Vanguard REIT Index Fund VNQ 02262015 Stanford Blyth Fund FICC Coverage Group 2015 Winter Quarter Pitch FIXED INCOME CURRENCIES AND COMMODITES COVERAGE GROUP Bryant Johnson EJ Bernard ID: 437135
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Slide1
Winter Quarter 2015 PitchVanguard REIT Index Fund (VNQ)
02/26/2015
Stanford Blyth Fund FICC Coverage Group 2015 Winter Quarter Pitch
FIXED
INCOME, CURRENCIES, AND COMMODITES COVERAGE GROUP
Bryant Johnson
EJ Bernard
Harrison Caruthers
Jaewoo
Jang
John
Solitario
Justin
Hsuan
Kuno Choi
Laura Zhang
Sen Lin
Nick BienSlide2
Pitch OutlineVNQ Price History & Metrics Overview
ETF Breakdown & CompositionMacro Catalysts: QE & US Economic Recovery
US Real Estate Sector Analysis: Historical LowsConclusionQuestions
02/26/2015
Stanford Blyth Fund FICC Coverage Group 2015 Winter Quarter PitchSlide3
Vanguard REIT Index Fund (VNQ)
02/26/2015Stanford Blyth Fund FICC Coverage Group 2015 Winter Quarter Pitch
VNQ was listed
October 1
st
, 2004 at $
51.18 per share. It seeks to track the performance of the MSCI US REIT Index, which represents around 2/3
rds
of the US real estate market.Slide4
REITs?A Real Estate Investment Trust (REITs) is a security
that sells like a stock on major exchanges and invests in real estate directly, either through properties or mortgages.To
qualify as a REIT, a company mustinvest at least 75 percent of its total assets in real estate assets and cash,
derive
at least 95 percent of its gross income from
such real
estate sources and dividends or interest from any
source, and
distribute
at least 90 percent of its taxable income to shareholders annually in the form of dividends
.
Equity REITs v. Mortgage REITs. VNQ is an equity REIT meaning its earnings mostly comes from rental income as opposed to gains and losses in MBS for MREITs.
Benefits
REITs
receive special tax considerations,Typically offer investors high yieldsHighly liquid method of investing in real estate.
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Stanford Blyth Fund FICC Coverage Group 2015 Winter Quarter PitchSlide5
1. VNQ OverviewSlide6
10 Year Historical Performance02/26/2015
Stanford Blyth Fund FICC Coverage Group 2015 Winter Quarter Pitch
Strong performance against S&P 500 over past decade.
Real Estate most profitable asset class past year (52 wk. +26.5%).Slide7
60 Day Rolling Correlation
VNQ exhibits moderate-to-high correlation with the S&P 500 based on the past 10 years.
02/26/2015Stanford Blyth Fund FICC Coverage Group 2015 Winter Quarter PitchSlide8
Dividend Yield 3.37%02/26/2015
Stanford Blyth Fund FICC Coverage Group 2015 Winter Quarter Pitch
Given REIT structure VNQ offers high dividend yield.Offer degree of downside protection in adverse price action. Slide9
VNQ vs. Competitors02/26/2015
Stanford Blyth Fund FICC Coverage Group 2015 Winter Quarter Pitch
Superior performance with less risk.
KBWY
ROOF
IYRSlide10
SPT: Volatility Statistics02/26/2015
Stanford Blyth Fund FICC Coverage Group 2015 Winter Quarter Pitch
10 Year Alpha
: 5.02
10 Year Beta: 1.12
10 Year SR: 0.46
5 Year Alpha:
11.13
5 Year Beta:
0.81
5 Year SR: 1.18
3 Year Alpha
10.36
3 Year Beta: 0.98
3 Year SR: 1.20
Benchmarked to
MSCI World
IndexSlide11
2. ETF CompositionSlide12
ETF Component Weightings
Replicate MSCI REIT Index (2/3rd of US real estate market)
02/26/2015Stanford Blyth Fund FICC Coverage Group 2015 Winter Quarter PitchSlide13
ETF Composition02/26/2015
Stanford Blyth Fund FICC Coverage Group 2015 Winter Quarter Pitch
Top 10 Holdings (37.5%)
(01/31/2015)
Simon Property Group (
SPG
)
8.4%
Public
Storage (
PSA
)
4.1%
Equity Residential (
EQR
)
3.9%
Health
C
are
REIT
Inc
(
HCN
)
3.6%
ProLogis
(
PLD
)
3.2%
AvalonBay
Communities
Inc
(
AVB
)
3.1%
Ventas
Inc
(
VTR
)
3.1%
HighLand
Capital
Partners (
HCP
)
3.0%
Vornado
Realty Trust (
VNO
)
2.9%
Boston Properties (
BXP
)
2.9%
Others
62.5%Slide14
Sample ETF Components
VNQ
ETF
47.3
4.47%
3.56
Holdings
Sector
P/E Ratio
Div. Yield
(5 Years)
P/B Ratio
Healthcare Property Investors
Inc
.
Health
Care Industry
21.10
4.20%
1.81
Boston Properties, Inc.
Apartments
48.66
5.00%
3.85
Vornado Realty Trust
D.C. & NYC Offices and Retail
103.40
2.90%
3.98
Ventas
Inc
.
Senior
Housing, Medical
46.61
N/A
2.56
Avalonbay
Communities
Inc.
Apartments
32.24
3.00%
2.47
Prologis
Inc.
Industrial
34.60
3.60%
1.57
02/26/2015
Stanford Blyth Fund FICC Coverage Group 2015 Winter Quarter Pitch
Dividend growth as revenue generating investmentSlide15
3. US Macroeconomic Catalysts
Quantitative Easing here and abroadStrength of $ on USD denominated asset demandJobs growth and recovery prospectsSlide16
Opportunities FrontierLabor market strengthening.
Jobs market has steadily recovered since the crisis. Analysts predict that although the housing market has not yet responded decisively to the improvement, there will be significant momentum when demand picks up.Lack
of attractive yield elsewhere = higher demand for US assets.
F
oreign
demand for $ denominated investments will rise
, particularly
in
real estate development projects in coastal luxury markets (i.e. SF, NYC
).
Hence
,
STRONG
JOB GROWTH
& SECULAR REAL ESTATE DEMAND02/26/2015
Stanford Blyth Fund FICC Coverage Group 2015 Winter Quarter PitchSlide17
Risk HorizonRates increase:
FRB Federal Funds rate at 0.12% (12-month consecutive inflation at -0.1% Jan.
2015). Rates increase (the first in almost a decade) expected around mid-year is expected.
Regulatory barriers:
Difficulty of obtaining mortgage loans due to the fallout of the 2008 Financial Crisis.
Uncertain Economy:
Last
year, analysts
had expected yields on 2-30 year Treasury notes and bonds to increase given a brighter overall U.S.
outlook
but instead they have fallen from 3.03% at the end of 2014 to 2.112%
currently.
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Stanford Blyth Fund FICC Coverage Group 2015 Winter Quarter PitchSlide18
“The Goldilocks” Capital structure of US real estate market with regards to QE increase resilience in real estate prices.
Moderate rise in rates signal real economic recovery.
Sustained lower rates feed virtuous cycle in asset prices.
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Stanford Blyth Fund FICC Coverage Group 2015 Winter Quarter PitchSlide19
4. US Real Estate Sector Outlook 2015Demand outstrips supply
Creditworthiness of sellers improveConstruction spending increaseSlide20
US Real Estate Sector Summary
Post-2008 Crisis left US in housing glut.By 2011-2012 glut becomes shortage as vacancy rates fall.
VNQ well poised to take advantage of secular growth trends in US commercial and residential real estate.
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Stanford Blyth Fund FICC Coverage Group 2015 Winter Quarter PitchSlide21
Housing: Demand > Supply
US Housing vacancies at 20 year lows (Q4 2015 at 7.0% = Q2 1990 levels)
02/26/2015Stanford Blyth Fund FICC Coverage Group 2015 Winter Quarter PitchSlide22
Monthly $pending on Construction ↑
Seasonally adjusted construction expenditures at 2004 levels.In 2014, US Construction Activity +$981 Billion Annual
02/26/2015Stanford Blyth Fund FICC Coverage Group 2015 Winter Quarter PitchSlide23
Construction Spending Remains ↓ 10-Year Mark
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Stanford Blyth Fund FICC Coverage Group 2015 Winter Quarter Pitch
US Census Bureau
Seasonally Non-Adjusted Residential and Nonresidential Construction
(2005 – 2015)Slide24
Number of Distressed Sellers ↓
Pre-crisis lows in property foreclosures and short sales.
02/26/2015Stanford Blyth Fund FICC Coverage Group 2015 Winter Quarter PitchSlide25
While Mortgage Credit Improves…
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Stanford Blyth Fund FICC Coverage Group 2015 Winter Quarter PitchSlide26
…Far From Pre-Crisis Highs02/26/2015
Stanford Blyth Fund FICC Coverage Group 2015 Winter Quarter PitchSlide27
Cause for Optimism02/26/2015
Stanford Blyth Fund FICC Coverage Group 2015 Winter Quarter Pitch
Housing starts still below long-run average.
As an equity ETF VNQ has much to gain still from rising demand once consumer credit conditions and construction continue recover to normalcy.Slide28
VNQ Investment SummaryVNQ is a fairly priced investment that stands to benefit from both loose credit conditions as well as a moderate raise in interest rates.
Fundamentals in US residential and commercial real estate are strong and growing stronger.
Short term horizons: slightly overbought.Possibility of moderate pullback.Given an investment timeframe of +1~2
years:
M
edium to
long
term prognosis is
excellent
02/26/2015
Stanford Blyth Fund FICC Coverage Group 2015 Winter Quarter Pitch