Alternative Asset Trust Quarterly Report: December 31, 2015


The MacNicol Alternative Asset Trust is a multi-strategy, alternative investment platform designed to generate positive and uncorrelated returns against the public stock and bond markets. The Trust, through its underlying limited partnerships, is invested in private real estate and mortgages, private equity, high yield bonds and multi-strategy hedge funds. Combined, the Alternative Trust is invested in more than 150 separate real estate projects, mortgages, hedge funds and private securities. The advantage of combining different alternative asset classes and high yield investments into one Fund include tremendous diversification, enhanced liquidity, and a more predictable and less volatile pattern of returns when compared against the performance of the individual asset classes themselves.


Chart 1 – Investment Structure MacNicol Alternative Trust




Alternative Trust Review: The goals of the Alternative Trust are to generate positive “real” returns (after-taxes and inflation) each year, and to generate annualized nominal returns of 6%-8% over rolling five-year periods. We are pleased to report that as of December 31, 2015 the Trust (E Class)  has met its primary goals by generating positive calendar-year returns that have exceeded inflation, while delivering annual returns of  10.3% from inception.

For all of 2015, the Alternative Trust (Class E) advanced by 21% with strong contributions coming from private equity, real estate and hedge funds. Looking forward, we are anticipating positive returns and more liquidIty from the Trust’s private equity holdings, and continued steady results from the Trust’s real estate holdings and hedge funds. At year end we rebalanced the Alternative Trust, reducing its private equity exposure by 10%,  and correspondingly increasing its exposure to hedge funds and real estate. Chart 2 below highlights the asset mix of the Trust after taking into account the rebalancing.




Fourth Quarter Highlights


During the fourth quarter of 2015 ending December 31, the Alternative Trust decreased in value by 4% mostly from a decline in the value of Shopify Inc.of Ottawa. This decline was due to the expiry of its “lock up” period in November, and generaly weak stock markets during the fourth quarter. As private investors in the company, the Emergence Fund (and the Trust) were subject to a six-month “lock up” of its notional Shopify shares which ended in November. Shopify is now subject to the day-to-day ups and downs of a public company, and hence we are expecting continued greater than normal volatility in the Alternative Trust and the Emergence Fund until these shares are ultimately sold, likely in 2016.


In addition to the very successful 2015 Initial Public Offerring (IPO) of Shopify, the Emergence Fund and the Alternative Trust benefitted througout the year from the successful “exits” of three private companies to strategic buyers. The three companies were Razorsight of Arlington, Virginia, Silanis Inc of Montreal, Quebec and Syncsort of Woodcliff Lake, New Jersey.


North American Private Real Estate


The Alternative Asset Trust invests in North American private real estate through its MacNicol 360 Degree Realty Income Fund holdings. The “360 Fund” is a private real estate fund focussing on value-added projects in the United States and Canada.

The 360 Fund invests in real estate projects and mortgage funds through an expanding number of carefully selected operators and sponsors. These partners are chosen for their high degree of local knowledge and experience in deal sourcing, finance, construction, and property management. Through its partners, the Trust has exposure to more than 120 separate real estate projects and six asset classes across North America. Chart 3 on page 4 highlights the regions of North America in which our real estate projects are located. The overall strategy is to invest in the fastest growing regions of the United States including Texas, Florida, Georgia, Phoenix, Las Vegas and California.


360 Fund Fourth Quarter Highlights: For the fourth quarter of 2015, the 360 Degree Fund (D Class) declined by 3.7% in USD terms. For all of 2015, the 360 Fund gained 1.8% in USD terms and 21% in Canadian dollar terms. The $USD gains were a combination of an increase in the valuations of our multifamily, office and mortgage portfolios as well as ongoing distributions of rental and interest income from our real estate sponsors. Partially offsetting these gains, was a decline in the value of United Development IV mortgage REIT due to concerns over its loan exposures in Texas. We believe these concerns are overdone considering the strong housing market throughout Texas, a shortage of developable land, low inventory for new homes, and rising collateral values underpinning UDF’s loan portfolio.


US Dollar Performance: An additional “drag” on the US dollar performance of the 360 Fund was caused by the decline in the value of the 360 Fund’s Canadian assets, representing about 18% of the Fund’s total assets. These assets lost value in US dollar terms because of the decline in the Canadian dollar in 2015. Finally, during the fourth quarter of 2015 we increased accruals for future US withholding taxes as more projects in the Fund are closer to completion and profitable sale. Together, the decline in the Canadian dollar, and the one-time increase in the (non-cash) tax accruals, had the effect of reducing the 2015 US dollar returns of the 360 Fund by approximately 6.0%.



Commercial Real Estate Outlook (U.S.)


Commercial real estate market fundamentals continue to improve across the board in the United States and are holding steady in much of Canada with the exception of Alberta. A resilient U.S. economy is leading to healthy tenant demand in all property types. Vacancy rates continued to fall in 2015, and rents are rising in most markets setting up conditions for what we believe will be sustained income growth in the multifamily, industrial, office and retail spaces.


Multifamily:  While capitalization rate (“cap rate”) compression improved the valuations of the multifamily space in 2015, decelerating Net Operating Income (NOI) growth and lower yields reduced the total return compared to 2014. This trend is expected to continue in the near term as the apartment sector shifts to the mature phase of the real estate cycle. In addition, apartment cap rates remain low relative to the other property sectors. Though apartments still provide an excellent source of income and long term value, new supply remains a major concern, especially in the core of Tier I metropolitan areas. The 360 Degree Fund’s multifamily exposure is primarily through its investments in Carroll Funds I, II and III of Atlanta, Georgia. The Carroll Funds invest in Class “A” and Class “B” multifamily complexes in Tier II and Tier II metropolitans in Florida, Texas, Georgia and the Carolinas. The three Funds together averaged a 12% return in 2015 including distributions.


 Industrial: The industrial sector continues to perform well with rising rents and lower capitalization rates driving returns. As with the office market in the US, income growth is benefiting from the roll up of expiring leases to higher market rents. Though strong market fundamentals have stimulated a supply response, the current development cycle is expected to continue to progress at a measured pace.


Office: With the recovery in the US office market finally taking hold, the office sector is now at the point in the cycle where expiring contract rents will likely roll up to market, which, in combination with rent abatements burning down, will put upward pressure on income growth and valuations. The 360 Fund is broadly exposed to the North American office space through its investments in the KingSett Income Fund of Toronto, Rockwood IX Fund of New York and the Ameritus Real Estate Fund of Chicago. All three portfolios are performing to plan, with Rockwood IX having a particularly good year with a 17% return in 2015. Ameritus is earlier in its investment program but its portfolio of Class “B” buildings continues to grow, and the fund recently began distributions at a 6% annualized rate, which we expect to climb further in 2016.


Retail. Though malls demonstrated resilient NOI growth this year, the overall performance of the sector is expected to lag the other property types during the next five years. This under-performance for income growth is primarily due to the longer lease durations inherent for retail tenants (though mall leases allow for percentage rents that allow retail owners to capture higher retail sales growth). The 360 Fund has several “value-add” retail investments through its investments with KingSett, Slate and a regional mall in Jacksonville, Fl. which is managed by the Sierra Building Group of Toronto.


Real Estate Portfolio Activity


During the fourth quarter of 2015, the 360 Fund made a follow-up investment in the McAlister Opportunity Fund of Dallas, Texas, as well as two co-investments projects sponsored by 13th Floor of Miami including “The Harbour” development in North Miami Beach. The McAlister Opportunity Fund was formed to pursue opportunistic investments in undeveloped real estate, primarily in larger markets in Texas. The land is purchased with a targeted 12-24 month hold and with a focus on undeveloped land suitable for commercial, single-family or multifamily residential development. The McAlister Fund capitalizes on its strong cash position to take advantage of buying opportunities as they arise. Prior to acquiring land, McAlister generally enters into option agreements with developers, locking in attractive rates of return once zoning approvals are in place and the developer options are exercised. We are pleased to report that the McAlister Fund had a large option exercised by a developer in late December 2015 at a 25% IRR (Internal Rate of Return), and this distribution will be paid out to the 360 Fund during the first quarter of 2016.



Private Equity – MacNicol Emergence Fund


The investment objective of the Emergence Fund is to generate capital gains and income by investing in a portfolio of private equity funds. The Fund seeks opportunities in private equity where capital exit strategies are clearly defined, and are likely to occur within a 5-year time frame. The Emergence Fund invests in established private equity funds with a focus on companies with defensible franchises, high growth profiles and proven management. Investments will largely focus on profitable companies with high levels of proprietary technology addressing large target markets.


The Emergence Fund achieves its objectives by investing in well-respected and managed third-party private equity funds including the Georgian Partners Funds I and II, Northleaf Secondary Private Equity Fund and the Northleaf Private Venture Catalyst Fund. Northleaf is one of the largest and most established private equity firms in Canada with clients that include the Canadian Pension Plan (CPP) and the Toronto Dominion Bank. The Emergence Fund is also invested in technology growth companies through an investment in a US-based fund (Multiplier Capital) that specializes in providing convertible debt loans to private companies. This strategy is highly lucrative with less risk than conventional private equity investing because of the senior position of its loans. Multiplier is currently paying a 10% annual distribution and its portfolio is performing extremely well across the board.


Liquidity: In 2016, we are expecting that Georgian Fund I will sell its sizable position in Shopify once the stock market, and particularly the NASDAQ market, stabilizes from its early 2016 correction. Once Georgian sells Shopify, it will distribute the proceeds to its investors, including the MacNicol Emergence Fund.


Hedge Funds – Absolute Return Fund


The investment objective of the Absolute Return Fund is to generate positive returns under most market and economic conditions, and to have little or no correlation to the US and Canadian stock markets. In order to achieve its objectives, the Absolute Return Fund invests in several value-added strategies managed by experienced and successful Canadian, US and U.K. hedge fund managers. Most of these investments are not available in the public market and are typically not accessible to individuals and smaller institutions because of high minimum investment thresholds, often in excess of five-million dollars. During the year, we continued to add to our investment in the Sankaty European Opportunities Fund which we expect to continue to generate a high-teens net return for its investors. Sankaty is one of the largest restructuring and secondary funds in Europe. It seeks to restructure and recapitalize companies and LBO funds (levered buyout funds) that have found themselves with too much debt post the 2009 economic downturn. 2015 was a very successful year for the Absolute Return Fund with at 17% return led by the Contrarian Emerging Markets Fund of Connecticut, which was short emerging market debt through most of 2015.


Closing Comments


We are very pleased with the progress of the private equity, real estate and hedge fund components of the Alternative Trust which continue to perform to our objectives while showing positive growth in both up and down stock markets. With respect to the private equity component of the Trust, we believe we are at an important inflection point for several of our investments which will in turn drive significant positive returns for the Trust in the quarters and years ahead. The Alternative Trust remains open to new investors and is available for purchase on a monthly basis.




MacNicol & Associates Asset Management Inc.