Close-ended investment products, such as real estate partnerships and vessel partnerships, are becoming increasingly popular. Where listed funds are scrutinized by analysts all over the world, these close-ended funds have no independent rating system at all.
Interested parties only have the initiatorÂ's prospectus to go by. In Germany the German economist and sociologist Stephan Appel introduced a rating system for close-ended funds, called Check-analyse, five years ago. Now he also entered the Dutch market.
Capital provided by Dutch investors in partnerships of all kinds has increased from several million Euros to almost EUR 3 bln. Apart from real estate partnerships and vessel partnerships, other categories, such as movie and venture capital partnerships, are becoming increasingly popular. Where others stipulate the tangibility and minimum correlation with the stock market, researcher Appel pinpoints the transparency of these products.
Â'In view of today’s scandals, listed companies are becoming suspect. It becomes clearer by the day that they have various methods to manipulate their balance sheets. How valuable are their reporting systems? Close-ended funds are much more transparent. As a participant you have for instance the right to view rental agreements. You can judge for yourself. The administration is checked by a delegation consisting of participants.Â'
Many investors are hesitant to invest in close-ended funds, as complicated reporting requirements may have hidden snags. ‘This is exactly the point’, according to Appel. ‘The prospectus is long and complicated, not in the least as many different definitions and calculation methods are being used. This makes it very difficult to compare the various products and makes the choice between the various products difficult.
Golden baskets unveiled
A market opportunity, the German researched realized five years ago. He developed a method and started to review newly introduced close-ended funds five years ago. In the meantime he has analyzed some 500 products in Germany. A hybrid and lengthy prospectus is reduced to a clear two-page summary. Based on a point-by-point Check-method they are judged on attractiveness, risks and potential yield.
‘In our analysis we pay a lot off attention to the initiator’s track record. Subsequently we list the product’s characteristics. For instance in the case of real estate we look at the quality of the building, the procurement price and the reliability and market position of the tenants’, Appel explains. ‘Also the management company’s reputation is being evaluated. He has to secure satisfied tenants, maintenance, sufficient parking facilities, etc. Finally, the very heart of our study are the fundamentals. In real estate these include location, competition, economic forecasts and market developments. We review comparable buildings on identical locations in terms of rental revenues and immediate possible divestment revenues.’The main objective of these studies is to review whether the golden baskets at the bottom of the rainbow are realistic. Each new product is rated on a scale from 1 to 10, which is the combined figure for financial risk and potential yield. Each year the product is being re-evaluated, where Appel sets his original findings off against actual results and adjusts his rating accordingly. Over the last five years he hardly had to review his ratings. Of all researched products only three percent under-performed compared to his forecasts. About 20% performed better and the remainder performed in accordance with his expectation.Provider paysThe German does not publish all his findings. Some products are considered inadequate at a very early stage. ‘The initiators may not have enough experience and without adequate access to the market may offer a realistic return. In terms of financial risk, the Check rating starts with a minimum of ‘sufficient’. Otherwise an evaluation is useless. A vessel partnership for instance only achieves the minimum score of 6 when it runs for at l
