Fund & Asset Manager Rating Group

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1 Managed by Petercam Institutional Asset Management (IAM) Full Rating Report Equity Funds / Belgium Key Rating Drivers Stock Picking Fund, Customised Benchmark: The long-term investment approach is based primarily on bottom-up fundamental stock picking, incorporating top-down sector and country views. The fund has a small- to mid-cap, quality growth bias and a customised benchmark adapted to Petercam s geographical expertise. Detailed, Sector Specific Research: Stock research is conducted jointly by the two coportfolio managers (PMs), who use a proprietary valuation model, tailored to real estate equity. This is combined with detailed qualitative analysis, focusing on management quality. Relative price targets are set for each stock held and monitored continuously. Lipper Leaders Consistent Return Rating End October Year 5-year 10-Year For more information, see Figure 1 Fund Features Co-Portfolio Managers (PMs) Inception Date 28 Dec 99 Size Olivier Hertoghe, Damien Marichal EUR216m (October 2014) Lipper Category Equity sector real Strategy estate Europe Long-only European real estate equity Reference Index PEPS net return Share Classes Primary share class : BE (capitalisation) Other capitalisation and distribution share classes available, all in EUR Legal form Source: Fitch Analysts Belgium SICAV Richard Woodrow, CFA richard.woodrow@fitchratings.com Anchored Portfolio Construction: Explicit risk guidelines limit deviation from a customised benchmark. Up to 30% of the fund is allowable in off-benchmark stocks, with liquidity of stocks a key consideration. Experienced Co-PMs: The co-pms have 27 years and 21 years of European real investment experience. The Petercam equity team consists of 16 PMs (16 years average experience). An independent investment risk team of seven provides effective oversight and a challenge to the PMs risk taking. Established Mid-Sized Manager: Petercam IAM is fully owned by Petercam SA, which was founded in Petercam SA is 70%-owned by 12 partners. At end-june 2014, Petercam SA had EUR14.4bn assets under management, EUR500m of which is invested in European real estate equities. The company s historical focus has been in European assets and investors. Appropriate Operational Framework: The operational set-up complies with Fitch Ratings operational assessment criteria as detailed on page 5. Solid Track Record: The fund has delivered a second quintile performance over three and five years. It is likely to underperform peers in markets where UK real estate performs strongly, given the benchmark s and fund s lower weighting to the UK compared with peers. Figure 2 Fund Performance and Assets (Base = 100) Fund AuM (RHS) B (LHS) PEPs index (LHS) Lipper Global Equity Sector Real Est Europe (LHS) (EURm) 85 0 Oct 09 Apr 10 Oct 10 Apr 11 Oct 11 Apr 12 Oct 12 Apr 13 Oct 13 Apr 14 Oct 14 Source: Lipper Manuel Arrive, CFA manuel.arrive@fitchratings.com 14

2 Figure 3 Fund Statistics At end-october 2014 Year Fund a Ref. index b Calendar returns (%) YTD Lipper category Statistics (1 year) Tracking error 2.99 Information ratio 0.67 Max drawdown (%) -8.7 a B shareclass b Reference index is PEPS net return Source: Lipper, Petercam Figure 5 Key Investment Features Return Objective: Outperform PEPS on a 3 year rolling period (target annualised excess return of 2%). Risk Objective: Expected tracking error of 4% max, lower volatility than investment universe. Investment Universe: Listed European property stocks Out of benchmark stocks: Max 30% (15% to 20%, typically). Max. holding deviation : +/- 3% vs. benchmark. Max. Sector/country deviation: +/- 10% vs. benchmark Currency risk: Unhedged. Number of positions: typically45 to 75 Turnover a : 67% (2013) Max cash balance: 5% a Formula used: (sales + purchases)/ average AUM Source: Petercam, Fitch Related Criteria Fund Quality Rating Criteria (September 2014) Qualitative Assessment Investment Process Investment Philosophy The investment approach is a combination of top-down allocation decisions and bottom-up security selection. The fund invests in European real estate equity companies, including diversified sub-sectors such as offices, retail, residential and industrial. Eligible investments include shares in REITs (Real Estate Investment Trusts), real estate companies, real estate certificates and developers. The fund is actively managed against a customised benchmark, the PEPS Index (Petercam European Property Shares Index), which is constructed independently by Global Property Research (GPR.) The index is based upon the market-cap weighted (float adjusted) GPR 250 index, with adaptions to match Petercam s real-estate equity strategy. See Figure 4 for details. The composition of the benchmark is provided daily to Petercam by GPR for use in performance and investment risk monitoring. Figure 4 Adaptions to GPR250 Index to Create PEPS Index Adaption Individual stock weight capped at 8% (important impact on Unibail-Rodamco, 15%). Weight of Belgium increased from 1% to 10% Weight of UK capped at 25% (37% in GPR 250 index at September 2014) Source: Fitch, Petercam Rationale To allow the fund to overweight a stock (UCITS rules limit maximum stock holding to 10%.) To account for Petercam s knowledge and experience of the Belgian real estate market. To limit volatility (UK real estate market has been historically more volatile) and to limit currency risk. The fund s investment edge originates from its investments in under researched, small- to midcap holdings, in markets geographically close to Belgium where Petercam s core expertise lies. It has a small to mid-cap bias, compared to the PEPS index, with a notable overweight against the benchmark in securities with market capitalisations between EUR100m and EUR300m. The fund has a quality growth bias: the lower liquidity of small caps must be offset by superior expected total return as well as lower volatility. Since its inception and over five years, the fund has adhered to its philosophy and achieved its objective of outperforming its benchmark with lower volatility. The fund is likely to underperform peers in markets where UK real estate performs strongly, given the benchmark s and fund s lower weighting to the UK compared with peers. Research The fund s eligible investment universe consists of all listed European property companies, which totals about 300 companies. Of these, the PMs actively cover around 100 stocks, of which 50 make up the PEPS index. Fundamental research is conducted by the PMs, with the focus on qualitative characteristics of management, such as the credibility of the business plan. Key consideration is placed upon their ability to sustain and grow the company s cash flow per share. This is combined with quantitative analysis that uses the PMs own proprietary valuation model, which incorporates cashflow, dividend and NAV yields. The valuation model is linked to external data feeds, such as Bloomberg, to allow real-time monitoring and updating. Company valuation is based on metrics such as price to cashflow and EBITDA yields, among others. The dividend yield and NAV premium/discount are also important considerations. A target price is generated for each stock held and monitored via the valuation model. 2

3 Research ideas are generated from a variety of sources. The PMs regularly attend property tours and investor days by relevant companies. Selective sell-side broker research is reviewed to challenge existing ideas and generate new ones. Petercam s in-house economics team is consulted to gain views on each economy invested within. Decision Making and Portfolio Construction Investment decisions are taken collectively by the co-pms, who are responsible for portfolio construction and the day-to-day management of the fund. Position sizing reflects the PMs level of conviction and judgements on liquidity, country, and sector allocation against the risk profile of the portfolio and the benchmark. Portfolio construction is anchored to the PEPS benchmark, with parameters in place to limit large deviations. Off-benchmark stocks have to be judged to be of higher quality than onbenchmark stocks to be eligible for investment, to offset the lower liquidity present. The sell discipline consists of a mixture of quantitative and qualitative considerations. Stocks may be sold if the investment thesis changes or if the management strategy changes for example. Valuation is the main quantitative reason that a stock may be sold, if the PMs price target is reached or if a cheaper alternative is present in the universe. Stocks may also be sold to comply with the fund s investment risk guidelines. Portfolio Monitoring The fund is monitored on an on-going basis by PMs based on the G2 portfolio management system and an extensive suite of risk analytics such as Barra, Factset and Bloomberg, where portfolios have been set up. PMs therefore have all the required tools to monitor risk budgets, styles, factor exposures and valuations metrics in a timely and comprehensive manner. The fund s portfolio is continuously monitored against the benchmark, which serves as an anchor in order to monitor risk (against tracking error and exposure guidelines). Risk management calculates on a weekly basis value at risk (VAR), tracking error and contribution. It monitors the fund against a set of internal risk limits. Risk Management also produces more detailed reports on a monthly and weekly basis. These reports include risk decomposition, style factor breakdown among other Barra-based metrics as well as a stress test analysis. Liquidity risk is monitored through estimates of time needed to liquidate positions assuming one-third of the last three months average market volumes. It is estimated that at least 75% of the fund can be liquidated within five trading days. Regular dialogue between the risk team and PMs, as well as a wider effective use of the risk analytics such as Barra, contributes to a genuine embedding of risk-management in the investment process. A monthly investment risk committee and a monthly fund meeting formalise the risk oversight and escalation mechanisms. Figure 6 Staffing Functions No. Equity management 16 Equity research 9 Macro economists 2 Dealing desk 5 Sales & marketing 21 Reporting & performance 3 Risk management 7 Administration 11 Compliance 5 Source: Fitch, Petercam Operational Front-Office Workflows The PMs are directly in charge of the operational management of the fund. The Front Office systems (see technology) support the straight-through processing of orders, which are executed by the central dealing unit of five. Pre-trade compliance checks are fully automated. Orders are routed to brokers via the Bloomberg electronic platform. The fund s post trade investment compliance is performed by the administrator and by Petercam IAM s risk management team. Resources Staffing The Petercam IAM equity team is large, stable and seasoned, consisting of 16 PMs who have 16 years of experience and 10-year company tenure on average. The fund is run jointly by the two co-portfolio managers. Olivier Hertoghe has been managing the fund since inception and has 26 years investment experience, the majority in European real estate markets. His co-pm, 3

4 Damien Marichal, took his role in 2006, although he has been at Petercam since 1995, as a sell-side analyst and as financial controller. Petercam IAM has a separate, well resourced, buy-side equity research team, which is a differentiator in the equity fund management industry. It consists of nine seasoned analysts (10-years average experience and three-years company tenure), primarily focused on Europe and organised on a sector basis. The analysts are used for general European equity research only, as the buy-side team do not have a real estate specialist. Figure 7 Petercam's AUM Evolution (EURbn) Figure 8 Petercam IAM Q14 Source: Petercam Petercam Petercam AUM Breakdown By Asset Class As at June 2014 Funds of funds 8% Money market 7% Equities 32% Other staffing resources are listed on Figure 7. Middle office and IT functions have been outsourced to Lombard Odier Bank since January The relationship is governed in a detailed service level agreement (SLA). Petercam now employs 423 people, including 104 working in the asset management division, all based in Brussels. Technology Petercam IAM uses G2 and Negoce, which are Lombard Odier s proprietary portfolio management system and order management systems, as part of the outsourcing agreement. Equities risk and analytics systems include Barra (factor risk analysis) and Factset (performance attribution). Risk analytics are fed by the G2 database. Petercam also has a proprietary intranet research portal. Overall, systems are scalable and appropriate. The SLA with Lombard Odier covers development and maintenance of G2 and Negoce for Petercam specific needs. Asset Manager Ownership and Financial Conditions Petercam IAM is the dedicated asset management company of the Petercam group. Petercam SA was established in 1968 in Brussels, as an independent private partnership. 70% of the equity is owned by 12 partners and 30% is held jointly by the two founding families, Peterbroeck & Van Campenhout. Petercam has three activities: asset management, private banking and investment banking. Its financial condition is sound, with a 16% operating margin in The company has very limited financial debt on the balance sheet and does not provide loans. Balanced 26% Source: Petercam Fixed income 27% Client Base Institutional and private clients (from the private bank) represent 58% and 36% of the fund s holders with the rest owned by other Petercam internal funds. Most of the clients are based in Europe mainly the Benelux countries and France. The largest institutional investor represents 25% of the fund. Institutional Experience & Market Presence European real estate equities represent 4% of Petercam s AUM (around EUR500m) as at June The team manages two European real-estate equity SICAV funds (the fund in question and a dividend focused fund) in addition to several segregated mandates. The company has a track record of more than 20 years in the management of European equities and fixed income, with a more recent expansion in the management of multi-asset portfolios and non-european assets. Stability Petercam s historically low staff turnover is a function of the Brussels job market. However, there was some turnover in the equity research team in Notable events included the outsourcing of middle office and IT functions to Lombard Odier in early In October 2013, the institutional asset management of Petercam SA was grouped in Petercam IAM to comply with existing and future UCITS regulation and future AIFMD regulation. 4

5 Figure 9 Operational Assessment Pass Attention required x Fail Service providers & asset segregation Custodian JP Morgan Europe Limited, Brussels branch. JPMorgan Chase & Co.is rated A+ / F1 ; Stable Outlook. Segregation of assets Assets are segregated and held by the custodian. Administrator CACEIS from January Auditors Deloitte Stability in service Stable over the past five years providers On January, 1 st 2012, Petercam outsourced IT Others and Operations to Lombard Odier Bank Fund may use derivatives for portfolio management efficiency purposes. Fund may use stock lending. Regulation & governance Regulated vehicle UCITS IV, Belgium SICAV with an umbrella structure Governance Control framework Valuation & pricing Pricing responsibility Pricing policy Back-office reconciliations Source: Fitch Board of directors of six, including one independent. Risk management team of seven. Monthly risk committees. Effective risk frameworks established in 2011 (inc. risk limits tables). Undertaken by CACEIS Underlying assets are all listed equities, with prices directly sourced from usual data providers Cash positions and holdings are reconciled on a daily and monthly basis respectively. Reconciliations are performed by Lombard Odier Fund terms Liquidity management Daily liquidity with T+3 settlement. Fund is invested in listed equities with a midcap bias (around 40% invested in securities with market capitalisations under EUR2bn). Petercam ensures that at least 75% of the fund can be liquidated within 5 trading days (assumption: 3M volume, 33% of volume). Fee structure Annual management fee of 0% to 2% depending of share class. No performance fee. Conflicts of interest Management of conflicts of interest Alignment of interests Petercam IAM is dedicated to institutional asset management. Petercam SA is active in private banking, corporate finance and equity brokerage, which are segregated from the Asset management business. Existence of an internal procedure governing conflicts of interests. Both short- and long-term incentive schemes. Structural independence of Petercam SA Disclosure & transparency Clear strategy Eligible instruments and investment strategy representation clearly described in prospectus. Level of disclosure Good level of transparency: monthly factsheets with top holdings and performance. Fund and market specific commentary available regularly. Important Notice A report providing a Fitch Rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the fund advisor and its agents in connection with the distribution of the fund. Investors should review the prospectus and/or legal information, which Fitch understands includes, inter alia, the jurisdictions in which the fund is registered for sale. 5

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