Quarterly Newsletter Q1 2013 Genevieve Blouin, CFA, CMT Caroline Bédard, CFA 1250 René- Lévesque Ouest Bureau 2200 Montréal, (Québec) H3B 4W8 www.altervest.ca A word from the president U.S. market view: a race for dividends! The S&P 500 was up more than 10% since the beginning of the year. From a supply and demand stand point, the message is clear: investors are back with a vengeance in U.S. stocks. Following a depressing draw down streak estimated at 300B$ from 2008 to 2012 investors rushed off the sidelines in the first quarter of 2013 and pumped 61B$ in mutual funds and ETFs that hold U.S. stocks. That is more inflow than any full calendar year since 2004. Low interest rates coupled with financial and political uncertainties lead them to defensive and dividend paying sectors such as Healthcare, Consumer Staples and Utilities. The latter have gone parabolic since the beginning of the year recording gains nearly twice the S&P500’s performance (see graph on right). There is one interesting caveat; basic materials and resources significantly underperformed (they are flat since the beginning of the year). It might imply that investors do not really believe in the global economic recovery, rather, they seem to be willing to chase yield in the stock market so long as the Federal Reserve has their back. U.S. stock mutual fund & ETF flows Over-performance of dividend stocks Fund launch September 1st, ,2013 We initially planned to launch a High Yield REIT fund at the end of the second quarter (as announced on BNN’s Berman Call) that would be accessible to smaller investors. Unfortunately, there is a delay on the provider’s side. As we awaited for our project to move forward, we carried on to launch another fund with our most performing absolute return REITs strategy. We named it Altervest absolute NAREIT fund (NAREIT stands for North American Real Estate Investment Trust). Like the High Yield REIT fund we plan to launch, it integrates conservative option strategies which aims to enhance income, hedge and decrease volatility. We are very proud of this product as we feel it reflects most our brand’s values and goals: conservative (low volatility target), innovative, centered on capital preservation while optimizing risk adjusted returns. Altervest absolute NAREIT fund will be available on Fund Serve ( a platform available to most brokers) the 1st of September 2013. The fund is available to accredited investors and Canadian institutions. The first 150 investors will be granted a class I shares (i stands for initial investors). To get more information please contact us at 514-443-4397. Our website will be available shortly. We invite you to take a look at www.altervest.ca We have added articles or videos accessible in the media section that we feel are pertinent and educative on issues linked to Altervest such as: Alternative investments, emerging managers, women owned firms, etc. We hope you enjoy it! Cordially, Genevieve Blouin 2 North American REITs Comment North American REITs underperformed (+8,1%) the broad U.S. stock indices (S&P500 +10%, Dow Jones +11,35%) this quarter but did much better than the Canadian stock market (+3,4%). Altervest’s Real Estate absolute return strategies have had impressive returns for the quarter beating handily their respective benchmarks. Our market neutral reached 9,9% compared to 2,6% for its benchmark and our long-short reaped 11,4% versus 5,3% (HFRI Equity Hedge Index). The North American REITs offer tremendous advantages from an absolute return standpoint because of significant valuation discrepancies that can readily be identified by experienced managers. We have positioned our portfolios to benefit from the outperformance of the secondary markets (suburban) versus the CBD (Central Business District) in the U.S. (graph above). Since suburban REITs are primarily mid and small capitalization it is also indirectly a small-mid vs large capitalization view. This trend has paid us well and we expect it to continue as long as the cap rate spread between these markets remains too wide (left graph). The cap rate spread currently stands at 200 bps while its historical 10 year average is at 160bps. This indicates that there is more room for a reversion to the mean. Several other factors also concur with our hypothesis. First, PricewaterhouseCoopers’ 2013 Real Estate Survey mentioned that investors were seeking higher revenues and were willing to increase slightly their risk exposure to reach their objectives. This trend was clear in the first quarter as investors turned to high-end mid and small capitalization REITs. As a result small and midcapitalizations outperformed large capitalizations respectively by 360 basis points and 630 basis points. A second factor favouring suburban markets is the growing demand from institutional investors. Thirdly, suburban markets are now more accessible following the recovery and increased accessibility of both unsecured debt markets and CMBS. As a result more capital is injected in secondary and tertiary markets and even reaches grade B buildings located in CBDs. Real Capital Analytics reported direct market transaction volumes reaching 29.6B$ in February which included a 15B$ transaction from Archstone. Excluding the transaction, volumes fell 8% month over month and rose 18% year over year. Japanese are very large holders of U.S. REITs (48B$) making potential large inflows or outflows of capital meaningful to their performance. The BoJ’s recently announced its intention to increase the monetary base by 60 to 70 trillion Yen annually (doubling its monetary base in two years). Japanese investors are likely to move capital overseas to pick up yield in foreign currencies. This might mean capital inflow for U.S. REITs. We believe that there are great opportunities in North American REITs from an absolute return perspective. CAROLINE BÉDARD CFA, Senior REITs Portfolio Manager 3 North American Real Estate Products Performance We went all out to deliver the best products for our clients. You can see Altervest’s performance (in yellow) against their benchmarks. We also included two images that we feel reflect our dedication for risk management (top right demonstrates how well we managed our portfolio volatility during in times of crisis). The Lower right graphs illustrates our ability to optimize returns adjusted for risk. Altervest’s Absolute NAREIT product delivered nearly twice the performance of its benchmark with the same volatility level. When compared to long only indexes it delivered a similar performance with nearly half the volatility. Market Neutral Monthly Returns * Jan. Feb. March 2012 3.0% -0.5% 0.3% 2011 -1.2% 0.4% -0.6% 2010 1.4% 0.1% 1.3% 2009 -1.7% -0.6% -2.0% 2008 April -0.8% -0.7% 2.1% 3.8% May -1.2% -0.8% -1.1% 1.5% June 0.9% -1.3% -1.1% 0.7% July -2.0% -1.5% -0.2% -1.1% August 3.2% -2.5% 0.2% 5.9% Sep. 3.4% -1.0% -0.2% 0.6% Cumulative maximal loss represents -8.4 % Oct. 0.1% 1.7% 1.3% -0.4% 1.2% Nov. 1.4% -0.1% 0.3% 2.0% -2.1% Dec 0.3% 1.3% 0.9% 2.3% 1.8% Annualized return since inception Year 8.3% -6.2% 5.1% 11.2% 0.9% 4.4% Since inception to August 2012, the track record has been generated by Caroline Bédard at Planum Investment Management Altervest Mkt Neutral vs HFR INDEXES Long-Short-Option Overlay Monthly Returns Jan. Feb. March April 2012 0.2% 0.4% -0.8% May -1.4% June 1.3% July -2.9% August 3.1% Sep. 3.5% Oct. -0.4% Nov. 1.9% Dec 0.9% Return since inception Year 5.8% 5.8% Cumulative maximal loss represents -3.7 % *Historical returns are in $CAD and net of all fees. Altervest Absolute NAREIT vs HFR INDEX 4 Disclaimer The information contained in this email communication is confidential and is intended only for the recipients named above and any others who have been specifically authorized to receive it. Any unauthorized dissemination, copying or use of the contents of this email is strictly prohibited and may be unlawful. If you received this email in error, please delete it and any attachments from your system and notify the sender immediately. This communication is for informational purposes only and does not constitute a solicitation or offer to buy or sell securities. Any such offer will be made only to qualified investors by means of a confidential private offering memorandum, and only in jurisdictions where permitted by law. Past performance is not necessarily indicative of future results.