Trustee’s Report (continued) Review of Investment Activities
We continue to reduce our exposure towards distressed debt funds as increasing amounts of capital in this sector threaten to reduce returns. This began to be evidenced in the past year when returns slipped to 3%, as against 72% over the past five years. These funds now represent 8% of our private interests and 4% of our commitments.
Our direct private investments continue to rise both in number and value. Given that we are indifferent as to whether strong companies are private or public, we increasingly are targeting add-on investments to the private investments held through our partners as these companies come to the public markets. We also co-invest directly with partners when they invest in attractive private companies.
Property and infrastructure Our property assets returned 13% in 2010/11 and 22% in the past five years. There has been a very sharp contrast between the performance of our directly held assets and that of funds; over 70% of our investments are now direct and we have not committed to any funds in the past four years. Despite travails in the broader property market in recent years, the largest component, direct residential property, has returned 70% over the past five years and our direct commercial property has returned 60% over the period, helped by the timing of sales as we substantially reduced exposure. Our largest exposure is to our estate of 1,800 properties in Kensington, London, which has underpinned our residential property return of eight times since inception in 1997 (16.0% per annum).
During the year, we attempted to acquire the site of the London Olympic Park but were unsuccessful. We continue to look for similar long-term large-scale assets in the UK and to seek partners who have aligned interests for projects around the world.
24 | Annual Report 2011
Figure 14 Property net returns (£)
Period to 30 September 1 year
Direct commercial Direct residential Commercial funds Residential funds
Property and infrastructure
29.6 15.6 8.4 6.0
13.3
Annualised return in £ (%) 3
5
years 21.4
9.3 (5.2)
(11.3) 4.1
years 9.9
11.2
(1.9) (1.7)
4.1 10
14.6 5.7
10.7
Inception dates as follows: direct commercial (January 1994), direct residential (July 1997), residential funds (June 2006), commercial funds (December 2000).
Since
years inception 13.5
11.4 16.2 5.1
(1.4) 11.1
Figure 15 Property investments by strategy (£)
As at 30 September
2011 Value £m
Residential property Commercial property
Total
1,340 214
1,554
Investment risk management We manage our portfolio within the context of four key risk parameters:
1. Value at Risk (VAR). The estimated VAR of our portfolio at the end of September 2011 was 16.3% (2010: 15.9%) as cash levels were reduced into the market sell-off and asset volatility increased.
2. Equity beta. The performance of most investments contains an element of equity beta. In September 2011, overall estimated equity beta was 0.74 (2010: 0.74), having troughed at 0.5 in December 2008.
2010 Value £m
1,199 194
1,393
2009 Value £m
1,101 399
1,500
2008 Value £m
1,180 439
1,619
3. Base case cash forecasts. Our current expectation is that, before accounting for reinvestment, cash levels will reach a minimum in 2012 and then rise steadily.
4. Base currency exposure. Since October 2009, we have measured our returns in a 50/50 blend of Sterling and Dollars in order to recognise the global nature of our portfolio and the need to maintain global purchasing power.
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