Manager's report - Second Quarter 2010

1 Firstly, an apology/explanation. The Fund’s unit price on any given dealing (the last business day of

each month) is based on the previous month’s NAV. So, July ‘s unit price is based on June’s asset

valuations. This means that the performance of the Fund’s assets in the Quarter ending June is not fully

available to us until the end of July – hence the apparent delay in the 2nd Q report.

2 So what has that performance been? In a word, steady;

3 Some numbers:

- Unit price over the last twelve months +5% (£0.86 to £0.92)*

- Unit price over this calendar year +2% (£0.90 to £0.92)

- Unit price over this 2nd Quarter +2% (£0.90 to £0.92)

*Source: CISX - for all unit prices of Fund, see

http://www.cisx.com/listedsecurityNAVs.php?secclassID=2511

4 When we launched the Fund we intended / wanted it to be”low volatility”. We felt reasonably

confident that, on the basis of our research going back to the 1970s, provided no undue risks were taken

with gearing (more below) this should be achievable. For the first year or so (January 2007-Autumn

2008) this proved to be the case. The financial woes of the period Autumn 2008-Spring 2009 and then

the rapid recovery in asset values of the period March 2009 – March 2010 challenged all previous

assumptions and models as we saw big swings in prices of all asset classes. However we feel that Prime

Central London residential property (PCL) is entering a period of normality now.

This should be characterised by a return to trend capital growth, or close to it, of 7% p/a and rents rising

in line with inflation (with perhaps a bit of above-inflation growth in the next year as rents catch – up

capital values);

5 What is normality for PCL? It is worth reminding ourselves of the relative performance of PCL

property versus other UK property asset classes in recent years:

(A) Total Returns

(Capital Gains/losses)

to June 2010

3.5 years 5.5 years 10.5 years

UK Commercial Property 15% (-34%) +19% (-15%) +69% (+5%)

PCL S/W Flats** +12.5% (-5%) +39% (+12%) +94% (+40%)

(B) Average p/a Capital

Growth

20 years 10 years 5 years

to June 2010

All PCL 13% 7% 7%

PCL S/W Flats 7% 6% 2%

* IPD

** Savills Prime Central London S/W Flats Index – the Benchmark for PLC

*** Savills All Prime Central London Index

(C) Performance (capital growth/loss) of mix of asset classes in period January 2007- June 2010:

£ invested in Prime London Capital Fund - 8%

£ invested in PCL S/W Flats* - 19%

UK Commercial Property - 34% (see above)

For more information please contact syorke@dngim.com

The Prime London Capital Fund

2nd Quarter 2010 Manager’s Report

Land Securities - 70%

British Land - 68%

Grainger Trust - 70%

FTSE 100 - 18%

* Savills PCL S/W Flats Index, assuming 50% gearing and 7% transaction costs

(D) Performance of PLCF against its peers (Offshore European property Funds)

source Trustnet

http://www.trustnet.com/Investments/Perf.aspx?univ=B&Pf_AssetClass=PROP&Pf_Sector=B:PRO

  1 year 3 year

PLCF  +21.6% -8.2%

Peer Group +17.9% - 27.4%

6 Apart from the blindingly obvious outperformance of PCL over UK Commercial property one of the

interesting things to note from the figures above is the split between capital growth and yield in the make

up of the total returns of the two property classes . Over the last ten and half years 93% of UK

Commercial property’s total return has come from yield, only 7% from capital growth. For the PCL S/W

Flats the relative numbers are more balanced, with 42% of the total return over the last ten and half years

coming from capital growth and 58% from yield. UK commercial property is over-reliant on yield to

produce its total return and this is part of the reason UK commercial property is such a volatile asset

class. PCL should be, and is, more stable because it has a more even split of return

between capital and yield.

7 Armed with this analysis we set ourselves the target of making sure that each asset we acquired earnt its

total return through partly capital growth and partly yield. Hence every asset we buy must earn its keep

by producing a decent income stream but, at the same time, we will be prepared to sacrifice a bit of yield

if we believe that either the asset has long term capital growth potential and/or we think we can add

significant capital value to it.

8 Our attitude to gearing has always been conservative, even in 2007 when we were being encouraged to

borrow more. Our LTV has never gone above 55% (at the depths of the crisis) and at the moment it is

20%. 20% is probably a bit low at this point in the cycle and we will be looking to lift this over coming

months but the Fund’s gearing is likely to settle at an average over the cycle of 30%. This should, we

think, allow the Fund to continue to be a”low volatility”one but also give investors a nice call option on

future capital growth,which we expect.

9 Forecasts? Every one is at it and the press have an insatiable appetite for house price forecasts as we

know. Here are ours:

(a) In our 3rd Quarter 2009 Report we forecast, in the face of unremitting gloom from other forecasters,

that the PCL Index would rise by 18% between the start of the 3rd Quarter 2009 and the end of 2011. So

far, to the end of June 2010, it has risen 13%;

(b) For our 3rd Quarter 2009 forecast to come good PCL will need to rise by a further 5% between now

and the end of December 2011;

For more information please contact syorke@dngim.com

The Prime London Capital Fund 2nd Quarter 2010 Manager’s Report

(c) We think it will rise at least 5% over that period and, if anything, the risks are on the upside.

In other words we think that there is a greater probability of PCL rising by 10% by the end of 2011 than

of it staying flat or falling. Agents in the PCL area are still very short of good stock (one large agent

described to me the lack of stock as”near critical”last week) and there does not appear to be any sign of

that changing in the near term.

10 Of course any view on asset prices depends on a macroview and our core forecast is that the London

economy will continue to outperform the rest of the UK economy. Fiscal austerity amounts to a transfer

of wealth from the poorer areas of the UK (which depend on public sector jobs and welfare) to the richer

where companies and those in private sector work will enjoy greater certainty about tax rates . This will

benefit London principally. At the same time, although sterling has recovered in recent months, the long

term (10 year) exchange rates still suggest UK assets are cheap and so foreign investment will continue to

target London.

% that £ Sterling is below the 10 year exchange rate average:

£/ US $ - 5.5% (10 year average $1.688)

Euro / £ - 13% (10 year average £0.722)

£ / Swiss Fr - 23% (10 year average SWF 2.14)

Source: http://www.oanda.com/currency/average

Summary:

One of the Fund’s investors described his investment with us the other day as”sleep at night money”and

that is precisely what we want . By keeping gearing modest and acquiring top quality assets in the best

residential areas of PCL the Fund gives itself a good chance of reducing volatility. We continue to aim

for a balance of capital growth and yield in every asset we acquire and this should stand investors in good

stead over coming months / years.

Over the next six months assets, that we acquired over the last twelve months, will have been improved

and the revaluation of them should underpin the unit price.