Fund Review Freehold A-REITs and Listed Infrastructure Fund

Transcription

1 Fund Review Freehold A-REITs and Listed Infrastructure Fund P 1-8 ISSUE DATE: About this Review SECTOR A-REITS / INFRASTRUCTURE SECURITIES TOTAL PRODUCTS RATED IN THIS SECTOR 2 About this Fund NAME APIR CODE PDS OBJECTIVE FREEHOLD A-REITS & LISTED INFRASTRUCTURE FUND LAM0042AU TO OUTPERFORM THE CUSTOMISED INDEX OVER ROLLING 3 YEAR PERIODS VIA AN ACTIVELY MANAGED ASX-LISTED EQUITY PORTFOLIO CONSTRUCTED OF A CONCENTRATED MIX OF PROPERTY AND INFRASTRUCTURE SECURITIES THAT HAVE A HIGH PROPORTION OF RENTAL OR MATURE/CONTRACTED INCOME. STRATEGY COMMENCED MAY 2010 MANAGEMENT FEES PERFORMANCE FEE STRUCTURE AVAILABILITY 0.85% P.A. 16.5% OF OUTPERFORMANCE ABOVE BENCHMARK, SUBJECT TO A HIGH WATERMARK. WHOLESALE, PLATFORMS About the Fund Manager FUND MANAGER FREEHOLD INVESTMENT MANAGEMENT OWNERSHIP TREASURY GROUP (30%), URBAN HOLDINGS (BURBANK) (20%) & DIRECTORS/STAFF (50%) ASSETS MANAGED IN THIS SECTOR (DEC 2013) $59M YEARS MANAGING THIS ASSET CLASS 4 INVESTMENT TEAM SIZE (DEDICATED) 2 PORTFOLIO MANAGERS TIM HANNON, ANDREW SMITH TEAM TURNOVER RATIO (2 YEARS) 0% Investment process BENCHMARK CUSTOMISED BENCHMARK (70% A-REITS / 30% AUSTRALIAN LISTED INFRASTRUCTURE) TARGETED ADDED VALUE 2% P.A. ABOVE BENCHMARK OVER ROLLING THREE YEARS EXPECTED TRACKING ERROR 4% - 6% P.A. TYPICAL STOCK NUMBERS 15 TYPICAL CAPITALISATION BIAS STOCK LIMITS SECTOR BET LIMITS MID CAP <25% TO SINGLE STOCK (SOFT) A-REITS (40-100%) LISTED INFRASTRUCTURE (0-60%) CASH EXPOSURE 0-20% GLOBAL PROPERTY SECURITIES EXPOSURE Fund rating history MAY 2014 SEPTEMBER 2013 JUNE 2012 (SMA VERSION ONLY) NIL RECOMMENDED RECOMMENDED INVESTMENT GRADE What this Rating Means The Recommended rating indicates that Lonsec has strong conviction the financial product can generate risk adjusted returns in line with relevant objectives. The financial product is considered an appropriate entry point to this asset class or strategy. Fund risk characteristics LOW MODERATE HIGH CORPORATE RISK CAPITAL VOLATILITY CONCENTRATION RISK 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. What is this Fund? The Freehold A-REITs and Listed Infrastructure Fund (the Fund) is an Australian property and infrastructure product managed by Freehold Investment Management ( Freehold or the Manager ). Lonsec considers the Manager s style to be core with a slight value bias. The Manager believes that excess returns can be achieved through extensive research which enables identification of emerging trends and cycles in real estate markets, as well as exploitation of technical and structural based market inefficiencies within the A-REIT market. The Manager believes this focus, combined with risk-aware execution in portfolio construction, enables excess risk adjusted returns to be earned by investors. The Fund s Customised Benchmark focuses on income generation from predominately Australian assets and is weighted 70% to A-REITs and 30% to Australian Infrastructure (top ASX 300). The benchmark s rules exclude A-REITs that generate less than 90% of earnings from rental income and/or that own more than 30% of assets offshore. This means that A-REITs such as Stockland, Mirvac, Goodman Group and Charter Hall are excluded from the investment universe. Westfield Group, which would otherwise be excluded, is given an exception based on its material size and it has a maximum benchmark weight of 7.0%. For the infrastructure portion, similar criteria apply and, most notably, Origin and AGL are excluded. While the benchmark serves to frame the authorised investment universe, the Fund is relatively unconstrained with regard to formal stock, active weight or tracking error limits relative to its benchmark. Lonsec believes this structure enables the Manager to impart a high degree of conviction in the portfolio; however, investors should be aware that this approach may lead to more concentrated positions and an We strongly recommend that potential investors read the product disclosure statement or investment statement. Lonsec Research Pty Ltd ABN AFSL No This information must be read in conjunction with the warning, disclaimer, and disclosure at the end of this document. This report supersedes all prior reports.

2 P 2-8 ISSUE DATE: elevated level of drawdown risk in comparison to traditional, benchmark aware A-REIT funds. The Manager adopts a primarily bottom-up research approach, preferring to focus on stock selection rather than making major tilts towards individual sectors or regions. As a result, sector and regional variations versus the benchmark (which may be large at times) will primarily be the result of bottom up stock selection. The Fund will generally hold a concentrated portfolio of around 15 stocks and the Manager intends for portfolio turnover to be relatively low (circa 30-40% p.a.). This aspect may reduce the impact of trading costs on fund returns. The Fund charges a 0.85% base fee which is lower than the average when compared to the Lonsec peer group universe. The Fund is one of the few within the sector that charges a performance fee. Lonsec believes the application of this fee is governed by appropriate rules, including a high watermark requirement. Lonsec would prefer to see the application of an additional performance hurdle (defined rate of return above the index which triggers the accrual of a performance fee) to improve this structure and alignment of interests with investors. Using this Fund This is General Advice only and should be read in conjunction with the Disclaimer, Disclosure and Warning on the final page. Lonsec recommends all potential investors consult the product PDS for further details on the nature of the risks associated with the Fund. While the Manager will seek to invest in listed securities that deliver reliable long-term cash flows, the Fund s returns are also subject to equity market risk, which means that movements (both positive and negative) in the share prices of the underlying securities in the portfolio will affect the Fund s returns. Investors should therefore be aware that there is risk of capital loss being incurred on the investment. As a long only product, the Fund will generally sit within the growth component of a balanced portfolio and is suitable for investors with a five-year plus investment horizon. The Fund s investment universe is based on a customised, rules based benchmark which differs from the more traditional market capitalisation weighted benchmarks prevalent in the Australian listed property and infrastructure sectors. The Customised Benchmark has been designed to provide a more pure play exposure to Australian landlords and infrastructure companies, reduce the structural concentration to Westfield Group present in traditional A-REIT indices, and to provide risk benefits in terms of reduced volatility and/or drawdown risk. However, as a relatively unconstrained, high conviction style product, the Fund is likely to exhibit periods of material performance variation compared to its own benchmark index. The following table illustrates the diversification characteristics of the Customised Benchmark compared to the S&P/ASX 300 A-REIT Index. S&P/ASX 300 A-REIT Index Comparison as at Stock S&P/ASX 300 A-REIT Index Freehold Customised Index WESTFIELD GROUP 27.3% 7.0% WESTFIELD RETAIL TRUST 10.7% 15.5% STOCKLAND GROUP 10.1% NIL GOODMAN GROUP 8.8% NIL GPT GROUP 7.6% 10.2% GOODMAN GROUP 8.8% NIL CFS RETAIL PROPERTY TRUST 6.4% 7.9% MIRVAC GROUP 6.1% NIL DEXUS PROPERTY GROUP 5.7% 8.5% TRANSURBAN GROUP NPV N/A 8.4% AURIZON N/A 7.1% FEDERATION CENTRES 3.8% 5.4% COMMONWEALTH PROP OFFICE FUND 2.9% 4.5% SYDNEY AIRPORT N/A 4.3% (Source: Freehold) Changes Since Previous Lonsec Review Corporate On 13 November 2013, Treasury Group Limited (TRG) announced the completion of a merger of Evergreen Capital Partners (Evergreen) with Freehold. Freehold had previously had a joint venture agreement with Evergreen to jointly deliver A-REITs and listed infrastructure investment management services (including investment management responsibility for this Fund). Under the transaction structure, Evergreen shareholders sold their shares in Evergreen in return for equity securities (shares and options) in Freehold, with Freehold now owning 100% of the issued capital in Evergreen. Prior to this transaction, Evergreen s board made the decision to wind up the Australian Equities Real Return Fund (an Australian equities long-short fund) and return all remaining capital to investors. This resulted in a net reduction in Evergreen s FUM by approximately $65m. Following the merger, TRG maintains a 30% ownership interest in Freehold. However, over time TRG s equity interest may be reduced to 15% if certain business performance and/or other milestones are met - including milestones in relation to profitability and level of funds under management. Previously, TRG had held a 30% equity interest in Evergreen. Currently, Freehold has approximately $132 million in funds under management or advice across its A-REITs and Listed Infrastructure strategy, and its unlisted and direct property funds. At present levels of FUM, the Freehold business is not yet profitable.

3 P 3-8 ISSUE DATE: Lonsec believes the merger should provide benefits in terms of improved operational efficiencies (such as shared infrastructure and reduced costs of running two separate businesses and AFSLs). However, Lonsec believes that the reduced FUM managed by the team following the closure of the Evergreen Australian Equity Real Return Fund has elevated the level of business risk. Given the business manages only a small level of FUM (and the leverage of all funds management businesses to the market) Lonsec notes that there is a high level of business risk in Freehold. This view is held despite the firm being supported by large backers in Treasury Group and Urban Holdings (Burbank). This aspect will continue to be a focus for Lonsec at future reviews and one it will continue to closely monitor in the interim. As a result of the merger and subsequent review of roles and responsibilities within the business, the role of Equity Dealer, previously held by Nishant Narayanaswamy was made redundant. Dealing responsibilities are now shared by CIO Tim Hannon and Fund Manager Andrew Smith. People and resources Stock research and portfolio management responsibilities are undertaken by Chief Investment Officer, Tim Hannon, and Fund Manager, Andrew Smith. Together the duo boast an average of 17 years investment experience and while their working relationship with respect to this strategy is around two years, they previously worked together for a number of years at Goldman Sachs JB Were Asset Management. Collectively, Lonsec believes the team demonstrate a high level of insight with regard to property and infrastructure securities markets and a strong motivation for this product. From its interactions with the team to date, Lonsec believes the team operates in what appears to be a genuine collegiate environment. Lonsec regards Hannon to be an experienced and quality property investment professional. Prior to founding the Evergreen business, he was a partner of Goldman Sachs JBWere, and his roles with Goldman Sachs JB Were Asset Management included Head of Australian Equities, Head of Real Estate and Co-Manager of Global Real Estate Securities portfolios. As such, Lonsec believes Hannon possesses the requisite skills and experience in leading investment teams and guiding the fundamental research effort. While Lonsec notes that Hannon initially achieved strong performance outcomes for investors in the Evergreen Australian Equity Real Return Fund, this initial success was not sustained over the longer term. Prior to the decision to close this fund and return capital to investors, it had experienced a period of significant negative returns, primarily during the final the six-month period. Lonsec notes that recent developments, including the merger of the Evergreen and Freehold businesses and wind-up of the Australian Equity Real Return Fund, has materially addressed Lonsec s previous concerns around Hannon s level of product focus. Lonsec observes Hannon now maintains a focus purely on the property and infrastructure sectors and the burden of business related activities associated with being the principal of the former Evergreen business has largely been removed. Smith joined the Evergreen business in late 2011, having previously managed property securities portfolios at APN Property Group, Goldman Sachs JBWere and Portfolio Partners. While still relatively new to Freehold (Evergreen), Lonsec has met with Smith on a number of occasions and believes him to be an assured and engaged investor. Smith s prior experience has primarily focused on the property sector, and in this regard Lonsec observes that Smith has donated significant time to developing his research and level of insight on the listed infrastructure sector over the past two years. Lonsec has previously noted the career risk Smith has taken in departing a more established fund manager to join Freehold (given the current low level of FUM) and regards his joining as indicative of his confidence in its ability to succeed. Lonsec notes Smith has recently acquired equity in the Freehold business and has certain performance based earn in arrangements which may increase his equity stake over time. While Lonsec regards this to be a positive development, at present his level of ownership in the business is lower than other key staff. As a result, Lonsec continues to believe there is material level of key person risk residing in Smith. The investment team is also able to draw on the broader resources of Freehold. Specifically, Grant Atchison (co-founder and Managing Director of Freehold) serves as Chair of the Investment Committee for Freehold. Atchison, who created the product and the design of the customised benchmark, previously co-managed the strategy with Hannon over the 18 months prior to the appointment of Smith. Atchison also brings experience in the field of investment consulting and asset allocation. Freehold also possesses many of the positive attributes common to boutiques, such as material co-investment and equity ownership by key investment personnel. This contributes to a generally higher level of alignment of interests between the Manager and investors than would be observed from larger institutional managers. However, Lonsec also notes that the boutique firm structure means the Fund may lack some of the informational advantages utilised by some of its larger peers. Such advantages include an on the ground research presence in key markets and access to a broad network of investment professionals, including capital market specialists and direct property / infrastructure personnel. Notwithstanding, Lonsec acknowledges the team is also able to draw upon the insight of a small but experienced direct property resource from within the Freehold business. Lonsec believes there is a high degree of key person risk in both Hannon and Smith. This means that the rating would be reassessed in the event of

4 P 4-8 ISSUE DATE: either member departing. In saying this, the risk in Hannon departing is well mitigated by his ownership position in Freehold. To date, the team responsible for the management of the Fund has been stable. Prior to the merger of the Freehold and Evergreen businesses, Evergreen experienced the departure of Analyst David Tay, who was working alongside Hannon with a primary focus on the Australian Equity Return Fund. Research and portfolio construction Lonsec regards the investment process to be logical and generally robust. Based on Lonsec s observation, both the depth and breadth of research coverage (stock and sector) has continued to develop over the past two years (since Lonsec s initial review of the strategy). This is primarily attributable to Smith s increased tenure in the role and his subsequently improved ownership of underlying models and portfolio names. Lonsec considers the rules-based process for framing the investable universe of stocks to have intuitive appeal. In a nutshell, this process seeks to de-risk the investment universe and remove the structural concentration to Westfield Group (WDC), and then take larger active positions in best idea stocks. This approach reflects the Manager s view that within these hard asset portfolios there is reasonable transparency on valuation and cashflow in normalised markets, so mispricing opportunities are often not as frequent. The Manager then seeks to exploit identified opportunities by taking large active positions. The Manager employs a strong valuation framework which ultimately forms the basis for buy/sell decisions. The primary valuation approach for A-REITs is based on Net Asset Value (NAV) and Adjusted Funds from Operations (AFFO), while infrastructure valuations are primary derived through a Discounted Cashflow (DCF) approach. Lonsec considers these approaches to appropriately cater for the nuances between the two asset classes and to be broadly in line with those implemented by peers. While the Fund s portfolio construction process maintains a strong link with the team s stock valuation outputs, it also incorporates a more intuitive and subjective overlay, such as the portfolio management team s conviction in the investment thesis, consideration of momentum and market pricers. Thus not every stock identified by the bottom valuation as a Buy will be included in the portfolio. In this regard the process is less systematic than some peers and relies more heavily on the views and insight of the portfolio management team. Lonsec believes this is consistent with the Manager s higher conviction style and allows the portfolio management to be more flexible and opportunistic in terms of final stock selection. This aspect increases the importance of conviction in the portfolio management team s edge and insight compared to peers. Accountability for the Fund is shared between Smith and Hannon, with the pair also receiving significant input from Atchison in his role on the investment committee. Broadly speaking, Lonsec prefers structures where an individual is responsible for the portfolio construction, believing that such arrangements are typically more accountable. In saying this, Lonsec believes team-based approaches have certain advantages, including enhancing peer review and helping to reduce key person risk. Lonsec also notes that team-based structures have proven quite successful in other sectors with similar characteristics (such as Australian small caps). Risk management While the Fund can potentially have more active risk relative to some sector peers (by virtue of broader parameters and the absence of a hard Tracking Error constraint), Lonsec believes the Manager generally applies an appropriate regard to risk throughout the various stages of the investment process. Risk management is achieved through a variety of measures, including the exclusion rules and diversification characteristics of the Customised Benchmark, the depth of the bottom up research and by the presence of an investment committee. At the stock level, the Manager considers factors such as underlying asset quality, the ability and track record of management, balance sheet strength and liquidity. Final portfolio weights also have regard for volatility and liquidity factors. Notwithstanding, the Manager s higher conviction style means the portfolio may often exhibit high single stock exposures in smaller or less liquid names (for example a recent 8.5% portfolio position in Aspen Group). This can lead to the Fund taking on more concentration risk versus most peers. The Manager utilises various tools and systems to support its risk review and monitoring (both absolute and benchmark relative risk) including Bloomberg Portfolio Analytics, APT risk management. Capacity The Fund is one of the smaller managers in the Australian property and infrastructure securities peer group, with total FUM of $59m as at 31 December The Manager s stated capacity limit for the strategy is around 1% of the Customised Benchmark, or circa $600m. There are positives and negatives to low or high levels of FUM, however on balance (and all other factors being equal) Lonsec believes managers with smaller FUM are better placed to add value. Larger fund managers typically have better access to key decision makers (CEOs etc), may gain better execution pricing and preferential access to IPOs. The infrastructure surrounding large managers is also extensive as compared to some smaller boutique operations. However, managing a smaller pool of funds means that the Manager is less likely to confront liquidity issues and is likely to be more nimble in the market (as it takes a

5 P 5-8 ISSUE DATE: shorter time for a position to be established or sold down). With regard to the team s access to key decision makers and broker support, Lonsec regards the experience and professional networks established by both Hannon and Smith during their time in the market mitigates this disadvantage to some extent. Performance Given the Fund s recent inception, its performance track record is currently too short to derive any meaningful analysis. However, the underlying strategy has been in existence for over three years now, albeit with a different fee profile. Based on an analysis of longer-term performance data supplied by the Manager, Lonsec observes that the strategy has outperformed its benchmark over the three years to December 2013 by 2.0% p.a. Over this period the strategy delivered an absolute return of 16.9% p.a. compared to the Customised Benchmark return of 14.9% p.a. Pleasingly, the strategy has met its objective of outperforming its benchmark over rolling three years. The strategy has also delivered solid outperformance relative to the broader peer group of A-REIT managers over this period, with markedly lower volatility. Shorter-term performance has been less successful, with the strategy underperforming its benchmark by 2.1% over the year to December The primary driver of this underperformance has been an overweight position in the Aspen Group. Lonsec also notes that the distribution of performance contributors over this period has been somewhat skewed to a single call an underweight position in the Sydney Airport Limited (SYD). Lonsec generally prefers to see a greater spread of performance drivers, although this type of attribution is somewhat reflective of the Manager s higher conviction approach. Overall Lonsec has maintained the Fund s rating as Recommended at this review. Lonsec believes the Fund provides a comparatively appealing product design versus competing A-REIT and Australian listed infrastructure funds. The higher conviction approach is also well aligned with the Manager s active management fee and differentiates the product within a highly benchmark aware peergroup. The broadening of the investment universe also allows the Manager to take advantage of any potential mispricing opportunities across sectors. Also noteworthy is that the Manager has a clear advantage with regards to capacity compared to many peers. Lonsec notes that FUM managed by the merged businesses has decreased since Lonsec s previous review and at current levels, Freehold is not profitable. Despite the presence of a large corporate backer in TRG, Lonsec believes business risk has been elevated. While the Manager has reported a number of recent developments which should have a positive impact on FUM over 2014, Lonsec would gain greater comfort from seeing the business increase FUM to a more profitable level. People and Resources Corporate Linear Asset Management Limited (Linear) is the Responsible Entity of the Fund. Linear is an established provider of funds management and platform and administration solutions to the financial services industry. Linear currently acts as responsible entity of several registered schemes, including its own platform and administration service. Linear has appointed Freehold Investment Management Limited to act as the investment manager of the Fund Freehold is an investment management company specialising in property investment funds. Freehold was established in June 2009 and is owned by its directors, most of whom are executives of the business, and by the TRG (30%) and Urban Holdings (personal family Trust of the founder of Burbank Group) (20%). Freehold currently manages total funds under management (FUM) of around $132m across unlisted property vehicles and A-REITs and listed infrastructure mandates. Investment team Name TIM HANNON Position CHIEF INVESTMENT OFFICER Years industry/firm 5/18 ANDREW SMITH FUND MANAGER 3/16 Tim Hannon has 18 years experience in the investment and securities markets. Hannon was a partner of Goldman Sachs JBWere and during his 14 year tenure at the firm had senior experience across all areas of equities investing. Hannon was Head of Australian Equities, Head of Real Estate and Co- Manager of Global Real Estate Securities portfolios with Goldman Sachs LLP. Hannon was also founder and co-manager of the Goldman Sachs JBWere Australian Infrastructure Securities Fund, and comanager of the Goldman Sachs JBWere Emerging Leaders Fund. Andrew Smith has over 16 years experience in the securities markets and portfolio management. Smith worked with Hannon during his tenure as Executive Director at Goldman Sachs Asset Management. Prior to this, Smith worked for six years with Aviva Investors where he was responsible for portfolio management of the Real Estate Securities Fund and undertook research on a variety of sectors including infrastructure, diversified industrials and resources. Most recently, Smith was a fund manager for APN Property Group. He was responsible for researching Australian and Asian real estate and Australian infrastructure opportunities. Grant Atchison is Managing Director and a cofounder of Freehold. He was the architect of the underlying Customised Benchmark and is also the Chair of the Investment Committee for the joint venture. Prior to Freehold, Atchison was a Senior Consultant with Atchison Consultants from 2005 to 2010, where he primarily focused on the global and

6 P 6-8 ISSUE DATE: domestic, listed and unlisted property sectors. His strategy consulting work covered the establishment of new businesses and products with both new and existing funds managers. Prior to his role with Atchison Consultants, he had over 10 years of direct property experience in project management, design and construction in the office, retail, industrial, residential, performing arts, education and infrastructure sectors. The first half of this period was with Lend Lease in Australia and the latter half with the AIM listed property group ISG in the United Kingdom. Other resources Freehold s other employees are Darren Brusnahan (Executive Director) and Chris Niall (Associate Director), Remuneration / alignment of interests For Freehold, the majority of the board members are also owners of the business and as such will not receive additional remuneration for this role. The remuneration policy is as follows: For owners of the business this will include a low base salary and profit share. For non equity participating staff this will include a moderate level salary and a bonus linked to the performance of the business and the individual s contribution to the outperformance. The bonuses will be linked to the performance fees generated by the business through the various funds and the individual s contribution to the outperformance. Research Approach Overview INVESTMENT UNIVERSE 40 STOCKS FULLY MODELED 28 STOCKS PARTIALLY MODELED 12 (OUTSIDE OF INDEX) TOP-DOWN / BOTTOM UP 20% / 80% AREITS INFRASTRUCTURE NAV AND ADJUSTED FUNDS FROM OPERATIONS (AFFO) DISCOUNTED CASH FLOW (DCF) AND RAB (SECONDARY) Research approach Fundamental research is central to the investment process. The key inputs which are included by the Manager in the research process are as follows: Company financial reports Meetings with companies Property inspections Macroeconomic inputs Direct real estate research and industry contacts Broker research Valuation approach The Manager assesses the following fundamental factors for use in the valuation framework: Property/asset quality Management quality Tenant risk (AREIT) Customer risk (Infrastructure) Trust liquidity/size Asset diversification Gearing Portfolio construction Portfolio construction is a team-based process. As a valuation and insight driven fund manager, buy and sell decisions are based heavily on the level of valuation support versus the security price. Put simply, if the investment case for a security has played out and a stock has performed well and reached valuation, the Manager will typically exit the position and shift the capital to a higher returning opportunity. Weights are firstly decided by conviction in mispricing (valuation support) and then adjusted for volatility, price momentum and liquidity. The Manager also applies a volatility targeting approach to portfolio construction, with the portfolio s volatility expected to be less than or in line with the benchmark. The Manager will also generally try to maintain an ex ante tracking error (versus the Customised benchmark) of below 6% p.a. Risk limits and monitoring The Fund also has a soft maximum individual stock limit of 25%. The key portfolio sector risk limits are as follows: % allocated to A-REITs 0-60% allocated to infrastructure. 0-20% allocated to cash. (Although the aim is to be fully invested and cash is typically 1-2%) Following the merger, Freehold inherited Treasury Groups compliance arrangements for Evergreen which have been adopted for the broader business. In addition, Freehold have engaged consultant Amos Hill to provide independent daily compliance verification of our listed portfolios. Hill reports directly to the board. Risks An investment in the Fund carries a number of standard investment risks associated with investment markets. These include performance, liquidity, counterparty, market and tax risks. These and other risks are outlined in the PDS and should be read in full and understood by potential investors. Lonsec considers the following to be the major risks: Equity market Investments in equity markets are subject to numerous factors which may have an impact on the performance of an investment (both positive and negative). Unexpected changes in economic, technological, structural, regulatory or political conditions can have an impact on the returns of all investments within a particular market.

7 P 7-8 ISSUE DATE: Glossary Absolute Return Top line actual return, after fees Excess Return Return in excess of the benchmark return (Alpha) Standard Deviation Volatility of monthly Absolute Returns Tracking Error Volatility of monthly Excess Returns against the benchmark (the Standard Deviation of monthly Excess Returns) Sharpe Ratio Absolute reward for absolute risk taken (outperformance of the risk free return (Bank Bills) / Standard Deviation) Information Ratio Relative reward for relative risk taken (Excess Returns / Tracking Error) Worst Drawdown The worst cumulative loss ( peak to trough ) experienced over the period assessed Time to Recovery The number of months taken to recover the Worst Drawdown

8 ISSUE DATE: About Lonsec Lonsec Research Pty Ltd (Lonsec) is an investment research house with specialist areas of expertise, that was originally established in 1994 and the current entity was registered on 23 June From 1 July 2011, Lonsec became a fully owned subsidiary of Lonsec Fiscal Holdings Pty Ltd, a privately owned and independent entity with a multi-brand strategy of providing leading financial services research and investment execution. Lonsec believes that professional financial advisers need informed opinions on the best investment strategies and financial products to provide real value for their clients. To meet this need, Lonsec has in place an experienced research team, which draws on a robust research process to undertake in-depth assessment of managed fund products. Analyst Disclosure and Certification Analyst remuneration is not linked to the research or rating outcome. Where financial products are mentioned, the Analyst(s) may hold the financial product(s) referred to in this document, but Lonsec considers such holdings not to be sufficiently material to compromise the rating or advice. Analyst 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 matters and financial product(s) to which this document refers. Date prepared May 2014 Analyst Andrew Coutts Release authorised by Peter Green P 8-8 LONSEC STRONGLY RECOMMENDS THIS DOCUMENT BE READ IN CONJUNCTION WITH THE RELEVANT PRODUCT DISCLOSURE STATEMENT OR INFORMATION STATEMENT Important notice: This document is published by Lonsec Research Pty Ltd ABN , AFSL No (Lonsec). Please read the following before making any investment decision about any financial product mentioned in this document. Disclosure at the date of publication: Lonsec receives a fee from the fund manager or product issuer(s) for researching the financial product(s) set out in this document, using comprehensive and objective criteria. Lonsec may also receive a fee from the fund manager or product issuer(s) for subscribing to research content and other Lonsec services. Lonsec s fee is not linked to the rating(s) outcome. 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 details of these holdings are not known to the Analyst(s). Disclosure of Investment Consulting services: Lonsec receives fees for providing investment consulting advice to clients, which includes model portfolios, approved product lists and other financial advice and may receive fees from this fund manager or product issuer for providing investment consulting services. The investment consulting services are carried out under separate arrangements and processes to the research process adopted for the review of this financial product. For an explanation of the process by which Lonsec manages conflicts of interest please refer to the Conflicts of Interest Policy which is found at: Warnings: Past performance is not a reliable indicator of future performance. Any express or implied rating or advice presented in this document is a class service (as defined in the Financial Advisers Act 2008 (NZ)) or limited to General Advice (as defined in the Corporations Act 2001(Cth)) 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. It is not a personalised service (as defined in the Financial Advisers Act 2008 (NZ)) and does not constitute a recommendation to purchase, redeem or sell the relevant financial product(s). Before making an investment decision based on the rating(s) or advice, the reader must consider whether it is personally appropriate in light of his or her financial circumstances, or should seek independent financial advice on its appropriateness. If our advice relates to the acquisition or possible acquisition of particular financial product(s), the reader should obtain and consider the Investment Statement or Product Disclosure Statement for each financial product before making any decision about whether to acquire a financial product. Lonsec s research process relies upon the participation of the fund manager or product issuer(s). Should the fund manager or product issuer(s) no longer be an active participant in Lonsec s research process, Lonsec reserves the right to withdraw the document at any time and discontinue future coverage of the financial product(s). The rating in this publication relates to the fund outlined in the publication which may have related funds or be associated with other funds and platforms. The rating may only be applied to the fund outlined in this publication at first instance and whether it applies to related or associated funds and platforms should be investigated by your financial adviser before you make an investment decision in relation to the related or associated funds and platforms. You should be aware that the mandate, fees, underlying investments, the issuers of the related and associated funds and platforms may be different from the fund specified in this publication. You should satisfy yourself that the related and associated funds and platforms meet your financial circumstances, needs and objectives before making an investment decision. 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. Financial 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, officers, employees and agents disclaim all liability for any error or inaccuracy in, misstatement 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. Copyright 2014 Lonsec Research Pty Ltd (ABN , AFSL No ) (Lonsec). This report is subject to copyright of Lonsec. Except for the temporary copy held in a computer's cache and a single permanent copy for your personal reference or other than as permitted under the Copyright Act 1968 (Cth), no part of this report may, in any form or by any means (electronic, mechanical, micro-copying, photocopying, recording or otherwise), be reproduced, stored or transmitted without the prior written permission of Lonsec. This report may also contain third party supplied material that is subject to copyright. Any such material is the intellectual property of that third party or its content providers. The same restrictions applying above to Lonsec copyrighted material, applies to such third party content.