March Market Update. Market returns (1 Month bar with LHS scale; 12 Month graph with RHS scale)

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1 Snapshot of the month March Market Update The ASX300 Accumulation index was -0.1% lower while the MSCI AC World Index (USD) returned -1.5% On a trade-weighted basis the AUD weakened -1.2% Within fixed income the Bloomberg AusBond Composite Index gained 0.8% The contribution from tactical asset allocation was essentially flat Within Australian equity stock selection added to relative performance but sector positioning detracted from it Market returns (1 Month bar with LHS scale; 12 Month graph with RHS scale) 1.5% 1.0% In US$ 15% March 0.5% 0.0% 5% 0% ACWI -0.5% -1.0% -5% - DM -1.5% All Countries (ACWI) Developed Markets (DM) Emerging Markets (EM) -15% EM 8.0% In AU$ 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% ASX 300 ACWI Property Bloomberg Ausbond 1 Month sector and security performances 4.0% 2.0% 0.0% -2.0% -4.0% 40% 30% 20% 0% - March ASX 300 ACWI Property Bloomberg Ausbond -6.0% IT Health Care Fins Ex-Reits Industrials Telecoms Cons Cons Staples Utilities A-Reits Materials Energy Discretionary 25.0% 15.0% 5.0% -5.0% -15.0% -25.0% TPG Primary Health Care Aristocrat Leisure ResMed Transpacific Crown Resorts Alumina BlueScope Steel ALS Ltd Fortescue 1

2 General Market Overview A mixed month for global equity markets The ECB s ramp up of quantitative easing saw European equity markets outperform while the US lagged as the latest nonfarm payrolls report beat expectations, fuelling speculation that the Fed is nearing its first interest-rate rise in nearly a decade. The impact of diverging monetary policies between Europe and the US is clearly illustrated by the massive performance differential during the first quarter of the German Dax which gained 22% and the US S&P 500 which was essentially flat. Chinese equities were the standout market despite a weakening economic backdrop, with the Shanghai composite index surging on speculation of monetary stimulus. Globally resource stocks were weighed down by weak commodity prices. Australian equity market treads water The low interest rate environment continued to drive flows to the domestic market as investors persist with their search for yield. Both the Financials and Healthcare sectors enjoyed gains above 2.0%. Other defensive sectors were more mixed as Telco s performed broadly in line with the market but Consumer Staples, REIT s and Utilities lagged. The Metals & Mining and Energy sectors weighed most heavily on the index performance as iron ore and oil prices continued to fall. Bond market enjoys broad based gains The rally was widespread as a further decline in yields helped all indices, with longer dated government bonds the biggest beneficiaries from duration impacts. The strongest performers were however the semi-government issues thanks to the additional benefit of a strong contraction in credit spreads as the impact of the Queensland election faded and Mike Baird was re-elected in NSW. In contrast, the non-government bonds tended to underperform as they benefit less from duration moves (being shorter dated) and slight spread widening also detracted from overall returns. The Australian dollar renews its trend lower The AUD trade-weighted index fell -1.2% with weakness against the USD (-2.6%) and JPY (-2.2%) partially offset by a rally against the EUR (+1.6%) and GBP (+1.5%). The AUD/USD had a volatile month, trading in a 5% range. Weakness in commodity prices continues Spot Brent crude ended the month down -13.7% as oil production continued to reach record levels in the US. The benchmark spot iron ore price also continued its decline, with five consecutive weeks of losses due to weakening Chinese demand coupled with increased supply. Over the past year the iron ore price has tumbled a little over -55%. Base metals as measured by the LME index were largely unchanged. Of the six primary index metals, lead, copper and zinc all posted gains whilst aluminium, nickel and tin traded lower. Spot gold ended the month up +2.4% after the Fed chair Janet Yellen made it clear that interest rates would not be raised until inflation lifted. Sources: CBA Global Markets Research, JP Morgan, UBS 2

3 Portfolio Update Australian equity Top 10 holdings: weights relative to index (LHS) and forecast gross yield (RHS) Macquarie Rio Tinto Asciano ASX Brambles Oil Search QBE BHP NAB ANZ -3% -1% 1% 3% 5% 0% 3% 6% 9% Relative weights are based on the Model Portfolio - actual weightings may differ across client portfolios. Gross yield based on Bloomberg consensus estimates including franking credits and assuming nil tax rate In terms of our model portfolio the largest overweight positions versus the index at month-end were in Macquarie, Rio Tinto and Asciano. The largest underweight positions were in Commonwealth Bank, Westpac and Wesfarmers (not owned). Overall stock selection added to relative performance, with the largest contributors to and detractors from performance being: Contributors Overweight Resmed Iluka Resources Ansell Underweight Fortescue Crown Resorts Origin Energy Detractors Bluescope Rio Tinto Oil Search Westpac Commonwealth TPG Telecom Portfolio sector allocations 50% 40% Portfolio Sector Weight Index Sector Weight 30% 20% 0% Financials Materials Industrials Energy Health Care Cons Discretionary Telecoms Cons Staples IT Utilities The Financials sector exposure includes A-Reits Sector allocations detracted from relative performance, driven by the overweight positions to Materials and Energy. 3

4 Portfolio Update Continued International During March there were no changes to the international allocations within the model portfolios. The effective geographic and sector exposures are detailed below: Materials 27% Americas 18% 5% 13% Cons Discretionary Fins Ex-Reits 46% Greater Europe 12% 14% Energy Industrials 27% Greater Asia 15% 7% 6% IT Cons Staples Health Care Other The underweight exposure to the US market relative to the benchmark helped drive outperformance from the international allocations, assisted by the weaker local currency given all allocations are currently currency unhedged. The ishares MSCI EAFE (IVE) which seeks to track the performance of an index composed of large- and mid-capitalisation developed market equities excluding the U.S. and Canada gained 0.9%. The ishares Global 100 (IOO) which seeks to track the performance of an index composed of 100 large-capitalisation global equities and hence has significant exposure to US companies returned -0.1% for the month. The Macquarie Asia New Stars No1 Fund ( MANS ) was the standout performer across the international allocations, returning 5.2% in March (all performances in AUD). The performance of MANS was supported by its Hong Kong and Chinese holdings as those markets outperformed on positive policy developments. During the month allocations to Hong Kong and China were increased while Taiwan was reduced as the manager opportunistically took profits in in latter following a very strong quarter that has driven valuations towards stretched levels. The fund is overweight Hong Kong and the Philippines, and underweight Taiwan and Southeast Asia. The key contributors to the Fund s outperformance were Wasion Group (a Chinese supplier of smart electrical systems), Guotai Junan (a Chinese securities broker) and Korea Kolmar (a Korean cosmetics manufacturer). Fixed income The Macquarie Income Opportunities Fund ( MIO ) and Russell Australian Select Corp Bond ETF (RCB) which are held across all asset allocation models delivered mixed performances with returns of 0.0% and 0.5% respectively, versus the benchmark (i.e. Bloomberg AusBond Composite 0-5 Yr) return of 0.4%. The Perpetual W/sale Dynamic Fixed Income Fund ( PDFI ), held only in the Moderate and Conservative asset allocation models returned 0.6%. While both RCB and PDFI benefitted from lower yields given duration impacts, MIO which primarily provides exposure to a wide range of investment grade credit-based securities and has little to no interest rate exposure did not enjoy the same benefit from lower yields. The performance of MIO was further negatively impacted by global credit markets trading weaker, though the manager has maintained a target allocation to US high yield credit on the view that liquidity from the ECB s purchasing program (along with the Bank of Japan) will gradually make its way into higher yielding assets over the globe, including the high yield market, and that the fundamentals of a gradually improving US economy remain intact. 4

5 Portfolio Activity and Stock News Portfolio activity There were no outright sales or new additions to our model portfolios during the month. Please note that individual client accounts may be rebalanced periodically despite no changes to the model portfolios due to client specific circumstances. Before any rebalancing is executed we do consider both the % deviation of a client s holding from the model allocation as well as the absolute dollar amount of the difference to avoid unnecessary small trades. Stock news Company Ansell ANZ Bank BHP Billiton Fairfax Media Insurance Australia Group Iluka Resources Macquarie Announcement Ansell announced the sale of its Shah Alam property in Malaysia has been completed with the net sale price of MYR84 million (approximately US$22.7m). The Company has further reached an agreement to acquire Microgard Ltd, a protective clothing manufacturer with headquarters in the UK, for a total consideration of GBP59 million (approximately US$88m). The agreement is expected to complete during 2Q of ANZ has completed its offer of ANZ Capital Notes 3, raising a total of $970 million in Additional Tier 1 Capital. The Company has also issued SGD 500 million 3.75% fixed rate subordinated notes pursuant to its US $60 billion Euro Medium Term Note Programme due on March BHP recommended shareholders approve the proposed demerger of South32. Eligible shareholders will receive one South32 share for every BHP Billiton share. BHP believe that a more focused portfolio will be better placed to achieve further productivity benefits in its core assets, while creating a substantial new company (South 32). South 32 expects to distribute a minimum of 40% of underlying earnings as dividends to shareholders. The Company hosted an Investor Briefing on Domain Group following increasing interest in the Domain business and high level of investor requests to meet with management. The briefing contained updates on FY15 H2 revenue trends for the Domain Group. IAG released an update on the tropical cyclone Marcia outlining approximately 3,500 claims has been received for the damage of cyclone Marcia. More than 90% of the total claims received to date relate to property damage caused by heavy rain and high winds. The Company has renewed its property catastrophe reinsurance protections at 1 January 2015 and its current maximum event retention is $250 million. Following the March quarter rebalance of the S&P/ASX Indices, Iluka has been removed from the S&P/ASX 50 Index. The company however still remains in the S&P/ASX 100 Index. Iluka and Monax Mining Limited signed a non-binding term sheet in respect of a proposed Farm-in and Joint Venture Agreement in relation to the Phar Lap Iron-Oxide Copper-Gold Project in South Australia. Macquarie entered into an agreement to acquire an aircraft operating lease portfolio from AWAS Aviation Capital Limited. The company further announced the completion of a A$500 million capital raising in the domestic and international capital markets. The institutional placement will result in the issue of 6.8 million new ordinary shares at a price of A$73.50 each. Myer Myer released disappointing 1H FY15 results with comparative store sales growth at 0.9%. Operating gross profit margin declined to 40.54%. EBITDA and EBIT margins declined to 8.24% and 5.68% respectively. Trading conditions during the second quarter were challenging, only improving in late December. Costs are expected to grow by approximately $15m in 2H FY15. Woodside The ACCC has announced that it will not oppose Woodside s proposed acquisition of Apache Corporation s interest in the Wheatstone, Balnaves and Kitimat Projects. The ACCC will continue to monitor the supply of domestic gas in WA and any future acquisitions in this area as concerns expressed by the market remain around the effects of any further industry consolidation. Sources: Company announcements, J.P. Morgan, Macquarie Wealth Management, Morgan Stanley, UBS 5

6 Disclaimer This material has been prepared for general information purposes only and not as specific advice to any particular person. Any advice contained in this material is General Advice and does not take into account any person s individual investment objectives, financial situation or needs. Before making an investment decision based on this advice you should consider whether it is appropriate to your particular circumstances, alternatively seek professional advice. Where the General Advice relates to the acquisition or possible acquisition of a financial product, you should obtain a Product Disclosure Statement ( PDS ) relating to the product and consider the PDS before making any decision about whether to acquire the product. You will find further details of the service we provide and any cost to you within the Financial Services Guide. Any references to past investment performance are not an indication of future investment returns. Prepared by EP Financial Services Pty Ltd (Elston) ABN AFSL Although every effort has been made to verify the accuracy of the information contained in this material, Elston, its officers, representatives, employees and agents disclaim all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy in, or omission from the information contained in this material or any loss or damage suffered by any person directly or indirectly through relying on this information. 6