Product Assessment. Aurora Fortitude Absolute Return Fund. Report data as at 28 Feb 2014 Rating issued on 15 Apr APIR Code VIEWPOINT & RATING

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1 Report data as at 28 Feb 2014 Rating issued on 15 Apr 2014 Product Assessment Aurora Fortitude Absolute Return Fund Highly Recommended Recommended Approved Not Rated Redeem APIR Code AFM0005AU Asset Class Alternatives Sub-Asset Class Market Neutral Investment Style Fundamental Investment Objective To deliver investors a return of between 5% p.a. to 10% p.a. above the RBA Cash Rate after fees. Although the Fund does not have a specific volatility target, it is expected to be less than 5% p.a. (ex-ante). Zenith Assigned Benchmarks Benchmark 1: UBS Bank Bill Index Benchmark 2: S&P / ASX 300 (Accum) Index Key People John Corr Chief Investment Officer & Director Sheriden Hure Senior Portfolio Manager Andrew Ward Senior Portfolio Manager Investment Team Size 4 Net Returns (% p.a.) 5 yrs 3 yrs 1 yr Fund Benchmark Income (% p.a.) Income Total FY to 30 Jun FY to 30 Jun FY to 30 Jun VIEWPOINT & RATING The Aurora Fortitude Absolute Return Fund (the Fund) employs an Australian equities market neutral strategy, managed by Fortitude Capital ("Fortitude"). John Corr is the Chief Investment Officer and the architect behind the investment process and ultimately performance. The strategy continues to be well regarded by Zenith, however we hold a number of concerns with respect to the breadth of Fortitude's oppportunity set and also the broader Aurora business. Zenith rates the Fund Recommended. Aurora Funds Management ("Aurora") is part of Aurora Funds Limited (ASX code - AFV) which is listed on the ASX with a market capitalisation of $7 million and manages approximately $306 million as at the end of February Since the start of the calendar year, Aurora has experienced outflows of circa $300 million, or 50% of assets under management. While Zenith is satisfied with the underlying rationale for the redemptions, the associated loss of revenue (approximately $1 million p.a.) places the business in a difficult position. Based on Aurora Funds Ltd interim report for the six months ending December 2013, the business posted a net profit after tax of $120,000. As such, the business will quickly need to source additional fund flows to remain profitable. While the business has sufficient liquidity reserves to operate in the medium-term, this will be an increasing area of focus for Zenith. Corr was the original founder of the strategy and has a long and distinguished career in generating absolute returns. Corr is well supported by Senior Portfolio Managers, Sheriden Hure and Andrew Ward who have been with Fortitude since 2005 and 2006, respectively. Zenith believes the investment team is appropriately resourced relative to the investment strategy. The Fund employs opportunistic trading across a range of strategies within the Australian equities universe. These include: Mergers and Acquusitions, Convergence, Long/Short and Yield. To protect the portfolio from sharp market movements, Fortitude uses an Options book to hedge market and stock specific risks. The portfolio construction process is discretionary in nature with Corr retaining the final decision making authority. In practice, each Portfolio Manager is responsible for identifying prospective trades within their strategy and presenting them to the team for consideration. In Zenith's opinion, Fortitude has the ability to structure a portfolio, that offers both downside protection and market neutrality. This includes navigating the portfolio through 2008 and other volatile periods. Despite this, performance over the last five years has been disappointing and below the return target. While Zenith notes that the Options book has been impacted by falling volatility, we believe it is incumbent on Fortitude to identify complementary alpha sources. Zenith considers the fee structure to be at the upper end of the range. When assessing the fee structure, Zenith looks for an equitable distribution between fees paid to the manager and the afterfee return to the end investor. Over the past five years, this distribution has been skewed towards Fortitude. FUND FACTS Maximum gross market exposure of 500% (actual exposure typically less than 200%) Expected portfolio turnover of 2,400% p.a. Exposure to five strategies: mergers and acquisitions, yield, convergence, long/short and options ABSOLUTE RISK (SECTOR) VERY HIGH RELATIVE RISK (FUND WITHIN SECTOR) VERY HIGH Fees (% p.a.) Management Fee: 1.49% Performance Fee: 20.5% Analyst Rodney Sebire Senior Investment Analyst (03) rodney.sebire@zenithpartners.com.au HIGH MODERATE LOW VERY LOW INCOME DISTRIBUTIONS PER MONTH QUARTER 6 MONTH ANNUM HIGH MODERATE LOW VERY LOW INVESTMENT TIMEFRAME 1-2 YRS 3-4 YRS 5-6 YRS 7+ YRS Zenith charges a fee to the Product Issuer to produce this report. Please refer to Research Methodology & Regulatory Compliance at the end of the document.

2 APPLICATIONS OF INVESTMENT SECTOR CHARACTERISTICS The Zenith Alternatives Market Neutral sector consists of funds that seek to profit from both increasing and decreasing prices. Market neutral strategies are often attained by taking matching and long and short positions in different stocks. This increases the returns from making good stock selections whilst simultaneously reducing the exposure to broad market movements, otherwise known as beta neutral. Market neutral strategies may employ a range of tools such as merger arbitrage, pairs trading, option strategies and shorting sectors. There is no single accepted method for employing a market neutral strategy. Managers who hold a market neutral position are able to exploit market momentum. A market neutral position may involve taking a 50% long and a 50% short position in a particular industry, taking the same position in the broader market, or taking considered long and or short stock positions and hedging the market risk through using index or basket options. Equity market neutral managers can be divided into two broad categories; fundamental arbitrage and statistical arbitrage. The former trades on a fundamental view whereas the latter uses quantitative models to create long and short portfolios. Pairs trading is an example of fundamental arbitrage or statistical arbitrage. In fundamental arbitrage, a manager seeks to derive a performance differential between two stocks, usually in the same sector, and normally holds one position long and one corresponding short position. This approach generally seeks to generate consistency of returns by earning small steady profits on many positions. Conversely, statistical arbitrage employs the principal of mean reversion. A trader will find two stocks whose returns are historically highly correlated. A price ratio chart (where one stocks price is divided into the other) is constructed to measure the deviation from the mean, or the average spread between the two stocks, indicating the relative performance. When the price ratio line moves to a pre-determined level of deviation from the mean, for example two standard deviations, the trade is entered. The trader will take a long position in the underperforming stock and a short position in the more strongly performing stock. The idea is that the trader will profit from both positions as the spreads ultimately revert to the mean. One of the key distinctions between statistical arbitrage and fundamental arbitrage is the human discretion allowed in the investment process. The former is to a large extent model based, whilst the latter revolves around stock selection. PORTFOLIO APPLICATIONS The Fund provides access to Fortitude's trading skills and ability to structure a portfolio with attractive downside protection characteristics. Furthermore, the Fund has low correlation with traditional asset classes. Whilst the Fund has a number of attractive features, investors should be aware that this Fund is a specialised investment and therefore should only be used as part of an investor's well diversified portfolio. Zenith expects the Fund to provide diversification to an investor s broader portfolio in that it aims to generate absolute returns which have a low or negative correlation to equity and fixed income markets. Zenith recognises that most investors continue to build an investment portfolio split along asset class categories the classic bond / equity decision. In such an approach it is natural for investors to consider equity market neutral funds as part of their equity allocation. For those investors wishing to build a more diversified Alternatives portfolio Zenith believes that this Fund will blend particularly well with single strategy hedge funds operating in the Global Macro, CTA and the FX and Commodities sectors given their low expected correlations to the Fund. The Fund targets a distribution amount of 1.5%, payable on a quarterly basis. The Fund will distribute available franking credits on an annual basis. Funds of this nature tend to engage in high volume trading, as a result, the major component of returns will be delivered via income distributions. The portfolio turnover is expected to be very high at 2,400% p.a. The Fund is therefore best suited to low tax rate investors & superannuation funds. The relative tax inefficiency of this Fund for investors on higher marginal tax rates is though offset by our expectation that the Fund will generate strong positive absolute returns and deliver diversification benefits it can add to an overall portfolio. RISKS OF THE INVESTMENT SECTOR RISKS Equity Market Neutral products are exposed to the following risks: MARKET & ECONOMIC RISK: Whilst the Fund strives to maintain market neutrality and focus on pure stock selection (i.e. the Fund's movements aim to be uncorrelated with the Australian equity market) there is a risk that the Fund may not be able to bring the portfolio to beta zero and neutralise market and industry risks. As a result, the Fund may be exposed to more market and/or industry risk than desirable. LIQUIDITY RISK: There is a risk that the Fund's positions cannot be exited readily due to infrequently traded securities or limited volumes. This means that the Fund may experience losses. Access to liquidity is highly important in a market neutral strategy where illiquidity issues can expose the Fund to unintended market and sector risks (i.e. the Fund is unable to remain market and sector neutral). Where positions cannot be readily exited, the strategy may risk not being implemented properly (i.e. the Fund will not be able to hedge positions due to illiquidity on either the long or short side). LEVERAGE RISK: The Fund s strategy uses leverage, which has attendant risks and can substantially increase the adverse impact to which the underlying investment portfolio may be subject. SHORT SELLING RISK: The Fund engages in short selling. Short selling involves borrowing and selling securities the Fund does not own. The action of stock borrow creates an obligation to redeliver the securities borrowed (or their equivalent) on an agreed date, or if circumstances change on demand from the stock lender. Short sale positions creates an unlimited risk for the portfolio, if the stock price of the security rises and the Manager is unable to buy the securities back in the market place. The act of buying securities in a rising market can add to the positive price momentum and adding to the losses in the Fund. Page 2 of 13

3 REGULATORY RISK: Legal, tax and regulatory developments may adversely impact the Fund. In recent years there has been an increase in regulatory scrutiny of hedge fund activity in particular short selling. Thus in September 2008 in response to global market conditions the Australian Securities and Investment Commission (ASIC) temporarily banned short-selling in ASX listed companies. The ban has since been lifted but the Government has introduced additional short selling reporting requirements. While there was limited impact of the short selling ban on the Fund there is no guarantee that it will not be affected if such a ban is reintroduced. The ASIC Regulatory Guide 240 Hedge Funds Improving Disclosure' comes into effect from 1 January 2014 and sets out mandatory industry definitions regarding hedge funds. The implications of RG240 are potentially significant for the Fund if current investors are prevented from holding the Fund due to asset allocation constraints around use of hedge funds which could potentially force large scale redemptions. Such actions can impact the tax position of remaining investors. FUND RISKS Zenith has identified the following key risks associated with the Fund; this is not intended to highlight all posible risks: KEY PERSON RISK: Zenith considers the greatest key person risk to be related to John Corr who is the Chief Investment Officer. The departure of Corr would result in an immediate review of the Fund's rating. BUSINESS RISK: In light of the business challenges facing Aurora, there is a risk that Aurora/Fortitude is unable to continue as a going concern over the medium to long-term. CAPACITY RISK: This Fund does not currently have any capacity issues with only $167 million invested in the strategy and a stated capacity of $1 billion. CONCENTRATION RISK: Investors are presented with the risk that the Fund does not hold a well-diversified portfolio of securities. This risk is amplified given Fortitude can hold up to 30% of the portfolio in a single security (with no minimum credit rating). LEVERAGE RISK: A significant risk of the Fund is leverage. The Fund can be leveraged up to five times which has a magnifying effect on gains and losses on the Fund s positions. Investors should be cognisant of the potential magnifying impact on returns should the Fund s positions be incorrect. The Fund s net market exposure is typically very close to zero. COUNTERPARTY RISK: The Fund is required to transfer collateral to UBS AG, Australia Branch or its associated entities (UBS) in respect of the securities that are borrowed to be sold short. The collateral is not required to be segregated by UBS from its other assets, and in the event of the insolvency of UBS, may not be recoverable in full. UBS may deal with, lend, dispose of, pledge or otherwise use all collateral for its own purposes and shall be obliged to redeliver equivalent collateral to the Fund on satisfaction by the Fund of all its securities lending obligations to UBS. The Fund will rank as an unsecured creditor in the event of the insolvency of UBS and it may not be able to recover amounts due to it in full. This means that the Fund has exposure to counterparty risk with UBS. QUALITATIVE DUE DILIGENCE ORGANISATION Aurora Funds Limited (Aurora) was established in early 2003 with the objective of delivering retail investors access to specialist investment strategies from both domestic and offshore investment managers. Aurora is the issuer and responsible entity, and ultimately responsible for the administration of the Trust. Zenith is comfortable that Aurora has all the necessary skills, background and expertise to perform this role. Aurora is part of Aurora Funds Limited (ASX code - AFV) which is listed on the ASX with a market capitalisation of approximately $7 million (as at end of Feb 2014). The listed entity comprises two businesses: Aurora Funds Management (RE and sales / marketing business); and Fortitude Capital (wholesale domestic hedge fund manager). The combined entity manages around $306 million as at the end of February Since our last review, Sandringham Capital was folded into Fortitude Capital, with Fortitude taking over its Individually Managed Account(s). From Zenith's perspective the integration was seamless with minimal impact on the investment management practices of Fortitude. The Board of Aurora Funds Ltd has undergone some minor compositional changes with Oliver Morgan joining as Non- Executive Chairman and Alastair Davidson resigning from an Executive role. Morgan replaces Steuart Roe (former Chairman) who continues in his Managing Director capacity. Finally, Richard Matthews resigned from the Board in May With respect to the above-mentioned changes, Zenith is pleased that Aurora has sought to introduce some level of independence to the structure. However, Sandy Morgan is a former Head of Marketing of Aurora Funds Management and cannot be considered completely independent. To ensure compliance best practice, Zenith would prefer to see an independent chair, independent director majority and the role of chair and managing director not performed by the same person. Since the start of the calendar year, Aurora has experienced outflows of approximately $300 million, or 50% of assets under management. While Zenith is satisfied with the underlying rationale for the redemptions, the associated loss of revenue (approximately $1m p.a.) places the business in a difficult position. Based on Aurora Funds Ltd interim report for the six months ending December 2013, the business posted a net profit after tax of $120,000. As such, the business will quickly need to source additional fund flows to remain profitable. While the business has sufficient liquidity reserves to operate in the medium-term, this will be an increasing area of focus for Zenith. INVESTMENT PERSONNEL Name Title Tenure John Corr Chief Investment Officer & Director 9 Yr(s) Sheriden Hure Senior Portfolio Manager 8 Yr(s) Andrew Ward Senior Portfolio Manager 7 Yr(s) Thomas Gillespie Head of Research 1 Yr(s) Fortitude employs a flat portfolio management structure with John Corr leading the team, in his role as Chief Investment Page 3 of 13

4 Officer. Corr is supported by a team of Senior Portfolio Managers who are responsible for researching and presenting trade ideas from within their respective sub-strategies. Corr maintains the final decision-making authority. Corr is well supported by Senior Portfolio Managers, Sheriden Hure and Andrew Ward who have been with Fortitude since 2005 and 2006, respectively. Corr has mentored each of them for their entire investment management careers, to the point where his investment philosophy and 'market thinking' is deeply ingrained. Hure is responsible for analysing and monitoring the Mergers and Acquisitions strategy, while Ward is responsible for the Convergence strategies and Derivatives Overlay. More recently, Fortitude has appointed a Head of Research, Tom Gillespie on a part time basis. Gillespie is a senior investment professional with over 25 years of experience. Gillespie has previously held roles at Russell, CSC and Citigroup. While Gillespie has no 'position level' responsibility, he acts as a sounding board for Corr and produces academic pieces supporting the strategy. Corr was the original founder of the strategy and has had a long career in generating absolute returns. Prior to establishing Fortitude, Corr was a Director at Citigroup Global Markets Australia where he was responsible for the management and development of a team of equity proprietary traders who traded local and overseas equities and equity derivatives. Prior to this, Corr held a variety of trading roles primarily on the equity derivatives desks of a number of investment banks. Zenith believes the investment team is appropriately resourced relative to the investment strategy. The strategy is relatively opportunistic and focused of specific market inefficiencies which means a large pool of analysts is not required. The core investment team has been stable for a number of years and each of the Senior Portfolio Managers could easily assume the other's responsibilities. The recent appointment of Tom Gillespie (albeit for only 1 day per week) is a positive and will add some diversity of thinking. The incentive structure comprises of three components: 1) base salary; 2) cash bonus which is paid in the quarter following the end of the financial year and is based on performance fees earned and the overall profitability of the Aurora business; 3) equity which may be offered to lock in key employees. Zenith notes that Corr is a significant equity holder in the Aurora business and his interests are closesly aligned to the performance of the Fund. In addition, Hure and Ward are also investors in the Fund. In addition to the Fortitude investment team, Corr has access to the ex-sandringham team based in Melbourne where he can use them as a sounding board to discuss trade ideas. Although their areas of focus are different, it nonetheless represents another experienced set of eyes to discuss the portfolio. INVESTMENT PROCESS The Fund's target returns is 5% to 10% p.a. above the RBA cash rate. Although the Fund does not have a specific volatility target, it is expected to be less than 5% p.a. (ex-ante), as measured by Standard Deviation. The Fund has a market neutral bias and offers strong downside protection. Fortitude's investment philosophy is premised on the belief that medium to long-term market outcomes are difficult, if not impossible, to predict. With the majority of the industry focused on making these long-term predictions, there are short-term pricing inefficiencies which can be exploited and traded. By investing in a number of uncorrelated trades that have a high probability of producing a positive return, Fortitude is able to build a portfolio which delivers meaningful returns with low volatility. The primary sources of value-add are through opportunistic trading across a range of strategies within the Australian equities universe. These include: Mergers and Acquisitions, Convergence, Long/Short and Yield. To protect the portfolio from sharp market movements, Fortitude uses an Options book to hedge market and stock specific risks. SECURITY SELECTION The Fund's investable universe is the Australian sharemarket (including Australian shares listed overseas) and equity derivatives, including options and convertible securities. The following section includes a summary of the underlying substrategies: Yield - invests in short dated debt/equity structured mostly issued by the major banks/financial institutions (less than two years duration) as they approach maturity. Typically these instruments are no longer relevant to fixed income investors and yet to come on to the radar of equity investors; Mergers and acquisitions invests in announced deals and schemes offering high certainty of completion. Fortitude reviews each announced deal, looking at terms, conditions, the regulatory issues and the expected potential for completing the bid; Convergence (ADR/CDI s arbitrage) - invests in situations where mispricings exist with securities that are both listed locally and on overseas exchanges. Short-term mispricings can exist for a number of differences including the timing of dividends and settlement differences; Long/Short equity - opportunistically buys or short sells a particular stock to take advantage of book builds, primary issues and block trades; and Options (hedging only) - derivative overlay to eliminate beta and market exposure and to enable more aggressive trading in other parts of the portfolio. The screening process involves reviewing market announcements, broker research, and leveraging the sell side community to generate a list of potential trade ideas within and across the underlying strategies. The screening criteria includes a combination of fundamental and quantitative analysis such as announced takeover deals and corporate restructurings, share price variations between jurisdictions, multiple share classes, option availability and pricing. Based on the identified trades, the investment team will discuss each trade and the potential distribution of returns (both upside and downside). This will include the ability to enter/exit the trade, the time horizon for the trade and the complementarity with the existing portfolio. All potential trades are discussed around the dealing desk on a real time basis, with Corr retaining the final decision making authority. The Options book is run in parallel with the other strategies and is mandated to be net long individual stock and equity index options. While the book is structured to generate performance, Page 4 of 13

5 its primary focus is to provide downside protection for other parts of the portfolio. An example of a typical trade is a 'long straddle' where the manager is simultaneously buying call and put options over the index, in the expectation of a large market movement (in either direction). The cost of the protection (or 'theta') can range from 0 to 10 basis points per day. Thus, in periods of compressing volatility, the options book will be a drag on performance and vice versa, and in volatile environments will deliver positive performance. PORTFOLIO CONSTRUCTION The portfolio construction process is discretionary in nature with Corr retaining the final decision making authority. In practice, each Portfolio Manager is responsible for identifying prospective trades within their strategy and presenting them to the team for consideration. The team will discuss the trade in the context of the broader portfolio, balancing diversification with liquidity. The overall portfolio is hedged intra-day to eliminate beta/market exposure through an Options book. The Fund does not use any limits at the strategy level, with allocations based on the output of the trade selection process. Since inception, the portfolio has allocated approximately one quarter of the risk to Mergers and Arbitrage, Yield and the Options book with the balance split between Long/Short and Convergence trading. These allocations will change significantly over time depending on the opportunity set and prevailing market conditions. The Fund typically holds between 50 and 90 positions with an average weighting of 2%. Portfolio turnover is very high with an average holding period of 25 days or 2,400% p.a. Zenith notes that the portfolio construction process is intuitive and draws heavily on the trading skills of Corr. Fortitude has a proven ability to construct a portfolio that delivers both positive returns with low volatility. The Options book has been a drag on performance over the last few years which is expected for a long volatility biased strategy. In the absence of any major spikes in volatility, it is important for Fortitude to identify additional alpha sources to ensure the return objective is achieved. OPERATIONAL DUE DILIGENCE RISK MANAGEMENT Portfolio Constraints Description Country limit ex-australia (%) 0% to 20% Gross Leverage ( times ) Maximum long or short exposure to indvidual security (%) 0 times to 5 times 0% to 20% Max weight in security (%) 0% to 30% Risk management is a function of both the investment strategy/process, and also independent risk management processes. With respect to the investment strategy, Fortitude controls market or beta risk through the use of an Options book, which targets a net equity exposure of +/- 25%. Liquidity is a major determinant of position sizing, with Aurora's investment guidelines stipulating that at least 90% of the portfolio by value should not represent more than 10 days trading volume. In addition, Fortitude actively uses stop-losses and clearly defined trade horizons, which act as another form of embedded risk management. Fortitude uses two risk management systems to oversee the investment risks and to ensure various limits are not breached. IRESS is its internal trading and risk management system and includes comprehensive position and risk management tools. It provides live portfolio valuation and includes an automated stop loss execution system. Aurora uses IRESS as its internal trading and risk management system. The system enables direct dealing into the ASX and equity derivative markets through all major institutional brokers. Upon execution the orders are automatically downloaded into the company s risk management system. The IRESS Risk Management System (RMS) incorporates the measurement of all equity derivative exposures including delta, gamma and theta values. The managers use RISK101 for exposure reports and risk reporting. This system collates data on exposure and performance by strategy on a daily basis. Zenith notes that Fortitude has a sound grasp of the underlying risks in its portfolio, reinforced by a long performance track record. To ensure best practice, Zenith would like to see a pre and post trade compliance system introduced. ADMINISTRATION & OPERATIONS The Fund has no redemption gates or fees. The Fund does not apply a lock-up. Operations The Operations function is out-sourced to UBS Nominees Pty Ltd and Unity Fund Services (Unity), who are appointed as the Custodian and Fund Adminstrator, respectively. Unity maintains the Fund s financial and accounting books and records, including daily valuations/ unit pricing, and statutory accounts. Fortitude monitor's Unity through the following processes: internal review of the quality and accuracy of their daily valuation packs against internally maintained valuation models; receipt and consideration of monthly compliance confirmations; receipt and consideration of an annual Type II GS007 audit report; and quarterly review meetings with Aurora and Unity representatives. Service Providers The Fund uses the following service providers: Custodian UBS Nominees Pty Limited Prime Broker UBS AG, Australia Branch Fund Administrator Unity Fund Services Auditor Deloitte Page 5 of 13

6 Legal Baker McKenzie Pricing The Fund's investable universe is restricted to liquid market securities, and as such only market prices are relied on for valuations. At Zenith we find comfort in market pricing rather than internally priced models. The result of using market pricing is that there has not been a dispute with the Fund Administrator regarding NAV estimates since inception. Transparency Aurora has provided full transparency of their portfolio in support of Zenith's due diligence process. Disaster recovery All the IT systems are backed-up nightly and traders have the ability to work remotely in the event of an IT disaster recovery. In addition, all trades and positions are recorded with the Prime Broker and Administrator thus creating an additional level of risk management. Personal trading Employees are permitted to hold long-term individual positions that do not conflict with the portfolio. All personal positions held are subject to the company s internal regulations. Compliance Aurora currently has two AFSL licences to manage wholesale and retail funds and operate managed investment schemes. The licences held are Aurora Funds Management (AFSL ) and Fortitude Capital (AFSL ). Protocols have been developed by Aurora in relation to the fund management and scheme issuing activities. This includes: immediate notification of any breach; maintenance, inspection, storage and back up of records; training; and staff trading. To comply with the Managed Investments Act, Aurora has a compliance committee with two independent members (Mark Hancock and David Lewis), has its capital adequacy reviewed by independent auditors (Deloitte), and maintains appropriate PI cover. It is also a member of the Financial Ombudsman Service. Capital is supplied by the parent entity (Aurora) through equity raisings and a subordinated debt issue. Compliance committee reports on unit pricing, etc are audited annually by Deloitte. Valuations and unit pricing is reviewed half yearly by auditors. Risk Management Aurora has incorporated risk as a function of the investment process, in addition to investing in systems that provide the CIO and Portfolio Managers with timely risk reports. To a large extent the investment team is responsible for its own risk management with no external oversight. While this is understandable given the size of the business and asset base, it nonetheless is inconsistent with industry best practice. Zenith would prefer to see external oversight of risk with a separate reporting line to the CEO. This risk is amplified given Aurora recently downsized the role of the Compliance Manager to one day per week. The role of Compliance Manager has been merged with the Chief Financial Officer role and is being performed on a full time basis as well as incorporating Complispace as a support tool. Page 6 of 13

7 INVESTMENT FEES The sector average fee in the table below is based on the average management fee of all flagship Alternatives - Market Neutral funds as surveyed by Zenith. The Fund's fee structure is 1.49% p.a. with a 20.5% performance fee, for out-performance of the RBA Cash rate subject to a non-resettable high watermark. Zenith considers the fee structure to be at the upper end of the range. When assessing the fee structure, Zenith looks for an equitable distribution between fees paid to the manager and the after-fee return to the end investor. Over the past five years, this distribution has been skewed towards Fortitude. Zenith would also like to see a cap added to the Fund's operating expenses. Under the current PDS, operating expenses are uncapped and permit a wide spectrum of costs to be paid from the Fund's assets. The Fund also charges a buy/sell spread of 0.02% on applications and redemptions. (The fees mentioned above are reflective of the flagship version only, fees may differ when the product is accessed through an alternate investment vehicle such as a platform.) Fees Type Fund Sector Average (Wholesale Funds) Management Fee 1.49% p.a. 1.34% p.a. Performance Fee 20.5% Description Buy Spread Sell Spread Buy / Sell Spread 0.02% 0.02% Page 7 of 13

8 PERFORMANCE ANALYSIS Report data: 28 Feb 2014, product inception: Mar 2005 Monthly Performance History (%) JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC FUND YTD BM1 YTD BM2 YTD Benchmark 1: UBS Bank Bill Index, Benchmark 2: S&P / ASX 300 (Accum) Index Growth of $10,000 ABSOLUTE PERFORMANCE ANALYSIS Return Incpt. 5 yr 3 yr 1 yr Fund (% p.a.) Benchmark 1 (% p.a.) Benchmark 2 (% p.a.) Best Month - Fund (%) Worst Month - Fund (%) Positive Months - Fund (%) Risk Incpt. 5 yr 3 yr 1 yr Monthly Histogram Standard Deviation Fund (% pa) Benchmark 1 (% pa) Benchmark 2 (% p.a.) Downside Deviation Fund (% p.a.) Benchmark 1 (% p.a.) Benchmark 2 (% p.a.) Risk/Return Incpt. 5 yr 3 yr 1 yr Sharpe Ratio Minimum and Maximum Returns Fund Benchmark Benchmark Sortino Ratio Fund Benchmark Fortitude benchmarks the Fund against the RBA Cash Rate Target; however, for consistency purposes, Zenith benchmarks all funds categorised within Alternatives Market Neutral universe against the UBS Bank Bill Index. All commentary below is as at 28 February Page 8 of 13

9 The Fund aims to deliver a return of 5% to 10% p.a. above the RBA Cash Rate (after fees). Although the Fund does not have a specific volatility target, it is expected to be less than 5% p.a. (ex-ante), as measured by Standard Deviation. The since inception returns for the Fund are solid, albeit below the stated return objective. Zenith notes that the track record above excludes franking franking credits in June 2012 and June 2013 financial years. The impact on those returns is 0.18% and 1.87% respectively. When assessing the track record, Zenith looks for consistent excess returns over all time periods. While the longer term track record is solid, performance over the last five years has been disappointing and well below the return objective and peer group (albeit the peer group is small). For the five years ending February 2014, the Fund has returned 4.91% p.a., outperforming the UBS Bank Bill Index by only 0.97% p.a. Zenith notes that this period has been a declining volatility environment which for a "long volatility" manager, is going to drag on performance. However, over a one-year period, the Fund has met its objectives with the inclusion of franking credits although this is at the lower range of the return target. The Fund has delivered returns with very low volatility. Since inception, the annualised volatility is 2.82% (as measured by Standard Deviation). With respect to risk-adjusted performance, the Fund's Sharpe ratio (commonly used measure of risk-adjusted performance) is 1.00 since inception which is in line with the investment strategy and the degree of leverage used. In line with previous comments, the Sharpe ratio over the last five years has declined to 0.42 which is well below Zenith's expectations. Drawdown Analysis Fund BM1 BM2 Max Drawdown (%) Months in Max Drawdown 2 16 Months to Recover 3 56 Worst Drawdowns Fund Benchmark 1 Benchmark The Fund's worst drawdown is an impressive -2.09% which was experienced in This compares favourably to the Australian sharemarket which experienced a worst drawdown of 47.09%. RELATIVE PERFORMANCE ANALYSIS Relative Performance vs BM1 Incpt. 5 yr 3 yr 1 yr Excess Return (% p.a.) Beta R-Squared Correlation Relative Performance vs BM2 Incpt. 5 yr 3 yr 1 yr Excess Return (% p.a.) Beta R-Squared Correlation All commentary below is as at 28 February Since inception, the Fund has out-performed the UBS Bank Bill Index by 2.82% p.a. and the S&P/ASX 300 Index by 0.47% p.a. As previously mentioned, the out-performance over the last five years has tapered with the excess return falling to 0.97% p.a. Importantly, performance has been delivered with low correlation to the Australian sharemarket. DRAWDOWN ANALYSIS INCOME/GROWTH ANALYSIS Income / Growth Returns Income Growth Total FY to 30 Jun % -2.00% 6.22% FY to 30 Jun % -2.19% 5.93% FY to 30 Jun % 0.97% 4.44% The Fund's income/growth splits for the past three financial years are shown above. The Fund targets a distribution amount of 1.5%, payable on a quarterly basis. The Fund will distribute available franking credits on an annual basis. Funds of this nature tend to engage in high volume trading, as a result, the major component of returns will be delivered via income distributions. The portfolio turnover is expected to be very high at 2,400% p.a. The Fund is therefore best suited to low tax rate investors & superannuation funds. The relative tax inefficiency of this Fund for investors on higher marginal tax rates is though offset by our expectation that the Fund will generate strong positive absolute returns and deliver diversification benefits it can add to an overall portfolio. REPORT CERTIFICATION Page 9 of 13

10 Date of issue: 15 Apr 2014 Role Analyst Title Author Rodney Sebire Senior Investment Analyst Sector Lead Bronwen Moncrieff Head of Research Authoriser Bronwen Moncrieff Head of Research RATING HISTORY As At Rating 15 Apr 2014 Recommended 6 Feb 2013 Highly Recommended 27 Jun 2012 Highly Recommended 2 Dec 2011 Recommended 19 Jan 2011 Recommended Last 5 years only displayed. Longer histories available on request. Page 10 of 13

11 ZENITH RESEARCH METHODOLOGY & REGULATORY COMPLIANCE Zenith Investment Partners ( Zenith ) ABN provides the following guidelines on Zenith s processes and procedures relating to research services, research methodologies and conflict of interest management. Detailed information on Zenith s Research Methodology & Regulatory Compliance can be accessed via the Zenith website. SCOPE OF RATING The Zenith rating referred to in this document is limited to General Advice (as defined by section 766B of Corporations Act 2001) for Wholesale clients and based solely on the assessment of the investment merits of the financial product on this basis. This advice has been prepared without taking into account the objectives, financial situation or needs of any specific person who may read it. It is not a specific recommendation to purchase, sell or hold the relevant product(s). Zenith advises that investors should seek their own independent financial advice before making an investment decision and should consider the appropriateness of this advice in light of their own objectives, financial situation or needs. Investors should obtain a copy of, and consider, the product PDS before making any decision. This report is prepared exclusively for clients of Zenith. The material contained in this report is subject to copyright and may not be reproduced without the consent of the copyright owner. The information contained in the report is believed to be reliable, but its completeness and accuracy is not guaranteed. Zenith accepts no liability, whether direct or indirect arising from the use of information contained in this report. SERVICES & EXPERTISE Zenith is the holder of Australian Financial Services License No which was issued by the Australian Securities & Investments Commission (ASIC) on 10 April 2003 for the purposes of providing General Advice as defined under the Corporations Act Further information on the services we are licensed to provide and our expertise can be found on the Research Methodology & Regulatory Compliance page of the Zenith website. CURRENCY OF RATING This Research Report and Rating is current as at the date it is issued and is valid until it is updated, replaced or withdrawn. Research Reports will be subject to future updates on an ongoing basis unless the Rating is Withdrawn. The Rating may be subject to change without notice and clients are advised to check currency via the Zenith website. Further information on Currency of Ratings is available on the Zenith website. COVERAGE POLICY Zenith s coverage policy defines the investment universe of products which are potentially eligible to receive an investment rating. This universe primarily focuses on those products available to financial advisers via the major wrap platforms and master trusts. Products predominantly encompass Unlisted Managed Funds and Listed Managed Investments available via the ASX. Zenith also includes in its coverage policy products in several asset classes which are traditionally only available directly offplatform. These asset classes include sectors such as Unlisted Direct Property Funds and products in the Alternatives asset class including Hedge Funds and Private Equity Funds. Detailed information on Zenith s coverage policy, processes, sector classifications and current coverage list can be found on the Research Methodology & Regulatory Compliance page of the Zenith website. CONFLICT POLICY Zenith maintains a Conflict Management Policy regarding the provision of non-research services to Product Issuer s, Fund Managers or other related parties relevant to the investment being rated. This policy relates to the provision of; Underwriting, managerial, consultancy or market making services to such parties; Whether such parties are a corporate client of Zenith; Whether such parties are related or otherwise associated with Zenith. Any conflicts relating to these issues will be prominently disclosed on the relevant Zenith Product Assessment Report. Further details on Zenith s Conflict Policy can be found on the Research Methodology & Regulatory Compliance page of the Zenith website. FEE FOR SERVICE Zenith charges an upfront flat fee to the Product Issuer, Fund Manager or other related parties to produce research on funds that conform to our Research Methodology (Direct business model). This fee is to compensate Zenith for the work required to undertake the process and is not linked to the rating outcome. Fees are generally standardised within each sector however a small number of sectors (typically those dealing with real assets) are charged based on individual complexity. Further details on how the fee for service arrangement is managed can be found on the Research Methodology & Regulatory Compliance page of the Zenith website and also in Zenith s Financial Services Guide (FSG). Zenith has charged Fortitude Capital a fee to produce this report. Page 11 of 13

12 ANALYST CERTIFICATION & DISCLOSURE Analyst remuneration is not linked to the rating outcome. Analysts holdings in investment products must be non-material and done in accordance with Zenith s Trading Policy. The Analyst certifies that the views expressed in the Product Assessment accurately reflect their personal, professional opinion about the financial product to which this report refers. ZENITH RATING DISTRIBUTION The following chart shows the current breakdown of Zenith s ratings as at the date of viewing. Ratings are based on the relevant fund peer group as determined by Zenith and include Parent funds only. Users can access more detailed information on ratings spreads on the Research Methodology & Regulatory Compliance page of the Zenith website. Ratings Methodology Zenith s ratings are based on the output of a proprietary scoring model. This model and its broad factors are shown in the following diagram. Please note we do not disclose the weightings of factors and sub-factors change for each sector. This information should be used as a guide only. Page 12 of 13

13 Ratings Bands Based on the scores assigned by Zenith s analysts for the above mentioned proprietary scoring model, a rating of Highly Recommended, Recommended, Approved or Not Approved is applied to all funds that have undergone full due diligence by the Zenith research team. As shown in the following table the ratings are determined based on the overall score out of 100. Funds may also be screened prior to conducting full due diligence based on qualitative or quantitative concerns as Zenith s research model aims to focus on the best investments in each sector. Rating Scoring Output (%) Confidence in Meeting Objectives Zenith Approved List Highly Recommended >= 80 Very High YES Recommended >= High YES Approved >= Moderate YES Not Rated - Declined Not Rated - Withdrawn N/A N/A No previous rating held. The fund has passed Zenith s preliminary screen however the issuer has declined to participate in a full due diligence review. Previous Zenith rating withdrawn due to either: Zenith downgrading the rating to below investment grade; the issuer electing to cease ongoing coverage; the fund has been closed to investment; or the fund has been terminated and wound up. Not Rated - Screened Out < 55 No previous rating held. The fund has either passed Zenith s preliminary screen but failed the full due diligence process; failed Zenith s preliminary screen making it ineligible for a full due diligence review; or is yet to be included in Zenith s preliminary screen or sector review process. Redeem N/A Previous rating removed where there has been a significant event that Zenith strongly believes will severely impacts the product to such an extent that investors are advised to redeem (withdraw) their investment. The performance of the investment in this report is not a representation as to future performance or likely return. ABSOLUTE RISK RATING The Absolute risk rankings should be viewed as a guide to potential capital volatility (in both gains and losses) of the relevant investment strategy (Zenith Asset Class / Sub Asset Class classification) of this product. A number of factors have been considered in setting this risk level. For liquid asset classes, we have typically used the underlying historical return volatility of the product s benchmark if the benchmark is a reasonable proxy for returns for this strategy. Where the risk of an investment cannot be reasonably estimated by historical benchmark return analysis, we have made a qualitative assessment of absolute risk and considered factors such as illiquidity risk, transparency, strategy risk, operational risk etc. VERY HIGH HIGH MODERATE LOW VERY LOW Funds classified as Very High risk are exposed to sectors with very high historical absolute volatility (typically a 16+% p.a. plus standard deviation over a rolling 20 year period). Where the risk of an investment cannot be reasonably estimated by historical return analysis, we have considered a range of qualitative risks in assigning a Very High absolute risk level. Funds classified as High risk are exposed to sectors with high historical absolute volatility (typically a 8-16% p.a. standard deviation over a rolling 20 year period). Where the risk of an investment cannot be reasonably estimated by historical return analysis, we have considered a range of qualitative risks in assigning a High absolute risk level. Funds classified as Moderate risk are exposed to sectors with moderate historical absolute volatility (typically a 4-8% p.a. standard deviation over a rolling 20 year period). Where the risk of an investment cannot be reasonably estimated by historical return analysis, we have considered a range of qualitative risks in assigning a Moderate absolute risk level. Funds classified as Low risk are exposed to sectors with low historical absolute volatility (typically a 2-4% p.a. standard deviation over a rolling 20 year period). Where the risk of an investment cannot be reasonably estimated by historical return analysis, we have considered a range of qualitative risks in assigning a Low absolute risk level. Funds classified as Very Low risk are exposed to sectors with very low historical absolute volatility (typically a <2% p.a. standard deviation over a rolling 20 year period). Where the risk of an investment cannot be reasonably estimated by historical return analysis, we have considered a range of qualitative risks in assigning a Very Low absolute risk level. RELATIVE RISK RATING The relative risk rankings should be viewed as a guide to the relative risk of a product within its sector. The relative risk levels are listed from high to low and are intended to provide some insight into the potential divergence of the investment s return profile relative to its assigned benchmark. Page 13 of 13