MARKET REVIEW GLOBAL MARKETS NEW ZEALAND MARKET

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1 MARKET REVIEW JULY TO SEPTEMBER QUARTER 2016 GLOBAL MARKETS Global share markets produced a wide range of results over the September quarter. Developed markets were positive for the period, despite giving up some ground during September itself. The developed market index rose 2.4% in New Zealand dollar (NZD) terms, while emerging markets were almost 6% higher, led by Brazil s and Russia s recoveries in commodity prices. At the top end, the tech-heavy US NASDAQ was up 10.4% in local currency terms easily outperforming the broader US indices. Elsewhere, the German DAX had a strong quarter and the Japanese Nikkei was also well ahead of the global index. The weakest share market was the Italian, up around 1.25% in local currency terms or close to flat in NZD terms. Oil fluctuated within the $40-50/barrel range over the quarter. By quarter end, it was back up towards the top of the range (close to where it started) after the odds of an OPEC-managed production slowdown increased. Economic data in the US was mixed, with a weaker tone emerging by quarter end as second-quarter GDP printed well short of market expectations. The September quarter was once again largely about the actions and words from the major central banks or at least the market s speculation about what they might say and do. From the Bank of England came a package of measures including easier monetary policy, a return to quantitative easing (buying both government and corporate bonds) and a new Term Funding Scheme for banks. The level of easing exceeded even market expectations and the UK pound weakened a positive for the international companies that make up a large portion of the FTSE100. Bond yields fell. In Japan, Prime Minister Abe added further stimulus and restructuring to the economy, while the Bank of Japan kept its minimum interest rate at -0.1% and confirmed its bond buy-back programme. In addition, the Bank committed to keeping the 10-year government bond maturity at a yield of close to 0%, while also trying to positively steepen the longer end of the yield curve to assist bank profitability. The US Federal Reserve continued to defer the decision to hike interest rates, with many analysts now expecting a hike in December although the market overall remains sceptical. There was no change to the very stimulatory monetary conditions in Europe as the European Central Bank continues to watch issues such as the outcome of Brexit, the upcoming Italian constitutional referendum and rising concerns around the solvency of Germany s largest bank. Deutsche Bank potentially faces significant fines from the Department of Justice in the US for the mis-selling of mortgage investment products. Fixed interest markets had a steady quarter, with September adding little to the gains made earlier in the year. US bond yields were marginally higher over the period, as were yields in the negative-yielding markets of Japan and Switzerland. Corporate bonds performed substantially better than sovereign bonds as swap spreads and credit spreads tightened; much of this gain occurred early in the period as markets recovered from the immediate Brexit shock. NEW ZEALAND MARKET In New Zealand, economic data continued to show slightly above-trend growth. Confidence was also strong throughout the quarter and the whole milk powder price continued to recover. The high NZD drove the Reserve Bank of New Zealand (RBNZ) to cut the Official Cash Rate to a record 2.0% in August and maintain an easing bias. However, in confirming the introduction of nationwide restrictions on loans to property investors, the RBNZ sought to limit any inflammatory effect the lower cash rate may have on the housing market. New Zealand shares finished higher for the quarter, supported by continuing offshore interest. Ownership of the country s top-50 listed companies by international investors rose to almost 50%. Government bond yields were little changed, although shorter maturities benefited from the cut to the cash rate. The NZD strengthened slightly against the USD and also rose on a trade-weighted basis.

2 ONEANSWER KIWISAVER SCHEME JULY TO SEPTEMBER QUARTER 2016 MULTI-ASSET-CLASS FUNDS CASH FUND CONSERVATIVE FUND The Cash Fund invests mainly in cash assets. The objective of the Cash Fund is to outperform the NZX NZ Bank Bill Index. Cash investments performed predictably over the quarter. The August cut to the Official Cash Rate (OCR) from the Reserve Bank of New Zealand (from 2.25% to 2.00%) had little effect, having been wellsignalled ahead of time. Term deposit rates held up well despite the lower OCR. Long-dated New Zealand bond yields were little changed over the quarter. However, 2-year maturities were 10 basis points lower as a result of the rate cut. 0.57% 2.38% 3.02% 2.92% 1 ASB Registered Certificate of Deposit 17/1/ % 2 ANZ Floating Rate Note 22/03/ % 3 Rabobank Registered Certificate of Deposit 01/12/ % 4 ASB Floating Rate Note 1/11/ % 5 Rabobank Floating Rate Note 4/9/ % The Conservative Fund invests mainly in cash and fixed interest assets, with a smaller exposure to share and listed property assets. The August cut to the Official Cash Rate (OCR) by the Reserve Bank of New Zealand (from 2.25% to 2.00%) had little effect on cash investments, having been wellsignalled ahead of time. Term deposit rates held up well despite the lower OCR. Long-dated New Zealand bond yields were little changed. However, 2-year maturities were 10 basis points lower as a result of the rate cut. International fixed interest produced a small positive return. The New Zealand dollar (NZD) was again strong, propelled by strong migration, high interest rates (relative to other G10 countries), a solid growth rate and improving dairy prices. The international share index rose just over 3% for a Australasian shares were among the better performers. The recovery in commodities (coal and iron ore in particular) offset a poor period for financials. In New Zealand, an ever-increasing ownership of the index by offshore investors fuelled the market to even more-expensive levels. 1.19% 6.34% 6.96% 7.06% 1 NZ Govt Stock 6.0% % 2 NZ Govt Stock 6.0% % 3 NZ Govt Stock 5.0% % 4 NZ Govt Stock 5.5% % 5 NZ Govt Stock 4.5% %

3 CONSERVATIVE BALANCED FUND BALANCED FUND The Conservative Balanced Fund invests mainly in cash and fixed interest assets, with some exposure to share and listed property assets. Long-dated New Zealand bond yields were little changed over the quarter. However, 2-year maturities were 10 basis points lower as the Reserve Bank cut the OCR in August. Corporate bonds outperformed sovereign bonds as credit margins to government bonds narrowed. The search for yield continued by investors. International fixed interest produced a small positive return over the quarter. Sovereign bonds hit record low yields across a number of countries, before the market shifted its view to preferring fiscal policy (spending and tax policy) over monetary policy (money supply) as a means of supporting consumer and business confidence. Australasian shares were among the better performers The international share index rose just over 3% for a US share indices provided relatively modest returns, 1.64% 7.17% 7.99% 8.84% 1 NZ Govt Stock 6.0% % 2 NZ Govt Stock 6.0% % 3 NZ Govt Stock 5.0% % 4 NZ Govt Stock 5.5% % 5 NZ Govt Stock 4.5% % The Balanced Fund invests in cash and fixed interest assets, with similar amounts of share and listed property assets. Long-dated New Zealand bond yields were little changed over the quarter. However, 2-year maturities were 10 basis points lower as the Reserve Bank cut the OCR in August. International fixed interest produced a small positive return over the quarter. Sovereign bonds hit record low yields across a number of countries, before the market shifted its view to preferring fiscal policy (spending and tax policy) over monetary policy (money supply) as a means of supporting consumer and business confidence. Australasian shares were among the better performers The international share index rose just over 3% for a US share indices provided relatively modest returns, UK shares bounced back over the quarter from the surprise Brexit result. The New Zealand dollar rose against most major currencies. The trade-weighted index was up around 1.4% over the period. 2.20% 8.16% 9.10% 10.62% 1 NZ Govt Stock 6.0% % 2 NZ Govt Stock 6.0% % 3 NZ Govt Stock 5.0% % 4 NZ Govt Stock 5.5% % 5 NZ Govt Stock 4.5% %

4 BALANCED GROWTH FUND GROWTH FUND The Balanced Growth Fund invests mainly in share and listed property assets, with some exposure to cash and fixed interest assets. Australasian shares were among the better performers The international share index rose just over 3% for a US share indices provided relatively modest returns, UK shares bounced back over the quarter from the surprise Brexit result. The introduction of easier monetary policy by the Bank of England saw the FTSE100, which is full of international corporations, do very well as the pound sterling fell. The Japanese market was strong as the Ministry of Finance added stimulus to the economy and the Bank of Japan maintained very easy monetary conditions. Oil had a volatile ride over the period, starting the month around $50/barrel, falling close to $40/barrel before recovering again to almost $49/barrel. The New Zealand dollar rose against most major currencies. The trade-weighted index was up around 1.4% over the period. The Growth Fund invests mainly in share and listed property assets, with a smaller exposure to cash and fixed interest assets. Australasian shares were among the better performers The international share index rose just over 3% for a US share indices provided relatively modest returns, UK shares bounced back over the quarter from the surprise Brexit result. The introduction of easier monetary policy by the Bank of England saw the FTSE100, which is full of international corporations, do very well as the pound sterling fell. The Japanese market was strong as the Ministry of Finance added stimulus to the economy and the Bank of Japan maintained very easy monetary conditions. Oil had a volatile ride over the period, starting the month around $50/barrel, falling close to $40/barrel before recovering again to almost $49/barrel. The New Zealand dollar rose against most major currencies. The trade-weighted index was up around 1.4% over the period. 2.67% 8.81% 9.99% 12.28% 1 NZ Govt Stock 6.0% % 2 Kiwi Income Property Trust 0.86% 3 Precinct Property NZ Ltd 0.84% 4 Ryman Healthcare Ltd 0.79% 5 Fletcher Building Ltd 0.77% 3.20% 9.66% 10.84% 13.88% 1 Kiwi Income Property Trust 0.99% 2 Precinct Property NZ Ltd 0.97% 3 Ryman Healthcare Ltd 0.95% 4 Fletcher Building Ltd 0.93% 5 Westpac Banking Corporation 0.90%

5 SINGLE-ASSET-CLASS FUNDS NEW ZEALAND FIXED INTEREST FUND It was a good quarter for New Zealand bonds, supported early on by offshore demand for the relative high yields available here. Further gains were seen after the Brexit vote as bond yields fell again. The Reserve Bank of New Zealand continues to struggle with the higher NZ dollar on the one hand and the soaring property market on the other. We expect the property price issue to be addressed by the introduction of further macro-prudential tools, and the currency by at least one more rate cut this year. The yield curve flattened over the quarter as investors continued to chase the greater yield available in longer-dated bonds. Corporate bonds largely underperformed sovereign, particularly as market uncertainty increased both before and after Brexit. 1.10% 6.47% 6.73% 5.32% 1 NZ Govt Stock 6.0% % 2 NZ Govt Stock 6.0% % 3 NZ Govt Stock 5.0% % 4 NZ Govt Stock 5.5% % 5 NZ Govt Stock 4.5% % INTERNATIONAL FIXED INTEREST FUND The fund gained for the quarter as rising yields in some countries offset falling yields in others. Compared to broader aggregate indices, the fund benefited as its relatively smaller exposure to Japan provided a buffer when Japanese yields rose. US bonds were little changed and produced a small positive return in spite of changeable messaging from the US Federal Reserve over the period. UK bonds were the best performers as the Bank of England cut interest rates and increased its bond purchase scheme. 1 United States Treasury 1.00% 31MAY % 2 United States Treasury 1.37% 30APR % 3 United States Treasury 2.75% 15FEB % 4 United States Treasury 0.75% 31OCT % 5 United States Treasury 1.25% 30APR % AUSTRALASIAN PROPERTY FUND The property sector lagged broader share market performance in both Australia and New Zealand over the quarter. However, the fund outperformed the benchmark index. Performance was led by an overweight position in Metlifecare, which held an investor day where the new CEO outlined a credible strategy going forward. Precinct also performed strongly. Overweight positions in Australian stocks Charter Hall and Mirvac also contributed as both stocks delivered FY16 results ahead of expectations and gave betterthan-expected FY17 guidance. Further adding to performance were underweight positions in both Argosy and Vital Healthcare. 2.96% 22.26% 17.66% 16.90% 1 Kiwi Income Property Trust 23.01% 2 Precinct Property NZ Ltd 20.69% 3 Stride Stapled Group 10.17% 4 Goodman Property Trust 6.19% 5 Property for Industry Ltd 5.98% Continued over the page 0.47% 7.10% 6.89% 5.68%

6 INTERNATIONAL PROPERTY FUND The fund rose the quarter, beating the index. The gains all occurred during July as markets recovered from the Brexit-induced fall in late June. The US market continued to be weak, with September a particularly poor month for the office, retail and healthcare sectors. Partially offsetting this weakness was strong performance from developed Europe, helping to beat the index, especially in the poor September market. 0.68% 12.44% 13.71% 15.75% 1 Simon Property Group Inc 6.75% 2 Health Care REIT Inc 3.91% 3 Prologis Inc 3.73% 4 Avalonbay Communities Inc 3.46% 5 Vornado Realty Trust 3.15% AUSTRALASIAN SHARE FUND The fund was up, but underperformed the New Zealand index as its overweight position in CSL disappointed. The speciality biotechnology company produced a worse-than-expected result as its flu division, in particular, fell short. Being overweight Fletcher Building and Metro Performance Glass, the fund benefited from the strong performance of the building sector. Overweight positions in NZX, Metlifecare, and Air New Zealand also lifted returns. However, an underweight in Auckland International Airport one of the most expensive stocks in the market on a price earnings basis detracted from performance. Elsewhere, underweight positions in Ebos and Trade- Me, both of which reported strong results, cost the fund some performance. However, both stocks are considered expensive. 6.19% 30.90% 15.92% 17.39% 1 Fletcher Building Ltd 10.01% 2 Fisher and Paykel Healthcare 9.54% 3 Ryman Healthcare Ltd 8.52% 4 Spark New Zealand Ltd 7.98% 5 Auckland International Airport 5.02% INTERNATIONAL SHARE FUND The fund beat the benchmark index and delivered a positive result. The New Zealand dollar (NZD) was once again strong, crimping unhedged returns especially in the pound sterling and emerging markets. Emerging markets were the strongest performers over the period, as commodity prices picked up, and low interest rates around the developed world saw investors seeking out higher-yielding markets. In the UK, the currency was a major factor, as the Government firmed up plans for Britain s exit from the EU (Brexit). 3.28% -1.49% 11.04% 14.38% 1 Visa Inc 1.93% 2 Reckitt Benckiser 1.90% 3 Roche Holding AG 1.52% 4 Nestle SA 1.42% 5 Thermo Fisher Scientific Inc 1.21% SUSTAINABLE INTERNATIONAL SHARE FUND 2.90% -3.18% 8.26% 10.44% Investments (as a % of net assets) 1 NN (L) Global Sustainable Equity 96.53% 2 Cash Deposit (ANZ Bank) 3.47%