For personal use only

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1 Hybrid market overview November 2015 (ABN ) AFS License number Level 10, 30 Collins Street Melbourne VIC 3000 Telephone: November 2015

2 Disclaimer The information and opinions contained in this presentation have been obtained from sources of (ABN ) believed to be reliable, but no representation or warranty, express or implied, is made that such information is accurate or complete and it should not be relied upon as such. Information and opinions contained in this presentation are published for the assistance of recipients, but are not relied upon as authoritative and may be subject to change without notice. Except to the extent that liability cannot be excluded, does not accept liability for any direct or consequential loss arising from any use of material contained in this presentation.

3 Fund performance While the Fund s performance was disappointing performance was broadly inline with that of the market over the 12 months to end 30 June. The Fund s total return was 0.71% (market return was 1.01%). Fund total return comprised; Poor performance of the Fund and the market at large was a function of; IPO supply and Non IPO supply. Cents per unit (cpu) Change in capital value <0.42> Income (Dividend 0.40 Franking benefit 0.063

4 Record IPO Basel 3 compliant Tier 1 hybrid supply a factor 4.0% Major bank Tier 1 hybrid issuance and average spread margin $ % $4.0 Margin percent (%) 3.0% 2.5% 2.0% 1.5% 1.0% $3.0 $2.0 $1.0 $0.0 Issuance $ billion 0.5% -$ % Issuance (rhs) Margin (lhs) -$2.0 Source: Elstree & ASX

5 ...so too are non IPO factors bank equity capital raisings Base June 2014 For personal use only Elstree Hybrid Index 30 June 2014 to 31 October SMSF tax loss selling and selling to fund purchase of bank shares and new bank equity capital raisings SMSF selling to fund new bank equity capital raisings CBA PERLS VII Issue 98.0 Source: Elstree Hybrid Index

6 What can we expect? Spread margins, which move in the opposite direction to price, are currently as wide as they have been since the GFC. The supply factors that contributed to spread margins widening to current levels are expected to dissipate over the next months. IPO supply expected to be half what it was in FY2015. Demand expected to increase as; SMSF retirees contemplate lower cash and TD rates amid continuing equity market volatility and Investors recognise the latent value in hybrid capital instruments. While the process will be protracted a combination of these factors is expected to narrow spread margins significantly over time. We estimate the fair value spread margin of the market at large to be around half what it currently is.

7 What can we expect? Banks, who are the major issuers of hybrid capital instruments, are now better capitalised and more securely funded than at any time in their history. This is not yet reflected in the spread margins of hybrid capital instruments which are as wide as they have been since the GFC. Only a matter of time before investors recognise the de-risking of the banks and reprice hybrid capital instruments accordingly. Portfolio well positioned in long credit term duration tier 1 hybrid capital instruments to capture maximum benefit from spread margin contraction. Spread margin contraction of 100 basis points equates to a c4% increase in the capital value. Worst case return outcome of the Fund in CY 2016 is the income yield of c7.00% (assumes no change in the capital value or the NAV). The total return outcome is limited (only) by the extent of spread margin contraction.

8 This doesn t make sense: More capital and wider margins 16% Equity Capital/RWA, Core Tier1 capital and average major bank margins (quarterly 9/2006 to present) 5% 14% 12% 4% 10% 8% 6% 3% 2% 4% 2% 0% 1% 0% Source: Elstree Equity Capital/RWA (LHS) Tier 1 Capital (LHS) Average Major Bank Hybrid Margin (RHS) Source: Elstree

9 While comparisons are odious the case is compelling All Ordinaries Accumulation Index and Elstree Hybrfid Index. December 1999 to September Amount invested to equal $1000 on 30 September All Hybrids AOAI Source: Elstree & ASX

10 Depth and duration of drawdowns - shallow and short S&P ASX200 and Elstree Hybrid Index. Drawdowns from all time high. October 2009 to present S&P ASX200 Accum Elstree Hybrid Index Source: Elstree

11 The case for using a managed fund rather than doing it yourself Period % per annum Fund Top 10 securities by market cap Bank Bill Swap Rate UBS (A) 1 year 0.12% 0.08% 2.48% 2 year 3.28% 2.24% 2.56% 3 year 4.96% 4.13% 2.74% 4 year 5.76% 4.46% 3.13% 5 year 5.59% 5.20% 3.51% # Returns are gross of franking and net of fees. Returns are to 30 September 2015

12 IPO risks are real and costly 1.00% 0.50% 0.00% Profit/loss percent (%) For personal use only Profit/loss 17 IPO's January 2013 to 30 June 2015 IPO Out-performance -0.50% -1.00% -1.50% -2.00% Average underperformance of the market as demoted by the Elstree Hybrid Index. Time period 5 weeks prior to listing to 2 weeks post listing. IPO Underperformance -2.50% Source: Elstree & ASX

13 IPO risks are real and costly a recent example Base July 2015 For personal use only Closing prices WBCPF and Elstree Hybrid Index 27 July 2015 to 15 September Elstree Hybrid Index WBCPF Source: Elstree & ASX

14 About the manager (Elstree) is both the Responsible Entity (RE) and the manager of the Australian Enhanced Income Fund (Fund). Elstree has been managing portfolios of listed hybrid debt securities since The investment managers have over 60 combined years experience managing portfolios of such securities. Securities are selected based on Elstree s 4 step filtered security selection process Securities are weighted in the portfolio based on their; Level of cheapness, Market capitalisation, Credit rating and Liquidity. Strong risk management emphasis with processes in place to measure and quantify market risk, liquidity risk and Black Swan event risk.

15 Top 10 securities in alphabetical order 1 ANZPD 2 ANZPE 3 CBAPD 4 CNGHA 5 CWNHB 6 GMPPA 7 NABHA 8 NABPB 9 WBCPC 10 WBCPE