If you DO NOT wish to proceed, please advise us no later than 21 August 2012 in order that we can exclude you from the restructure.

Transcription

1 DFS Advisory Services Pty Ltd ACN: ABN: August 2012 Dear DFSMA Client MODEL UPDATES : CHANGES TO MODELS: DFS International Equities Large Caps (LC) last restructured Nov 2011 DFS International Equities Asia ex Japan last restructured Dec 2010 DFS Sovereign Bond last reviewed Mar 2012 DFS Alternative Investment Strategies (AIS) commenced Jan 2011 Level 3, 179 Queen St Melbourne Victoria 3000 Australia Phone Fax GPO Box 2816 Melbourne Victoria 3001 AFSL No : Refer below executive summary detailing proposed changes to various models and the key drivers for the changes. Model Changes International Equities Large Caps Hedging to be increased to 25% + New manager International Equities Asia ex Japan New manager Sovereign Bonds Activate a 10% allocation to Inflation-Linked Bonds Alternative Investment Strategies A range of new managers + adjustment to underlying % Key highlights of note : Increased focus on risk management ; Reduced model fees (savings range from 0.008% to 0.30% pa) as a result of Preferred Pricing negotiated with fund managers. Distributions recently received in cash will be invested into the new models. No change to your overall Asset. The proposed changes are manager composition changes, which impacts your existing investments within each asset class based model. It does not change your current allocation to the respective models. We encourage you to read the attached short Investment Summaries prepared by the DFS Investment Team detailing the basis for the proposed changes. We also refer you to Appendix A which outlines impact of the proposed restructure, risks and fees. These were discussed with you as part of the initial inclusion of these holdings in your portfolio as well as during our informal and formal Investment Review discussions. The Model changes will commence automatically on 22 August NO ACTION IS REQUIRED FROM YOU. If you DO NOT wish to proceed, please advise us no later than 21 August 2012 in order that we can exclude you from the restructure. If you have any queries, please do not hesitate to contact your DFS Adviser. Yours sincerely DFS Advisory Services Pty Ltd Patricia Chan Stephen Romic George A Krithis Principal Principal Principal Encl 1) DFS 6 monthly Investment Research Summary Reports 2) Wholesale Product Disclosure Statements for the recommended funds 3) Appendix A

2 Executive Summary of Changes International Equities Large Caps (IEQ) Aberdeen Fully hedged International Equity Fund 20% 25% Increase 5% Magellan Global Fund 20% 30% Increase 10% Platinum Unhedged Fund 25% - Full Sell Platinum International Brands Fund (NEW) - 20% Increase 20% Schroder Global Active Value Fund 35% 25% Decrease 10% International Equities Asia ex Japan (IEQAsia) Aberdeen Asian Opportunities Fund 35% 60% Increase 25% PM Capital Emerging Asia Fund (NEW) -- 40% Increase 40% Platinum Asia Fund 65% -- Full Sell Sovereign Bond (SovB) Macquarie True Index Australian Fixed Interest Fund 65% 55% Decrease 10% CFS W/Sale Gov t Inflation-Linked Bond Fund (NEW) -- 10% Increase 10% Vanguard International Fixed Int Index Fund (Hedged) 35% 35%- No Change Alternative Inv Strategies (AIS) Defensive DWS Diversified Income Fund 32% - Full sell JANA Triplepoint Fund 11% 6% Decrease 5% Perennial Tactical Income Trust (NEW) - 22% Increase 22% Growth GOLD.ASX 10% 5% Decrease 5% GMO Systematic Global Macro Trust 16% 25% Increase 9% Blackrock Asset Alpha Fund 16% - Full sell Ascalon H3 Commodities Fund 15% - Full sell Quiris Currency Fund (NEW expected early Sep 2012) - 25% Increase 25% Aspect Diversified Futures Fund (NEW) - 17% Increase 17% Background As part of the ongoing focus on risk management, the DFS Investment Team (DFSPS) conducts regular reviews, including 6 monthly intra-cycle reviews. The intra-cycle review is limited to the Reserve-List within each sector to ascertain whether each manager has continued to sustain superior performance against their peers. This is a proactive measure that allows DFSPS to efficiently replace any appointed manager, if required. The review is also performed to further qualify the results of the previous formal review process. In light of the continued volatility experienced in capital markets and further to our Q&A manager meetings (and/or conference calls), updates and in some cases, changes have been made to our appointed managers. DFSPS currently has a cautious outlook which is underpinned by (1) the high levels of OECD government & consumer debt; (2) the range trading within equity markets since mid 2011; (3) the convergence of significant prevailing inflationary & deflationary forces within the global economy; and (4) the volatility in the Australian Dollar. We believe that markets are susceptible to further pullbacks in the short term and we expect volatility to persist over the next several years. As such, we favour a more defensive approach as the global economy - 2 -

3 continues to adjust to the prevailing imbalances. Furthermore, there exists uncertainty around the political ability or desire to implement various economic (monetary & fiscal) levers. As such, our objective is to provide multiple diversifying tools to better manage portfolio risk in a highly uncertain world. IEQ Large Caps (IEQLC) REVIEW a) What are the Manager changes? Platinum Unhedged will be replaced with Platinum International Brands Fund. Platinum as a firm is in a transitional phase as it aims to create an environment that is focussed on promoting a culture of greater team orientation. This cultural shift has seen the role of some of their portfolio managers evolve to include managerial duties around developing analysts. DFSPS believes that the increase in managerial duties is distracting the respective managers from their portfolio management responsibilities. Although the transition of Platinum s operational culture may well be highly beneficial in the medium to long term, we do not have the same high conviction around Jacob Mitchell s immediate stock picking focus in the Platinum Unhedged Fund. We believe it is now prudent to implement a tactical shift to an alternative Platinum strategy, namely the International Brands Fund managed by Simon Trevett. DFSPS believes this fund is quarantined from the effects of the firm s shift in operational cultural and that the disruptions are isolated to the strategies managed by Jacob Mitchell, Andrew Clifford and Kerr Nielson. b) Why is the Hedging increased to 25% (from 20%)? Notwithstanding the recent decrease in interest rates by the Reserve Bank of Australia (RBA) which has seen official borrowing costs drop to 3.50%, interest rate differentials between Australia and most developed economies remain elevated at an average level of around 3.5% p.a. This is the incremental return that investors earn on the fully hedged component of their international equities. We have further confidence (perhaps against consensus) that the AUD will hold up during risk-off periods as recently observed leading up to Greece s June elections. IEQ Asia ex-japan (IEQAsia) REVIEW c) What are the Manager changes? Platinum Asia will be placed with PM Capital Emerging Asia Fund. We refer to the above commentary on the cultural shift occurring within Platinum. Our concern that this will impact Andrew Clifford s focus in managing the Platinum Asia strategy is a key reason for the manager change. PM Capital was a Reserve-Listed manager in our prior review. It has since built up a sufficient track record across disparate market conditions which has enabled its inclusion in this review in a more meaningful way. DFSPS believes that the fund is in a strong position to capitalise on a segment of the Asian market (approx. $1 billion capitalisation) that current managers cannot provide due to size. Sovereign Bond (SovB) REVIEW d) What are the Manager changes? DFSPS believes an allocation to inflation-linked bonds (ILB) is now appropriate. DFSPS recommends an allocation of 10% to ILBs to further diversify our Sovereign Bond Model. Whilst ILBs only offer slight to moderately better value than nominal bonds, we expect they will produce better risk-adjusted returns. We reiterate that ILBs will generate greater returns than nominal bonds in the event that real yields fall further than nominal yields (i.e. further risk aversion). This downside risk management further underpins our recommendation

4 Alternative Investment Strategies (AIS) REVIEW e) What are the Manager changes? Notwithstanding that many clients have been invested in the AIS Model for a relatively short period, we note that DFSPS initially launched the Model in September The Model is dynamically managed and unlike other model portfolios that provide exposures to a single (homogenous) asset class, the AIS Model allocates to disparate investment strategies. The composition of the AIS Model will change based on our assessment of prevailing macroeconomic conditions, with our current view being that markets will oscillate between risk-on and risk-off conditions over the next few years. Although the Model is likely to be readjusted more often than the other (asset-class based) Models, the changes are underpinned by our core belief of managing downside risk rather than trying to opportunistically time the market. This explains also why there are a number of changes to the AIS Model per this review, driven in part by ongoing market volatility across most of the underlying asset classes and the corresponding risk exposures of each of the managers, necessitating further changes. Defensive DWS Diversified Income Fund (DWS) will be replaced with Perennial Tactical Income Trust. The objective of the enhanced cash strategy (DWS) within the AIS Model is to provide added diversification to high growth assets, whilst also reducing the overall volatility exposure. Notwithstanding the positive absolute returns generated by the DWS, the macro strategies employed has consistently muted the fund s risk/return profile. The inclusion of the Perennial Tactical Income Trust is expected to further reduce the risk profile of the overall AIS Model whilst simultaneously providing stronger returns. Growth several changes to existing model per below: Full redemption from Ascalon H3 Commodities Fund, which is a specialist long-only commodities manager, in favour of our global macro and managed futures managers which can trade commodities, both long and short opportunistically. BlackRock Asset Alpha Fund will be removed from the AIS Model and as such GMO Systematic Global Macro Trust has become our preferred global macro manager. Appointment of Aspect Diversified Futures Fund. We believe that blending this fund with our current global macro manager GMO, maintains the Model s gross exposure to commodities, an important characteristic for diversification purposes, without specifically relying on rising commodity prices. Appointment of Quiris Capital, a specialist currency manager that believes significant and persistent inefficiencies are exhibited in currency markets due to the existence of non-profit seeking participants within these markets. The appointment of Quiris further enhances the risk management dynamics of the AIS Model. Unlike other asset classes that fluctuate through a market cycle, currency markets are effectively cycle-neutral with currency valuations generally a consequence of exogenous variables. Finally, we note Quiris small level of Funds under Management of approximately $50 million gives the manager a distinct and strong trading advantage. The fund will be launched in Australia in late August f) Other changes? Reduction in exposures : JANA Triplepoint Fund (reduced by 22%) and Gold (reduced by 5%). PREFERRED MODEL PRICING Managed Accounts (MA) only We are pleased to highlight the positive impact of preferred pricing (reduced fees) which we have negotiated with several of the fund managers. This is now possible because of the earlier transitioning of our clients portfolios to the Managed Account platform and the direct negotiations between our investment team and the respective investment managers. We highlighted this potential for preferred pricing during the recent Dollar Fee restructure implemented during the first quarter of 2012 for MA accounts. We are still working on suitable alternative platform for our SuperWrap clients, which will enable eventual access to the same preferred pricing. The overall fee reduction provides a very meaningful enhancement to your overall portfolio returns. DFS Model Standard Pricing Preferred Pricing Reduction IEQ Large Cap 1.21% 1.13% 0.08% IEQ Asia ex Japan 1.27% 0.97% 0.30% Sovereign Bond 0.138% 0.13% 0.008% Alternative Investment Strategies 1.15% 0.97% 0.18% This truly highlights how the DFS value proposition is strongly aligned to our client interests

5 APPENDIX A RESTRUCTURE CONSIDERATIONS Transactions Timing difference between redemption and subsequent reinvestment Capital Gains & Tax Dollar Cost Averaging Tranches Buy sell costs Full redemption of excluded managers and reallocate to new model. Model rebalancing: Overweight in existing holdings (if any) will be reduced back to the model %. GOLD.ETF being a listed security delay of up to 3 days. Managed funds delay of up to 10 days is possible. Should the market surge over the period of restructure, an opportunity cost will result by investors being out of the market. Conversely, should markets fall during this period, you may benefit by not losing capital. Capital gains (if any) - will be realised however given ongoing volatile state of markets such gains are likely to be nominal. This is mitigated by the funds ongoing distributions of earnings and carried forward losses as a result of the impact of the GFC to date. Where clients are in tax concessional phase (eg : Pension Fund tax exempt and super Fund max 10%), the tax impact is also mitigated. You may wish to seek specific advice with regard to the taxation implications of realising gains through this reallocation. New investments to the models will be stopped and recommenced post the restructure to the new managers and new allocation. Cost to trade GOLD.ETF is 0.165% brokerage + buy-sell spreads of up to 0.30% for managed funds We note that the changes are necessary to maintain your portfolio in line with our optimised Model. FEE DISCLOSURE The Indirect Cost Ratio (ICR) comprises the expenses incurred by a fund as a percentage proportion of its average net asset value through a year. These expenses generally include investment management and performance fees, legal, accounting, auditing and other operational and compliance costs. The individual Manager s fee is detailed in the accompanying 6 monthly review reports, including where applicable, the indicative fee reduction from Preferential Pricing

6 RISK AND THE CONSTRUCTION OF YOUR PORTFOLIO Investing involves some degree of risk. The list below outlines some risks associated with investing in the various models, many of which have been discussed with you as part of our informal and formal Investment Review discussions. Further details can be found in the Product Disclosure Statements provided. Market risk - Market risk is the risk associated with being exposed to a particular investment market for instance the Australian share market. and anticipated economic conditions, political events, general movements in the Australian and international stock markets, investor sentiment, interest rates and exchange rates are all factors that may influence (positively or negatively) the value of the securities and the investment returns. Economic risk - A downturn in the general economic conditions in Australia or globally may adversely affect the performance of the Model. Specific security risk - The value of an individual company s shares and interest bearing securities may change as a result of factors such as changes in management, market sentiment or industry specific events. Concentration risk - The fewer the number of holdings in a the higher the concentration risk. With a more concentrated there is a greater risk that poor performance by one or a group of securities can significantly affect the performance of the whole Credit Default risk - the risk that an issuer may default on its obligations. Relative degrees of Credit Risk are categorised by the ratings of the rating agencies. Credit Exposure is the measurement of the Credit Risk in a portfolio. Currency risk - A may include international investments the price of which is significantly determined by the value of the Australian dollar against the relevant foreign currency. Fluctuation in the Australian dollar will directly impact the value of the international investments (positively or negatively). Derivative risk - The underlying portfolio may include futures, options, swaps and other derivatives, which could accentuate or moderate the effect of market movements. Emerging Markets risk - Investment risk may be particularly high to the extent that a Fund invests in Emerging Market Securities. These securities may present market, credit, currency, Liquidity, legal, political and other risks different from, or greater than, the risks of investing in developed countries. Government risk - The impact of the Australian or a foreign government s fiscal, taxation and other political policies may have an impact on the values of investments. Inflation risk Inflation risk is the risk that returns will not be sufficiently higher than inflation to enable an investor to meet their financial goals. Interest Rate risk The possibility that your investment will be adversely impacted by a fall or rise in interest rates. Key Person risk - The underlying specialist investment managers may not anticipate market movements or execute the investment strategy effectively. The Investment Management may not achieve the s investment objective other risks notwithstanding. Changes in staff of specialist investment managers may also have an impact on the performance of the s. The performance of the could be dependent upon particular key individuals. Accordingly, incapacity, ill health or death of this individual could impact the performance and capacity of the manager. Leverage risk - results from the Fund s investment strategy utilizing leverage, obtained via the use of derivatives such as currency forward contracts. Leverage has the effect of magnifying the profits and losses on trading positions, and therefore on the Fund s unit price. The investment strategy is designed to seek to control the amount of leverage as part of the systematic investment process in such a way as to maintain the targeted level of Value at Risk through diversification of long and short positioning. Liquidity risk - Should a hold less liquid securities, it may be difficult to dispose of the security at a fair price, at particular times. As the s may be invested through managed funds, there may be periods during which the ability to withdraw from one or more funds is constrained or withdrawals are suspended. Volatility risk is the potential for the price of the Fund s investments or the unit price of the Fund itself to vary, sometimes markedly and over a short period of time. The investment strategy actively targets the volatility level and seeks to rebalance the portfolio to this target on a regular basis