Product Assessment. Wealth Defender Equities Limited. Rating issued on 12 Mar 2015 VIEWPOINT & RATING. APIR Code. Asset Class.

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1 Rating issued on 12 Mar 2015 Product Assessment Highly Recommended Recommended Approved Not Rated Redeem APIR Code ASX:WDE Asset Class Australian Shares Sub-Asset Class Listed Investment Companies - LICs Investment Style Value Zenith Assigned Benchmark S&P/ASX 300 (Accum) Key People John Murray Head of Australian Equities - PVM Dan Bosscher Portfolio Manager VIEWPOINT & RATING (ASX:WDE) is a newly incorporated Listed Investment Company (LIC) which will invest in Australian Equities, derivatives and cash. WDE's investment strategy mirrors that of the recently launched Perennial Value Wealth Defender Australian Shares Trust (the Fund) operated by Perennial Value Management (PVM). Zenith believes the strategy provides investors with a unique exposure to Australian equities which is intuitively appealing. Through the use of dynamic protection strategies, the strategy aims to construct an asymmetric return/risk profile that is designed to reduce losses in market downturns by approximately 50% whilst allowing for full participation in market upswings. Zenith believes WDE is an innovative product managed by a highly capable risk expert in Dan Bosscher. Zenith rates RECOMMENDED. Perennial Value Wealth Defender (PVWD) is a boutique within a boutique, with equity in the business split 80/20 between Perennial Value Management (PVM) and investment staff. Zenith believes PVM's boutique ownership structure appropriately remunerates members of the investment team and provides a strong staff retention mechanism. Since inception, PVM has steadily expanded its investment team and now consists of 13 investment professionals, led by John Murray. The strategy is managed by Bosscher, who has more than 18 years investment experience. Prior to joining PVM in 2012, Bosscher held the position of Head of the Fundamental Investment Group at UBS, where he was responsible for a successful multi-strategy hedge fund. Although Bosscher has limited fundamental and value style investment experience, Zenith is impressed with his expertise regarding risk management, derivative instruments and strategies. To construct the strategy, Bosscher draws upon the expertise of portfolio managers: Murray, Grant Oshry and Andrew Smith. In Zenith's opinion, the investment team is of a high calibre and well resourced to manage Australian Equities exposures, and we have a high level of confidence in the calibre of the team. The portfolio managers use the output from the team's fundamental research (particularly the analyst conviction ratings) and ranking model to construct a portfolio holding between 35 and 100 stocks. Portfolio construction is driven by a combination of analyst conviction ratings, output from a proprietary ranking model called the Perennial Value Screen, portfolio manager judgement and risk control considerations. To achieve the desired asymmetric risk/return profile, dynamic protection strategies are employed. The implementation of these dynamic protection strategies is contingent upon Bosscher's macroeconomic views, driven by proprietary risk models. Implementation will also depend on the cost of protection. However, the strategy will always have some level of protection and will aim to reduce losses in market downturns by approximately 50%. The dynamic protection strategies at Bosscher's disposal are, in order of preference: derivatives protection, allocation to cash, decreased small cap allocation, and tilting the portfolio towards defensive stocks. Zenith believes Bosscher's experience and expertise are highly valuable with regards to the implementation of the protection strategies. WDE is seeking to raise a minimum $50m and maximum $160m under the Offer (with free attaching Options on a one-for-one base exercisable within 18 months of listing, no dividend entitlement). Upon listing WDE expects the shares to have a NAV of $0.971 (based on min. $50m raised). WDE will pay the Joint Lead Managers (Macquarie Capital (Australia) Limited, Morgan Stanley Australia Securities Limited and Lonsec Limited), in equal proportions a management fee of 1.2% (ex GST) of the total proceeds of the Offer. LIC FACTS Value-styled investment approach with strong downside protection capabilities available in a LIC format Large and stable investment team Equity exposure can vary between 50% to 100% Investment Team Size 13 Fees (% p.a.) Management Cost: 0.98% Performance Fee: 15% of the excess return over the benchmark. Analyst Dugald Higgins Senior Investment Analyst (03) dugald.higgins@zenithpartners.com.au ABSOLUTE RISK (SECTOR) VERY HIGH HIGH MODERATE LOW VERY LOW INCOME DISTRIBUTIONS PER MONTH QUARTER 6 MONTH ANNUM RELATIVE RISK (FUND WITHIN SECTOR) Active Derivatives - Net Mkt Exp > 1 Active Derivatives - Net Mkt Exp <= 1 Active - High Conviction Active - Benchmark Aware Index - Enhanced/Fundamental Index 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 Listed Investment Companies In assessing the performance of the LIC sector, it is vital to understand how their structure affects the final performance figures as it is materially different to unlisted funds. As listed companies, the portfolio returns generated are exposed to additional volatility from share price movements and can trade at significant premiums or discounts to the NTA. In addition, the impact of pre and post-tax returns needs to be considered because LICs distribute returns net of company tax, whilst benchmark index returns are quoted on a pre-tax basis. Accordingly it is difficult to accurately compare shareholder returns to either benchmarks which do not account for tax or realised peer group LICs where the timing of company tax on realised gains differs. As an indication however, a series of return data can be viewed on the basis of the returns generated by: share price and dividends: change in pre-tax NTA value and dividends; and returns generated internally by the investment portfolio. For comparison purposes, the use of the internal portfolio returns vs. the benchmark gives the closest measure of the skill of the investment manager in generating returns. However these returns may not be able to be fully crystallised to shareholders given the potential for share price movements. Caution should be used in too close a comparison of these figures as share price and pre-tax NTA are measures which take into account company tax paid on realised capital gains and unfranked income, whereas benchmark performance is a wholly untaxed measure. At various times when assessed on a purely quantitative basis, a LIC can trade away from its longer term average discount or premium to NTA which may represent a period of good buying opportunity. While these can be periods to boost investment returns when buying at a deeper discount, there is no guarantee that any gain through positive movement in the discount to NTA can be crystallised. Potential investors must keep in mind that while discount opportunities may frequently present themselves there is no guarantee that management will be able to close the price to NTA gap. Australian Equities The sector incorporates both benchmark aware and benchmark unaware strategies but the funds focus predominantly on large capitalisation stocks. The sector is one of the most competitive in the investment landscape, based on the number of managers and strategies available to investors. Despite the competitiveness of the sector, the Australian share market has historically provided many opportunities for active management, with the median active manager outperforming a passive index over the longer term. The Australian share market, as represented by the S&P/ASX 300 Accumulation Index, is highly concentrated and narrow. Technically, a company is assigned the large cap moniker if it falls within the S&P/ASX 50, with those companies falling between the S&P/ASX 50 and S&P/ASX 100 assigned to the mid cap category. All stocks below the top 100 are considered small capitalisation stocks. As at 31 December 2014, the Financials and Resources sectors combined represented a significant portion of the S&P/ASX 300 Accumulation Index, with the Financials sector accounting for close to 46% of the index, and Resources approximately 25%. The split between Industrials and Resources stocks was approximately 75%/25%. The top 10 stocks represented over 50% of the weighting of the index, and the top 20 stocks represented over 65% of the index. PORTFOLIO APPLICATIONS In general, compared to most other asset classes, equities offer investors the opportunity for higher capital growth over the longer term with some income. However, this higher growth is also often associated with higher volatility. Therefore, it is recommended that investors adopt a longer time frame when investing in equities. Investors should also be cognisant of the fact that the Australian equity market is relatively concentrated, with the Materials and Financials sectors dominating the market; the market also only represents approximately 1% of global equity markets (in terms of market capitalisation). Therefore, to mitigate this concentration risk it is highly recommended that investors diversify their investments across asset classes, both domestically and globally. Zenith believes WDE is a relatively unique product within the Australian equities sector. The strategy aims to reduce losses in market downturns whilst allowing for participation in market upswings. Given the asymmetric return/risk profile, Zenith believes the strategy may be held as an investor's standalone exposure to Australian equities. However, the strategy may underperform peers in certain market conditions, that is, flat or strong rising markets. Given the strategy will have an inherent value bias, it may blend well with growth orientated and/or style neutral products to achieve a diversified exposure to the sector. Despite the relative merit of a strategy which seeks to limit the impact of market downturns, potential investors should give consideration to the method of access. While the Fund structure may be less convenient for some investors, accessing through a LIC will mean that the effectiveness of the strategy may be altered by WDE's own trading movements. RISKS OF THE INVESTMENT SECTOR RISKS Funds within the Australian Equities/Listed Investment Company sector are exposed to the following broad risks: MARKET & ECONOMIC RISK: As is the case with all long only Australian Share funds, the biggest risk to performance is a sustained downturn across the Australian share market. In addition, changes in economic, social, technological or political conditions, as well as market sentiment could also lead to negative fund performance. This risk can be significantly reduced by investors adhering to the Fund's prescribed investment time frame. SPECIFIC SECURITY RISK: This is the risk associated with an individual security. The price of shares in a company may be affected by unexpected changes in that company s Page 2 of 11

3 operations such as changes in management or the loss of a significant customer. LIQUIDITY RISK: This is the risk that a security or asset cannot be traded quickly enough, due to insufficient trading volumes in the market. When trading volumes are low, sellers can significantly impact the price of a security when attempting to quickly exit a material position. STYLE BIAS RISK: Australian equity managers will either employ a Growth, Value or Neutral (combination of Value & Growth) styled approach to investing. Each style is conducive to certain market conditions, i.e. Growth should outperform Value in an upward trending market and vice versa in a downward trending market. As with Market Risk, investors should adhere to the fund s investment time frame to avoid short-term market movements and style impact. CAPACITY RISK: High levels of funds under management (FUM) can present additional challenges to an Australian equity manager, as high FUM has the potential to hamper the manager's ability to trade efficiently and/or be forced to disclose substantial shareholdings to the market (most common in smaller companies). PREMIUM / DISCOUNT TO NTA: The appetite for LIC s can be cyclical and sentiment driven and this can result in inefficiencies with LIC s trading at either a greater (premium) or lesser (discount) value relative to the value of the underlying assets. There continue to be several LIC s trading at large discounts (value traps) and large premiums (investors over paying for assets) which should be avoided. FUND RISKS Zenith has identified the following key risks associated with the Fund; this is not intended to highlight all possible risks: CAPACITY RISK: Excessive levels of funds under management (FUM) can inhibit a manager's ability to trade portfolio positions effectively and may therefore limit outperformance potential. PVM is cognisant of such risks, and has assessed its capacity to be in the vicinity of 0.75% to 1% of total market capitalisation. As at 30 April 2014, PVM managed approximately $8.4 billion in Australian equities, which at approximately 0.5%, remains below the capacity range. KEY PERSON RISK: As is the case with most boutique business models, there is a level of key person risk associated with the firm. Bosscher and Murray remain critical members of the investment team and the departure of either would be a material loss for the Fund. Zenith acknowledges that the addition of Mike Zhang and Scott Stewart to the derivatives team alleviates some key person risk associated with Bosscher. BUSINESS RISK: Business risk is generally higher for boutique firms, especially start-up boutiques like Perennial Value Wealth Defender (PVWD). Products which fail to grow FUM to a scalable level run the risk of being unviable over the longer-term and could be wound up. The risks associated around a fund wind up are principally that of timing, forcing a crystallisation of tax consequences to investors which may not be suitable (particularly if purchasing on margin). Zenith notes that this risk is in part mitigated by PVM's pledged ongoing support. In addition, PVWD manages approximately $1.2 billion in derivative overlay strategies for institutional clients. DERIVATIVE RISK: There are multiple risks associated with the use of derivatives; for example, the value of the derivative may not move in line with the underlying asset, counterparties to the derivative may not be able to meet payment obligations (relevant when purchasing an option) or a particular derivative may be difficult or costly to trade. COUNTERPARTY RISK: Derivative transactions are subject to the risk that a counterparty to the transaction will wholly or partially default on their contractual obligations. The Fund has the capacity to trade over the counter (OTC) options with various investment banks. Counterparties in OTC options are not subject to the same level of evaluation and regulatory oversight as exchange traded options (ETOs). Additionally, the settlement protections offered by organised exchanges or clearinghouses do not apply. PVM may also concentrate its counterparty risk with a single dealer, and has limited ability to independently assess the credit risk of the other party. To diversify its counterparty risk, PVM has a panel of six core counterparties. In addition, the OTC options used in the Fund will have exactly the same terms as their exchange traded counterparts, which will allow PVM to offset apparent counterparty risk with ETOs. PORTFOLIO MANAGER FOCUS: In addition to this Fund, Bosscher is partly responsible for PVM's flagship Australian Share fund, which holds substantially more FUM. While Zenith acknowledges that Bosscher is highly incentivised to ensure the success of the Fund, we believe his other commitments have the potential to draw his focus away from this Fund. MARKET EXPOSURE RISK: Like most funds in this asset class, one of the key risks to the Fund's performance, is a sustained downturn in the Australian equities market. However, given the Fund may take an effective market exposure of as low as 50%, it is expected to exhibit a return profile that is less sensitive to market movements. LISTING RISK: As a newly incorporated entity yet to be listed, there is a risk that WDE does not raise its minimum required $60 million. While WDE isn't leaning as heavily as some previous LIC's on its joint lead managers, Zenith has sensed some investor fatigue on capital raisings in the LIC sector. QUALITATIVE DUE DILIGENCE ORGANISATION WDE is a newly incorporated listed investment company due to begin trading on the ASX in May The Company provides investors the opportunity to invest in an actively managed portfolio of Australian equities that aims to provide the long term benefit of shares while seeking to reduce risk of major market falls. The minimum raising for the WDE Initial Public Offering is $50 million with a maximum of $160 million (excluding options). Subscribers to the WDE IPO will receive Loyalty Options on a 1 for 1 basis for every share subscribed. While free options have become a standard feature of LIC IPO's in recent years, WDE Loyalty Options will have a vesting date six months after the shares are quoted on the ASX. Vesting will only occur however if the applicant holds the same or greater the number of WDE shares taken up under the IPO. WDE Loyalty Options cannot be sold or otherwise transferred until they are vested. In the past, Page 3 of 11

4 many LIC IPO's have occurred where applicants have taken up shares with free options and then sold the shares once they are quoted and kept the options as an asymmetric bet on the LIC. Arguably the use of a vesting period may help limit negative trading patterns caused by applicants dumping stock when first quoted, putting early pressure on the share price relative to the LIC's NTA. The Board consists of the following individuals (all Board members appointed on 27 January 2015): Alan Schoenheimer, Non-Executive, Independent Chairman; Richard Morath, Non-executive, Independent Director; Paul Clitheroe, Non-executive, Independent Director; Anthony Patterson, Executive Director; and John Murray, Executive Director. Alan Schoenheimer has 25 years experience in funds management across Australasia and global markets. In 2014 Schoenheimer retired from a full time career with Russell Investments, having held a number of senior roles since joining the company in Schoenheimer is currently a Director of Russell Investment Management Ltd and Ping An Russell (Shanghai) Joint Venture in China. Richard Morath is a non-executive director with over 40 years experience in the funds management, financial planning and banking industries. Morath has held senior roles in Australian Bank (acquired by State Bank of Victoria) and Lend Lease/MLC. Morath is currently a Director and Chairman of the Advice & Licences Boards of all Financial Planning companies in NAB/MLC, Chairman of National Australia Trustees and a Director of JANA Investment Advisors and BNZ Investments Services. Paul Clitheroe has over 30 years in financial services having been a joint founder of Ipac securities in Clitheroe has been the Chairman of the Australian Government Financial Literacy Board since 2002 and also chairs Australasian Wealth Investments, Money Magazine and the Clitheroe Foundation. Anthony Patterson has over 25 years in financial services and is an Executive Director of Perennial Value Management. He commenced with Perennial Investment Partners (PIPL) in 2001 and was CEO between Prior to joining PIPL, Patterson was CEO of Lend Lease Corporate Services Limited. John Murray has over 25 years in funds management and established PVM in 2000 where he maintains his role as Managing Director (see Investment Personnel). The composition of the Board complies with ASX corporate governance principles. Zenith is currently comfortable with the composition of the Board. Engagement by key investment personnel with shareholders is vital and has historically been a key driver of investor sentiment and can be a trigger for share price to NTA premiums or discounts. PVM has been engaged by WDE as the Investment Manager via an Investment Management Agreement (IMA). This agreement has an initial 5 year term from the date of issue of WDE shares, with an option to extend by a further 5 years. The IMA provides for provisioning whereby PVM may be terminated after the initial term (i.e. on 3 month notice by way of ordinary resolution, which typically requires a simple or bare majority). After the initial term it is typically harder to terminate a Manager. In Zenith's opinion, the majority of LIC's which utilise IMA's with third parties are effectively "locking in" the Investment Manager. Share holders should treat the investment this way and if they become unsatisfied with the performance of the Manager then they should sell their holding. Perennial Value Management Perennial Value Management is a subsidiary of Perennial Investment Partners, a specialist investment management company wholly owned by the IOOF Group. Operating under the Perennial banner are three specialist investment management boutiques, including PVM, Perennial Growth Management and Perennial Fixed Interest. Key investment staff within these boutiques hold up to 50% of the equity in their underlying boutiques with PIPL owning the remaining equity. As at 31 December 2014, PIPL had $18 billion in funds under management of which $7.7 billion is within PVM. Perennial Value Wealth Defender (PVWD) is responsible for the underlying management of the strategy. PVWD is essentially a boutique within a boutique whereby equity in the business is split 80%/20% between PVM and investment staff. John Murray and the investment executives hold Board control of PVM. PVWD has funds under management of $18 million in the strategy as at 31 December INVESTMENT PERSONNEL Name Title Tenure John Murray Head of Australian Equities - PVM 15 Yr(s) Tony Oesterheld Senior Portfolio Manager 7 Yr(s) Stephen Bruce Portfolio Manager / Senior Analyst 15 Yr(s) Dan Bosscher Portfolio Manager 2 Yr(s) Grant Oshry Andrew Smith Portfolio Manager - Small Caps / Analyst Portfolio Manager - Small Cap / Analyst 12 Yr(s) 6 Yr(s) Paul Durham Senior Analyst 15 Yr(s) Damian Cottier Senior Analyst / Research Co-ordinator 9 Yr(s) Sam Berridge Equities Analyst 3 Yr(s) Scott Stewart Portfolio Manager 8 Mth(s) Mike Zhang Derivatives Analyst 1 Yr(s) The investment team, led by John Murray (Managing Director), comprises 13 investment professionals. Zenith considers Murray to be an experienced and high quality investor. Murray has extensive experience as a value-style investor, having previously held senior positions with domestic fund managers Perpetual Investments, Maple-Brown Abbott and Westpac Investment Management. In comparison to other boutique fund Page 4 of 11

5 managers, the team is highly resourced for the management of Australian equities portfolios. The strategy is managed by Lead Portfolio Manager, Dan Bosscher, who has more than 18 years investment experience. Prior to joining PVM in 2012, Bosscher held the position of Head of the Fundamental Investment Group at UBS, where he was responsible for a successful multi-strategy hedge fund. Although Bosscher has limited fundamental and value style investment experience, Zenith is impressed with his expertise regarding risk management, derivative instruments and strategies. Zenith notes that, as of 1 May 2014, Bosscher assumed portfolio management responsibilities for a portion of PVM's flagship Australian Shares fund. To construct the strategy, Bosscher draws upon the expertise of portfolio managers: Murray, Grant Oshry and Andrew Smith. Murray and Bosscher will be responsible for the large companies portion of the strategy while Oshry and Smith will manage the small companies allocation. In addition, there have been two recent hires to the derivatives team. Mike Zhang (hired November 2013, Derivatives Analyst) to provide support and redundancy with regards to systems and derivatives and Scott Stewart (hired July 2014, Portfolio Manager) to aid Bosscher directly in trading. Both Zhang and Stewart previously worked with Bosscher at UBS. Since inception, PVM has steadily expanded its investment team. Research responsibilities are divided along industry lines with the average number of stocks per analyst approximately 30 (Murray and Bosscher do not have formal stock responsibilities). PVM intends to make sector rotations on an ad hoc basis rather than on a routine schedule. Each analyst has a backup for their assigned coverage and therefore information sharing remains strong. Historically, PVM has experienced extremely low levels of staff turnover, which Zenith believes is a testament to the personnel management skills of Murray and the rewarding incentive structure. Overall, Zenith considers PVM's investment team to be well resourced to manage Australian Equities, and we have a high level of confidence in the calibre of the team and the overall structure. INVESTMENT PROCESS The investment objective of the strategy is to achieve returns of 3% p.a. (gross of fees) in excess of the S&P/ASX 300 Accumulation Index over rolling three year periods. It is anticipated that this objective will be achieved within a targeted ex-ante Tracking Error range of between 3% p.a. to 5% p.a. PVM s investment philosophy is based on the belief that investment markets are not fully efficient, as asset prices are often driven by irrational influences, which can lead to a disconnect between a stock s share price and its true intrinsic value. In seeking to exploit mispriced securities arising from this inefficiency PVM incorporates a bottom-up, value driven investment process. Essentially, PVM believes that securities will ultimately revert to the mean, such that undervalued stocks will be re-rated upwards to market multiples. Zenith believes the strategy offers a unique exposure to Australian equities, which is intuitively appealing. Through the use of dynamic protection strategies, the strategy aims to construct an asymmetric return/risk profile that is designed to reduce losses in market downturns by approximately 50% whilst allowing for full participation in market upswings. SECURITY SELECTION PVM s security selection process is consistently applied across both the large and small cap portfolios. PVM s eligible investable universe includes all companies with a market capitalisation of greater than $50 million listed on the Australian Stock Exchange (ASX). In addition, the strategy will also consider Australian companies which are dual listed on foreign exchanges. In reducing this universe to a more manageable size, PVM conducts a quantitative screen based on the following factors: One year Price to Earnings Ratio (P/E) of less than nine times Once year cash dividend yield of at least 5% Interest coverage of at least five times Conducted on a weekly basis using data provided by two external brokers, this initial screen is punitive in nature and is intended to identify under-priced securities. It is expected that these screens will reduce the eligible universe to approximately 220 companies. Structured along sector lines, the investment team will conduct a detailed fundamental analysis on securities passing through the initial filter. As part of this analysis, the investment team will seek to engage directly with company management to gain a more complete understanding of the management team s strategy and ability. PVM endeavours to meet with company management on at least a semi-annual basis, typically following the release of a company s semi-annual results, although more frequent meetings may be conducted should the need arise. Company modelling is conducted using a standardised template, with analysts adjusting for non-recurring items such as one-off profits from asset sales or unsustainably low tax rates. Where possible, at least 13 years of data is incorporated within the financial models; 10 years of historical data and three years of forecasted data. Research reports are written for stocks that analysts consider candidates for portfolio inclusion. In addition to a summarised version of the financial models, the reports will also provide a discussion on the following four categories: Management quality Profit track record Financial position Market positioning of core products These reports are distributed to all team members at peer review meetings, which Zenith believes to be a strong feature of the process. The fundamental research process culminates in the analyst assigning a conviction score (ranked 1 to 4) based on the expected level of outperformance for stocks within their universe. Conviction ratings are updated fortnightly. In addition to the analyst s fundamental research, PVM also employs a proprietary ranking model called the Perennial Value Screen (PVS), which is used to rank each stock from the best value security stock down to the lowest value stocks. In ranking Page 5 of 11

6 securities, the PVS draws on six financial measures from the company models generated by the investment team: Price to earnings Price to free cash flow Gross dividend yield Price to net tangible assets Net interest cover Earnings growth The first five measures are assessed using the analyst s one and two year prospective outlook, while earnings growth is based on a three year prospective outlook. Companies are assigned a rank for each of the six measures, with each measure being equally weighted to determine an overall ranking. PVM s security selection process, which incorporates both the fundamental analysis of a company and a stock ranking list, is considered by Zenith to be both well-structured and sufficiently detailed. Furthermore, the research reports and the PVS provide a useful reference point for debates within PVM s peer review process. Zenith considers PVM s fundamental research process to be robust, ensuring that all stocks are considered using a transparent and consistent process. PORTFOLIO CONSTRUCTION To construct the portfolio, Bosscher draws upon the expertise of PVM's portfolio managers. Murray and Bosscher will be responsible for the large companies portion of the Fund, which is typically split 75% and 25%, respectively. Oshry and Smith will manage the small companies allocation, as a mirror of the Perennial Value Smaller Companies Trust that they are responsible for. In constructing their underlying portfolios, the portfolio managers will give consideration to a number of factors including: Analyst conviction ratings (scored 1 to 4) PVS rankings Risk control considerations Stock's trading liquidity Stocks with higher conviction ratings and higher market capitalisations will generally be assigned higher active weightings (and vice versa). The team believes that there is a high correlation between market capitalisation and stock liquidity. It is expected that stocks receiving higher rankings in the PVS will typically form the core holdings of the portfolio. Another major consideration in the portfolio construction process is ensuring that the portfolio remains a true value biased domestic equities exposure. In this regard, the sum total of all stocks in the portfolio must possess valuation characteristics (as measured by the PVS) which are are cheaper than the overall market. The resultant portfolio is expected to contain between 35 and 100 securities. To achieve the desired asymmetric risk/return profile that protects in market downturns whilst allowing for participation in upswings, dynamic protection strategies are employed. The implementation of these dynamic protection strategies is contingent upon Bosscher's macroeconomic views, driven by proprietary risk models. That is, more protection will be purchased if Bosscher, through the process, holds bearish views and vice versa. Implementation will also depend on the cost of protection, and will only be conducted in a cost effective manner. However, the strategy will always have some level of protection and will aim to reduce losses in market downturns by approximately 50%. The dynamic protection strategies at Bosscher's disposal are as follows, in order of preference: Derivatives protection Allocation to cash Decrease small cap allocation Selection of defensive stocks in Bosscher's portion of the large cap portfolio Derivatives are employed in the first instance due to the asymmetric payoff profile that is offered. Index derivatives are the major instruments employed by the strategy, however, stock specific options may be used if the portfolio managers' are concerned about a stock over the short-term. While it is important for the strategy to remain protected from market downturns, Bosscher will only implement protection via derivatives at reasonable prices. Given the dynamic nature of the protection strategies, there is no formal budget, however, management expects cost to be approximately 1.0% - 2.0% p.a. In its simplest form, the derivatives protection strategy involves the purchase of an index put option. Put options allow investors to profit from a fall in price for an upfront fee, which is very similar to buying insurance. When the simple put option strategy appears to be expensive, Bosscher may implement a put spread strategy, which varies the degree of downside protection on the portfolio. Put spread strategies involve a further sale of a put option, offsetting the cost of the initial purchased put option. As derivative markets are dynamic and complex, Zenith believes Bosscher's experience and expertise are highly valuable with regards to the implementation of the protection strategies. Derivatives will not be used for gearing purposes, as all options will be cash backed. That is, cash will be set aside for the notional value of the options. Net effective derivative exposures can be as high as 50%. Cash allocations may also reach 50%, which Zenith believes to be consistent with the Fund's protection target. The strategy may hold up to 10% in international securities, however, this allocation will be used sparingly. As the strategy (and associated funds) are still in their infancy, expected portfolio turnover levels are not available. However, Zenith notes that the strategy's portfolio turnover is expected to be higher than PVM's flagship Australian equities offering, which has averaged approximately 30% p.a. to 40% p.a. over the past three years. Overall, Zenith retains a positive view on PVM's portfolio construction process, which is structured to ensure the strategy's investment objectives are met. Page 6 of 11

7 OPERATIONAL DUE DILIGENCE RISK MANAGEMENT Portfolio Constraints Description Security Numbers 35 to 100 Weight - Security Rel. Index +/- 5% Large Cap Allocation 50% to 100% Small Cap Allocation 0% to 20% Net Effective Derivatives Exposure 0% to 50% Weight - Issued Capital max. 12.5% Cash 0% to 50% Tracking Error 3% p.a. to 5% p.a. The strategy is managed within the above listed risk management constraints. Zenith believes these risk limits allow the strategy sufficient flexibility to achieve its investment objective, whilst maintaining a disciplined approach to investing. Given the philosophy of the strategy, Zenith believes risk management is paramount. At the individual security level, Zenith believes that risk management is well-incorporated in the detailed fundamental research process undertaken by PVM. At the portfolio level, the dynamic protection strategies employed aims to ensure that the strategy should, at most, participate in 50% of market drawdowns. To assist with the dynamic protection strategies, PVM utilises proprietary risk management tools and models. These models were customised internally by Zhang which ensures that the pertinent aspects effecting the strategy are highlighted. The strategy has a soft Tracking Error constraint range of between 3% p.a. to 5% p.a. Zenith believes this constraint provides investors with an unnecessary guide, as the strategy is expected to perform very differently from the market in downturns, thus increasing Tracking Error. In regards to monitoring compliance with risk controls, PVM's parent entity, PIPL, has an independent compliance team. The compliance team reports to the board of PIPL and monitors compliance with investment guidelines on a daily basis. Zenith draws a high level of comfort with regards to the strategy's risk management process and systems, which leverages strongly off Bosscher's expertise and experience. INVESTMENT FEES WDE will pay the Manager a management fee of 0.98% per annum (plus GST) on the first $250 million of the Portfolio NAV and 0.80% per annum (plus GST) thereafter, which is calculated and paid monthly in arrears. There is also a performance fee of 15% of any excess return over benchmark (S&P/ASX 300 Accumulation Index), net of fees. A high water mark is attached to the performance fee calculation, meaning that any negative relative performance is carried forward and must be recouped prior to performance fees being paid. Given the unique nature of the strategy, Zenith believes the fee structure is reasonable. However, like all funds that charge a performance fee, Zenith would prefer to see an excess return hurdle (i.e. target return above the index other than base management fee) in place. LICs can broadly be categorised into two groups from a management and fee standpoint on the basis of whether they are internally or externally managed (operating under an IMA). Typically, internally managed LICs have lower proportional management costs due to a larger asset pool. Externally managed LICs tend to have base management fees more in-line with unlisted managed funds. WDE's base management fee is broadly in-line with its externally managed peers. Should WDE break through the $250m threshold to trigger the sliding fee scale, cost savings would become more significant. It should be understood that the management fee only forms part of the overall cost of operating a LIC and the total attributable cost. The overall cost can only be accurately measured once WDE has at least its first years operations behind it. Dividend Policy The Board intends to pay a dividend to shareholders twice a year. The amount of the dividend will be at the discretion of the Board and will depend on a number of factors, including future earnings, capital requirements, financial conditions, future prospects and other factors that the Board deem relevant. It is the current Board policy that all dividends paid to shareholders will be franked to 100% or to the maximum extent possible. Page 7 of 11

8 PERFORMANCE ANALYSIS ABSOLUTE PERFORMANCE ANALYSIS All commentary below is as at 12 March As at the date this rating was released, WDE has no performance track record. The investment objective of the underlying strategy is to achieve returns of 3% p.a. (gross of fees) in excess of the S&P/ASX 300 Accumulation Index over rolling three year periods. Zenith draws comfort from PVM's long track record of successfully managing Australian equity products. In addition, we draw confidence from Bosscher's successful long-term track record managing a multi-strategy hedge fund at UBS. REPORT CERTIFICATION Date of issue: 12 Mar 2015 Role Analyst Title Author Sector Lead Dugald Higgins Dugald Higgins Senior Investment Analyst Senior Investment Analyst Authoriser Bronwen Moncrieff Head of Research RATING HISTORY As At Rating 12 Mar 2015 Recommended Last 5 years only displayed. Longer histories available on request. Page 8 of 11

9 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 Perennial Investment Partners a fee to produce this report. Page 9 of 11

10 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 10 of 11

11 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 11 of 11