Instreet Reliance Funds

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1 Important Dates Maturity Date Key Information Product Type Responsible Entity Swap Counterparty Distribution Manager Capital Protection Provider Capital Protection Level Profit Lock- Ins Distributions Underlying Investments Liquidity FX Hedging Minimum Investment Fees and Commissions Contribution Fee Administration Fee Investment Maintenance Factor Distribution Management Fee Leverage Costs Open-ended Units in the Instreet Reliance Global Allocation Fund and the Instreet Reliance Commodities Fund (the ), which are registered managed investment schemes under the Corporations Act. Merrill Invest (Australia) Limited. Merrill Lynch International (MLI). Instreet Investment Limited. MLI in its capacity as the counterparty to the Swap Agreements. Each Fund s investments will be capital protected to at least the Initial Capital Protection Level - initially will be 75% of the Funds investments. The Capital Protection Level may rise due to the Profit Lock-In feature. The Funds have the potential to pay quarterly distributions. Schroder Alternative Solutions Commodity Fund (Instreet Reliance Commodities Fund). BlackRock Global Funds Global Allocation Fund (Instreet Reliance Global Allocation Fund). Initial exposure to the underlying investments (via the Swap Agreements) starts at their maximums of 100% for the Commodity Fund and 125% for the Global Allocation Fund. The leverage component is provided at wholesale rates. Redemptions are available on a daily basis. MLI will employ a foreign exchange hedging strategy to minimise, but not eliminate, foreign exchange exposure. $5,000 per Fund (subject to IDPS minimums). Up to 5.5% of initial investment amount. Negotiable with financial adviser. A trail commission may also be payable. Up to % p.a. of the gross asset value of the underlying investments (including leverage). Payable to the Responsible Entity. 1.45% p.a. for the Global Allocation Fund. 1.65% p.a. for the Commodities Fund. Calculated on the value of the Reference Index. MLI will pay to the Distribution Manager up to 0.77% p.a. of the gross asset value of the underlying investments. The Swap Counterparty provides leverage under the Swap Agreement at wholesale interest rates, currently 1 month USD Libor+1%. What these Ratings Mean The Highly Recommended rating indicates that Lonsec has high conviction that the fund or product can achieve its objectives and, if applicable, outperform peers over an appropriate investment timeframe. The manager or product has strong competitive advantages in people, process and product design and has no areas of material weakness. The investment is a preferred entry point to access this asset class or strategy. The Recommended rating indicates that Lonsec has conviction that the fund or product can achieve its objectives and, if applicable, outperform peers over an appropriate investment timeframe. The manager or product has a number of competitive advantages in people, process and product design. The investment is a recommended entry point to access this asset class or strategy. Product Risk Characteristics Low Moderate High Leverage Liquidity Counterparty Concentration Volatility Risk categories are based on Lonsec s qualitative opinion of the risks inherent in the product s asset class and the risks relative to other products in the relevant Lonsec sector universe. Lonsec Opinion of this Product An investment in the provides investors with an opportunity to access potential growth in global commodity markets and global equity and fixed income markets via two actively managed Funds with the benefit of capital protection of at least 75% of the Funds investments. The Funds and capital protection are both open-ended, meaning investors can apply for and withdraw units from the Funds at any time. At inception, the Instreet Reliance Commodities Fund and Instreet Reliance Global Allocation Fund have exposure to the respective underlying funds of 100% and 125%. The exposure for subsequent investors will vary. Many structured products are designed in-house by product providers and then sold to the investors. have been structured after consultation with selected investors. Lonsec considers this a sound approach, however, all investors need to consider whether the product features in this offering suit their unique requirements. WE STRONGLY RECOMMEND THAT POTENTIAL INVESTORS READ THE PRODUCT DISCLOSURE STATEMENT 1 Lonsec Limited ABN AFSL No Participant of ASX Group

2 Ordinarily, Lonsec would question the wisdom of capital protection over a fund such as the BlackRock Global Funds - Global Allocation Fund, particularly given the highly diversified nature of the Fund s investments and the impressive track record in producing strong absolute returns through different cycles. However, given the Instreet Reliance Fund employs leverage of up to 125% and the fact that the capital protection applies to 75% of the Funds investments, Lonsec feels the capital protection is justifiable for some medium to high risk profile investors. Lonsec considers MLI to be a very experienced provider of structured investment products both globally and in Australia. Many of the Fund s features have been designed in consultation with Instreet Investment Limited, who work with financial advisory firms in order to structure investment product. In Lonsec s view the profit lock-in feature is suited to this type of product, particularly the Instreet Reliance Commodities Fund. The underlying investment, the Schroder Alternative Solutions Commodities Fund, should be considered a reasonably volatile investment, with levels in excess of a typical diversified global equities exposure. In addition, the timeframe over which commodity prices may benefit from the various macroeconomic and geopolitical themes playing out is uncertain. The Fund is able to lock-in a portion of the unrealised gains when prices move through pre-defined thresholds. This reduces the risk that early gains may be eroded. Product Fees are clearly outlined in the PDS and, compare reasonably well with similar style products which tend to carry reasonably high fees. If, at ay stage, investors are exposed to greater than 90% cash the Swap Agreement will terminate and investors will receive the greater of the value of the swap or the Capital Protection Level. This means investors will not keep paying fees in the event of a substantial exposure to cash. The underlying fees charged by the actively managed funds used in the Instreet Reliance Funds charge active management fees broadly in line with similar style funds. Using this Product This is General Advice only and should be read in conjunction with the Disclaimer, Disclosure and Warning on the final page. The BlackRock Global Funds - Global Allocation Fund has both growth and defensive characteristics. Lonsec considers this Fund should sit within the growth component of a balanced portfolio with a 60% allocation to global equities and 40% to fixed income. The Fund is suitable for medium to high risk profile investors with a 5+ year investment time horizon. Lonsec classifies the Schroder Alternative Solutions Commodity Fund as Alternative Assets Aggressive and suitable for Growth and High Growth investors with a 5+ year investment time horizon. Percentage allocations are outlined in Lonsec s Risk Profile Review. Investor Suitability Instreet Reliance Commodities Fund - Investors wanting exposure to the price movements of a broad range of global commodities with the benefit of partial capital protection. Instreet Reliance Global Allocation Fund - Investors wanting potentially leveraged exposure to a diverse portfolio of global equities and fixed income securities with the benefit of partial capital protection. The underlying investments are actively managed funds likely to appeal to higher risk profile investors who are comfortable paying fees for active management and product structuring. Investors seeking capital growth who do not require the certainty of dividends. Investors should be comfortable funding interest payments on the investment loans from their own financial resources. Relevant Parties Merrill Invest (Australia) Limited is the Responsible Entity of the Fund. The responsibilities of the Responsible Entity are set out in the Corporations Act and include protecting the rights and interests of unitholders as set out in the constitution. Merrill Invest (Australia) Limited is a fully owned subsidiary of Merrill Lynch Markets (Australia) Pty Limited which is owned by Merrill Lynch (Australasia) Pty Limited, part of the global Merrill Lynch group headed by Merrill Lynch & Co., Inc. The Responsible Entity has appointed a custodian, Merrill Lynch (Australia) Nominees Pty Limited ACN , AFSL to hold and maintain the assets of the Funds as agent of the Responsible Entity. The Swap Counterparty is Merrill Lynch International (MLI). MLI is a United Kingdom-based dealer in equity and fixed income securities of a significant number of global issuers, sovereign government obligations and asset-backed securities. MLI is Merrill Lynch's primary non-u.s. credit, equity derivatives and futures product dealer. It is regulated by the United Kingdom Financial Services Authority. It does not hold an Australian financial services licence and operates in Australia under Class Order 03/1099 issued by ASIC. MLI is a subsidiary of and its obligations under the swap are guaranteed by Merrill Lynch & Co., Inc. Merrill Lynch & Co., Inc. has long term credit ratings of A2 by Moody s Investor Services and A+ by Fitch Ratings. Lonsec Limited ABN AFSL No Participant of ASX Group 2

3 Instreet Investment Limited (Instreet) acts as distribution manager. Instreet is not a member of the Merrill Lynch Group or a representative of MLI. The key personnel of Instreet are experienced investment professionals and appropriately qualified to carry out the distribution role. The Fund Administrator is FundBPO Pty Ltd, a business that provides back office functions for fund managers and financial institutions. How Does the Product Work? Investors purchase units in either of the Instreet Reliance Funds. The Responsible Entity, on behalf of the relevant Fund, enters into a swap with Merrill Lynch International (MLI) as Swap Counterparty to provide economic exposure to the underlying investments. The swap provides investors with: A notional exposure to the underlying investments (including any leverage), and A notional investment in cash, with interest accruing at the rate of approximately 1 month AUD BBA Libor. The value of this exposure is referred to as the Reference Index. At inception, an investor s exposure will be 100% for the Instreet Reliance Commodities Fund and 125% for the Instreet Reliance Global Allocation Fund (or $125 of exposure per $100 invested). Exposure in excess of 100% is delivered via notional leverage provided by MLI at wholesale interest rates. The formulaic, non-discretionary allocation is calculated daily and based on the performance of the underlying investments in relation to a floor (the level of capital protection locked in by the Profit Lock-In mechanism from time to time). A full description is outlined in Section 4 of the PDS. Lonsec has reviewed the rules and considers them to be broadly consistent with other structured products offering potentially leveraged exposure to underlying investments of this type. Generally speaking: if the value of the underlying investments performs well in relation to the floor, then the allocation to the underlying investments will increase. The higher the floor as a result of profit lock-ins, the lower the allocation to the underlying investments. Investors should note that with every profit lock-in, there is an increased potential for exposure to the underlying investment to be reduced and exposure to cash to be increased. If the Reference Index is notionally invested in greater than 90% cash the swap agreement (and an investor s interest in the Fund) will terminate and investors will receive the greater of the value of the swap or the Capital Protection Level. The underlying investments are denominated in USD, while investors units are denominated in AUD. MLI will use a hedging strategy to minimise (but not eliminate) the currency risk. Capital Protection and Profit Lock-In The Funds investments are continuously capital protected at the Capital Protection Level. Capital protection is not provided directly to investors. The initial Capital Protection Level is 75% of the initial Reference Index Level, but may increase due to the profit lock-in feature. Every time the Reference Index Level rises by 5% above the initial Index Reference Level of 100, the Capital Protection Level will be increased by 3.75%. The profit lock-in applies only once per quarter. Distributions A quarterly distribution will be paid to investors if the Capital Protection Level is increased due to the profit lock-in feature. The distribution will be equivalent to the difference between the Capital Protection Level before the distribution and the initial Capital Protection Level of 75, up to a maximum of 4 cents per quarter. Page 15 of the PDS provides an outline of the calculation of distributions and the Capital Protection Level. Scenario Analysis The scenarios below are included to provide a guide to the potential pay-off for investors over the life of an investment in the Instreet Reliance Global Allocation Fund, based on the assumptions noted below: Bullish (+15%p.a.) 1 year 3 years 5 years 7 years Underlying Investment Return per $ Instreet Reliance Global Allocation Capital Return Minimum Exposure % 93.07% 90.41% 85.01% Average Annualised Coupon 10.68% 11.80% 13.07% 13.69% Instreet Reliance Global Allocation Fund Total Return p.a % 21.36% 19.80% 20.92% Lonsec Limited ABN AFSL No Participant of ASX Group 3

4 Bearish (-10%p.a.) 1 year 3 years 5 years 7 years Underlying Investment Return per $ Instreet Reliance Global Allocation Capital Return Minimum Exposure 72.13% 39.31% 31.06% 25.48% Average Annualised Coupon 2.52% 1.01% 0.64% 0.43% Instreet Reliance Global Allocation Fund Total Return p.a % -4.52% -3.04% -2.03% Flat (+5%p.a.) 1 year 3 years 5 years 7 years Underlying Investment Return per $ Instreet Reliance Global Allocation Capital Return Minimum Exposure 93.19% 77.17% 71.06% 48.01% Average Annualised Coupon 6.91% 6.47% 6.49% 6.45% Instreet Reliance Global Allocation Fund Total Return p.a. 7.97% 7.17% 6.66% 7.15% Rebound (-10% first year, then 15% p.a.) 1 year 3 years 5 years 7 years Underlying Investment Return per $ Instreet Reliance Global Allocation Capital Return Minimum Exposure 72.27% 68.08% 67.83% 64.26% Average Annualised Coupon 2.43% 5.28% 8.33% 10.20% Instreet Reliance Global Allocation Fund Total Return p.a % 10.36% 13.02% 15.68% The calculations included in the 4 tables above have been provided to Lonsec by MLI, at the request of Lonsec. MLI has taken reasonable steps to confirm the accuracy of such calculations, based on the assumptions set out below. However, MLI does not take any responsibility for the inclusion of the calculations in this research report, the explanation of such calculations, the relevance of the calculations to the products described in this research report or for any conclusion or inference investors may draw from the scenarios. Assumptions: Data represents the average of 2,000 random simulations. The scenario analysis refers to the parameters applied to the Global Allocation Fund, so assumes a maximum exposure of 125%. All scenarios assume a volatility of 10% for the underlying fund. The currency hedging strategy assumes a positive 3.3% interest rate differential between AUD and USD 1 month Libor is used (in line with the average over the past 12 months). The performance of an investment in the may be different from that of the underlying investments due to the application of the capital protection strategy (including profit lock-in and quarterly distributions), the application of the FX hedging strategy and the deduction of fees. What Happens when the Funds terminate? The swap agreements are for a term of 7 years. At the end of the swap agreements, the Responsible Entity intends to enter into further swap agreements provided the terms of further swap agreements are substantially similar. Otherwise the Funds will terminate and investors will receive a distribution equal to the maturity value of the Funds investments. Lonsec Limited ABN AFSL No Participant of ASX Group 4

5 Underlying Investments Investors choose from two actively managed funds. An outline of each Fund follows, along with Lonsec s opinion of the Funds: BlackRock Global Funds - Global Allocation Fund About this Fund Underlying Fund BlackRock Global Funds - Global Allocation Fund Fund Size ($ USD million) 17,675 Responsible Entity Fund Commenced Fee (p.a.) Ownership Blackrock Investment Management (Australia) Limited June 2005 in Australia and 1989 in the US 1.5% p.a. Blackrock Inc., a publicly listed company. Assets Managed in this Sector ($ billion) 30 Years Managing this Asset Class 18 Investment Team Team size 9 Located Princeton/New Jersey USA Portfolio Manager Dennis Stattman Turnover/Team Ratio (past 2 yrs) 0% Investment Process Style Value Targeted Return Not stated but Fund aim is to achieve strong absolute returns throughout investment cycles. Targeted Volatility Range Not stated Typical Security Numbers Typical Capitalisation Bias No bias specified Typical Portfolio Net Market Exposure Range 60% Equities 40% Debt Typical Regional Exposure USA 50% Europe 5% Asia 20% Global 25% Stock Bet Limits No hard limits Sector Bet Limits No hard limits Use of Derivatives Yes Use of Gearing No Lonsec Opinion of this Fund The Fund is a long only product that possesses a global mandate with the flexibility to allocate assets across the entire spectrum of equity and fixed income investments. The Fund is not managed to a particular benchmark aiming to deliver positive absolute returns in differing market conditions. Lonsec considers the investment team to be suitably experienced, stable and adequately resourced. Importantly, members of the investment team are generalists possessing core analytical competencies across equities and fixed income. In particular, Lonsec considers the Portfolio Manager, Dennis Stattman to be a high quality investment professional. Stattman has 26 years of investment management experience, including 18 years at Merrill Lynch Investment Managers/ Blackrock. The Fund is well diversified, with approximately 600 to 700 holdings across equities, bonds, and currencies within 30 countries. While the Fund generally employs a 60%/40% benchmark in terms of allocating assets between equities and bonds, the team has complete flexibility in structuring the asset mix to be inline with the risk and return opportunities that are identified in the market at any point in time. Investors should note that this is a relatively unconstrained global allocation fund, meaning that there are no restrictions on the markets, countries, industries and issuers to which the Fund may be exposed. It should be noted that currency is managed as a separate asset class with the objective of generating additional returns. Investors are therefore particularly reliant on the skills of personnel relative to processes, and key person risk is high. Lonsec considers alignment of interests between the investment team and external investors to be high, supported by the high level of co-investment in the global allocation fund, and the linking of the analyst variable remuneration with the Fund s performance fee. Lonsec has rated the Fund Highly Recommended given the strength and stability of the staff, the thorough and logical investment process as well as a long track record of outperformance. People & Resources The investment team is led by Portfolio Manager, Dennis Stattman. Stattman has 26 years of investment management experience, including 18 years at Merrill Lynch Investment Managers/ Blackrock. Stattman was initially appointed as the Associate Portfolio Manager for the Global Allocation Fund in Stattman has been the Fund s senior portfolio manager since He was senior co-portfolio manager of the Fund from 2000 to Prior to joining Merrill Lynch Investment Managers/ Blackrock, Stattman served as the Director of Research for Meridian Management Company and, before that, as Pension Investment Officer for the World Bank. Lonsec considers Stattman to be a highly experienced and capable investment professional. Dan Chamby is the Fund s associate Portfolio Manager. Chamby began his investment management career at Mellon Bank in 1982 as an Asia/Pacific credit analyst, and later managed the International Money Market desk. Chamby joined the Global Allocation team in 1993 and was appointed the Fund s associate portfolio manager in Aldo Roldan has recently been appointed to the role of associate portfolio manager and will focus on fixed Lonsec Limited ABN AFSL No Participant of ASX Group 5

6 income, emerging markets and currency management. Roldan has a background in emerging markets and has 22 years investment experience. Roldan adds further depth to the investment team. Stattman, Chamby, and Roldan are supported by a 6 member investment team of which 2 are analysts (including 1 quantitative analyst) and 4 are senior analysts. The investment team possesses an impressive degree of investment experience (average of 17 years investment management experience, including an average of 13 years at Merrill Lynch Investment Managers/ Blackrock) and importantly has displayed a high degree of stability. The investment team is supported by a further 7 staff members responsible for non investment management functions. Lonsec considers the investment team to be adequately resourced and appropriately qualified. Style and Philosophy The Fund is characterised by a value oriented approach to security selection that seeks to identify attractively priced investment opportunities through utilising both top-down and bottom-up analysis. Lonsec notes that the Fund s investment mandate is highly flexible permitting the manager to seek out investment opportunities in both equity and debt securities, including money market securities and other short term securities in both developed and emerging markets. The Fund seeks diversification across markets, countries, industries and issuers. The Fund has no geographic limits on where its investments may be located. That said, it is important to note that the manager has an internal benchmark (which underlines the manager s asset allocation agenda) being 60% equity, 40% fixed income (specifically: 36% S&P 500 Composite, 24% Financial Times/S&P Actuaries World Index ex US, 24% Merrill Lynch Government Index and 16% Citigroup Non-USD World Government Debt Index. Unlike most managers reviewed by Lonsec, Blackrock does not adopt stated performance or volatility (risk) targets. Whilst we recognise that the manager s focus is on generating absolute returns, Lonsec prefer managers to state a hard return target (i.e. XX% pa - XX% pa) so as to provide potential investors with a guide as to what return profile that should reasonably be expecting. conservatively compared to the earnings and cash flow being generated and future growth prospects for the company. A variety of valuation tools are used in the analysis of a potential investment including; financial ratios, discount cash flows, revenue growth forecasts, profit forecasts and profit margin forecasts. On the fixed income side, the team is focused on tracking the entire spectrum of fixed income investments. Consideration is given to the highest quality and the lowest quality securities, government securities, corporate securities, high yield and convertibles and distressed securities. Lonsec notes that the team has a dedicated analyst who specifically monitors debt securities that may be going through corporate reorganisation or even restructuring. The Fund will generally hold in excess of 400 securities diversified across regions, equity, debt and money market securities. Essentially the global allocation team believes that the level of positive absolute returns achieved is a far more relevant benchmark to investors, than a market index. This approach results in a portfolio that can vary significantly from most global indices and which is essentially focused on total returns rather than returns relative to an Index. Risk Limits and Monitoring The Fund does not operate with hard limits (either relative to an index or absolute) in relation to security, industry, country or currency positions and therefore has the scope to deviate significantly from the benchmark index and from other global funds. There are no limits on Tracking Error or cash weight within the Fund. Whilst there are no hard rules in place, the main way risk is controlled is through diversification (holding over 400 securities with typically no security accounting for more than 1% of the total portfolio) and secondly, from having a portfolio that is value oriented, which is believed to offer lower downside risk. Investment Process The investment process begins with a top-down assessment of current global market conditions. Although this is undertaken within the investment team, the large majority of the emphasis comes from Stattman and Chamby. The results of this top-down analysis assist in determining the manager s general global outlook and in identifying those markets and sectors most likely to deliver superior relative value. Indepth bottom-up research is then conducted with a focus on identifying companies that are priced Lonsec Limited ABN AFSL No Participant of ASX Group 6

7 Schroder Alternative Solutions Commodity Fund About this Fund Underlying Fund Schroder Alternative Solutions Commodity Fund Fund Size ($ USD million) 3,509 Responsible Entity Schroder Asset Management Fund Commenced 31 Oct 2005 Fee (p.a.) Ownership Assets Managed in this Sector ($ USD million) 1.50% pa. Publicly listed 10,225 Years Managing this Asset Class 3 Investment Team Team size 4 Located Portfolio Manager London Rob Howell Turnover/Team Ratio (past 2 yrs) 0% Investment Process Style Benchmark Targeted Value Add Targeted Volatility Range Long only, actively managed. Average of the 4 main commodity indices. 5% pa in excess of benchmark. < Benchmark, anticipated 12%-15% pa. Typical Commodity Numbers Portfolio Constraints Use of Derivatives Use of Gearing Each sector (Energy, Metals and Agriculture) is limited to a range of 20-60%. Futures, swaps and physically-backed ETFs are limited to %. Each commodity is limited to a maximum of 5%, 10% or 20% depending on liquidity (except crude oil 30%). Yes Lonsec Opinion of this Fund The Fund originated from the Emerging Markets Debt team at Schroders. This background provides the investment team with a solid understanding of the economies that supply much of the world s natural resources. This knowledge is bolstered by specific commodities experience. The investment team of 4 is quite small, although the considerable resources of the wider Schroders group are also utilised in the investment process. The investment process is driven by a focus on bottom-up research and is both robust and logical. The inclusion of a dedicated resource that co-ordinates commodities research from the wider Schroders No network is pleasing and sometimes a feature lacking in global investment managers. There are significant difference between the main commodity indices, with the S&P GSCI being production weighted and having an over 70% weighting to energy, whilst the Rogers International is consumption weighted and currently only has a weighting of just over 40% to energy. Given the lack of uniformity, Lonsec considers this to be an appropriate benchmark. The Fund was approved 4 years ago and 1 year of research was undertaken before the launch in October The commitment to researching commodities and commodity exchanges should hold the Fund in good stead for the future. People & Resources The investment team is made up of 4 full time members, all based in London. The lead portfolio managers are Rob Howell and Rodolphe Roche who have commodity research backgrounds. Although small in size, the team draws on the considerable resources of the Schroders group including research, risk management, marketing and cash management. Research produced by various analysts is co-ordinated by an equity analyst in the team and there is a full time trader who executes orders. Schroders has 115 equity analysts globally, with 20 devoted solely to resources. These 20 analysts do not work exclusively for this Fund, however the research produced is an input in the investment process. Whilst the investment team has impressive experience and seem suitably qualified the average level of experience is below that of other commodity funds reviewed by Lonsec. Style and Philosophy The objective of the Fund is to outperform an average of the 4 main commodity indices S&P Goldman Sachs Commodity Index, DJ-AIG Commodity Index, Rogers International Commodity Index and the CRB Commodity Index (all indices are total return indices). The Fund is constructed to provide broad exposure to the energy, metals (industrial and precious) and agricultural commodities sectors. The Fund is research driven and long only, seeking to achieve its objective by investing primarily in commodity futures but also equities where a futures market is not available and cash. The fund is self described as an enhanced beta fund. Investment Process The Fund seeks long-term returns from the active management of commodities exposure through an investment approach based primarily on bottom-up fundamental research. The Fund also incorporates a top-down view of the attractiveness of each sector, which is influenced by the outlook of analysts for global economic growth, global inflation pressure and major currency relationships. These macro views are Lonsec Limited ABN AFSL No Participant of ASX Group 7

8 established at quarterly investment committee meetings. The Fund will typically provide exposure to commodities through derivatives instruments and securities. These instruments typically only require a small margin upfront, therefore the fund will invest most of remaining funds in cash (3 or 6 month US Treasuries). The Fund s Investment universe currently covers 64 commodities (50 with available futures contracts and 14 commodities only accessible through the equities market). This investment universe is significantly larger than the major commodity indices which include approximately 20 to 35 commodities. The research conducted is extensive, with a 50 to 60 page report being prepared for each commodity. These reports are largely fundamental bottom-up analysis drawing on publicly available information from trade bodies and government statistics as well as views from equity analysts. The quantitative analysis is not a major driver of investment decisions but is incorporated to confirm the qualitative views. The analysis also takes into account seasonal factors and market sentiment. Once a view is established for each commodity the trader will determine how to most efficiently execute (futures, equities or ETF and on which Exchange). The trader is able to actively implement positions across various contract maturities. Investors should note that historical performance data for the underlying investments is contained in the PDS. Risk Limits and Monitoring Risk controls are observed across sector, asset type and commodity. Briefly these are: The Fund must have a minimum exposure of 20% and maximum 60% to the Metal, Energy and Agriculture sectors to ensure diversity. Maximum exposure per commodity ranges between 5% and 20%, depending on liquidity, with crude oil being subject to a maximum of 30%. The allocation to cash can range between 0% to 33% in order to mitigate the risk of a runaway loss. Risks An investment in the carries a number of standard investment risks associated with international investment markets. These include economic, political, legal, tax and regulatory risks. These and other risks are outlined in Section 6 of the PDS and should be read in full and understood by potential investors. Lonsec considers the major risks to be: Underlying investment risk - The value of, and returns (if any) from, an investment in the Instreet Reliance Funds will depend upon the performance of the relevant underlying investments. There is a risk that investors may not be fully exposed to movements in the underlying investments and instead be invested up to 90% in cash. This can have a major impact on returns, particularly where the reallocation to cash occurs early in the life of a Fund. Investors should note that if their exposure to cash increases to over 90% the investment will terminate and funds will be returned to investors. Adjustment Events and Early Termination Risk There are a number of circumstances which can lead to an adjustment to the Swap Agreement or early maturity such as: if the notional exposure to the underlying investment is 10% or lower (and the notional exposure to the cash asset is greater than 90%), the underlying investments terminate or are wound up, there is a disruption to the Swap Counterparty s ability to hedge its exposure under the Swap Agreement or there is an increased cost of such hedging, or the Swap Counterparty becomes insolvent. In these circumstances the swap agreement may terminate and investors could be exposed to an early termination. It is unlikely that the net asset value of the Funds prior to maturity will correspond to the value of the underlying investment at that time due to movements in interest rates and changes in the volatility of the underlying investments. Counterparty risk The capital protection and returns from the underlying investments are dependent on the ability of the Swap Counterparty to meet their obligations as they fall due. Investors will rank as unsecured creditors of the Swap Counterparty in the event of default. The Swap Counterparty is a subsidiary of and guaranteed by Merrill Lynch & Co., Inc. Merrill Lynch & Co., Inc. has long term credit ratings of A2 by Moody s Investor Services and A+ by Fitch Ratings. Receiving less than the Capital Protection Level Capital protection is not provided directly to investors units in the Funds. Rather, the Funds investments are protected at the capital protection level. This means at maturity investors receive a distribution equal to the net asset value of the Funds investments less any taxes payable and less any accrued but unpaid fees owing to the Responsible Entity. Emerging Markets risk Investments in emerging markets are subject to heightened risks due to a lack of legal, political, business and social frameworks to support securities markets. This means the prices of securities in these countries are generally more volatile than securities in developed economies. Lonsec Limited ABN AFSL No Participant of ASX Group 8

9 Leverage Risk - The underlying investments do not employ leverage; however leverage may be used under the Swap Agreement. Leverage has the effect of amplifying both potential gains and losses in the underlying investments. The Swap Counterparty provides leverage under the swap Agreement at wholesale interest rates. Currently this rate is 1 month AUD Libor+1%, while the 1% spread is fixed, the overall rate can increase or decrease as a result of an increase or decrease in Libor rates. Taxation If investors acquire units for the purposes of receiving a distribution of Fund income shortly after maturity, those units should generally be held on capital account. In such a case the CGT discount should generally be available to investors. Interest on any investment loans used to acquire units should generally be deductible. These comments constitute General Advice only and Lonsec advises potential investors to consult a taxation specialist before making a decision to invest (or not to invest) based upon these taxation considerations. Investors should refer to Section 8 of the PDS for more information regarding the taxation of shareholders. Contact Information Further information on the can be obtained by contacting Instreet Investment Limited on (02) , the Responsible Entity on or at or Lonsec Limited ABN AFSL No Participant of ASX Group 9

10 Analyst Disclosure & Certification Analyst remuneration is not linked to the rating outcome. The Analyst(s) may hold the products(s) referred to in this document, but Lonsec considers such holdings not to be sufficiently material to compromise the rating or advice. Analyst(s) holdings may change during the life of this document. The Analyst(s) certify that the views expressed in this document accurately reflect their personal, professional opinion about the financial product(s) to which this document refers. Date Prepared: August 2008 Analyst: Michael Elsworth Release Authorised by: Grant Kennaway IMPORTANT NOTICE: The following relate to this document published by Lonsec Limited ABN ("Lonsec") and should be read before making any investment decision about the product(s). This report, dated August 2008, expires when the initial offer closes or if there are any material changes in relation to the information contained in this report or any disclosure or offer document issued in relation to this offer. Lonsec reserves the right to change its opinion, rating and/or withdraw the report at any time on reasonable grounds Disclosure at the date of publication: Lonsec receives a fee from Instreet Investment Limited ( Instreet ) for rating the product(s) using comprehensive and objective criteria. Lonsec s fee is not linked to the rating outcome. Costs incurred during the rating process of international funds, including travel and accommodation expenses, are paid for by Instreet to enable on-site reviews. Lonsec does not hold the product(s) referred to in this document. Lonsec s representatives and/or their associates may hold the product(s) referred to in this document, but detail of these holdings are not known to the Analyst(s). Warnings: Past performance is not a reliable indicator of future performance. Any express or implied rating or advice presented in this document is limited to General Advice and based solely on consideration of the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs ( financial circumstances ) of any particular person. Before making an investment decision based on the rating or advice, the reader must consider whether it is personally appropriate in light of his or her financial circumstances or should seek further advice on its appropriateness. If our General Advice relates to the acquisition or possible acquisition of particular financial product(s), the reader should obtain and consider the Product Disclosure Statement for each financial product before making any decision about whether to acquire a product. Lonsec s rating process relies upon the participation of Instreet. Should Instreet no longer be an active participant in Lonsec s rating process, Lonsec reserves the right to withdraw the document at any time and discontinue future coverage of the Fund(s). Disclaimer: This document is for the exclusive use of the person to whom it is provided by Lonsec and must not be used or relied upon by any other person. No representation, warranty or undertaking is given or made in relation to the accuracy or completeness of the information presented in this document, which is drawn from public information not verified by Lonsec. Conclusions, ratings and advice are reasonably held at the time of completion but subject to change without notice. Lonsec assumes no obligation to update this document following publication. Except for any liability which cannot be excluded, Lonsec, its directors, employees and agents disclaim all liability for any error or inaccuracy in, or omission from, this document or any loss or damage suffered by the reader or any other person as a consequence of relying upon it. Lonsec Limited ABN AFSL No Participant of ASX Group 10