering called Amazon Prime. Subscribers to Amazon Prime not only get access to Amazon s fast and free delivery but also streaming films (Prime Video), streaming music (Prime Music) and unlimited photo storage (Prime Photos) Amazon changes the concept of convenience rapid delivery is the number one reason shoppers use Amazon Amazon s range is materially better than its competition The course of events 1. Retailers will have to adapt to compete with Amazon by reducing their cost base and differentiating their offering 2. As part of this adaptation process, retailers will most likely seek lower rents from their landlords, as well as shrinking their store network 3. These actions will increase vacancy rates across shopping centres, and lower rents. This will result in lower income for retail landlords, and subsequently lower capital values for retail real estate 4. This fall in retail real estate asset values will in turn spur some retail landlords to adapt - owners of retail real estate will need to restructure reducing their land footprint, remixing retail offerings and incorporating new uses such as residential and office The process of evolution will see a reduction in retail store numbers and ultimately overall physical retail space. The retail space remaining will exist within both highly dense areas and low population centres. The offering will be more experiential and service oriented, and will seek to complement the online retail industry. This path will take many years (5-7 years) and will be very difficult for the industry. Nonetheless, there will be many opportunities as the industry reshapes itself.
Long position in Aveo Group (AOG) We established a material position in retirement centre operator Aveo Group (AOG). AOG was the target of a negative publicity campaign, with claims of poor standards and misrepresentation made against the company. Whilst we take these claims very seriously, we believe they are mostly unfounded and will not translate into significant value destruction. The negative news report sent the AOG share price down 25% to $2.30, 32% below the company s asset backing of $3.37. This was an excessive response to the issues facing the company. We expect the company will address the criticisms over the coming 12 months and the stock will gradually recover to again trade above $3.00. $3.60 Aveo Group (AOG) $3.40 $3.20 $3.00 $2.80 $2.60 $2.40 $2.20 FUND PROFILE Fund Investment Objective Newgate Real Estate and Infrastructure Fund Generate returns of between 10-12% per annum over rolling three year periods with target volatility of less than 10% Fund Inception 1 July 2013 Trustee: Newgate Capital Partners, AFSL 478 388 Fund Managers: Prime Broker: Administrator: Auditors and Tax Legal: Regulator: Tim Hannon Macquarie Bank Mainstream BPO PricewaterhouseCoopers DLA Piper, CNM Legal Australian Securities and Investment Commission (ASIC)
IMPORTANT DISCLAIMER This may affect your legal rights: Because this document has been prepared without consideration of any specific client s financial situation, particular needs and investment objectives, you should consult your investment adviser before any investment decision is made. While this document is based on the information from sources which are considered reliable, Newgate Investment Management Pty Ltd, its associated entities, directors, employees and consultants do not represent, warrant or guarantee, expressly or impliedly, that the information contained in this document is complete or accurate. Nor does Newgate Investment Management Pty Ltd accept any responsibility to inform you of any matter that subsequently comes to its notice, which may affect any of the information contained in this document. This document is a private communication to clients and is not intended for public circulation or for the use of any third party, without the prior approval of Newgate Investment Management Pty Ltd. This is general securities advice only and does not constitute advice to any person. Disclosure of Interest: Newgate Investment Management Pty Ltd, Newgate Capital Partners Pty Ltd and its associates may hold shares in the companies recommended. The individual fund performance figures are based on an investment in the Fund s June 2013 Series made on July 1st, 2013, the date of the Funds inception. The performance numbers are based on the net asset value of the Fund and are calculated net of management fees, brokerage commissions, administrative expenses, and accrued performance allocation, if any, and include the reinvestment of all dividends, interest, new issue income or loss, and capital gains. The Firm and the Fund have a limited operating history. This report is not an offer to buy or sell any security. Offering by private Information Memorandum only. Investing in hedge funds such as the Newgate Real Estate and Infrastructure Fund is risky and investors are exposed to capital loss. Investors should review the Information Memorandum for the Fund, which contains a complete description of the investment program and its risks, in its entirety before investing. The Fund invests in listed securities, which can be volatile and subject to market factors beyond the control of the manager. Certain information provided herein is based on third-party sources, which information, although believed to be accurate, has not been independently verified. The Firm assumes no liability for errors and omissions in the information contained herein. This report is for informational purposes only and may not be reproduced or distributed without the prior consent of the Firm. Volatility is calculated by using the annualised standard deviation of monthly returns since inception of Newgate Real Estate and Infrastructure Fund. Standard deviation measures the distribution of returns around the mean return. Low standard deviations reflect low variation in monthly results; higher variability is usually interpreted as higher risk. Standard deviations are based on monthly results, and then annualised. The Sharpe Ratio is the ratio of excess return to volatility. Excess return is defined as the annualised rate of return less the risk-free rate, using monthly returns since inception. The volatility measure is the annualised standard deviation of monthly excess returns since inception. Any investment in the Funds is speculative and involves substantial risk, including the risk of losing all or substantially all such investment. No representation is made that the Funds will or are likely to achieve their objective, that any investor will or is likely to achieve results comparable to the estimated performance shown, will make any profit at all or will be able to avoid incurring substantial losses. Past performance is not necessarily indicative of future results. Comparisons of the performance of actively managed accounts such as the Funds with passive securities indices involved material inherent limitations. Performance estimates are presented only as of the date referenced above and may have changed materially since such date. Newgate Capital Partners Pty Ltd, ABN 32 606 357 831, AFS Licence Number 478 388