Brandeaux Funds Update - December 2008 The Brandeaux Group announced on Friday 12th December 2008 that it was temporarily suspending dealing on all of its funds. Brandeaux has in the past stopped taking new money into the funds because they have been oversubscribed and holding too much cash would have created a performance drag. This time they are concerned that they will not have enough cash to meet redemptions without selling quality assets and this would be to the detriment of those that remain invested in the fund. Brandeaux have over the past fortnight received a significant number of redemption requests for the Ground Rent funds from one single adviser, and until this event they had a healthy level of net subscriptions with considerably more money coming in than going out each month. Although the requests do not create an immediate liquidity problem, Brandeaux decided to take immediate action and the only way to halt this short-term flow of redemptions was to suspend dealing. This is something that we support.
We met with Brandeaux only three weeks ago and are extremely confident that the assets of both the Ground Rent funds and Student Accommodation funds will continue to perform. The Ground Rent Income fund has returned 8.0% over the last 12 months, whilst the Student Accommodation fund has returned 10.7% over 12-months. (Source: Financial Express Analytics, Total Return, Bid to Bid, to 28th November 2008).
We are confident that the one adviser that has decided to switch from the funds does not know something we do not. Brandeaux currently has over 20,000 ground rents that continue to perform strongly and although there has been a reduction in performance from last year, it is not something that causes us undue concern. Annual performance has historically fluctuated 12.8% 2001, 6.8% 2002, 8.5% 2003, 8.5% 2004, 9.0% 2005, 8.8% 2006, 10.7% 2007. During recessionary times we would expect to see less lease extensions and the shorter term reversions (only 5% of the fund has under 20 years to run on leases) valued slightly lower, but neither alters our opinion on the relative attractions of Ground Rents versus other low risk assets.
The Student Accommodation funds have also gone from strength to strength as a recent independent report by King Sturge on the sector confirms. Demand for beds remains high with 100% occupancy during this current academic year. Over half of the beds that the fund owns are leased back to the Universities directly. Importantly, rent reviews for the next academic year are currently being finalised by the managers and with over two thirds now complete the average rental increase is over 6%. Coupled with continued high demand for purpose built high quality accommodation, (during previous recessions student numbers have increased), we remain as positive as ever on this asset class. If you would like a copy of the Kings Sturge report then please just ask.
Having spoken to both Kay Brandeaux (Chairman) and Roger Boyland (Chief Executive) with regards to this situation, we believe that the suspension of dealing is a sensible course of action. A much worse situation than suspending redemptions for shareholders, whether they wish to redeem or not, would be that Brandeaux is forced into selling good performing assets at knockdown prices. Although monies cannot be invested or redeemed in the short-term, rental income from the ground rents and student accommodation will still be received. This means that the performance of the funds will not suffer whilst dealing is suspended and will continue to be strong over both the long and short-term.
We have been told that dealing will resume in the early New Year, at which point Brandeaux will be implementing a redemption policy to ensure investors are protected against this situation in the future. As yet we do not have any detail regarding this, other than a commitment from Kay and Roger that our views will be listened to. We are confident that once Brandeaux has reached a suitable solution and trading has re-commenced the actions of any one misguided adviser will not have the same repercussions on the funds in the future.
Should you have any questions with regards to your holdings in the Brandeaux funds, or if we can be of any further assistance, please do not hesitate to contact either myself, Derek, Tony or Alan.
Chris Birch
Director
15 December 2008
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