Why is Totus Capital different?

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2 Contents Why is Totus Capital different? 4 Totus Capital 5 Portfolio Manager profile 6 Performance 7 Portfolio snapshot 8 Organisational structure 9 The Totus Capital edge 10 Totus Alpha Fund 12 Fund summary 13 What is a structural investment theme? 14 Investment process 15 Idea generation 16 Security selection 17 Portfolio construction 18 Risk management 19 Hedging 20 What we won t do 21 Case study: Evolution of a short 22 Appendix 1: Examples of structural themes 24 Appendix 2: Why invest in an emerging manager? 29 Appendix 3: Systems & compliance 30 Contacts 31 2

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4 Why is Totus Capital different? PROCESS FOCUS TRANSPARENCY ALIGNMENT FLEXIBILITY DISCIPLINE PARTNERS a proven process that has delivered significant absolute returns under a variety of market circumstances outsourcing of support functions allows manager to maximize focus on performance boutique operation provides a level of manager accessibility that is not available at larger funds manager has significant personal stake in the fund (the bulk of the managers after tax profits are also reinvested in the fund) mandate scope to pursue best opportunities for growth while also protecting capital during times of market volatility stick to areas we understand, where we have an edge best in class support for everything from prime broking, audit, and legal to middle and back office infrastructure 4

5 Totus Capital OVERVIEW Sydney based absolute return manager founded in 2012 (AFSL ) Strategy - concentrated long short investing principally in developed market equities commodities and related derivative instruments Totus Capital operates an outsourced model using specialist middle, back office and operational support infrastructure which enables the manager to remain focused on maximising returns for investors PORTFOLIO MANAGER Ben McGarry (38) has 16 years of financial markets experience, most recently with Mathews Capital Partners and Ausbil Dexia. As an analyst at UBS Australia and Morgan Stanley in London, Ben covered a broad range of companies and sectors. Ben also qualified as a Chartered Accountant with PricewaterhouseCoopers in Sydney. OPERATIONS MANAGER Larry Adams has extensive experience in fund accounting, operations, statutory reporting, taxation, and compliance. 5

6 Portfolio Manager profile Qualifications Employment History Sector Research Experience Markets Covered & Invested Chartered Accountant * Bachelor of Economics (University of QLD) Bachelor of Commerce (University of QLD) Ausbil Dexia (Australia long only $13bn) Mathews Capital (absolute return $1bn) UBS (Australian emerging companies) Morgan Stanley (European building materials & construction) PWC (Audit) ENERGY Oil, Gas, Coal, Alternatives MATERIALS Miners, Gold, Building Forestry, Agriculture INDUSTRIALS Contractors, Auto parts Logistics, Mining Services IT Services, Internet FINANCIALS Insurance, Banks, Funds management Australia USA Canada United Kingdom Europe Singapore RETAIL TELCO SERVICES REAL ESTATE * Completed Institute of Chartered Accountants in Australia exams in 2000 and maintained membership of the Institute until

7 Performance (post fees) Unit price Alpha Founder Series ASX 300 (incl. dividends) RBA Cash Rate Returns (%) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec YTD * * Note that the June 2013 performance number is an estimate at this time. Final performance numbers for June (verified by the funds external Administrator TMF Group) are due mid month. 7

8 Portfolio snapshot As at 31 May the fund had a net exposure of 44% and a gross exposure of 269% The fund held 93 positions (37 long and 56 short) Largest up month 9.21% Largest down month 2.77% Time to recover from largest drawdown 4 months Average monthly performance: +1.82% Average up month: +3.83% Average down month: -1.20% Average performance in months when the ASX is up: +1.45% Average performance in months when the ASX is down: +2.81% 300% 200% 100% 0% -100% Gross exposure Net exposure 8

9 Organisational structure PRIME BROKER Bank of America INVESTMENT MANAGER Totus Capital ADMINISTRATOR TMF Group LEGAL Henry Davis York AUDIT Ernst & Young BACK OFFICE SUPPORT QRMO MIDDLE OFFICE SUPPORT QRMO 9

10 The Totus Capital edge PROVEN INVESTMENT PROCESS MANDATE FLEXIBILITY SIZE GLOBAL PERSPECTIVE FOCUS 10

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12 Totus Alpha Fund INVESTMENT OBJECTIVE To maximise returns for investors through fundamental industry and company research and active portfolio management INVESTMENT STRATEGY Identify medium to longer term structural investment themes and seek absolute returns by investing in securities that have concentrated exposure to those themes 12

13 Fund summary Fund Style Absolute Return Domicile Australia Manager Totus Alpha Management Pty Ltd Functional Currency Australian Dollar Inception 2 April 2012 Annualised return (net of fees) 24.0% Return since inception (net of fees) 30.0% Management Fee 2% Performance Fee 20% Prime Broker Bank of America Auditor Ernst & Young Administrator TMF Group Liquidity Monthly 13

14 What is a structural investment theme? Long-term trends driven by structural changes to a specific industry or the broader economy These trends are usually significant and powerful drivers of long-term performance (both upside & downside) and continually surprise the market with the impact they have on earnings 14

15 Investment process Idea Generation Security Selection Portfolio Construction Risk Identify theme Critically analyse idea Assess the markets view Identify best investment approach Fundamental bottom up analysis Assess asset quality Management meetings Money in our best ideas Largest upside not necessarily largest position Hedging Never bet the house Net & gross exposure limits Position limits Liquidity Counterparty Jurisdiction 15

16 Idea generation Identify a structural theme Critically analyse the idea Assess the markets view Books Newsletters Bloomberg Conferences Meetings Conference calls Webcasts Site tours Independent research Press reviews Google searches Industry presentations Company presentations Industry modelling Where could we be wrong? Broker research Analyst meetings Evaluate both the Bull & the Bear case Critically weigh them up 16

17 Security selection What is best investment approach? Fundamental bottom up analysis Asset quality filter Long or short Equities or commodities Australia or offshore Absolute & relative valuation Upside & downside risk Operational & balance sheet leverage Capital requirements Location Industry position Management track record Catalysts 17

18 Portfolio construction Money in our best ideas Diversification Hedging Weighting towards highest conviction ideas Highest conviction may not equal largest upside Risks, capital requirements, catalysts equally important Continually monitor & adjust positions as information evolves Avoid over exposure to any single theme or security Using a basket approach to long or short exposures can help mitigate event risk Use hedging to mitigate market or industry risk where appropriate Recognise that we could be wrong & size positions accordingly 18

19 Risk management Limits Fundamental analysis Monitoring Net exposure < 150% (typically %) Gross exposure < +/- 300% Position limit < 125 securities No net new purchases of a stock or commodity if the position is >20% of fund NAV* Liquidity Short interest Asset quality Management track record Developed markets focus Portfolio monitored daily by QRMO & compliance Breaches notified by & documented Immediate follow up required * From time to time the fund uses index futures to hedge against market exposure. These securities are derived from diversified indices of shares and as such we do not apply the 20% of fund NAV limit to these positions. 19

20 Hedging The fund uses active hedging and shorts to protect capital and generate alpha Bulk of hedging activity conducted via index and single stock shorts Process for short selection is similar to that for longs with emphasis on the following Idea Generation Security Selection Portfolio Construction Risk Industries with structural headwinds New paradigms Timing Valuation Industry position Financial position Capital requirements Impact on net & gross exposure Are we doubling up? (e.g. long oil, short airlines) Avoid illiquid names Monitor short open interest Takeover potential Management track record Management honesty 20

21 What we won t do Invest in over the counter derivatives Invest in unlisted securities Invest on emerging market exchanges Invest in industries we don t understand Attempt to replicate or beat the performance of an arbitrary index 21

22 Case study: Evolution of a short Maverick Drilling Rapid price rise noted, research commenced, Sept 2012 catalyst noted Upgrades reserves to mb Production 597 bpd Totus attends Energy tour to US Checklist: Industry knowledge Returns Management Liquidity Edge Catalyst 1.00 Short Initiated Production averages 532 bpd in Q Stock IPO s in 2008 at 20c Production 373 bpd Reserves 7.8 mb Upgrades reserves to 28.1 mb Production 755 bpd 30% of issued capital due to be released from escrow Opportunistic profit taking on short position Balance of short closed Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr

23 Backing our ideas Source: The Australian Financial Review, 30 October

24 Appendix 1: Examples of structural themes Developed world deleveraging Lower growth and higher debt (the new normal ) The search for yield The impact of quantitative easing and zero interest rate policies Currency debasement Resources The end of the boom? Slower growth + higher operating and capital costs = fewer projects Changing of guard at the majors, capital discipline trumps growth Funding challenges for junior miners Potential impact on interest rates and the A$ The impact of fund flows The US unconventional energy revolution Relative winners and losers Bricks to Clicks Migration from real world to online (print, retail) Market share growth + low capital intensity = high returns Ageing populations Mandated superannuation growth Scarcity of affordable care 24

25 World Mining Capital Spending vs. copper price ( E) Source: Citigroup estimates 25

26 The US unconventional energy revolution Source: Energy Information Agency 26

27 Australian Superannuation Guarantee Rate 12.5% 12.0% 11.5% 11.0% 10.5% 10.0% 9.5% 9.0% 8.5% 8.0% FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 Source: Australian Government 27

28 Online retail as a percentage of Total Retail Source: Citigroup 28

29 Appendix 2: Why invest in a emerging fund? 29

30 Appendix 3: Systems & compliance Totus Capital Pty Ltd holds an Australian Financial Services Licence (AFSL ) Compliance with AFSL requirements is central to the in house compliance program 30

31 Contact details Level 17, 60 Margaret Street Sydney NSW 2000 Tel: Web: enquiries@totuscapital.com.au Disclaimer Totus Capital Pty Ltd, including its subsidiaries and or affiliates, its staff, consultants or any individuals preparing this presentation, may at any time have a position in securities or options of any of the companies mentioned in this presentation (to the extent permitted by law). An employee or consultant of Totus Capital Pty Ltd may be a director of a company mentioned in this presentation. Although the statements of fact in this presentation have been added from and are based on sources that Totus Capital Pty Ltd believes to be reliable, we do not guarantee their accuracy, and any such information may be incomplete or condensed. All opinions and estimates in this constitute Totus Capital Pty Ltd s judgement as of the date of this presentation and are subject to change without notice. Totus Capital Pty Ltd is not providing any general advice or personal advice regarding any potential investment in any financial products within the meaning of section 766B of the Corporations Act. No consideration has been made of any specific person s investment objectives, financial situation or needs. The provision of this presentation is not and should not be considered as a recommendation in relation to an investment in any entity or that an investment in any entity is a suitable investment for any specific person. Recipients should make their own enquiries and evaluations they consider appropriate to determine the suitability of any investment (including regarding their investment objectives, financial situation, and particular needs) and should seek all necessary financial, legal, tax and investment advice. Totus Capital Pty Ltd, it s directors and employees do not accept any liability for results of any actions taken or not taken on the basis of information in this presentation, or for any negligent misstatements, errors or omissions. This presentation is not an advertisement and is not intended for public use or distribution. Past performance of a fund is no guarantee as to its performance in the future. 31

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