Product Assessment. AMP Capital Global Infrastructure Securities Fund (Unhedged) (Managed Fund)

Transcription

1 Report data as at 31 Aug 2017 Rating issued on 04 Oct 2017 Product Assessment Highly Recommended Recommended Approved Not Rated Redeem AMP Capital Global Infrastructure Securities Fund (Unhedged) (Managed Fund) APIR Code ASX:GLIN Asset / Sub-Asset Class International Shares Exchange Traded Fund - ETF Investment Style Value Investment Objective To provide total returns (income and capital growth) after fees and before tax, above each Fund's performance benchmark over the long term. Zenith Assigned Benchmark S&P Global Infrastructure Index $A Net Returns (% p.a.) 1 yr 6 mth 3 mth Fund Benchmark Median Income (% p.a.) Income Total FY to 30 Jun Fees (% p.a., Incl. GST) Management Cost: 0.85% Performance Fee: 10.25% (incl. GST less input tax credits) on net returns in excess of the Dow Jones Brookfield Global Infrastructure Index VIEWPOINT & RATING The Fund is a global listed infrastructure strategy accessible via units which are quoted on the ASX AQUA market (ASX:GLIN). Similar to Exchange Traded Funds (ETFs), a market making function is in place to maximise efficiency in pricing around the underlying net asset value during trading hours. The Fund is offered to market by the AMP Capital's (AMPC) Global Listed Infrastructure team (GLI) and provides unhedged exposure to a portfolio comprising global listed infrastructure securities. Zenith notes that the GLI team has been subject to significant change in recent times, and this followed a period of challenged performance. By consequence, we deem it integral for the team to consolidate under its revised configuration and leadership structure. In addition, we believe enhancements to the Fund's investment process and risk management framework may better position the GLI team to deliver upon targeted objectives. In November 2016, AMPC announced the redundancy of Tim Humphreys, previously Head of GLI. An experienced and regarded investment professional, Humphreys was one of the key architects of AMPC's GLI investment process. His departure from the business was deemed material and was followed by other corporate changes including the promotions of David Allen to Global Chief Investment Officer (CIO) - Equities, Matthew Hoult to Head of Global Listed Real Assets and Giuseppe Corona to Head of Global Listed Infrastructure (GLI). Furthermore, these business changes follow the departure of a senior analyst, the relocation of two investment personnel across regional offices, on boarding of an analyst and subsequent reassignment of research coverage. Zenith believes the degree of change noted across the team is both material and comes following a time where Fund performance was challenged. As Head of GLI, Corona retains a range of responsibilities including the management of a team of six analysts that are located across AMPC's Sydney and London offices. In addition, Corona is lead Portfolio Manager for the Fund and is charged with the strategic direction of AMPC's GLI capability. Zenith believes Corona retains the requisite skill set to fulfil these key responsibilities. That said we deem him to be presently too thinly stretched across each of these functions. Furthermore, we retain some reservations with respect to the network in place to support Corona, not least as this extends to portfolio construction and risk management. These are ares we will seek to monitor closely over the near to medium term. AMPC adheres to an active approach to investment management and portfolio construction. The process is strongly focused at discovering mispriced securities through fundamental bottom-up research, and subject to a top down overlay. Significant emphasis is placed on portfolio diversity and the identification of companies that exhibit quality characteristics. To ensure alignment with investor expectations, AMPC also focuses on those companies that exhibit core infrastructure qualities, namely those with predictable long-term cash flows and low correlations to other core asset classes. The investment process is centred around the derivation of a Quality and Valuation score for each security. The quality score is derived subject to an assessment of industry analysis, asset quality and broader company assessments. For valuation, the primary tool used is equity Internal Rate of Return (IRR) minus the cost of equity. The final portfolio is then constructed based on an outworking of a securities blended score, which guides position sizing, together with consideration of a range of macro thematics that have the potential to impact portfolio outcomes. Zenith believes AMPC's approach to security selection is sound, albeit there exist aspects of the process that we believe could be enhanced, not least as this pertains to the derivation of macroeconomic inputs, and the formalisation of analyst secondary coverage. Furthermore we believe AMPC lags peers with respect to risk management, and the derivation of factor-based outputs. Accordingly, these are areas that further improvements is warranted. FUND FACTS AMPCI's global listed infrastructure strategy available via the ASX AQUA platform Fundamental, Bottom-up research process with unhedged currency exposure 30 to 45 securities As at 31 August 2017, the Fund market cap was $23.6 million ABSOLUTE RISK (SECTOR) VERY HIGH HIGH MODERATE LOW VERY LOW INCOME DISTRIBUTIONS PER MONTH QUARTER 6 MONTH ANNUM RELATIVE RISK (FUND WITHIN SECTOR) Geared Active - Benchmark Unaware Active - Benchmark Aware Index - Enhanced/Fundamental Index INVESTMENT TIMEFRAME 1-2 YRS 3-4 YRS 5-6 YRS 7+ YRS Zenith charges a fee to the Product Issuer to produce this report. For further information please refer to the Disclaimer & Disclosure at the end of this report.

2 APPLICATIONS OF INVESTMENT SECTOR CHARACTERISTICS The Zenith Exchange Traded Funds sector incorporates a range of ETF styles including: Market Beta ETFs; Alternative Beta ETFs; and Active ETFs. These products may encompass a range of strategies across the market capitalisation spectrum or adopt sector specific themes. Zenith benchmarks all ETFs against their specific benchmarks as well as against a relevant broadmarket Index as an additional yardstick where relevant. Infrastructure includes the following sub-asset classes: social infrastructure (Courts, Hospitals), regulated assets (Water and Sewage, Pipelines), user demand assets (Seaports, Toll Roads) and market-priced infrastructure (Telecommunication assets). The level of regulation, pricing power and competition differs significantly by sub-asset class. The fundamental drivers of revenue within this asset class tend to be changes in macroeconomic factors and demographic trends. The universe of Infrastructure managers reviewed by Zenith focus on listed infrastructure companies that primarily own and operate either regulated or user-demand assets. Typical features of infrastructure assets which can be supportive of a monopolistic environment include: High barriers to entry assets normally require a significant initial capital investment, but will generally have a low marginal cost of production. This makes it difficult for new entrants to compete with the incumbent provider. Regulation - regulated entities are often required to sell a particular service at an approved price that is sufficient to cover operating costs and provide a certain return on capital. Regulatory constraints may also prevent competing assets being constructed nearby. Inelastic Demand - due to the essential service and product provided to support a functioning society or economy (e.g. water, gas or electricity) a price increase will generally not result in a material decline in demand. Financial Leverage - operations typically require a significant level of debt, although the underlying asset's relatively stable and re-occurring income streams provide a greater level of certainty to financiers, generally resulting in access to capital at relatively attractive rates. Long life assets while the assets generally require high initial capital investment, this is paid back through consistent cash flows over the relatively lengthy life of the asset. It is also important to note that from an investor s perspective the asset lifespan can be finite, in that many assets are handed back to the government at a certain date; as is the case with many toll roads. Given the nature of the assets held within the infrastructure sector, it is expected to display greater defensive attributes relative to the broader equities market. These attributes include lower volatility and a higher and a more consistent distribution return. PORTFOLIO APPLICATIONS Zenith believes the inclusion of listed infrastructure in an investor's international equities exposure provides significant diversification benefits, with the potential to improve the risk/return profile of the overall portfolio. Infrastructure securities provide a long-term reliable income stream, which is resilient to changing economic conditions, is largely protected from inflation (based on income indexed to inflation), and provides less volatility with a lower correlation to other asset classes over the medium to long-term. While infrastructure has historically been seen as a more defensive asset class, with a lower correlation to the overall economic cycle, it should be noted that listed infrastructure performed poorly during the market downturn in The manager offers investors a high conviction global listed infrastructure exposure that aims to generate an attractive mix of both capital growth and income yield. The Fund may be blended with a growth style global equity fund or could be used as a relatively defensive stand alone exposure to global equities, within a well-diversified portfolio. Higher and more stable distribution returns relative to general equities, is a feature of listed infrastructure assets that some investors will find appealing. Liquidity Units quoted on the ASX AQUA platform may be purchased and sold via a standard broking service in a similar fashion to equities. Like traditional ASX transactions, settlement is via CHESS. Units are traded on the AQUA platform subject to liquidity. AMPCI has invested $10 million of its own capital in GLIN to initiate liquidity as well as aid in alignment of interests. The Fund also facilitates an intraday market making function in conjunction with an independent market participant to execute the Fund's market making activities. At the end of each day, units are created or cancelled to clear the Fund's net market making position. The aim is to provide an efficient pricing environment in which investors can purchase Fund units. Creations/redemptions are in cash only, not in-specie. It should be noted that the Fund bears the risk of its market making activities and such activities result in either a net benefit or loss to the Fund. AMP have not indicated any specific repatriation schedule for their seed funding in the Fund. Management have informally indicated their preparedness to maintain this funding to ensure the Fund market making activities are efficient. AMPCI provides an intraday indicative Net Asset Value (inav) which is published on a continuous basis on the Fund website. inav reflects adjustments for exchange rates, portfolio changes and equity price movements. Given that parts of the portfolio trade on international exchanges outside ASX trading hours, the inav is exposed to elements of 'stale' pricing at certain times (i.e. whenever portfolio stocks do not have live trading prices during the ASX trading day the Fund's inav only updates for live market prices. Given the current composition of the strategy, the majority of movements in the inav only reflects movements in foreign exchange. Given that AMPCI is in the best position to price its own Page 2 of 11

3 portfolio (as opposed to a third party market maker), Zenith believes that this process is operated reasonably efficiently. However there is no guarantee that the spread between unit prices and the Fund's NAV will be efficient at all times. No long term real trading data around the level of pricing efficiency is as yet available. We note however that the Fund is aiming to deliver a total spread of <1% around the NAV and to date results have been generally within this range. RISKS OF THE INVESTMENT SECTOR RISKS The broad risks of investing in listed infrastructure are comparable to global equities, for example: MARKET RISK: Infrastructure companies tend to have a lower beta relative to broader equity markets due to their more predictable earnings; however, significant market downturns can directly impact the returns of the strategy. REGULATORY RISK: Many infrastructure assets are heavily regulated and changes to the regulations may materially impact returns. GEARING / INTEREST RATE RISK: Owing to the capital intensive nature of the industry, infrastructure assets often carry high levels of debt on the balance sheet. Rising interest rate conditions could materially impact operating cash flow and valuations. DEMAND RISK: Demand, usage or patronage for the service provided by an infrastructure asset may vary unexpectedly over time. AUD CURRENCY RISK: The AUD has historically experienced declines during weaker market environments, and appreciation in market upturns. For funds that maintain an unhedged currency exposure, an appreciating Australian Dollar (AUD) is likely to have a negative impact on a fund s total return. Conversely, an unhedged fund is likely to benefit relative to hedged global equities funds in periods where the AUD depreciates. Zenith believes that over the long-term, the currency impact on performance will be minimal and therefore does not advocate retail investors making active currency decisions based on near-term currency predictions. For investors who are concerned about the short-term risks associated with taking fully unhedged or hedged currency positions, Zenith suggests blending hedged and unhedged global equity exposures to reduce short-term volatility. FUND RISKS Zenith has identified the following key risks associated with the Fund; this is not intended to highlight all possible risks: KEY PERSON RISK: as the most experienced member of the GLI investment team, Zenith believes there exists a degree of key person risk associated with Corona. Accordingly, his departure would be deemed material by Zenith, potentially necessitating us to reassess our stance with regard to the Fund's rating. TRANSITION RISK: Zenith believes there is a risk Corona fails to smoothly transition into the Head of GLI role given the magnitude of change recorded across the broader business. STRATEGY CAPACITY / LIQUIDITY RISK: Excessive levels of Funds Under Management (FUM) can inhibit a manager s ability to trade positions effectively, and therefore limit outperformance potential. AMPCI currently has FUM of A$2 billion across the strategy (as at 31 March 2017). Given the current level of FUM, Zenith does not view this to be a current concern. However, Zenith will continue to monitor the strategy's level of FUM to ensure this does not become an issue. ASX AQUA RISK: Although GLIN is quoted on the ASX AQUA platform, liquidity may be limited if GLIN's market making activities are not efficient. The ASX may suspend trading under certain circumstances. inav RISK: Intraday unit pricing published by GLIN (inav), is indicative only and may not accurately reflect issues such as currency movements or stocks in the portfolio which are trading outside the hours of operations of the ASX. MARKET MAKING RISK: GLIN relies on market making activities to minimise any dislocation between the unit price and underlying value of the portfolio. There is the risk that such activities may not be effective, result in unexpected costs and/or errors in execution. LONGEVITY RISK: ETF's which fail to grow funds under management (FUM) to a scalable level run the risk of being unviable for issuer to maintain over the longer-term and could face delisting. The risks associated around delisting are principally that of timing, forcing a crystalisation of tax consequences to investors which may not be suitable (particularly is purchasing on margin). As at 31 August 2017, the Fund's FUM was $23.6 million. Zenith sees it as strategically important that FUM grows to a more economic level. QUALITATIVE DUE DILIGENCE ORGANISATION AMP Capital Investors (AMPCI) is a majority owned subsidiary of Australian Stock Exchange (ASX) listed parent AMP Ltd. A diversified financial services company, AMPCI has investment operations that span multiple geographies including Australia, Bahrain, China, Hong Kong, India, Japan, Luxembourg, New Zealand, Singapore, the United Kingdom, and the United States. On 31 March 2011, AMP Ltd. acquired AXA Asia Pacific Holdings' Australia and New Zealand operations. Under the umbrella AMP Group, the merged entity is now among the five largest asset managers in Australia, employing over 240 investment personnel worldwide, and FUM of approximately $A billion as at 30 June The Firm has investment capabilities across each of the major asset classes. In March 2012, Mitsubishi UFJ Trust and Banking Corporation (Mitsubishi) announced the acquisition of a 15% strategic stake in AMPCI. As part of this arrangement, Mitsubishi agreed to be the sole distributor of AMPCI products to the Japanese retail market. As at 31 August 2017, the AMPC GLI team managed approximately $A 2 billion in funds under management (FUM). Of this amount $A 1.3 billion was managed in a core fashion consistent with this Fund. As at the same date, the Fund itself had a market capitalisation Page 3 of 11

4 of $A 23.6 million. INVESTMENT PERSONNEL Name Title Tenure David Allen Global CIO Equities 1 Yr(s) Matthew Hoult Head of Real Assets 5 Yr(s) Giuseppe Corona Head of Global Listed Infrastructure 5 Yr(s) In November 2016, AMPCI announced the redundancy of Tim Humphreys, previously Head of Global Listed Infrastructure. An experienced and regarded investment professional, Humphreys was one of the key architects of AMPC's infrastructure investment process. His departure from the business was deemed material and was followed by other corporate changes including the redundancy of Chief Investment Officer (CIO) Mark Beardow, and corresponding promotions of David Allen to CIO Equities, Matthew Hoult to Head of Global Listed Real Assets and Giuseppe Corona to Head of Global Listed Infrastructure (GLI). In addition, these business changes follow the departure of a senior analyst, the relocation of two investment personnel across regional offices, on boarding of a new analyst and subsequent reassignment of research coverage. Zenith believes the degree of change noted across the team is both material and comes following a time where Fund performance was challenged. As Head of GLI, Corona joined AMPC in April 2012, and has over 18 years investment experience. Based in London, Corona retains a mix of portfolio management, analytical and strategic responsibilities, and while we believe he retains the requisite skill set, he is too thinly stretched across each of these functions. With regard to leadership, Corona is also responsible for a team of six analysts that are located across AMPC's Sydney and London based offices. Zenith believes that in its current configuration, the GLI team is appropriately experienced yet less than optimally resourced. That said, average tenure at AMPC is mixed and we believe it will take time before the team is settled under its revised configuration. While Zenith has formed a favourable assessment of Corona, our hesitation is with regard to his ability to smoothly transition into the Head of GLI role given the magnitude of change recorded across the broader business. We believe this transition will be ever more difficult in the absence of an appropriate sounding board as this pertains to portfolio construction and risk management, with Zenith believing that neither Allen or Hoult are suitably positioned to fill this role as neither has an infrastructure background. In support of the GLI investment team is AMPC's broader network of analysts, portfolio managers and specialist resources including the Investment Strategy & Dynamic Markets Team, Direct Infrastructure team, Global Listed Real Estate team and the Australian Equities team. Most importantly is the access to the highly regarded AMPCI Direct Infrastructure team, which cover multiple facets of the infrastructure industry including Public and Private infrastructure. Zenith believes the research knowledge of the wider AMP Capital group is broad can provide input that can aid to enhance the GLI's investment process. INVESTMENT OBJECTIVE AND PHILOSOPHY The Fund is positioned to generate total returns (before costs and taxes), above the Dow Jones Brookfield Global Infrastructure Index, by 2% p.a. to 3% p.a. over the long-term. To deliver upon stated outcomes, AMPC adheres to an active approach to investment management and portfolio construction. The process is strongly focused at discovering mispriced securities through fundamental bottom-up research, and subject to a top down overlay. Significant emphasis is placed on portfolio diversity and the identification of companies that exhibit quality characteristics. To ensure alignment with investor expectations, AMPC also focuses on those companies that exhibit core infrastructure qualities, namely those with predictable long-term cash flows and low correlations to other core asset classes. SECURITY SELECTION AMPC's initial investment universe contains approximately 300 securities, which includes all securities that comprise the Fund's index. In addition, AMPC is permitted to consider securities that are omitted from the index but exhibit infrastructure characteristics including: monopolistic characteristics high barriers to entry highly regulated assets long-term guaranteed contracts mature assets inflation protection Once the investable universe has been established, the investment team will seek to focus its research by excluding those stocks with undesired characteristics or where there exists insufficient liquidity and/or market capitalisation. Following this initial screen, the universe is reduced to approximately 150 securities, each of which is then subject to deep dive research, with analysts seeking to establish a quality and value score. Quality Score The qualitative assessment is centred on fundamental analysis, which necessitates an assessment of three core factors including: Industry level assessment (20%): consideration is given to factors such as threat of substitution, threat of new entrants, and rivalry within the industry. In a recent development, the team now also considers how sensitive an industry is to macro centric factors. Asset Quality (40%): the company is assessed on factors including commodity sensitivity, organic growth opportunities, stability of cash flows, unrewarded maintenance capex and regulation/contract security. Company level analysis (40%): companies are analysed based on factors including corporate structure, acquisition opportunities, financing, management track record, transparency of financials and ESG. With regard to ESG, this is considered at both an industry and company level. Each factor is scored and multiplied by the stated weighting to determine a company s overall Quality score. Companies are Page 4 of 11

5 then ranked into quartiles, with the top quartile receiving an overall rating of A and the bottom quartile receiving a D rating. Zenith notes that AMPC has been unable to provide us with any logic or reasoning in support its weighting system. Accordingly, in the absence of further research on this front, we are unable to attest to its suitability. Furthermore, we note that there exist factors of consideration that are also implicitly included within its valuation methodology (see below), including 'sustainability of cash flows'. While Zenith believes that such an approach lends itself to a more conservative assessment, we are also of the view that AMPC's process may be enriched should the team take into consideration further discrete factors. Valuation Score The valuation score aims to capture securities trading at deep discounts to valuation. The primary valuation metric employed is equity Internal Rate of Return (IRR) minus the cost of equity, an approach that is consistently applied to securities, regardless of their industry or country of domicile. AMPC has adopted this valuation metric as it believes this approach best captures long-term value and derives the risk adjusted return to equity. To derive the equity IRR, AMPC base their model on a 30-year company forecast. In addition, the manager incorporates a series of standard inputs including the 10-year bond rates, inflation, asset betas and market risk premiums. To ensure the analysis is appropriately detailed, assets are valued on a country by country basis, with standard country inputs including sovereign risk and the corporate tax rates. Securities are ranked based on their primary valuation metric, with the cheapest quartile (highest excess return) achieving a 1 rating and most expensive (lowest excess return) receiving a 4 rating. To ensure risk is mitigated and valuations are accurate, a secondary valuation metric is also used to assess each security. Depending on the security, secondary valuation metrics include Net Asset Value (NAV), Price to Earnings Ratio (PE), Dividend Yield, Sum of parts and Price/Book. In determining model inputs, analysts leverage off the outputs produced by the AMPC Investment Strategy & Dynamic Markets team who generate forecasts with respect to factors including GDP, inflation and long-bond yields. These forecasts are however largely focused at Australia and G4 countries and by consequence the team are required to derive their own forecasts for those countries in which securities are domiciled and no macro research is provided. This is achieved through a combination of Bloomberg based estimates and IMF based data. Zenith does not believe the macro forecasting is a skillet of the GLIF team and given the degree of opaqueness in this aspect of the process, we view this as a key area of weakness. Given the sensitivity of long-term IRR models, we believe improvements are needed on this front. In 2016, AMPC advised us of the introduction of analyst secondary coverage in an effort to enhance the peer review process and maintain 24 hour coverage of the investment universe. In concept Zenith viewed this development positively, however noted that further work was to be undertaken with regard to formalisation of coverage following some changes to analyst coverage and relocation of analysts across geographies. Zenith has since been advised by Corona that this process continues, however where possible, there is an intention to ensure analysts only provide coverage over those stocks within their time zones and geographies. Top-down macroeconomic research In addition to the team s bottom-up process, a top-down overlay is included to ensure the portfolio is comprised of the most attractive investment opportunities, and is positioned to take advantage of desirable economic environments. More specifically, this step in the process is targeted at assessing the regulatory environment (and associated country risk), a factor we consider to be particularly important with respect to the operation of infrastructure assets. To gain insight into the global environment in which the securities operate, the investment team utilise the resources of the broader AMP Capital group, in addition to a series of external inputs. The internal resources include the AMP Investment Strategy & Dynamic Markets Team, the AMP Capital Direct Infrastructure team and other AMP Capital equity and global fixed income teams. External resources that are also used in conjunction include broker economic views, journals, Central Bank commentary and company views. Armed with this information, the team seek to derive a series of macroeconomic themes that aid them in gaining a deeper understanding of the macroeconomic factors affecting a security and the effects these have on the company s performance, which in turn plays into the portfolio construction process. While Zenith views favourably this step in the process, it should be noted that the themes produced are used more so for informative purposes, rather than being key drivers of the portfolio construction process (see below). Ultimately, Corona has the ability to take positions that are in contrast with the group's core macroeconomic themes. Overall, Zenith believes AMPC's approach to security selection is sound, albeit there exist aspects of the process that we believe could be enhanced, not least as this pertains to the derivation of macroeconomic inputs, and the formalisation of analyst secondary coverage. PORTFOLIO CONSTRUCTION Portfolio construction is an outworking of the bottom-up investment process, primarily the Quality / Valuation scores, in conjunction with the top-down macro overlay. The Q and V scores provide a guide for a securities weighting within the portfolio, which sets the foundations for the team to determine the precise weightings based on their collective experience. The relative ranking system also permits the team to skew the portfolio to those securities deemed to be trading at the greatest discount to valuation, therein ensuring the portfolio is constructed in a manner consistent with AMPC's investment philosophy. AMPCI employs a buy/sell discipline that works in conjunction with the investment process. When a security is presented for inclusion in the portfolio, the portfolio manager will assess the Quality and Valuation scores, and the suggested weighting in the portfolio. This is discussed by the portfolio manager and analyst to arrive at the final weighting. Similarly, the primary catalyst for a reduction in weighting of a security is a change in the security s Valuation or Quality score. A sell decision will be Page 5 of 11

6 prompted by a fall in a Valuation score from a 2 to 3 or a reduction in the Quality ranking from a B to C. The resulting portfolio is expected to comprise between 30 and 45 high conviction securities. Zenith notes that portfolios holdings have been below the lower range in recent periods, therefore, this range may not be an accurate reflection of the portfolio holdings going forward. The securities with the greatest overweight positions will be companies with a high Quality and Valuation score; however, most positions are between 2.5% to 3.5%, with the highest-quality stocks not exceeding 10%. Zenith has observed AMPC utilising the full breadth of these position sizes through time, which we believe if reflective of their high conviction approach. That said, we seek to ensure the Fund remains appropriately diversified by sector, region and style risks. The portfolio is constructed with reference to the benchmark, with the majority of positions sized between 1.5% and 2.5% relative to the benchmark. However, the portfolio will also comprise larger active allocations where the team have conviction. Zenith notes that the manager is unlikely to assume large regional bets. RISK MANAGEMENT Portfolio Constraints Description Individual Positions max. 10% Off-Benchmark (%) max. 10% Regional Limits +/- 20% versus Benchmark In a portfolio context, AMPC seeks to manage risk on a range of fronts. Primarily risk is managed through fundamental bottom-up research, with analysts dedicating considerable time to discover those securities deemed to be of high quality and trading at a discount to valuation. In addition, AMPC undertakes macroeconomic analysis in an effort to identify thematics that have the potential to impact the performance. To ensure sufficient portfolio diversity (in terms of security, industry, region) the Fund is also subject to a range of portfolio constraints as shown in the above table. By way of portfolio management tools, this is an area where AMPC has sought to further bolster. In addition to the BARRA risk system, the team also has access to Cortex, a proprietary risk system that generates a daily 'risk file' with data that the team then manipulates to produce broad based analytics (such as key detractors from performance). A final level of risk oversight is provided by Corona as lead portfolio manager for the Fund. While Zenith believes Corona is a solid analyst, we have yet to form the same view with regard to portfolio management and risk allocation. Accordingly it will take time for us to develop a comparable assessment of his skills in these areas relative to his predecessor. Notwithstanding the recent developments made with regard to risk management, Zenith believes AMPC lags rated peers with respect to the derivation of factor-based outputs. This is an area we deem to be particularly weak, potentially exposing the Fund to unintended risks and biases which may ultimately be to the detriment of performance. INVESTMENT FEES ETF's contain a variety of explicit and implicit costs to the investor. Investors should be aware that poor ETF selection and/or trade execution can rapidly erode any advantage gained by the lower management fees espoused by ETFs in comparison to managed funds more broadly. Management Costs The manager charges a base management fee of 0.80% p.a., an administration fee of 0.05% p.a. plus a performance fee of 10.00% on the net excess return above the Dow Jones Brookfield Global Infrastructure Index (Australian Dollar Hedged). The performance fee is paid on a quarterly basis. The Active ETF sector is still in an emerging phase with few available products to date which distorts the sector. GLIN's total cost structure is more appropriately compared to actively managed fund peers. While AMPCI s management fee for GLIN is below that of peers; Zenith believes the performance fee is not optimally structured and would prefer to see it be subject to both an absolute and relative hurdle. In addition, Zenith would prefer to see the performance fee be subject to a high watermark. A high watermark means that for a performance fee to be payable, the unit price at the end of the calculation period must exceed the corresponding unit price at the end of the last calculation period when the manager was last entitled to performance fees. Bid/ask spread As listed products, investors are exposed to bid/ask spreads as an intangible cost of investment and divestment. The bid/ask spread is primarily a function of market liquidity in ETF units as well as the impact of market making functions. It should be noted that as a safeguard in the absence of a natural market in which two investors are transacting in the Fund, market makers ensure the maximum spread is limited to a pre-agreed spread limit. It is important to note however that bid/ask spreads tend to be at their highest and most volatile at the start and end of the trading day and decreases during the course of the day s trade as efficiency improves. Investors are able to use Indicative Net Asset Values (INAV) as an indication of the underlying fair value of an ETF during trading hours. As at 31 July 2017, the Fund has demonstrated trading spreads lower than peers in the Active ETF sector. Page 6 of 11

7 It should be noted that the Fund bears the risk of its market making activities and such activities will result in either a net benefit or loss to the Fund. Given that AMP is in the best position to price its own portfolio, Zenith believes that this process should be fairly efficient and have gained conviction in the process since our last review. However Zenith notes the spread between unit prices and the Fund's NAV has the potential to materially widen under certain market conditions. AMP provides an intraday indicative Net Asset Value (inav) which is published on a continuous basis. inav reflects adjustments for exchange rates, portfolio changes and equity price movements. Given that parts of the portfolio trade on international exchanges outside ASX trading hours, inav is exposed to elements of stale pricing at times, meaning portfolio stocks do not have live trading prices during the ASX trading day inav will only update for live market prices. Given the current composition of the strategy, the majority of movements in the inav will only reflect movements in foreign exchange. Page 7 of 11

8 PERFORMANCE ANALYSIS Report data: 31 Aug 2017, product inception: Jul 2016 Monthly Performance History (%, net of fees) JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC FUND YTD BENCHMARK YTD Growth of $10,000 Benchmark: S&P Global Infrastructure Index $A ABSOLUTE PERFORMANCE ANALYSIS Return Incpt. 1 yr 6 mth 3 mth Fund (% p.a.) Benchmark (% p.a.) Median (% p.a.) Ranking within Sector Incpt. 1 yr 6 mth 3 mth Fund Ranking 53 / / / / 69 Quartile 4th 4th 2nd 2nd Standard Deviation Incpt. 1 yr 6 mth 3 mth Monthly Histogram Fund (% p.a.) Benchmark (% p.a.) Median (% p.a.) Downside Deviation Incpt. 1 yr 6 mth 3 mth Fund (% p.a.) Benchmark (% p.a.) Median (% p.a.) Risk/Return Incpt. 1 yr 6 mth 3 mth Sharpe Ratio - Fund Sortino Ratio - Fund Minimum and Maximum Returns (% p.a.) NOTE ON PERFORMANCE - Performance data contained in this report is based on an ETFs end of day Net Asset Value (NAV) as opposed to the last market price. Zenith has elected to use NAV over last price as this eliminates extraneous trading noise which typically occurs at the end of the trading day. While we see this as a cleaner approach to assessing ETF performance, readers should be aware that actual performance of an ETF may differ depending on the timing of investment and divestment of holdings. For consistency purposes, Zenith has benchmarked the Fund against our standard global infrastructure benchmark, FTSE Global Core Infrastructure 50/50 $A (Hgd) Composite. Accordingly all performance and risk measurements are calculated with the Zenith assigned index. The FTSE Global Core Infrastructure 50/50 $A (Hdg) dates back to January 2010, for periods prior to this, Zenith has benchmarked all funds against the UBS Global Infrastructure & Utilities Index (Hgd). All commentary below as at 31 August While the Fund has a minimal performance record, the parallel Page 8 of 11

9 strategy (unhedged) utilised by AMPCI has been in operation since July The Fund seeks produce returns that are 2-3% (before costs and taxes) above the Fund's performance benchmark over the long term. When assessed relative to its own benchmark, the strategy has failed to meet with this objective. Performance over the one and three-year investment terms has been particularly weak, placing the Fund in the fourth quartile relative to competitors. Furthermore, the Fund's volatility, as measured by Standard Deviation of returns, has consistently remained above that of its performance benchmark. In addition, we note that volatility has been rising since inception. RELATIVE PERFORMANCE ANALYSIS Alpha Statistics Incpt. 1 yr 6 mth 3 mth Excess Return (% p.a.) % Monthly Excess (All Mkts) independently. That is, the largest drawdown for the Fund and benchmark(s) will not always refer to the same time period. Drawdown Analysis Fund Benchmark Max Drawdown (%) Months in Max Drawdown 2 4 Months to Recover 4 1 Worst Drawdowns Fund Benchmark % Monthly Excess (Up Mkts) % Monthly Excess (Down Mkts) Beta Statistics Incpt. 1 yr 6 mth 3 mth Beta R-Squared Tracking Error (% p.a.) Correlation Risk/Return Incpt. 1 yr 6 mth 3 mth Information Ratio All commentary as at 31 August To date the Fund has minimal performance history. Zenith seeks to identify funds that can achieve an outperformance ratio above 50% of months in all market conditions, as we believe this reflects a consistency of manager skill. Disappointingly, AMPC has shown mixed success in achieving an outperformance ratio of above 50%, in all market conditions. However, the strategy has traditionally displayed stronger performance in downward trending markets. The strategy is not managed to a Tracking Error target; however, the manager expects the Tracking Error to be between 2% and 5%. The strategy's Tracking Error has exceeded the expected range over all time periods. DRAWDOWN ANALYSIS Drawdown analysis assesses the relative riskiness of a Fund versus the benchmark, in reference to capital preservation. The maximum Drawdown is recorded as the percentage decline in the value of a portfolio from peak to trough (before a new peak is achieved). All Drawdown analysis is calculated commencing from the inception date of the Fund in question, and Drawdown analysis for the Fund and benchmark(s) are calculated All commentaries below are as at 31 August To date the Fund has minimal performance history. The strategy's worst drawdown to date was 6.01% in 2011, which is less than the benchmark. Given the inception of the strategy (July 2010), it has not experienced what Zenith considers to be an extreme market environment such as the GFC. Therefore, it is difficult to assess the indicative risks associated with the strategy from the drawdown history. INCOME/GROWTH ANALYSIS Income / Growth Returns Income Growth Total FY to 30 Jun % 4.93% 5.97% AMPCI aims to outperform the benchmark over the long-term, with no specific income or growth target. REPORT CERTIFICATION Date of issue: 4 Oct 2017 Role Analyst Title Author Dugald Higgins Senior Investment Analyst Page 9 of 11

10 Sector Lead Dugald Higgins Senior Investment Analyst Authoriser Bronwen Moncrieff Head of Research ASSOCIATIONS & RELATIONSHIPS ASIC Regulatory Guide RG requires Research Houses to disclose certain associations or relationships that they may have with a product issuer. As at the date this report was issued, an associated entity of the Investment Manager relevant to this report is; or has been, a subscriber to Zenith's investment research services within the past 12 months. Conflict management arrangements are in place where Zenith provides research services to financial advisory businesses who provide financial planning services to investors and are also associated entities of product issuers. This is in accordance with Zenith's Conflict of Interests Policy. As at the date this report was issued, a related party of which provides financial planning services is, or has been, a subscriber to Zenith's research services within the last 12 months. RATING HISTORY As At Rating 4 Oct 2017 Approved 22 Dec 2016 Approved 16 Nov 2016 Under Review 17 Oct 2016 Recommended 8 Jun 2016 Recommended Last 5 years only displayed. Longer histories available on request. Page 10 of 11

11 DISCLAIMER AND DISCLOSURE Zenith Investment Partners (ABN ) is the holder of Australian Financial Services Licence and is authorised to provide general financial product advice. This Product Assessment Report (report) has been prepared by Zenith exclusively for Zenith clients and should not be relied on by any other person. Any advice or rating contained in this report is limited to General Advice for Wholesale clients only, based solely on the assessment of the investment merits of the financial product. This report is current as at the date of issue until it is updated, replaced or withdrawn and is subject to change at any time without notice in line with Zenith s regulatory guidelines. Zenith clients are advised to check the currency of reports and ratings via Zenith s website for updates. Any advice contained in this report has been prepared without taking into account the objectives, financial situation or needs of any specific person who may read it. It is not a specific recommendation to purchase, sell or hold the relevant product(s). Investors should seek their own independent financial advice, obtain a copy of, and consider any relevant PDS or offer document and consider the appropriateness of this advice in light of their own objectives prior to making any investment decision. Zenith charges an upfront flat fee to the Product Issuer, Fund Manager or other related party to produce research on funds that conform to Zeniths Research Methodology. Zenith s fee and Analyst remuneration are not linked to the rating outcome in any way. Views expressed in Zenith reports accurately reflect the personal, professional, reasonable opinion of the Analyst who has prepared the report. Zenith may also receive a fee for other non-research related services such as subscription fees for Zenith s research services and/or for the provision of investment consultancy services. Conflicts management arrangements are in place where Zenith provides research services to financial advisory businesses who provide financial planning services to investors and are also associated entities of the product issuers, with any such conflicts of interest disclosed within reports as appropriate. Full details regarding such arrangements are outlined in Zenith s Conflicts of Interest Policy /ConflictsOfInterestPolicy Zenith s research process seeks to identify investment managers considered to be the best of breed through a comprehensive, multi-dimensional selection process. Zenith utilises both quantitative and qualitative factors in its ratings models. Models maximise commonality across different asset classes while retaining flexibility for specialist asset classes and strategies. The selection process is rigorous in both its qualitative and quantitative analysis and each component is equally weighted. Zenith does not manage any proprietary assets and as such Zenith is able to choose investment managers with absolute independence and objectivity. More detailed information regarding Zenith s research process, coverage and ratings is available on Zenith s website /ResearchMethodology This report is subject to copyright and may not be reproduced without the consent of the copyright owner. The information contained in this report has been prepared in good faith and is believed to be reliable at the time it was prepared, however, no representation, warranty or undertaking is given or made in relation to the accuracy or completeness of the information presented in this report. Except for any liability which cannot be excluded, Zenith does not accept any liability, whether direct or indirect arising from the use of information contained in this report. Past performance is not an indication of future performance. Full details regarding the methodology, ratings definitions and regulatory compliance are available at /RegulatoryGuidelines 2017 Zenith Investment Partners. All rights reserved. Zenith has charged AMP Capital a fee to produce this report. Page 11 of 11