EUROPE - European non-listed funds returned a negative -7.8% in 2009, compared with -19.8% the previous year, according to the INREV Index of 258 funds representing assets worth €132.7bn.

Despite capital growth of -11.1% driving negative performance, INREV described the figures as "a turning point". At 3.3%, income return has remained steady over the past two years.
The UK lead the recovery, returning -6.4% compared with -33.2% the previous year, suggesting it had responded more positively to improving conditions. The UK market had been more volatile during the downturn and the fall in its performance as a result was much sharper than in mainland Europe.

The continent recovered from a less severe shock at a slower pace, with returns of -8.4% compared to -9.2% in 2008.

INREV CEO Andrea Carpenter said European markets were "recovering from the downturn at their own pace. The UK had a sharper fall and the sharper rise. On the continent, valuations didn't vary so much."

She added: "European markets still have issues to do with restructuring - it isn't over yet. I won't say the market will go into positive territory, but there will be opportunities as well as risks."

The poorest returns came from markets with exposure to southern and peripheral economies, notably Spain, where capital values fell hardest. Multi-country funds - of which 104 appeared in the index - returned -11.4%.

"It doesn't necessarily apply just to central and eastern European markets. We're thinking of those with exposure to Spain and perhaps to the influence of smaller economies because these will have less liquidity," said Carpenter. 

"Spain will have a long journey back. Only a tough investor would look at Spain now given the widespread nature of its problems."

High levels of gearing exerted a negative influence on fund performance. In contrast, less geared, more cautious funds delivered higher returns. Funds with gearing below 50% gross asset value (GAV) returned -2.8%. Those with above 50% gearing returned -17.2%.
"The funds within the index have already established their debt levels. For new fund launches it will be different," said Carpenter. "It isn't just about them the amount of debt used. They will be looking at corporate governance and alignment. They want to see the structures are set up to manage the debt.

"Due diligence is taking longer. Both sides - fund managers and investors - will be making sure that the structures work for both good and bad markets. On debt, on capital calls, the decision-making process has to be clear." She added that core funds were likely to be more cautious over the coming year.