Fund Review Monash Absolute Investment Fund

Transcription

1 Fund Review Monash Absolute Investment Fund P 1-9 ANALYST: PETER GREEN APPROVED BY: SHAILESH JAIN ISSUE DATE About this Review ASSET CLASS REVIEWED SECTOR REVIEWED AUSTRALIAN EQUITIES AUSTRALIAN LONG SHORT TOTAL FUNDS RATED 20 About this Fund ASIC RG240 CLASSIFIED FUND REVIEWED APIR CODE PDS OBJECTIVE STATED RISK OBJECTIVE DISTRIBUTION FREQUENCY YES MONASH ABSOLUTE INVESTMENT FUND MON0001AU THE FUND HAS A RETURN TARGET OF 12-15% P.A. (AFTER FEES) OVER A FULL MARKET CYCLE, WHILE SEEKING TO PRESERVE INVESTOR CAPITAL EACH FINANCIAL YEAR CAPITAL PRESERVATION ANNUAL FUND SIZE $36M FUND INCEPTION MANAGEMENT FEE PERFORMANCE FEE RESPONSIBLE ENTITY About the Fund Manager FUND MANAGER OWNERSHIP % P.A. 20.5% OF THE AMOUNT THAT INVESTMENT PERFORMANCE (BEFORE FEES) EXCEEDS THE RBA CASH RATE THE TRUST COMPANY (RE SERVICES) LIMITED MONASH INVESTORS PTY LTD MAJORITY STAFF OWNED ASSETS MANAGED IN THIS SECTOR $88M YEARS MANAGING THIS ASSET CLASS 4 Investment Team PORTFOLIO MANAGER SHANE FITZGERALD AND SIMON SHIELDS INVESTMENT TEAM SIZE 3 INVESTMENT TEAM TURNOVER STRUCTURE / LOCATION Investment process STYLE MARKET CAPITALISATION BIAS BENCHMARK STOCK LIMITS SECTOR LIMITS NONE SYDNEY, AUSTRALIA STYLE NEUTRAL SMALL CAP RBA CASH RATE MINIMUM -10%, MAXIMUM 15% (10% AT COST ) MINIMUM -15%, MAXIMUM 25% (20% AT COST ) CASH LIMITS UP TO 100% (TYPICALLY 0% TO 40%) NET EXPOSURE -50% TO 150% (TYPICALLY 60% TO 100%) GROSS EXPOSURE -100% TO 300% (TYPICALLY 80% TO 120%) GLOBAL EQUITIES 0% TO 20% (TYPICALLY 0% TO 5%) CAPACITY LIMIT Fund rating history NOVEMBER 2016 $500M ( HARD CLOSE) RECOMMENDED 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. Strengths Very experienced investment team with a mix of portfolio management and analytical experience. Attractive boutique investment culture with strong alignment of interests. Logical investment process focused on capitalising on the skill-set of the two portfolio managers and preserving capital. Capacity is a tail-wind with FUM presently below $100m. Weaknesses Small team size given the all cap focus. The willingness to take on very high levels of idiosyncratic stock risk in micro-cap stocks is potentially at odds with the focus on capital preservation. Higher governance risk due to the lack of independent directors on the Manager s Board of Directors. Also, as a holder of a wholesale AFSL, there is no independent Compliance Committee. Heavy reliance on sell side brokers. High fee load including an uncapped performance fee benchmarked against the RBA Cash Rate. Fund Risk Characteristics BUSINESS SUSTAINABILITY RISK CAPITAL VOLATILITY LEVERAGE RISK SECURITY LIQUIDITY RISK SECURITY CONCENTRATION RISK GOVERNANCE RISK LOW MODERATE HIGH Risk categories are based on Lonsec s qualitative opinion of the risks inherent in the financial product s asset class and the risks relative to other financial products in the relevant Lonsec sector universe. BIOmetrics Aggregate risks STD RISK MEASURE A Standard Risk Measure score of 7 equates to a Risk Label of Very High and an estimated number of negative annual returns over any 20 year period of 6 or greater. This is a measure of expected frequency (not magnitude) of capital losses, calculated in accordance with AFSA/FSC guidelines. 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 2-9 ANALYST: PETER GREEN APPROVED BY: SHAILESH JAIN ISSUE DATE Features and benefits COMPLEXITY ESG AWARENESS Fee profile FEES VS LONSEC UNIVERSE FEES VS ASSET CLASS FEES VS SUB SECTOR LOW MODERATE HIGH LOW MODERATE HIGH Fee BIOmetrics are a function of expected total fee as a percentage of expected total return. What is this Fund? The Monash Absolute Investment Fund ( the Fund ) is an Australian equity long-short fund with an absolute return target of 12-15% p.a. (after fees) over an investment cycle (seven years). The Fund also has the objective of preserving capital over each financial year. The Fund s absolute return focus means it is wholly benchmark unaware and its performance is not referenced to any conventional ASX benchmark. The Fund can also significantly vary both its net and gross market exposure using either cash or derivatives. The Fund was first seeded in 2012 as a wholesale only product and was converted to a retail fund in While having the ability to short stocks, the Fund will typically be long-biased with shorts entered into opportunistically on a case-by-case basis. Monash Investors Pty Ltd ( Monash or the Manager ) believes that while most stocks are reasonably fairly priced most of the time, opportunities to identify significant mispricing occurs because of recurring business situations or recurring patterns of behavior by investors, analysts and company management. The Manager believes the extensive buy-side and sell-side experience of its principals provides it with the platform to identify and exploit such opportunities, both on the long and short side, well before the opportunities are fully appreciated by the market. Also, the Manager believes that these opportunities cannot be effectively exploited if a capability is managed relative to a market cap weighted benchmark; hence the absolute return focus. The Manager is style neutral and believes compelling investment opportunities exist across all investing styles, i.e. value or growth. The Manager s benchmark unaware style also means that it will hunt down the market cap spectrum for opportunities of merit. Meaningful positions will be taken in small and micro-cap stocks as long as liquidity is not a barrier. While the Fund will seek to predominantly implement its investment strategy using Australian equities, it can invest up to 20% of its net asset value ( NAV ) in global equities. However, in practice this sleeve will only receive a 0-5% allocation. The Fund s focus on capital preservation means that it can also significantly vary its net market exposure including holding up to 100% of its NAV in cash or taking on a net short position down to -50% of NAV. However, the Fund does not have any set asset allocation targets and its market exposure, both net and gross, will be the outcome of the investment opportunity set. The Fund has broad portfolio constraints in terms of its net and gross exposure. In particular, its allowable net exposure range is -50% net short to 150% net long. In terms of its maximum long and short limits, the Fund can lever up to 200% long and -100% short which reflects a gross maximum of 300%. In practice, the Fund will not be run in such an aggressive manner and the expected net average exposure range will be % while the expected gross exposure range will be %. At the time of Lonsec s review, the Fund s net position was 64% and the gross position was 81%. Since inception, the range has been % net and % gross. Lonsec considers the ability to vary its market exposure combined with a willingness to invest in micro and small cap stocks will lead to the Fund s return varying significantly from broader Australian equity indices. Lonsec considers the Fund to have a relatively high turnover investment approach, with turnover expected to be % p.a. over time. The driver of this relatively higher levels of turnover is the eventdriven trades the Manager will actively engage in, the stringent sell discipline and the mandated stop losses. Lonsec notes that high turnover can lead to a higher levels of transaction costs. Lonsec notes that the Fund has a high ongoing management fee of % p.a. However, Lonsec highlights that the Fund will be capacity constrained and will be hard closed at $500m and the fee needs to be considered in this context. Further, the fee is inclusive of all administrative costs and hence is not wholly retained by the Manager. Nonetheless, Lonsec considers the fee to be towards the higher end on a peer relative basis. The Manager is also entitled to a performance fee, calculated as 20.5% p.a. of the outperformance (pre fees) above the RBA Cash Rate. Lonsec generally supports the concept of performance fees as long as these are appropriately structured. Lonsec considers an appropriate structure to be one where the performance fee is in line with industry standard (in percentage terms), where the fee is subject to an appropriate hurdle rate of return, and where the fee is subject to a high water mark with no reset period. With regards to this Fund, Lonsec considers the performance fee to be reasonably structured. However, Lonsec highlights that due to its static hurdle rate (RBA Cash) and uncapped nature, investors should expect to incur a very high ICR during bullish market conditions. Using this Fund This is General Advice only and should be read in conjunction with the Disclaimer, Disclosure and Warning on the final page. The Fund utilises a broad range of strategies including short selling, derivatives and varying its cash levels in the operation of the Fund. The use of shorting and the adjustment of market exposure are undertaken for performance enhancement, risk mitigation and hedging purposes.

3 P 3-9 ANALYST: PETER GREEN APPROVED BY: SHAILESH JAIN ISSUE DATE Shorting introduces additional risks to investors when compared to traditional long only and benchmark aware product designs. As an Absolute Return Long-Short product, Lonsec considers the Fund to be suitable for blending with other Australian equities strategies, including more benchmark aware products. The Fund is subject to equity market risks and movements (both positive and negative) in the prices of the underlying securities in the portfolio. Investors should be aware of and comfortable with the potential for the Fund to experience periods of negative returns which may result in capital losses being incurred on their investment. As such, the Fund will generally sit within the growth component of a diversified portfolio. Advisors should consult the Lonsec Risk Profile Review and / or the Lonsec Risk Profile Definitions document(s) for guidance on appropriate allocations to Australian equities within a diversified portfolio. Lonsec recommends that equities are suitable for investors with a time horizon of at least five years. Suggested Lonsec risk profile suitability SECURE DEFENSIVE CONSERVATIVE BALANCED GROWTH HIGH GROWTH For guidance on appropriate asset allocations and risk profiles, refer to the latest Lonsec Strategic Asset Allocation Review and Risk Profile Definitions on our website. Changes Since Previous Lonsec Review This is Lonsec s initial review of the Fund. Lonsec Opinion of this Fund People and resources The Manager s investment team consists of co- Portfolio Managers ( co-pms ) Simon Shields and Shane Fitzgerald and a junior analyst (Ryan Sohn). Shields and Fitzgerald are also the co-founders of Monash and are its majority shareholders. Monash was established in 2012 and the investment team has four years co-tenure with the Manager. As well as being investors, Shields and Fitzgerald are also executives with the firm with the former being the current CEO and the latter the CFO. Lonsec considers the investment team to be small when compared to many peers. The co-pms also do not have extensive co-tenure as a decision-making unit at Monash. However, Lonsec notes that the investment process that has been implemented is a purer reflection of the way that both co-pms wish to run money. In particular, it has been set-up to capitalise off the market observations, knowledge, and networks that both have cultivated over their respective careers. In Lonsec s estimation, this crucial element should ensure that both individuals have significant buy-in to the investment philosophy. It also ensures that the investment process is not dependent on deep sector coverage. Rather, the co- PMs will seek to capitalise on the best ideas that they uncover and selectively invest in. Shields has a lengthy portfolio management track record in the market. He has held senior Australian equity portfolio management roles mainly at Monash, UBS (for five years) and Colonial First State (for nine years) in an investment industry career spanning 26 years. A highlight of Shields track record is that he has held roles across a variety of investment styles; for instance, at UBS he implemented more of a core style while at CFSGAM it was more of a growth style. Unlike the more buy-side focused career of Shields, Fitzgerald s experience before Monash was more on the sell side and in particular with JP Morgan where he was a highly rated insurance and diversified financials analyst. However, he had a buy-side analytical role at UBS immediately prior to joining Monash. Fitzgerald also has over 20 years in the industry. Lonsec considers both investors to be appropriately experienced and considers the mix of backgrounds to aid in diversity. As well as being co-pms, both also have executive, analytical and trading duties at Monash. In terms of business duties, Shields is the CEO and the Chair of its Board while Fitzgerald is the CFO and a director on the Board. Monash is also currently seeking to grow the FUM of the business and this is likely to increase the marketing burden on Shields in particular. Lonsec highlights that the combination of all these roles and responsibilities means that both men have a heavy work load at present. However, the addition of a junior analytical resource should alleviate the burden to a smaller degree. Having highlighted this, Lonsec notes that Monash runs a mostly outsourced model including the Fund s RE (Perpetual), back and middle office administration (White Outsourcing) and third-party distribution (Winston Capital Partners). Monash also has a dedicated COO (Sandra Donnarumma) who is responsible for all compliance monitoring and company secretarial matters. Lonsec considers this model to provide significant support to the co-pms and to allow them to spend the majority of their time on investment matters. As with many boutiques, the alignment of interest between the investment team and end investors is very strong. Both Shields and Fitzgerald are significant investors in Monash, with Shields holding 51% of the equity and Fitzgerald 34%. This means that the majority of their remuneration will come in the form of dividends earned from investment performance fees. Lonsec considers key person risk in the co-pms to be very high. Lonsec notes the pivotal executive and investment roles both hold in the firm and the performance track record both hold in the market. The departure of either would likely trigger a rating review of the Fund. Lonsec notes that the risk of either departing is moderated by the significant stake each has in Monash and their strong buy-in to the investment process which they have developed. Lonsec notes that the co-pms comprise the majority of the Board of Directors of the firm, with the third director (Glen Rice) being a representative of minority shareholder UBS. Lonsec highlights that none of the three directors are independent and considers this to be a governance deficiency for Monash. Lonsec also notes that while Monash does have an external Responsible Entity, as the holder of a wholesale AFSL there is no need for

4 P 4-9 ANALYST: PETER GREEN APPROVED BY: SHAILESH JAIN ISSUE DATE an independent Compliance Committee and the independent oversight this brings. Research and portfolio construction Lonsec considers the Manager s investment process to be well suited to supporting the co-pms efforts in identifying high conviction ideas of merit based on their market insight and experience. Importantly given the smaller team size, this means that Monash is not trying to cover the whole market. Instead, the focus is on stock ideas with some common attributes that the Manager s experience suggests occur repeatedly due to the behavioral constraints of market participants. These also typically deliver asymmetric pay-offs, defined by the Manager as offering strong upside with limited downside. The Manager has identified four common stock attributes that it believes need to be present in combination to identify these ideas of merit; insight, growth, value and event. Insight means that the co-pms have some insight into why the stock has been mispriced by the market and how this will be resolved, growth means that the stock has good growth prospects in terms of EPS and CFPS, value means that the stock price is offering a large pay-off if the Manager s assessment of intrinsic valuation is reached, and event means that the catalyst for closing this gap is in the near-term. Lonsec considers these attributes to be a sensible framework for the Manager to keep identifying high conviction stock opportunities on an on-going basis. Lonsec notes that unlike many competitors, the Manager s investment process is not dependent on broader coverage of the market. Instead, the Manager s process is heavily dependent on stock ideas that come from its panel of 26 sell side brokers. The Manager also extensively uses FactSet as a source of historical financial information as well as consensus estimates. This data set is then supplemented by the insights gained by the co-pms from their own meetings with company executives and industry participants. Lonsec notes that the skill-set of this Manager is interpreting this data set for ideas of merit based on the experience of the co-pms. Hence, the extensive use of sell side data needs to be understood in this context. Nonetheless, Lonsec notes that sell side data is commoditised to a large extent and prefers that managers produce their own intellectual property to sustain their competitive advantage over the market. Once ideas of merit have been identified, the Manager will run a desktop assessment using a proprietary model. This model uses ten-years of historical financial information and three-years consensus estimates to form a view as to the valuation upside in the opportunity. In particular, the assessment contrasts what the market knows with the initial views of the co-pms based on their analysis and expertise. If the stock idea has at least 60% upside, it is identified as a potential outlook driven or product launch opportunity. If the upside is less than 60% but there is an identifiable catalyst, then the opportunity is classified as a potential event trade. Lonsec considers this upfront focus on the potential pay-off of each stock event to be vital in focusing the research agenda of the small team on its best ideas. Lonsec notes that the classification of stock ideas of merits into outlook driven, product launch or event driven plays a critical determinant on the extent of the bottom-up research effort and portfolio construction. For outlook driven stocks, these have been identified as the highest returning ideas and hence most of the research effort is expended on these. Extensive bottom-up stock research is performed including meeting with management and performing industry analysis. The Manager will also build an integrated financial model (P&L, Balance Sheet, Cashflow Statement) and make their own earnings forecasts. The research process culminates in the completion of a formal investment proposal for ratification by the co-pms. The Fund will typically take 6-8% absolute weights in approved outlook driven stocks if there is sufficient liquidity. The Manager takes more of a basket approach to product launch stocks which are defined as early stage businesses that have multi-bagger potential but also have high risk. The same rigorous bottomup research is under-taken; however, the initial positions taken in this bracket is % and no more than 10% in aggregate. For event-driven stocks, these are stocks assessed as having lower upside potential but nearer-term payoffs. The category is dependent on the identification of the event itself and this consumes part of the research effort. The category also is dependent on the Manager s assessment of the asymmetric pay-offs which is more a function of the past experience of the co-pms. For these positions, the Manager can take a -2.5% to 2.5% position or a pair trade will be entered into. Lonsec considers an attractive feature of the investment process to be the strong link between performance outcomes, bottom-up stock analysis and portfolio construction. The investment process is not designed to cover the broader market. Rather it is designed to ensure that the research effort is focussed on the ideas of greatest merit and that the highest portfolio weights are taken in these highest conviction opportunities. Risk management Lonsec considers that the Manager s risk management framework to be comprehensive and relatively well aligned with the focus on capital preservation. At a stock level, this entails the classification of stock ideas into the various categories with the opportunity set to take larger weights being truncated for product launch and event driven opportunities. The Manager is also especially focused on sell discipline and will sell out of names as the price targets are reached. Finally, the Manager has set stop loss limits; for outlook driven stocks the limits are set for thesis violations and for event driven stocks for adverse price moves. Lonsec considers that the Manager s research process to be relatively flexible and unconstrained including for outlook driven stocks. Hence the Manager will take large absolute positions in stocks with relatively low market caps. Lonsec notes that this segment of the market is less liquid than larger

5 P 5-9 ANALYST: PETER GREEN APPROVED BY: SHAILESH JAIN ISSUE DATE cap stocks and also tends to be more volatile, a characteristic that is potentially at odds with the focus on capital preservation. However, Lonsec notes the Manager s focus on diversification by industry, investment themes, and pay-off horizons tempers this observation to a degree. Lonsec notes that there are portfolio mandate constraints including stock and sector limits (stocks 10% at time of purchase, up to 15%; sector 20% at the time of purchase, up to 25%). There are also net and gross exposure ranges and limits on longs and shorts in aggregate. However, Lonsec notes that these mandate limits are very broad in keeping with the Manager s flexible investment approach. The Manager has invested in its systems architecture to ensure that the risks that matter can readily be monitored. EzeCastle is the order management system while Imagine is used for risk management oversight and reporting. Imagine, in particular, is used to monitor portfolio risk. Funds under Management (FUM) The Manager has set a hard capacity limit of $500m for the Fund. Given FUM is still well below this at $88m, Lonsec does not have any current capacity concerns. In fact, Lonsec considers the Fund to be relatively attractively positioned from a capacity perspective. The Manager s capacity limit is relatively tight when compared to peers and in Lonsec s view, goes some way to justifying the high fee load for this product. There are positives and negatives to low and high levels of FUM; however, on balance Lonsec believes managers with smaller FUM to be better placed to add value. Larger fund managers typically have better access to key decision makers and may gain better execution pricing and preferential access to IPOs and secondary offerings. However, on the negative side, managing a large pool of FUM means that a larger manager may confront liquidity issues and is likely to be less nimble in the market as it takes longer for a position to be established or sold down. While only a recently established boutique firm that is expected to take some time to gain traction, Lonsec remains cognisant that wind up risk is inevitably present at this stage of the firm life cycle. Having highlighted this, Lonsec notes that FUM has grown substantially in recent years and that $52m of this is locked in via a LIC structure. The Manager has also demonstrated the ability to attract seed capital from specialist investors in its recent past. Performance Given its inception date in mid-2012, the Fund does not as yet have a lengthy track record of performance. However, Lonsec notes that the Fund is coming close to reaching its five-year anniversary. Nonetheless, Lonsec prefers to monitor a Fund s performance over an investment cycle to make a more definitive observation about performance. This is especially so for Monash where the team only has four years of cotenure at the Manager. Nonetheless, Lonsec acknowledges that the Fund has made a solid start with its since inception total return as at 30 September 2016 of 13.6% p.a. (after fees) lying within the Fund s 12-15% p.a. absolute return target. Over the three-year period to 30 September 2016, the Fund has fallen marginally below its return target, recording a total return of 8.2% p.a. (after fees). This is marginally ahead of the peer group median of 7.4% p.a. Lonsec notes that the return over the shorter-term has been consistent with the three-year trend, with the Fund returning 8.5% versus 9.8% for the peer median over 12-months. Key winners for the Fund were long positions in Netcomm Wireless, Emerchants and Catapult Group which pleasingly for the Manager were all outlook-driven stocks. Key detractors were Slater & Gordon, Eservglobal, and Moboom. The Fund has demonstrated some sound defensive qualities, having both outperformed in over 80% of down-markets over three years and had a much lower drawdown than the peer average (7.7% versus 11.1%). Volatility (as measured by standard deviation) over the three year period was also lower at 9.1% p.a. versus the peer median of 11.9%. Volatility over twelve months has risen to 11.4%, which is slightly lower than the peer median (11.6%). Overall Lonsec has assigned the Monash Absolute Investment Fund with an initial Recommended rating. Lonsec has a high regard for the investment acumen and track record of portfolio managers Simon Shields and Shane Fitzpatrick. Lonsec also highlights the attractive boutique investment culture and logical investment process as being relative strengths for the Fund. Lonsec notes some deficiencies detracting from its rating at this stage. The investment team is small and the investment process allows the Manager to take on very high idiosyncratic stock risk in micro-cap names. There is also a heavier reliance on sell side brokers versus many peers. Finally, Lonsec highlights the higher fee load and enhanced governance risk. People and Resources Corporate overview Monash Investors Pty Ltd ( Monash ) is a specialist boutique Australian equities asset manager with a focus on long-short investing. Monash was founded in 2012 by Simon Shields and Shane Fitzgerald who are its majority shareholders and act as its CEO and CFO. Monash is owned 51% by Shields, 34% by Fitzgerald and 16% by minority shareholders. Both Shields and Fitzgerald are on the Board of Directors ( BOD ) along with a UBS-nominated director Glen Rice. UBS is a minority shareholder. There are no independent directors on the BOD. Monash has current FUM of $88m across an LIC, Monash Absolute Investment Company Limited (ASX: MA1), and the Fund. The Fund has FUM of $36m with the balance in the LIC. The LIC was listed in Monash runs an outsourced model for non-investment services, with key service providers being as follows: Responsible Entity is Perpetual; Back / middle office support, i.e. fund accounting, unit registry, investor reporting, is Whites Outsourcing; and Distribution is provided by Winston Capital Partners.

6 P 6-9 ANALYST: PETER GREEN APPROVED BY: SHAILESH JAIN ISSUE DATE Size and experience NAME SIMON SHIELDS SHANE FITZGERALD POSITION CEO / PORTFOLIO MANAGER CFO / PORTFOLIO MANAGER EXPERIENCE INDUSTRY / FIRM 26 / 4 22 / 4 RYAN SOHN ANALYST 2 / <1 Simon Shields and Shane Fitzgerald are jointly responsible for the portfolio management and analytical duties for the Fund. They both also hold executive roles for Monash Shields is the CEO and Fitzgerald the CFO. The team has recently been bolstered by the addition of a junior analytical resource in Ryan Sohn. He has less than two years of relevant experience. Simon Shields, CEO / Portfolio Manager Shields has a 26 year industry track record, both as a buy-side analyst and a portfolio manager. Before founding Monash in 2012, he was the Head of Australian Equities for UBS Global Asset Management from 2007 to 2012 where his roles included being Head of the Investment Team, Portfolio Manager and a senior analyst. He was also the Head of Australian Equities at Colonial First State Global Asset Management from 2004 to 2007 having been a Portfolio Manager / analyst at CFSGAM from 1998 to His first portfolio management role was with Rothschilds Australia ( ) and he was also a buy-side analyst with Westpac Investment Management from Shane Fitzgerald, CFO / Portfolio Manager Fitzgerald has a 22-year industry track record, both as a portfolio manager (Monash only) and a buy and sellside analyst. Before founding Monash in 2012, he was a Director for UBS Global Asset Management from 2008 to 2012 where his role was as a buy-side analyst. He was also an Executive Director for JPMorgan from 1994 to 2008 where his primary responsibility was as a sell side analyst / Head of Insurance and Diversified Financial Research. Remuneration Neither Shields or Fitzgerald had been drawing a salary before 1 July 2016 and the only compensation they had received was in the form of dividends received from their mutual shareholdings in Monash. Both individuals have been drawing a market-based salary since 1 July Research Approach Overview RESEARCH PHILOSOPHY TARGET COMPANY BOTTOM-UP +60% UPSIDE NO. STOCKS IN UNIVERSE 300 NO. STOCKS FULLY MODELED / RESEARCHED RESEARCH INPUTS BROKER RESEARCH VALUATION OVERVIEW COMPANY MEETINGS ON A ROTATIONAL BASIS DATA INPUTS ( SELL SIDE, FACTSET), DESK-TOP ANALYSIS USING A PROPRIETARY MODEL. IDEA GENERATION DCF, EARNINGS MULTIPLES APPROXIMATELY 200 P.A. Overview The investment process seeks to identify situations where the behavioural constraints of market participants can produce an asymmetric pay-off profile and the stocks possess the following attributes: 1. Are misunderstood by the market in some way; 2. Have high EPS or CFPS levels; 3. Represent strong value, defined as >60% upside; and 4. Have a near-term catalyst. Idea generation The Manager filters news and ideas sourced from its network of 26 sell side brokers, other market strategists and their own research (mainly reading of publiclysourced documents) for all ideas of merit. The team will also leverage their network of company and senior broking executives for idea flow. FactSet data is also used during this initial screening process. The data considered includes the size and liquidity of the company, consensus earnings expectations, recent share price trends, recent broker reports and recent company announcements. The emphasis of the filtering process is for the portfolio managers to utilise their collective buy and sell-side pedigree to identify situations where the behavioural constraints of market participants (company management, fund managers and sell side analysts) have provided a market event that the team can exploit. Once an idea of merit has been identified, a desk-top assessment of the likely upside of the opportunity is run to identify whether it is worthy of further research. This is ascertained via a proprietary model. Bottom-up Research The upside potential of the stock will drive the extent of the research steps that ensue. The Manager uses a demanding performance hurdle rate of 60% for this. Stocks are either categorised as outlook driven, product launch or event driven based on the upside potential. Outlook Driven / Product launch For outlook driven stocks, the Manager expects to earn a pay-off of at least 60% on the position. These opportunities are also assessed as having moderate to low downside risk, i.e. an asymmetric pay-off profile exists. These ideas are considered to be high conviction opportunities. The Manager will undertake extensive bottom-up fundamental research on all outlook-driven positions before an investment recommendation is made. The research steps typically taken include the construction of a detailed financial model (P&L, balance sheet, cash flow statement), meeting with management and industry participants and the calculation of a DCF stock valuation. The output of this process is the production of a formal investment proposal. This proposal will outline: 1. Investment thesis; 2. Expected sign posts ; 3. Potential thesis violation; 4. Valuation and expected pay-off; 5. Recommended investment action; and 6. Re-assessment program.

7 P 7-9 ANALYST: PETER GREEN APPROVED BY: SHAILESH JAIN ISSUE DATE A similar level of research is also undertaken for product launch stocks, which are defined as early-stage businesses with multi bagger potential. Event driven These opportunities are initially assessed by the Manager as having less than 60% upside. A critical component of these opportunities is also that they need to have clear, shorter-term catalyst. The opportunity can result in a long, short or pairs trade being entered into. The research burden for such trades is less than for outlook driven stocks. This is mainly due to such events being quite time sensitive. However, greater time is taken in understanding the event itself. The Manager uses three types of events to classify the opportunity: 1. Pre-event, i.e. forthcoming earnings surprises or shocks; 2. Post-event, i.e. the likely behaviour of a stock post an earnings surprise; and 3. Liquidity event, i.e. a block trade. Portfolio Construction Overview FUND BENCHMARK RETURN OBJECTIVE (INTERNAL) RISK OBJECTIVE (INTERNAL) PORTFOLIO APPROACH INVESTMENT STYLE PORTFOLIO DECISIONS STOCK SELECTION TOP-DOWN INFLUENCE TYPICAL NUMBER OF HOLDINGS MARKET CAPITALISATION BIAS GLOBAL EQUITY EXPOSURE EXPECTED PORTFOLIO TURNOVER RBA CASH RATE 12-15% P.A. (AFTER FEES) CAPITAL PRESERVATION BEST IDEAS, HIGH CONVICTION AND LONG BIASED STYLE NEUTRAL JOINTLY MADE BY CO-PMS BOTTOM-UP LIMITED RELATIVELY BROAD AND A FUNCTION OF THE OPPORTUNITY SET SMALL LIMITED 200% P.A. OBSERVED ACTIVE SHARE 65-75% % OF PORTFOLIO IN TOP 10 HOLDINGS A SELECT NUMBER OF OUTLOOK-DRIVEN STOCKS WILL TEND TO DOMINATE THE PORTFOLIO DUE TO 6-8% INDIVIDUAL WEIGHTS. The actual portfolio weights taken in individual stocks is quite mechanistic and is very closely linked to the labeling of an opportunity during the research process as follows: 1. Outlook driven stocks initial 6% to 8% weight is taken; 2. Product launch stocks initial 0.5% to 1.5% weight is taken; and 3. Event-driven stocks initial -2.5% to 2.5% weight is taken. A stock will be sold or trimmed once the stock valuation has been reached, if a thesis violation has occured or if a stock loss limit has been breached. Risk Management Risk limits SEPARATE RISK MONITORING STOCK LIMITS SECTOR LIMITS YES -10% TO 15% ABSOLUTE -15% TO 25% ABSOLUTE CASH LIMITS 100%, TYPICALLY 0-40% NET EXPOSURE RANGE -50% TO 150% LONG / SHORT LIMITS MAXIMUM 200% LONG / -100% SHORT GROSS EXPOSURE MAXIMUM 300% GLOBAL EQUITIES RANGE 0% TO 20% (TYPICALLY 0 TO 5%) ILLIQUID ASSETS MAXIMUM 5% LIQUIDITY RULES MINIMUM 50% OF NAV REALISABLE IN 5 DAYS / MINIMUM 80% OF NAV REALISABLE IN 10 DAYS There are comprehensive stock and sector limits in place. There are also firm limits regarding the net / gross market exposure of the Fund as well as its ability to go to cash. There are also limits in place in terms of the maximum long and short positions in aggregate. Risk monitoring The Manager uses EzeCastle to monitor portfolio weights and Imagine to monitor portfolio risk. Hedging risk is also monitored real-time using these systems with particular reference being paid to the Fund s gross and net exposure and value at risk (VaR). The COO monitors compliance with the Compliance and Risk Management Plan ( the Plan ). The Plan summarises the periodic compliance monitoring that needs to be completed as per requirements of the firm s AFSL and all regulatory bodies. The COO reports all findings directly to the BOD. Risks The Fund carries a number of standard 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. Derivatives The Manager has scope to implement various derivative strategies with the objective of mitigating equity market risks. Lonsec notes that derivatives (mainly SPI futures) are actively used in the investment process to vary the Fund s market exposure. Derivatives cannot be used to leverage the Fund. Leverage risk The Fund is permitted to short-sell stocks (i.e. borrow and sell a stock it does not own). The Manager can under its PDS directly lever the Fund. The Fund s maximum gross equity market exposure is 300%.

8 P 8-9 ANALYST: PETER GREEN APPROVED BY: SHAILESH JAIN ISSUE DATE Quantitative Performance Analysis - annualised after-fee % returns (at ) Performance metrics 1 YR 2 YR 3 YR 5 YR FUND PEER MEDIAN FUND PEER MEDIAN FUND PEER MEDIAN FUND PEER MEDIAN PERFORMANCE (% PA) STANDARD DEVIATION (% PA) EXCESS RETURN (% PA) OUTPERFORMANCE RATIO (% PA) WORST DRAWDOWN (%) TIME TO RECOVERY (MTHS) NR NR NR 5 NR NR - - SHARPE RATIO INFORMATION RATIO TRACKING ERROR (% PA) FUND: MONASH ABSOLUTE INVESTMENT FUND LONSEC PEER GROUP: AUSTRALIAN EQUITIES - AUSTRALIAN LONG SHORT BENCHMARK USED: S&P/ASX 300 TR INDEX AUD CASH BENCHMARK: BLOOMBERG AUSBOND BANK BILL INDEX AUD TIME TO RECOVERY: NR - NOT RECOVERED, DASH - NO DRAWDOWN DURING PERIOD Growth of $10,000 over three years Snail trail Risk-return chart over three years Outperformance consistency

9 P 9-9 ANALYST: PETER GREEN APPROVED BY: SHAILESH JAIN ISSUE DATE Glossary Total return Top line actual return, after fees Excess return Return in excess of the benchmark return 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 Snail Trail A trailing 12-month relative performance and relative risk measurement over the benchmark. The trail is generated using a 12-month rolling window over the specified period 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 entity with a multibrand 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. 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 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: general/lonsecresearchconflictsofinterestpolicy.pdf Warnings: Past performance is not a reliable indicator of future performance. Any express or implied rating or advice presented in this document is 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 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 2016 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, microcopying, 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.