Stanford Blyth Fund FICC Winter Quarter 2015 Pitch Vanguard REIT Index Fund (VNQ) 02/26/2015Stanford Blyth Fund FICC Coverage Group 2015 Winter Quarter

Stanford Blyth Fund FICCWinter Quarter 2015 Pitch

Vanguard REIT Index Fund (VNQ)

02/26/2015Stanford Blyth Fund FICC Coverage Group 2015 Winter Quarter Pitch

FIXED INCOME, CURRENCIES, AND COMMODITES COVERAGE GROUP

Bryant Johnson EJ Bernard Harrison Caruthers Jaewoo Jang John Solitario

Justin Hsuan Kuno Choi Laura Zhang Sen Lin Nick Bien

Pitch Outline

1. VNQ Price History & Metrics Overview

2. ETF Breakdown & Composition3. Macro Catalysts: QE & US Economic

Recovery4. US Real Estate Sector Analysis:

Historical Lows5. Conclusion6. Questions 02/26/2015Stanford Blyth Fund FICC Coverage Group 2015 Winter Quarter Pitch

Vanguard REIT Index Fund (VNQ)


VNQ was listed October 1st, 2004 at $51.18 per share. It seeks to track the performance of the MSCI US REIT Index, which represents

around 2/3rds of the US real estate market.

REITs?A Real Estate Investment Trust (REITs) is a security that sells like a stock on major exchanges and invests in real estate directly, either through properties or mortgages.To qualify as a REIT, a company must1) invest at least 75 percent of its total assets in real estate assets

and cash,2) derive at least 95 percent of its gross income from such real estate

sources and dividends or interest from any source, and3) distribute at least 90 percent of its taxable income to shareholders

annually in the form of dividends.4) Equity REITs v. Mortgage REITs. VNQ is an equity REIT meaning its

earnings mostly comes from rental income as opposed to gains and losses in MBS for MREITs.

Benefits- REITs receive special tax considerations,- Typically offer investors high yields- Highly liquid method of investing in real estate.


Stanford Blyth Fund FICC

1. VNQ Overview

10 Year Historical Performance


Strong performance against S&P 500 over past decade.

Real Estate most profitable asset class past year (52 wk. +26.5%).

60 Day Rolling CorrelationVNQ exhibits moderate-to-high correlation with the S&P 500 based on

the past 10 years.


Dividend Yield 3.37%


Given REIT structure VNQ offers high dividend yield.

Offer degree of downside protection in adverse price action.

VNQ vs. Competitors


Superior performance with less risk.

KBWY

ROOF

IYR

SPT: Volatility Statistics


10 Year Alpha: 5.02

10 Year Beta: 1.12

10 Year SR: 0.46

5 Year Alpha: 11.13

5 Year Beta: 0.81 5 Year SR: 1.18

3 Year Alpha 10.36

3 Year Beta: 0.98 3 Year SR: 1.20

Benchmarked to MSCI World Index


2. ETF Composition

ETF Component Weightings

Replicate MSCI REIT Index (2/3rd of US real estate market)


ETF Composition


Top 10 Holdings (37.5%) (01/31/2015)

Simon Property Group (SPG) 8.4%

Public Storage (PSA) 4.1%

Equity Residential (EQR) 3.9%

Health Care REIT Inc (HCN) 3.6%

ProLogis (PLD) 3.2%

AvalonBay Communities Inc (AVB) 3.1%

Ventas Inc (VTR) 3.1%

HighLand Capital Partners (HCP) 3.0%

Vornado Realty Trust (VNO) 2.9%

Boston Properties (BXP) 2.9%

Others 62.5%

Sample ETF Components

VNQ ETF 47.3 4.47% 3.56

Holdings SectorP/E

Ratio Div. Yield (5

Years)P/B

Ratio

Healthcare Property Investors Inc.

Health Care Industry 21.10 4.20% 1.81

Boston Properties, Inc. Apartments 48.66 5.00% 3.85

Vornado Realty TrustD.C. & NYC Offices and

Retail103.40 2.90% 3.98

Ventas Inc.Senior Housing,

Medical46.61 N/A 2.56

Avalonbay Communities Inc.

Apartments 32.24 3.00% 2.47

Prologis Inc. Industrial 34.60 3.60% 1.57


Dividend growth as revenue generating investment


3. US Macroeconomic Catalysts

Quantitative Easing here and abroad

Strength of $ on USD denominated asset demand

Jobs growth and recovery prospects

Opportunities Frontier• Labor market strengthening. Jobs market has steadily

recovered since the crisis. Analysts predict that although the housing market has not yet responded decisively to the improvement, there will be significant momentum when demand picks up.

• Lack of attractive yield elsewhere = higher demand for US assets.

• Foreign demand for $ denominated investments will rise, particularly in real estate development projects in coastal luxury markets (i.e. SF, NYC).

Hence,

STRONG JOB GROWTH & SECULAR REAL ESTATE DEMAND02/26/2015Stanford Blyth Fund FICC Coverage Group 2015 Winter Quarter Pitch

Risk Horizon• Rates increase: FRB Federal Funds rate at 0.12% (12-month

consecutive inflation at -0.1% Jan. 2015). Rates increase (the first in almost a decade) expected around mid-year is expected.

• Regulatory barriers: Difficulty of obtaining mortgage loans due to the fallout of the 2008 Financial Crisis.

• Uncertain Economy: Last year, analysts had expected yields on 2-30 year Treasury notes and bonds to increase given a brighter overall U.S. outlook but instead they have fallen from 3.03% at the end of 2014 to 2.112% currently.


“The Goldilocks”

Capital structure of US real estate market with regards to QE increase resilience in real estate

prices.

Moderate rise in rates signal real economic recovery.

Sustained lower rates feed virtuous cycle in asset prices.



4. US Real Estate Sector Outlook 2015

Demand outstrips supplyCreditworthiness of sellers

improveConstruction spending increase

US Real Estate Sector Summary

Post-2008 Crisis left US in housing glut.By 2011-2012 glut becomes shortage as

vacancy rates fall.

VNQ well poised to take advantage of secular growth trends in US commercial and

residential real estate. 02/26/2015Stanford Blyth Fund FICC Coverage Group 2015 Winter Quarter Pitch

Housing: Demand > Supply

US Housing vacancies at 20 year lows (Q4 2015 at 7.0% = Q2 1990 levels)


Monthly $pending on Construction ↑

Seasonally adjusted construction expenditures at 2004 levels.

In 2014, US Construction Activity +$981 Billion Annual


Construction Spending Remains ↓ 10-Year Mark


US Census BureauSeasonally Non-Adjusted Residential and Nonresidential Construction

(2005 – 2015)

Number of Distressed Sellers ↓

Pre-crisis lows in property foreclosures and short sales.


While Mortgage Credit Improves…


…Far From Pre-Crisis Highs


Cause for Optimism


Housing starts still below long-run average.As an equity ETF VNQ has much to gain still from rising

demand once consumer credit conditions and construction continue recover to normalcy.

VNQ Investment Summary

VNQ is a fairly priced investment that stands to benefit from both loose credit conditions

as well as a moderate raise in interest rates.Fundamentals in US residential and

commercial real estate are strong and growing stronger.

Short term horizons: slightly overbought.Possibility of moderate pullback.

Given an investment timeframe of +1~2 years:

Medium to long term prognosis is excellent02/26/2015Stanford Blyth Fund FICC Coverage Group 2015 Winter Quarter Pitch

Documents

Stanford Blyth Fund FICC Winter Quarter 2015 Pitch Vanguard REIT Index Fund (VNQ) 02/26/2015Stanford Blyth Fund FICC Coverage Group 2015 Winter Quarter