2009-11-24 18:44:45 -
London, November , 24, 2009
TAPESTRY INVESTMENT COMPANY PCC LIMITED
Interim Management Statement - 3 months to 30 Sep 2009 (unaudited)
November 2009
This statement has been prepared to provide additional information to
shareholders as a body to meet the relevant requirements of the UK
Listing Authority's Disclosure and Transparency Rules. It should not
be relied upon by any party for any purpose other than as stated
above.
Tapestry Investment Company PCC Limited ("The Company") is registered
in Guernsey, Channel Islands as a closed-ended protected cell company
in accordance with the provisions of The Protected Cell Companies
Ordinance, 1997 and The Companies (Guernsey) Law, 1994. It is
established with one "Cell" known as Tapestry Investment Company -
Multi-Strategy (GBP) which has an unlimited life.
At an Extraordinary General Meeting and Class Meeting held on 11
September 2009, the Company's shareholders approved the Managed
Wind-Down of the Company (as more particularly described in the
circular that was sent to shareholders on 21 August 2009 (the
"Circular"). On 18 November 2009, the Company returned £31,470,343
to shareholders by way of a compulsory, pro rata, partial redemption
of shares.
Investment Objective and Policy
The Company will not make any new investment however, this will not
preclude the Company from switching an existing investment to a new
share class or new vehicle should this enhance the prospects of that
particular investment's future realizations.
The Company will seek to realize the Company's existing investment
portfolio with a view to maximizing the orderly return of invested
capital to Shareholders.
Any cash received by the Company as part of the realization process
but prior to its distribution to Shareholders will be held by the
Company as cash on deposit.
The Company will not have borrowings other than for short-term
working capital purposes.
Manager
The Company has appointed Ramius Fund of Funds Group LLC as
investment manager with responsibility for the day to day
discretionary management of the Company's investment portfolio,
including cash in accordance with the Company's investment objective
and policy, subject to the overall supervision of the directors.
Performance summary
Over the three month period the Company achieved a return of 1.46%
net of all fees. The closing net asset value as at 30 September 2009
was £80.7 million representing 96.55 pence per share. At the close of
business on 30 September 2009 (the last business day of the month)
the mid market price of The Company's shares on the London Stock
Exchange was 84.50p, representing a discount of 12.48%.
The performance of the Company's portfolio for the three months to 30
September 2009 was as follows:
July 2009 0.73%
August 2009 0.34%
September 2009 0.37%
Risk assets continued their upward trend throughout the 3rd quarter
as economic data improved on a global basis. The reversal of a
depression-like contraction of global inventory levels created a mini
cyclical boom being reflected in data such as industrial output,
business and consumer confidence. However, the key question at hand
is the nature and sustainability of this rebound which undeniably
began from an extremely low base. The sustainability of any such
recovery is likely tied to meaningful improvement in aggregate global
demand given the continued high levels of unemployment.
For the investment community, the impact of the current economic
uncertainty described above on asset prices remains the most
important dynamic going forward. In summary, we see a 'story of
two-tails' unfolding. The left tail argument (of further rapid
deterioration in asset prices) was driven in 2008 by a financial
crisis where counterparty risk, liquidity and solvency concerns
destroyed risk capital and pushed many participants to delever over a
number of weeks. For the time being a repeat of this scenario is off
the table with a change in economic fundamentals more likely to
influence a deterioration in asset prices in the future. If the
traditional time horizon prevails (that asset markets should begin to
discount a material change in fundamentals 6 to 9 months in advance
of the change in economic fundamentals taking place) we anticipate
that sometime within the next 12 months markets will likely need to
decide on the health of the global economy post the short-term
inventory readjustment coupled with the government stimulus packages
receding into the background.
Market positioning will likely cause this adjustment to take place in
a hurried and thus disorderly fashion. As a whole, current investment
levels are lower than in 2008 as risk capital remains lower, leverage
levels remain significantly lower and the reemergence of a shadow
banking system that was previously nonexistent. This all potentially
points to a more orderly effect on asset markets if the fundamentals
deteriorate. Unfortunately, this is where the good news ends. The
crowded trade, which tends to suggest a potentially disorderly
reaction, remains a disconnect between investors' medium-term
conviction in fundamentals driven by the health of the global economy
versus their portfolio positioning which is long risk assets. Many
investors believe they can reconcile this difference by cutting
exposure when the economic data supports their medium-term view and
the markets begin to price this in. Everyone expects to be able to
cut risk and watch the volatility walk through someone else's
portfolio. Simply put, they recognize the game is in overtime and
everyone wants to head for their cars at the same time; the problem
is that the game is far too exciting for anyone to leave early and
they all believe the exit door is wider than it actually is.
The other part of the story of two tails is one where central banks
and governments have created an environment that they hope will
support asset prices, especially for any society that is in debt. The
consensus is that inflation is the better of two evils and asset
values are key to any type of credit extension into the economy. All
policies point to asset re-inflation, if not bubble creation, at a
time where acceptable yield is no longer available in traditional
money market assets and the new supply of investment assets that used
to be generated by the securitization machine remain low. The push to
into risk assets and away from the curse of cash is almost mandatory
at this time. Because of this, the ongoing scenario of further asset
price momentum is as likely as any other path.
Strategy contribution
Three months to
30 September 2009
Convertible/Capital Structure Arb. 0.03%
Credit-Based 1.64%
Event Driven 0.23%
Fixed Income Arbitrage 0.06%
Hedged Equity 1.17%
Other 0.41%
Source: Ramius Alternative Solutions LLC
Equity Driven Strategies
The 3rd quarter was again positive, with global equities posting
double digit returns for the second straight period, a feat
accomplished only for the 3rd time in the last 50 years. The MSCI
World Index returned 17.6% whilst geographic dispersion was higher
than the previous quarter with Asia noticeably underperforming
developed and other emerging markets. This underperformance was
predominantly driven by Japan where ongoing economic weakness
contributed to a change in the political leadership of the county and
secondly in China where authorities looked to tighten lending
conditions.
The rally in developed markets was largely driven by a combination of
better than expected 2nd quarter earnings results, further
confirmation of the ongoing global economic recovery and expectations
for earnings growth for the remainder of the year. Earnings
improvements however continued to be more supported by cost cutting
by corporates rather than revenue growth.
Technology and material sectors retained their leadership of the
market together with sectors like consumer discretionary sectors that
had previously witnessed higher levels of short interest. The
environment over the summer, where lower market liquidity in
combination with an upward trending market, resulted in the remaining
concentration of short positions being squeezed as positions were
covered.
Hedge fund managers continue to expand their gross and net exposures
over the quarter with Morgan Stanley reporting that aggregate gross
and net exposures across more than 200 long short equity funds
increased from 138% gross and 41% net at the close of the 2nd quarter
to 146% gross and 53% gross through the end of the 3rd quarter. In a
number of cases we are seeing man-ager exposures return to 2007
levels.
Performance across the universe of long short equity funds was
positive over the quarter with returns being dominated more by net
market exposure than alpha because, in general, lower quality
businesses (that managers tend to be short) outperformed the broader
market. For example, a Goldman Sachs customized index of weak balance
sheet companies returned 30.11% as compared to the index of strong
balance sheet companies which returned 16.01%. This translated into a
difficult environment for managers with more of a hedged investment
style versus directional orientated managers that benefited more from
the overall movement higher in the equity market.
This stage of the market has been dominated by multiple expansions in
a correlated fashion across the broader market. Going forward, this
multiple expansion stage should be followed by earnings growth
providing a far better climate for fundamental hedged investment
styles.
Credit Based Strategies
The 3rd quarter of 2009 for the credit markets represented a
continuation of many of the same themes that were in place the prior
quarter: dramatically tighter spreads, heavy inflows into risk assets
(credit in particular), strong market technicals, receptive capital
markets towards new issue corporate bonds and government sponsored
programs designed to foster demand for securitized assets. These
considerations brought risk premiums in the credit indices to levels
below where they were trading prior to the calamitous events of
September 2008.
One of the biggest developments that led to the rally in corporate
credit was the ability of companies to effect bond for loan
take-outs. These takeouts involved issuing secured bonds to pay-down
(at par) loans. The bond-for-loan takeout trade had three primary
benefits. First, the onerous maintenance covenants found in bank
loans went away. Secondly, the technicals in the loan market improved
as these instruments got taken out at par and were not replaced by
incremental supply. Third, the secured bonds that were issued
extended the maturity profile of the company thus buying them more
time to reduce debt and improve operating metrics without the specter
of a debt overhang.
Bond-for-loan takeouts in addition to sponsor-led debt exchanges have
been a key component in lowering default expectations for 2010.
Defaults are currently expected to peak at 12.5% at year-end and then
drop to 4.5% for 2010 according to strategists at Moody's. The
extension of maturities has now resulted in $1 trillion of high yield
bonds and loans that maturing between 2012 and 2015.
The securitization markets showed signs of life over the 3rd quarter
as the RMBS and consumer ABS markets improved largely due to
government sponsored programs aimed at increasing demand for these
securities. The consumer ABS market continued to be supported by
follow-on interest by TALF investors. Lastly, the CMBS market is
being viewed with a lot of caution given the bleak outlook for
employment which is pressuring rent rolls and capitalization rates.
Credit manager performance during the 3rd quarter of 2009 was better
than virtually all other hedge fund strategies. The HFRI Fixed Income
Corporate Index was up 7.72% during the 2nd quarter and is now up
23.36% year to date. Other alternative credit-based indices such as
the Distressed Index and Fixed Income Asset Backed Index were up
9.22% and 6.61% respectively for the quarter.
In terms of credit manager return differentiation, pure distressed
managers led the pack because the strategy often entails very little
in terms of hedging and the trajectory of the market was up nearly
the entire quarter. Managers that employ a more balanced approach
with smaller net exposures were positive but didn't participate to
the same extent. These managers have concentrated their short
exposures primarily in investment grade CDS which detracted from
performance. Additionally, many credit based managers have
implemented policies to hedge tail risk in their credit portfolios
without of the money puts on the S&P 500. This cost managers anywhere
from 25-75bp per month depending upon the amount of premium they
committed to the trade.
Overall, managers are wary of the speed and strength of the recent
rally in risk assets and have started the process of trimming back
exposures and acknowledging that the market is no longer generically
cheap.
Event Driven Strategies
Event driven strategies experienced strong performance in the 3rd
quarter with the HFRI Event Driven Index +9.8%. Stressed/distressed
corporate credit (see credit commentary) was the primary driver of
performance. Directional equity strategies such as deep value with a
catalyst also performed well. Merger arbitrage underperformed other
strategies but was positive nonetheless. The HFRI
Distressed/Restructuring Index gained +10.5% and the HFRI Merger
Arbitrage Index returned +2.5%.
In merger arbitrage, fourteen deals were completed during the quarter
with the largest and most widely held being Suncor/Petro-Canada at
$14b. Annualized deal spreads continued to tighten over the quarter
as capital markets became less volatile and hedge funds, as well as
proprietary trading desks at banks, be-came more fully invested.
Hedge funds remain invested in the relative safety and liquidity of
the larger deals where annualized deal spreads range between 6 - 8%
(excluding outliers).
Total deal flow in the 3rd quarter reached $35bn over the quarter
remaining near the lows of 2002 with the number of announced deals
only reaching 15 a similar level to 2003. The largest announced deals
over the quarter were Xerox/Affiliated Computer Service ($6.3b) and
Baker Hughes/BJ Services ($5.2b). According to Barclays Capital
research the average deal size was $2.3b, one of the lowest of any
quarter since 1998.
Traditional event driven managers react to corporate announcements
and the 3rd quarter represents a trough in deal announcements, deal
value and corporate transactions as a whole. Corporations continue to
raise more cash via the capital markets and together with this higher
equity prices and access to financing have all contributed to
businesses being in a better position to finance acquisitions. In
addition, the likelihood of slower growth in 2010 could result in
companies looking increasingly at inorganic ways to grow their
businesses whilst also allowing them to take excess capacity out of
their respective markets.
Distressed performed well during the quarter. The technical
tail-winds detailed in our credit commentary show no signs of
abating. The massive rally in credit took high yield credit spreads
tighter by 240bps to end the quarter at 779bps. Today only 2.2% of
the market is trading at levels (<50% of par) traditionally de-fined
as distressed.
Also, the pace and par value of defaults continues to decline. Many
in sell side research believe that defaults have already peaked this
year and predict a much lower default rate for 2010 (4%). This will
lead to a less attractive opportunity set for distressed/bankruptcy
specialists over the short-term. However, with over $1 trillion in
high yield maturities through 2015 the opportunity set is likely to
rebuild in the medium to longer term.
Shareholder activists experienced strong positive performance during
the 3rd quarter. In a repeat of the 2nd quarter, activist performance
during the 3rd quarter was generally beta driven rather than "value
realization" driven. Activists tend to be long-only; therefore,
equity market performance (S&P +15.6%, Russell 2000 +19.3%) during
the 3rd quarter explains much of the performance. With that said,
there were a few instances during the quarter where activist
investors were responsible for a catalyst. Sara Lee sold its personal
care business to Unilever for $1.8b. Sara Lee plans to increase
marketing, consider strategic acquisitions and/or buy back stock with
the proceeds. Also, Kraft Foods made a $16.7b hostile bid for
Cadbury. Lastly, Target Corporation has implemented many of the
corporate governance improvements that Pershing Square fought for in
last quarter's failed proxy contest.
In other news, we will continue to monitor the SEC's decision
regarding the proxy access. The SEC has decided to wait until 2010 to
vote on a proposal to allow shareholders greater leeway and make it
less costly to nominate directors to corporate boards. The SEC was
supposed to have voted on the proposal during November 2009.
Notwithstanding the positive trends listed above, public share-holder
activism in the current environment remains challenging. We will
continue to focus our attention on managers that pursue a
friendly/private approach to management and managers that have
operational expertise.
Portfolio Allocation
Following the first redemption of the Company's shares on 18 November
2009, the Company's portfolio consists of [26] underlying managers in
the following strategies:
Strategy As at
18 November 2009
%
Convertible/Capital Structure Arb. 1.19%
Credit-Based 26.60%
Event Driven 26.04%
Fixed Income Arbitrage 6.46%
Hedged Equity 22.53%
Other 17.19%
Source: Ramius Alternative Solutions LLC
Material Events
At an Extraordinary General Meeting and Class Meeting held on 11
September 2009, the Company's shareholders approved the Managed
Wind-Down of the Company (as more particularly described in the
Circular).
On 16 November 2009, the Company cancelled all 7,018,000 shares held
in Treasury.
On 18 November 2009, the Company returned £31,470,343 to shareholders
by way of a compulsory, pro rata, partial redemption of shares
(equivalent to 37.65p per share). Following the redemption, the
Company's issued share capital consists of 50,981,904 shares with
voting rights.
For further information contact:
Anthony Simpson at Ramius Alternative Solutions LLC tel: 020 7016
4201
Kleinwort Benson (Channel Islands) Fund Services Limited
Company Secretary
24 November 2009
Disclosure:
Source for statistics in commentary: Bloomberg
Performance results for Tapestry Investment Company PCC Limited (the
"Company") are net of all fees and reflect the reinvestment of
dividends and other earnings. Prospective investors should be aware
that past performance is not necessarily indicative of future results
and that an investment in a leveraged fund is speculative and
involves a high degree of risk. Investors should read the Company's
prospectus which describes the leverage intended to be employed. The
Company's performance can be volatile and an investor could lose all
or a substantial amount of his or her investment. The Company's fees
and expenses may offset its trading profits. The Company's Investment
Adviser has total trading authority over the Company. The investor
should be aware that the use of a single investment adviser applying
generally similar trading programs could mean lack of diversification
and, consequentially, higher risk. A substantial portion of the
investments made by the underlying funds may take place on foreign
exchanges. The Target Returns are presented for the purposes of
providing insight into the Company's objective, detailing the
Company's anticipated risk and reward characteristics in order to
facilitate comparisons with other investments, and aiding in
assisting in future evaluations of the performance of the Company.
The Target Returns are not a prediction, projection or guarantee of
future performance. They are based upon assumptions regarding future
events and conditions which may not prove to be accurate.
Accordingly, the Target Return should not form the primary basis for
an investment decision. There can be no assurance that the Target
Returns will be achieved.
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This announcement was originally distributed by Hugin. The issuer is
solely responsible for the content of this announcement.
