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Sep 2011 Quarterly Report - WIOF Global Utilities Fund

Ken Teale
Ken Teale

- Performance is calculated before management fees of between 1.50% and 2.25% per annum. The fund's inception date is July 31, 2009. The benchmark is the UBS Developed Infrastructure & Utilities Index, which is USD hedged and total return. - The fund's share price decreased 0.3% in the quarter compared to a 6.0% decrease in the benchmark index, due to avoiding large Italian, Spanish and French utilities and geographic allocation. - The portfolio holds positions in regulated utilities (41%), semi-regulated utilities (38%), generation (2%), communications infrastructure (7%), rail (3%) and airports (1%). The largest geographic exposures are the US (46%),

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1 Performance is calculated on I class shares, pre management fees of between 1.50% and 2.25% per annum 2 Performance inception date is 31 July 2009 3 The UBS Developed Infrastructure & Utilities Index is a USD hedged, total return index IMPORTANT NOTES This report has been prepared for information only, and it does not represent an offer to purchase or subscribe for shares. While Nucleus Global Investors Pty Ltd ( Nucleus ) believes that the information is correct at the date of production, no warranty or representation is given to this effect and no liability can be assumed for the correctness or accuracy of the given information, which may be subject to change at any time, without notice. Returns can be volatile, reflecting increases and decreases in the value of underlying investments. Changes in market conditions and exchange rates can cause a decrease or an increase in the share value. Past performance does not guarantee the same results in the future. The WIOF Global Listed Utilities Fund (the Fund ) is a sub fund of World Investment Opportunities Funds (the SICAV ), an open-ended investment company registered on the official list of collective investment undertakings pursuant to part I of the Luxembourg law of 20th December 2002 on collective investment undertakings (the 2002 Law ). Julius Baer (Luxembourg) S.A is the designated management company of the SICAV, authorised under the provisions of Chapter 13 of the 2002 Law. Applications can only be made on the form in the current WIOF Prospectus dated April 2010. Prospectus can be obtained by contacting the Nucleus investment team on +61 2 9356 2866, by fax +61 2 9357 6640, or by emailing kteale@nucleusglobal.com.au or at http://www.wiof.eu/institutional/download/prospectus/. Before investing in the Fund, investors should contact their financial adviser and refer to all relevant documents relating to the Fund, such as the latest annual report and prospectus, which specify the particular risks associated with the Fund, together with any specific restrictions applying, and the basis of dealing. In the event an investor chooses not to seek advice from a financial adviser, he should consider whether the Fund is a suitable investment for him. WIOF Global Listed Utilities Fund September 2011 Performance Summary (total return before fees) Performance 1 1 Month 3 Months 12 Months Inception 2 WIOF Global Listed Utilities Fund 0.2% (0.3%) 5.7% 18.3% Benchmark (UBS Developed Infrastructure & Utilities Index 3 ) (0.6%) (6.0%) 0.0% 11.0% Overview The fund s share price decreased by 0.3% over the quarter, compared to a 6.0% decrease in our benchmark index. Equity markets had a horrible quarter as markets became increasingly worried about the ability of the European banking sector to deal with potential sovereign defaults and writedowns of not just Greek, but also Italian and Spanish sovereign debt. Continental European markets were particularly badly hit with equity markets in Germany, France and Italy all falling by just over 25%, In contrast, the UK s FTSE 350 and the S&P 500 each fell by only 14%. Markets are clearly pricing in a recession in Europe and a sharp slowdown in the US economy and are also clearly worried about the possibility that a GFC mark II is sparked by Europe s sovereign debt crisis. The outperformance of the fund was due to stock selection (not owning the large integrated utilities in Italy, Spain and France which make up a significant part of our investment universe) and geographic allocation. We sold our small positions in Italian utilities early in the quarter and our French holdings mid quarter, as the interest rates paid by Italy on its sovereign debt rose sharply, greatly impairing the ability of the government to service its large debt burden and increasing the probability of default. An Italian default would hurt not only the Italian economy, but also the French economy, given the impact it would have on the French banking sector which holds large amounts of Italian sovereign debt. The best performing stocks in the fund over the quarter were Consolidated Edison (a US electricity utility) +8.2%, Central Japan Railway (operator of the Tokyo- Osaka high speed rail link) +7.8% and Duke Energy (a US electricity utility) +7.6%. The worst performing were E.On (a pan European electricity and gas utility) -16.5%, Inmarsat (a global satellite operator) -11.6% and Fortum (a Finnish power generator) -11.4%. Portfolio Changes During the quarter, we established positions in Southern Company, CLP Holdings, TransCanada, AGL Resources, SES and RWE. We exited positions in Iren, Enel, Vinci, GDF Suez and Drax. Outlook The probability of a European banking crisis has clearly increased. Europe s banks are woefully under capitalised. If proof of this was needed, the collapse of Dexia (one of the highest rated banks under the recent European Banking Authority stress tests) has provided it. It is widely acknowledged that a recapitalisation of Europe s banking sector is needed, the problem is where the capital will come from. Policy makers estimates of a total cost of EUR 100 Bn to bail out Europe s banks is way too optimistic. It cost USD 700 Bn (EUR 500 Bn) to bail out the US banking sector (USD 300 Bn in equity injections and USD 400 Bn in asset guarantees), which serves a similar sized economy to the Eurozone banks. US banks, however, were much less leveraged when the sub prime crisis hit than European banks are now and we believe the total cost of a Eurozone banking sector bailout is likely to be between EUR 200 Bn and EUR 500 Bn and possibly even more. Furthermore, Eurozone governments would probably find it more difficult than the US government to raise the capital for a bailout. The Eurozone has basically two options to fund a bailout: the ECB prints money or individual member states issue bonds. Germany will certainly oppose large scale money printing given their experience of hyperinflation caused by printing money during the Weimar Republic and bond markets would likely balk at lending Italy or Spain (15% and 10% of the Eurozone respectively) their share of the funding necessary to effect a co-operative Eurozone bailout. A Eurobond guaranteed by all of the Eurozone members (in essence a bond guaranteed by Germany) looks to be an unlikely saviour. Even if it wanted to, could Germany actually afford to bail out the entire Eurozone? Germany s economy represents around 25% of the Eurozone. Asking them to guarantee a bailout for the entire Eurozone is akin to asking California and New York (which together represent around 22% of the US economy) to bail out the entire US banking system. Should a banking crisis occur, our view is that national governments will bail out their own banks. Consequently, we have limited our exposure in Europe to those countries where we are confident the government could afford to bailout its banking system should this be required. Regulated Utility 41% Semi Regulated Utility 38% Generation 2% Communications Infrastructure 7% Rail 3% Airports 1% Cash 8% Sector Allocation US 46% Europe ex UK 16% UK 12% Japan 7% Asia excl. Japan 6% Canada 6% Cash 8% Geographic Allocation Company Name Country Sector % of Portfolio E.ON AG Germany Semi Regulated Utility 5.5% Consolidated Edison Inc US Regulated Utility 5.3% National Grid PLC UK Regulated Utility 5.3% Scottish & Southern Energy UK Semi Regulated Utility 4.6% SES Luxembourg Communications Infrastructure 3.9% Top 5 Holdings

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Sep 2011 Quarterly Report - WIOF Global Utilities Fund

  • 1. 1 Performance is calculated on I class shares, pre management fees of between 1.50% and 2.25% per annum 2 Performance inception date is 31 July 2009 3 The UBS Developed Infrastructure & Utilities Index is a USD hedged, total return index IMPORTANT NOTES This report has been prepared for information only, and it does not represent an offer to purchase or subscribe for shares. While Nucleus Global Investors Pty Ltd ( Nucleus ) believes that the information is correct at the date of production, no warranty or representation is given to this effect and no liability can be assumed for the correctness or accuracy of the given information, which may be subject to change at any time, without notice. Returns can be volatile, reflecting increases and decreases in the value of underlying investments. Changes in market conditions and exchange rates can cause a decrease or an increase in the share value. Past performance does not guarantee the same results in the future. The WIOF Global Listed Utilities Fund (the Fund ) is a sub fund of World Investment Opportunities Funds (the SICAV ), an open-ended investment company registered on the official list of collective investment undertakings pursuant to part I of the Luxembourg law of 20th December 2002 on collective investment undertakings (the 2002 Law ). Julius Baer (Luxembourg) S.A is the designated management company of the SICAV, authorised under the provisions of Chapter 13 of the 2002 Law. Applications can only be made on the form in the current WIOF Prospectus dated April 2010. Prospectus can be obtained by contacting the Nucleus investment team on +61 2 9356 2866, by fax +61 2 9357 6640, or by emailing kteale@nucleusglobal.com.au or at http://www.wiof.eu/institutional/download/prospectus/. Before investing in the Fund, investors should contact their financial adviser and refer to all relevant documents relating to the Fund, such as the latest annual report and prospectus, which specify the particular risks associated with the Fund, together with any specific restrictions applying, and the basis of dealing. In the event an investor chooses not to seek advice from a financial adviser, he should consider whether the Fund is a suitable investment for him. WIOF Global Listed Utilities Fund September 2011 Performance Summary (total return before fees) Performance 1 1 Month 3 Months 12 Months Inception 2 WIOF Global Listed Utilities Fund 0.2% (0.3%) 5.7% 18.3% Benchmark (UBS Developed Infrastructure & Utilities Index 3 ) (0.6%) (6.0%) 0.0% 11.0% Overview The fund s share price decreased by 0.3% over the quarter, compared to a 6.0% decrease in our benchmark index. Equity markets had a horrible quarter as markets became increasingly worried about the ability of the European banking sector to deal with potential sovereign defaults and writedowns of not just Greek, but also Italian and Spanish sovereign debt. Continental European markets were particularly badly hit with equity markets in Germany, France and Italy all falling by just over 25%, In contrast, the UK s FTSE 350 and the S&P 500 each fell by only 14%. Markets are clearly pricing in a recession in Europe and a sharp slowdown in the US economy and are also clearly worried about the possibility that a GFC mark II is sparked by Europe s sovereign debt crisis. The outperformance of the fund was due to stock selection (not owning the large integrated utilities in Italy, Spain and France which make up a significant part of our investment universe) and geographic allocation. We sold our small positions in Italian utilities early in the quarter and our French holdings mid quarter, as the interest rates paid by Italy on its sovereign debt rose sharply, greatly impairing the ability of the government to service its large debt burden and increasing the probability of default. An Italian default would hurt not only the Italian economy, but also the French economy, given the impact it would have on the French banking sector which holds large amounts of Italian sovereign debt. The best performing stocks in the fund over the quarter were Consolidated Edison (a US electricity utility) +8.2%, Central Japan Railway (operator of the Tokyo- Osaka high speed rail link) +7.8% and Duke Energy (a US electricity utility) +7.6%. The worst performing were E.On (a pan European electricity and gas utility) -16.5%, Inmarsat (a global satellite operator) -11.6% and Fortum (a Finnish power generator) -11.4%. Portfolio Changes During the quarter, we established positions in Southern Company, CLP Holdings, TransCanada, AGL Resources, SES and RWE. We exited positions in Iren, Enel, Vinci, GDF Suez and Drax. Outlook The probability of a European banking crisis has clearly increased. Europe s banks are woefully under capitalised. If proof of this was needed, the collapse of Dexia (one of the highest rated banks under the recent European Banking Authority stress tests) has provided it. It is widely acknowledged that a recapitalisation of Europe s banking sector is needed, the problem is where the capital will come from. Policy makers estimates of a total cost of EUR 100 Bn to bail out Europe s banks is way too optimistic. It cost USD 700 Bn (EUR 500 Bn) to bail out the US banking sector (USD 300 Bn in equity injections and USD 400 Bn in asset guarantees), which serves a similar sized economy to the Eurozone banks. US banks, however, were much less leveraged when the sub prime crisis hit than European banks are now and we believe the total cost of a Eurozone banking sector bailout is likely to be between EUR 200 Bn and EUR 500 Bn and possibly even more. Furthermore, Eurozone governments would probably find it more difficult than the US government to raise the capital for a bailout. The Eurozone has basically two options to fund a bailout: the ECB prints money or individual member states issue bonds. Germany will certainly oppose large scale money printing given their experience of hyperinflation caused by printing money during the Weimar Republic and bond markets would likely balk at lending Italy or Spain (15% and 10% of the Eurozone respectively) their share of the funding necessary to effect a co-operative Eurozone bailout. A Eurobond guaranteed by all of the Eurozone members (in essence a bond guaranteed by Germany) looks to be an unlikely saviour. Even if it wanted to, could Germany actually afford to bail out the entire Eurozone? Germany s economy represents around 25% of the Eurozone. Asking them to guarantee a bailout for the entire Eurozone is akin to asking California and New York (which together represent around 22% of the US economy) to bail out the entire US banking system. Should a banking crisis occur, our view is that national governments will bail out their own banks. Consequently, we have limited our exposure in Europe to those countries where we are confident the government could afford to bailout its banking system should this be required. Regulated Utility 41% Semi Regulated Utility 38% Generation 2% Communications Infrastructure 7% Rail 3% Airports 1% Cash 8% Sector Allocation US 46% Europe ex UK 16% UK 12% Japan 7% Asia excl. Japan 6% Canada 6% Cash 8% Geographic Allocation Company Name Country Sector % of Portfolio E.ON AG Germany Semi Regulated Utility 5.5% Consolidated Edison Inc US Regulated Utility 5.3% National Grid PLC UK Regulated Utility 5.3% Scottish & Southern Energy UK Semi Regulated Utility 4.6% SES Luxembourg Communications Infrastructure 3.9% Top 5 Holdings