City Trading Post

For those of you with a more adventurous spirit, or just a larger portfolio that can accommodate further diversification, we put forward ‘alternative’ investment opportunities. We’ve decided to start keeping track by putting together a portfolio made up of our favourite alternative investments. We expect that the performance figures will be very choppy, at least to begin with, for the simple reason that many (but not all) of the alternative investment opportunities that we put forward are unlisted or illiquid or structured products, and therefore regular ‘marking to market’ is just not possible. But here we go...

Our first three investments for this quarter’s newsletter are as follows –

€100,000 into the Dalmatia Developments (II) Ltd private equity property development project

Well, okay, we have to admit, this is effectively one of our own; DD(II) is the second in a series of Croatian property development investment opportunities to come off the Emerging Market Property production line. For the benefit of our newer clients, the Emerging Market Property business was spun off from CTP a couple of years ago, but the two companies are still closely associated.

However, in spite of that link, DD(II) stacks up in its own right. The first project is well under way now, and the equity investors (some of whom are CTP clients) who funded that project to the tune of €3.3m this time last year are looking forward to a very healthy return on their investment in around June 2009. Have a look at the web site for the property that the project is developing: www.kavanjin.com

DD(II) builds on the experience and success of that first project. They’re aiming to raise €6.3m to fund the land purchase and get the project rolling. It’s expected to take about two and a half years from land purchase to liquidation and exit. The investment is structured as part loan, part equity. The loan element is required for around 14 months and will pay 15% interest. The equity element is required for the duration of the project, and returns are conservatively forecast at 23.8% per year compound, which equates to almost 70% return in absolute terms.

However, the investment is unlisted, illiquid, geared, and generally should be treated as risky and not for the faint hearted. Only experienced or professional investors need apply.

£50,000 into the Meteor Galaxy Commodities 5 geared protected commodities fund

We like this one very much. Quite a number of our clients have been very happy with their investment in the JPM Natural Resources fund over the last three or four years. And so they should be, because it’s gone through the roof!

We believe commodities prices are still on the way up, but the higher they go, the less certain we can be. The top is somewhere up there… This clever little structured product from Meteor Asset Management allows you to get exposure to commodities (albeit a different mix than the JPM fund) with both upside gearing and downside protection. This means that our JPM Natural Resources investors have been able to switch to Meteor (transaction costs involved, obviously, so we only contacted investors with large enough positions to make the trade worth considering), lock in their commodities gains achieved so far, still get any future upside, and put in a floor at the current level. We like that a lot.

The only restriction is that this is a structured product rather than a listed fund, so you’re in for the full 5-year duration, and if you need out in the mean time, you could lose out badly depending on market conditions.

But if you believe that inflation is going to be a major issue over the next few years, and if you think that the US is going to pull through eventually, and that China and the other chunky emerging markets are going to carry on steaming ahead, we think this is a good bet.

£50,000 into a basket of Hong Kong listed property developers with large Chinese land banks

We’re thinking outside the box with this one. A few years ago we put a number of our clients into direct property investment in Shanghai, and even arranged mortgages for them with the local Chinese banks. Ground breaking stuff, at the time. And then the Chinese regulations changed, and foreign investors were pretty much locked out. We’ve been looking for a way back in ever since. We think we’ve found it.

There are a number of Chinese property developers listed on Hong Kong stock exchange. The very fact that they are listed there rather than solely in mainland China is highly reassuring – surely an indicator of a higher than average Chinese standard of corporate governance and financial control.

We have selected a handful of these companies which have substantial land banks in mainland China, in the belief that this will create a proxy exposure to the mainland Chinese property market. They’re listed in Hong Kong, liquid, you can buy and sell them through a stock broker, and they’re developing property in China. That ticks all the boxes for us.

With literally hundreds of millions of Chinese moving out of the countryside and into towns and cities, there is an enormous amount of development work going on. Plus the population is expected to grow by the equivalent of a whole USA in the next generation. These are big numbers – they’ll all need a roof over their heads.

We’ll build up out alternatives portfolio over time, marking to market where possible, marking to cost where not. We’re not going to go overboard – we’ll just add one or two investments each quarter at the very most, investing a fairly nominal amount (or the product minimum) of fantasy money. Let’s see how it goes!

All of the investments we back can be accessed directly or via a SIPP (Self Invested Personal Pension).

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