Investment Management

Question 1

What is the Internal Rate of Return?

Answer 1

The discount rate that, when applied to a cash flow, produces a NPV of zero

Question 2

How would you calculate the IRR if you didn’t have software to do so?

Answer 2

Use linear interpolation

Question 3

How do you calculate the IRR?

Answer 3

1. Input the current market value as a negative figure
2. Add the cash flow for the holding period (usually 10 years), including the exit value at the end of this period
3. The IRR is the discount rate which produces an NPV of zero for this cashflow

Question 5

What do investors factor into their target rate of return?

Answer 5

Risk-free rate (e.g. UK Govt. bonds)
Risk premium (market and asset-specific)

Question 6

How would you calculate income return?

Answer 6

(Income return/(capital value + capital expenditure) * 100

Question 7

How would you calculate capital return?

Answer 7

((CV2 - CV1)/ CV1 ) * 100

Question 8

What comprises total return?

Answer 8

Income return + capital return

Question 9

What is a key difference between IRR and total return?

Answer 9

IRR is influenced by the timings of cash flows, whereas total return is not

Question 10

What are examples of property buyers in the UK?

Answer 10

Institutional Investors (e.g. pension funds/banks) - generally low risk, longer hold periods, cash buyers
Overseas buyers - attracted by the UK market’s transparency and relative political stability
PropCos/PE houses - typically further up the risk curve, shorter hold periods, may use leverage

Question 11

What are some of the advantages of investing in property?

Answer 11

Tangible asset class, variety of markets, potential for capital growth, diversification

Question 12

What are some of the disadvantage of investing in property?

Answer 12

Can be more illiquid than other asset classes (e.g. stocks and shares); high transaction costs; management intensive; performance affected by asset-specific factors including rent reviews, expiries, capex

Question 13

What is the premise of Modern Portfolio Theory?

Answer 13

The performance of different asset classes is likely to move in different directions, therefore diversification is likely to yield higher returns

Question 14

What type of mandate is your fund?

Answer 14

A discretionary mandate (i.e. we have full discretion over investment decisions, as long as they meet the parameters set out in the IMA

Question 15

What restrictions are set out in your IMA?

Answer 15

• Max 20% +/- divergence from benchmark sector/regional weightings
• Max 2% - divergence from benchmark income return
• If doing a development, must have at least 66% committed rent

Question 16

What are your fund objectives?

Answer 16

Reviewed annually, but the principal objective is to match or exceed the benchmark return on a three year rolling basis
Other objectives include transitioning the portfolio to NZC by 2040 and capturing reversion

Question 17

What is an advisory mandate?

Answer 17

Fund managers advise the client on investment decisions but do not have mandate to make decisions themselves

Question 18

What is set out in an Investment Management Agreement?

Answer 18

Investment objectives, performance objectives, investment restrictions, fee basis

Question 19

What are your reporting requirements?

Answer 19

Talk about quarterly reporting/annual strat meetings/VC/IC

Question 20

What are the characteristics of a close-ended fund?

Answer 20

Finite life and limited liquidity; can sell units to other investors but can only redeem units at end of fund life

Question 21

What are the characteristics of an open-ended fund?

Answer 21

finite or infinite life; can trade on issues/redemption basis