Product Review Sandhurst Strategic Income Fund B

Transcription

1 Product Review P 1-8 ANALYST: JUDE MCDONNELL APPROVED BY: PRASANKA RAJAPAKSHA ISSUE DATE About this Review ASSET CLASS REVIEWED SECTOR REVIEWED FIXED INTEREST ENHANCED CASH AND DEPOSITS TOTAL FUNDS RATED 20 About this Fund ASIC RG240 CLASSIFIED FUND REVIEWED APIR CODE SANDHURST STRATEGIC INCOME FUND B STL0044AU PDS OBJECTIVE TO OUTPERFORM THE BENCHMARK (AFTER FEES) OVER ANY TWO YEAR PERIOD INTERNAL OBJECTIVE STATED RISK OBJECTIVE DISTRIBUTION FREQUENCY OUTPERFORM THE BENCHMARK BY 1.0% P.A. (BEFORE FEES) OVER THE TWO YEAR TIME PERIOD PLUS PRODUCE A POSITIVE RETURN OVER ANY ROLLING ONE-YEAR PERIOD INTEREST RATE DURATION LESS THAN ONE YEAR QUARTERLY FUND SIZE $84M (FEBRUARY 2018) FUND INCEPTION MANAGEMENT COSTS RESPONSIBLE ENTITY About the Fund Manager FUND MANAGER OWNERSHIP 0.45% P.A. SANDHURST TRUSTEES LIMITED SANDHURST TRUSTEES LIMITED BENDIGO AND ADELAIDE BANK LTD ASSETS MANAGED IN THIS SECTOR $1,967M (DEC 2017) YEARS MANAGING THIS ASSET CLASS 13 Investment Team PORTFOLIO MANAGER ROGER COATS INVESTMENT TEAM SIZE 5 INVESTMENT TEAM TURVER STRUCTURE / LOCATION Investment process BENCHMARK DURATION RISK LIMIT MINIMUM CREDIT QUALITY AT PURCHASE HIGH ADELAIDE BLOOMBERG AUSBOND BANK BILL INDEX <1 YEAR BBB- MAXIMUM SUB-INVESTMENT GRADE 10% MAXIMUM SINGLE ISSUER LIMIT 40% N AUD EXPOSURE GEARING / ECOMIC LEVERAGE TYPICAL ALLOCATION TO TERM DEPOSITS AND 31 DAY TICE ACCOUNTS Fund rating history APRIL 2018 MAY 2017 MAY % RECOMMENDED RECOMMENDED 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 The Fund is managed with a strong focus on liquidity management Focus on the development of the investment process and systems in recent years. Weaknesses The fee load of this Fund is towards the upper end of the scale relative to some peers in this sector offering similar strategies. The investment team has suffered significant turnover in the past 12 months, with the overall level of investment experience reduced. The team is considered lightly resourced compared to the broader peer group. Fund Risk Characteristics BUSINESS SUSTAINABILITY RISK CAPITAL VOLATILITY CREDIT RISK FOREIGN CURRENCY EXPOSURE INTEREST RATE RISK LEVERAGE RISK SECURITY LIQUIDITY RISK SECURITY CONCENTRATION RISK REDEMPTION 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 Aggregated risks STD RISK MEASURE A Standard Risk Measure score of 2 equates to a Risk Label of Low and an estimated number of negative annual returns over any 20 year period of 0.5 to less than 1. This is a measure of expected frequency (not magnitude) of capital losses, calculated in accordance with ASFA/FSC guidelines. RISK TO INCOME LOW MODERATE HIGH We strongly recommend that potential investors read the product disclosure statement or investment statement. Lonsec Research Pty Ltd ABN AFSL. No This information must be read in conjunction with the warning, disclaimer and disclosure at the end of this document. This report supersedes all prior reports.

2 P 2-8 ANALYST: JUDE MCDONNELL APPROVED BY: PRASANKA RAJAPAKSHA ISSUE DATE Features and benefits COMPLEXITY ESG AWARENESS Fee profile FEES VS. 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 Sandhurst Strategic Income Fund ( the Fund ) is a defensive income-focused strategy, with a distinct bias towards high quality floating rate notes, term deposits and residential mortgage-backed securities (RMBS) denominated in AUD. The Fund aims to deliver a return of 1% (before fees) in excess of the Bloomberg AusBond Bank Bill Index ( the Benchmark ) over a rolling two year time period. Additionally, the Fund aims to deliver a positive return over rolling one year time periods, which is a reflection of the defensive type nature of the strategy. As the Fund is expected to exhibit low-moderate volatility, it will seek to deliver alpha by blending debt securities issued by corporates and governments. Additionally, the Fund is permitted to hold up to 40% in asset backed securities, although historically it has never reached the maximum limit. As per the PDS dated January 2017, the management cost of the Fund is 0.45% p.a. of the net asset value of the Fund. In addition to the management cost, the Fund may incur transactional and operational costs when acquiring and disposing of certain Fund assets. These costs may include clearing costs, brokerage, stamp duty, and buy/sell spreads. Some of these costs are recovered by way of the buy/sell spread charged to investors. Costs that are not recovered by the way of the buy/sell spread are paid for by the Fund when they are incurred and are reflected in the Fund s unit price. Based on the past financial year s transaction and operational costs, Sandhurst estimates the transactional and operational costs to be 0.01% of the Fund s total average net asset value for the previous financial year. The buy/sell spread of the Fund is 0.0% buy, 0.10% sell. Please refer to the Fund s PDS for further details. Using this Fund This is General Advice only and should be read in conjunction with the Disclaimer, Disclosure and Warning on the final page. Enhanced Cash and Deposit products are typically managed with the aim of generating returns that exceed cash (or a cash proxy such as the RBA Cash Rate or Bloomberg AusBond Bank Bill Index). Product risk expectations (Standard Deviation, credit risk and Interest rate risk) are generally positioned as low, barring periods of exceptional market circumstances. Lonsec suggests that the Fund should only be considered for those clients who are (a) seeking yields greater than those from available in cash or cash-like instruments (e.g. bank bills) and, more importantly, (b) those prepared to accept low to moderate volatility in the unit price. Enhanced Cash and Deposit Funds are generally liquid in normal market conditions, though exposure to term deposits and 31-day notice accounts may result in delays processing withdrawals in stressed conditions or if the withdrawal requests exceed the level of securities able to liquidated overnight. At the time of this review, the Trust s exposure to Term Deposits and 31-day notice accounts was 13% and the manager has indicated the maximum level in ordinary conditions would be 25%. The Trust may be suitable for investors seeking a regular income stream but wishes for capital stability and protection, particularly in rising rate environments. 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 There has been significant team turnover since the last review. Kosta Jaric, Analyst departed the team in November 2017 to take an academic position. Jaric was a dedicated resource for the team and over recent years has been primarily involved in the development of the firm s RMBS systems, analysis of securitised assets and liquidity management. Jaric s departure is viewed as disappointing. Tim Lovell, Senior Analyst and named Portfolio Manager on the Sandhurst Select Mortgage Fund also departed in late 2017 to take up another opportunity outside the investment industry. Approximately 20% of Lovell s time was dedicated to the Sandhurst Strategic Income Fund B focused on RMBS analysis, liquidity, interest rates and risk management. Mallory Trovato, Junior Investment Analyst who spent 20% of her time assisting the team has been seconded to another part of the Bendigo business and is due back later in Hayden Woolgar, Junior Risk Analyst is no longer included as a team resource with the project to integrate the portfolio analysis system with Bloomberg PORT complete. Blake Cetinich, Analyst has joined Sandhurst as a replacement for Jaric, although he has no previous investment experience. Cetinich will also focus on RMBS analysis, systems and liquidity management. Nicky Hall, Senior Analyst and long-term employee on the operational side at Bendigo Bank (23 years) will be undertaking analysis on liquidity, interest rates and risk management. Hall s time contribution

3 P 3-8 ANALYST: JUDE MCDONNELL APPROVED BY: PRASANKA RAJAPAKSHA ISSUE DATE to the Fund will be fairly minimal noting she does not have prior investment experience. Erin Connelly, Junior Analyst with eight years experience and tenure at Bendigo Bank will now contribute 10% of her time to the analysis of credit, liquidity and risk. Overall, the new team additions have far less experience managing money than those who have departed. The Group Asset Allocation meeting (including the income and multi-asset teams) that was previously held on a monthly basis has been moved to a weekly rotation. This meeting is a forum to discuss and review market data for equities, rates, commodities, derivatives and credit. The team is of the view that more frequent discussions are necessary to better leverage ideas given the late stage of the risk asset cycle. Lonsec Opinion of this Fund People and resources The investment team consists of five investment professionals, although in reality Coats is the only member of the team 100% dedicated to the Fund, closely followed by new joiner Cetinich at 90%. Head of Investments, Thadeus McCrindle is a longstanding member of the firm, having joined in Lonsec considers McCrindle to be adequately experienced to act as an overseer for the Fund and the broader team, having honed his skills during the stressed conditions of the GFC. His ongoing contribution to Fund and support for Coats is an important factor in Lonsec s level of conviction in the Fund. Roger Coats has been the Portfolio Manager responsible the Fund since early Since joining, Coats has been instrumental in the refinement of the investment process and tightening of risk limits which Lonsec views in a favourable light. Coats displays a keen awareness of risk and liquidity requirements within the portfolio complimented with the in-depth due diligence of investment opportunities. Additionally, Coat s tenure within the industry has coincided with large market shocks, which Lonsec views as an important factor in risk analysis. Coats 30 years experience was largely gained on the sell side of interest rate markets, where he held a number of senior positions in origination, which encompassed trading and syndication of bonds. Directly supporting Coats is newcomer Blake Cetinich, Analyst. Cetinich joined the team in January 2018 as a replacement for Kosta Jaric who departed in November However, Cetinich has limited investment experience with his most recent role of one year at the Rural Bank (subsidary of Benigo Bank) focusing on commerical lending and assisting in treasury functions. Prior to this he worked at SAI Global in their property division for two years. Compared to Jaric who had 13 years experience, 10 of them at Bendigo, Cetinich is viewed as inexperienced with time needed to assess his skills and contribution to the Fund. Jaric was also instrumental in the development of RMBS systems and analysis which Lonsec considered a strength of the product offering. The level of granularity applied in the analysis is a testament to the conservative approach the team takes when analysing risk and opportunities. Pleasingly all RMBS models have been automated so work on the development front is largely complete. Cetinich will work closely with Coats who will assume a mentoring role alongside his existing responsibilities as Portfolio Manager. Overall, the level of resourcing and investment experience has reduced over the past year which Lonsec considers disappointing. The team is considered lightly resourced and direct portfolio management experience is less well developed relative to Lonsec-rated peers. However, Lonsec is comforted by the stability presented by Coats and McCrindle, noting the former has a heavy workload. Lonsec considers there to be high key-personrisk given the size of the team, noting that the departure of McCrindle and/or Coats would warrant a reconsideration of this Fund s rating. Portfolio Manager remuneration is a mixture of product outperformance, profitability and qualitative factors. Analysts have an additional component which tracks value added/detracted by individual security recommendations. Co-investment is not mandatory but Lonsec notes some team members are co-invested in the Fund. Lonsec considers coinvestment to be beneficial in aligning individual interests with the objectives of the Fund. Lonsec perceives this remuneration structure as being consistent with other asset managers in this space and considers the alignment of interests to be moderate. Research and portfolio construction The Fund s investment process is segregated into three components: 1) Combine inputs into market sentiment, economic forecasts and credit fundamentals, 2) Conduct detailed analysis of interest rate movements, form sector preferences and conduct bottom-up credit analysis, 3) Construct the portfolio to best reflect the teams risk / return expectations. Lonsec considers the process to be intuitively appealing, albeit not materially different to peers offering similar strategies. The Fund is essentially constructed by blending both a core and satellite, with the core consisting of highly rated senior bank debt which pays a small margin over bank bills and has only very small interest rate duration exposure. The satellite, which will often possess less liquidity than the core, will consist of term deposits, floating rate notes, corporate bonds and RMBS. Lonsec has witnessed how the Manager forms the portfolio in practice and considers it to be appropriate for delivering on investment objectives and adhering to liquidity and other risk constraints. Historically the Fund has had a material exposure to Bendigo & Adelaide Bank term deposits, which have been a key tool in enabling the Fund to deliver above benchmark returns. Pleasingly, in recent years Lonsec has witnessed a significant reduction in the Fund s allocation to these securities, although as at 31st March 2018 exposure remained noteworthy at 13%. Lonsec is conscious that related party exposure may create the perception that objectivity of the investment process could be compromised. Lonsec s level of comfort has increased over time, commensurate with the level of diversification to

4 P 4-8 ANALYST: JUDE MCDONNELL APPROVED BY: PRASANKA RAJAPAKSHA ISSUE DATE alternate issuers. Lonsec will continue to test this exposure during future reviews. Lonsec notes the Manager has exhibited a high degree of sensitivity regarding Basel III regulatory controls around term deposits and 31-day notice accounts since introducing formal limits around liquidity management in mid The Manager has materially decreased allocations to securities that fit this illiquid profile and have actively focused on managing portfolio exposures in line with the liquidity limits set in place. At the most recent review, Lonsec observed that further work had been undertaken to formalise how the team thinks about liquidity risk within the portfolio. In short, a more nuanced approach is taken to assess the liquidity profiles of securities taking into account maturity profiles, bond factor scoring and diversification benefits. Although proprietary in nature Lonsec considers this approach is beneficial and serves to illustrates the team s conservative approach to portfolio management. Over recent years much work had been done on the development of the firm s proprietary RMBS analysis systems. The team has advised this work is now complete. Lonsec has witnessed these systems and the teams analysis of these securities in practice and considers them to be consistent with peers who also adopt granular RMBS analysis. Risk management Given the defensive type characteristics of this Fund, risk management is a primary consideration when constructing the underlying portfolio. The Manager utilised Bloomberg as its primary risk management tool on a day to day basis. This is supplemented by its own internal proprietary risk tools when monitoring and analysing the Fund s exposure to credit risk, interest rate risk and liquidity risk. Lonsec notes Roger Coats as Portfolio Manager has been instrumental in improving and effectively managing the counterparty risk inherent in this Fund and is pleased with the continued focus in this area. Furthermore, Lonsec is pleased to observe the risk constraints pertaining to liquidity management introduced in mid-2014 post-basel III regulations are working as intended and overall the team continue to down-weight illiquid exposures within the portfolio. The Manager does not consider the risks of newer style bank hybrids (which may be mandatorily converted to equity in a crisis) appropriate for this defensive style of Fund. Lonsec considers this approach intuitively appealing. Performance The Fund has achieved its PDS objective of outperforming the Bloomberg Ausbond bank Bill Index (after fees) over two years to March 2018 with an excess return of 1.14%. The Fund also achieved its internal target objective to outperform the Bloomberg Ausbond Bank Bill Benchmark by 1.0% (before fees) over a rolling two year period. Over the three and five year period, the Fund has also performed relatively strongly on a net basis exceeding the benchmark by 0.80% p.a. and 0.99% p.a. respectively. Pleasingly the Fund is comfortably ahead of the Lonsec peer group over all time periods assessed to 31 March The Fund s risk (as measured by standard deviation) has been higher than the peer median over the two, three and five year period but in line with the Lonsec peer group over one year to March Lonsec notes backwards-looking risk measures, such as Standard Deviation, do not capture all the inherent risks associated with strategies such as this, including credit risk and market liquidity risk. Overall Following its most recent review of this Fund, Lonsec has maintained the Fund s Recommended rating.this rating is supported by the depth of experience of Roger Coats as lead Portfolio Manager of the Fund, supported by Thadeus McCrindle in his role as overseer for the team. A key attraction of the Fund is the high level of sensitivity concerning counter-party risk and management of liquidity risk within the portfolio, which Lonsec considers appropriate for this type of offering. That said, Lonsec is mindful of the exposure to Bendigo & Adelaide Bank term deposits and will continue to test this in future reviews. In addition, team turnover in the past year is disappointing with new hires considered less experienced than their predecessors adding additional pressure to Coats s workload. Lonsec is looking for a period of stability for the existing rating to be maintained. People and Resources Corporate overview Sandhurst Trustees is a wholly owned subsidiary of Bendigo and Adelaide Bank Ltd. Sandhurst offers a range of financial services, including investments and funds management, superannuation, commercial loans, funeral bonds, estate management and custody services. Sandhurst also acts as the Fund s Responsible Entity (RE). Sandhurst had approximately $3.4bn of funds under management (FUM) (as at December 2018).

5 P 5-8 ANALYST: JUDE MCDONNELL APPROVED BY: PRASANKA RAJAPAKSHA ISSUE DATE Size and experience NAME POSITION EXPERIENCE INDUSTRY / FIRM THADEUS MCCRINDLE HEAD OF INVESTMENTS 18 / 13 ROGER COATS PORTFOLIO MANAGER 31 / 4 BLAKE CETINICH NICKY HALL ERIN CONNELLY ANALYST-RMBS, LIQUIDITY AND SYSTEMS SENIOR ANALYST- LIQUIDITY, INTEREST RATES AND RISK MANAGEMENT JUNIOR ANALYST- CREDIT ANALYSIS, LIQUIDITY AND RISK 3 / <1 <1 / 23 8 / 8 The investment team consists of five investment professionals, who all have varying degrees of involvement with this strategy (ranging from 10%-100%). A brief overview of the investment careers of the two most senior members of the team is outlined below. Thadeus McCrindle (Head of Investments) McCrindle has spent the majority of his career working within Sandhurst s investment team. In addition to his responsibilities associated with this Fund, he is also responsible for the management of the firm s Diversified strategies. In recent years McCrindle s involvement with this strategy has transitioned lower given his additional responsibilities within the broader team. Roger Coats (Portfolio Manager) Since joining the firm, Coats has been responsible for the day to day management of this Fund. Coats has worked in the bond markets for more than 25 years and has held a number of senior positions in origination, structuring, derivatives, sales and distribution. Research Approach Overview The Fund s investment universe comprises of AUD denominated debt securities issued by governments, corporates and packaged securities (i.e. RMBS and ABS). Top down research The Manager s top-down research process consists of dissecting macroeconomic research and formulating well-refined views on interest rates, sector fundamentals and global factors driving Australian fixed interest markets. Bottom up research The Manager s bottom-up research effort will largely consist of assessing the credit fundamentals of individual securities and subsequently determining if they are suitable for the potential inclusion into this Fund. At times the team may also refer to research undertaken by the Bendigo credit team as an additional layer of due diligence. Noting this is restricted to Australian bank securities and a small number of international bank securities. When conducting analysis into individual Residential Mortgage Backed Securities (RMBS) the Manager has developed its own proprietary systems to assess the risk of these securities. Specifically, the systems determine the geographical exposure, loan-to-value ratios, seasoning and expected liquidity of the underlying pool of assets. Portfolio Construction Overview PHILOSOPHY AIMS TO CAPTURE MARKET INEFFICIENCIES THAT EXIST IN RELATION TO THE ASSESSMENT OF CREDIT RISK AND INCORPORATE VIEWS OF RELATIVE RISK BETWEEN SECTORS OF THE CREDIT AND CASH MARKETS UNDERLYING STRATEGY OBJECTIVE (T PDS) FUND BENCHMARK SUB INVESTMENT GRADE OUTPERFORM THE BENCHMARK BY 1% P.A. (BEFORE FEES) BLOOMBERG AUSBOND BANK BILL INDEX T PERMITTED AT PURCHASE (MAX 10% IF DOWNGRADED WHILE HELD) TYPICAL NUMBER OF ISSUERS (CURRENTLY 34) The Manager constructs this portfolio by referencing its views on interest rates and credit fundamentals and subsequently incorporating the recommendations of individual members of the investment team. Below summarises the key considerations when the team is forming its risk / return views: Top down considerations The Active Asset Allocation process reviews the global macro issues and cross asset class market dynamics. A view is developed on levels of credit risk being undertaken and assists with positioning and general market momentum. This strengthens the case for dialling up or down spread duration of the Fund. Housing data, employment, government yields, credit spreads, rating changes and primary issuances. Bottom up considerations Financial analysis, quality of management, issuer competitive position, seniority in the capital structure and covenant analysis. Liaise with sell side and buy side analysts to gauge consensus opinions on issuers Investor roadshows plus direct meetings with issuers and investors prior to most new issues. Risk Management Risk limits MINIMUM CREDIT RATING OF ANY ISSUER (AT PURCHASE) MAXIMUM PORTFOLIO WEIGHT TO ANY ONE ISSUER FUND DURATION TRACKING ERROR TARGET MINIMUM COUNTERPARTY CREDIT RATING CURRENCY HEDGING OFFSHORE EXPOSURE MINIMUM PORTION OF THE PORTFOLIO ABLE TO BE LIQUIDATED WITHIN ONE MONTH 40% (EXCEPT FOR COMMONWEALTH GOVT BONDS 80%) <1 YEAR T SPECIFIED BBB- BBB- 30% (TARGET 45%) A full liquidity forecast is completed on a daily basis in an effort to maximise returns to investors while considering the Liquidity risk. Targeted liquidity ensures that at least: 5% of the portfolio can be liquidated within one day and over 30% can be liquidated (without a haircut) within a month. Short term investments are chosen on the basis that they can be liquidated under most stressed environments.

6 P 6-8 ANALYST: JUDE MCDONNELL APPROVED BY: PRASANKA RAJAPAKSHA ISSUE DATE Risk monitoring Sandhurst relies on Bloomberg to monitor the risk of the Fund on a day to day basis. This is supplemented by its own proprietary risk models to assess and monitor the inherent credit risk of the portfolio and individual securities (particularly relevant for RMBS). The Fund manages its modified duration with reference to rate forecasts, total return expectations and the Benchmark modified duration. Additionally, the Fund is managed in accordance with a strict set of guidelines to assist in ensuring the Fund s risk and return characteristics are in line with investors expectations in normal market conditions. The Investment Committee monitors the composition of the portfolio and adherence to limits. The separate Sandhurst Board monitors regulatory compliance, with the support of the 12 person wealth compliance department. Risks An investment in the Fund carries a number of standard investment risks associated with investment markets. These include economic, political, legal, tax and regulatory risks. These and other risks are outlined in the PDS and should be read in full and understood by investors. Lonsec considers the major risks to be: Company-specific (or credit) risk Credit risk refers to the risk that a party to a credit transaction fails to meet its obligations, such as defaulting under a mortgage, a mortgage-backed security, a hybrid security, a fixed interest security or a derivative contract. This creates an exposure to underlying borrowers and the financial condition of issuers of these securities. The Fund is not permitted to buy sub-investment grade debt. Concentration risk Is the risk that poor performance in a group of investments common to a particular section of the market will significantly affect the performance of the Fund. Counterparty risk The Fund may use over-the-counter derivatives (e.g. swaps) which exposes the Fund to counterparty risk where there is indirect exposure to a third party (i.e. counterparty) for the completion of a trade or investment. Sandhurst applies its credit research process when assessing counterparties. Liquidity risk The risk that assets of the Fund cannot be converted to cash in a timely manner in order to pay withdrawal requests. Market risk Investment returns are influenced by the performance of the market as a whole. This means that your investments can be affected by things like changes in interest rates, investor sentiment and global events, depending on which markets or asset classes you invest in. Other risks Please refer to the Fund s PDS for more details on the following items further identified by the R/E and Manager: Concentration risk Currency risk Liquidity risk Derivatives Interest rate risk Investment Manager risk Responsible Entity risk

7 P 7-8 ANALYST: JUDE MCDONNELL APPROVED BY: PRASANKA RAJAPAKSHA 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) SHARPE RATIO INFORMATION RATIO TRACKING ERROR (% PA) FUND: SANDHURST STRATEGIC INCOME FUND B LONSEC PEER GROUP: FIXED INTEREST - ENHANCED CASH AND DEPOSITS BENCHMARK USED: BLOOMBERG AUSBOND BANK BILL INDEX AUD TIME TO RECOVERY: NR - T RECOVERED, DASH - DRAWDOWN DURING PERIOD Growth of $10,000 over five years Snail trail Risk-return chart over three years Outperformance consistency

8 ISSUE DATE P 8-8 ANALYST: JUDE MCDONNELL APPROVED BY: PRASANKA RAJAPAKSHA 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 IMPORTANT TICE: 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 financial 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 financial 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 financial product(s) referred to in this document. Lonsec s representatives and/or their associates may hold the financial 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 financial 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 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 financial product issuer(s). Should the fund manager or financial 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 financial product outlined in the publication which may have related financial products or be associated with other financial products and platforms. The rating may only be applied to the financial product outlined in this publication at first instance and whether it applies to related or associated financial products and platforms should be investigated by your financial adviser before you make an investment decision in relation to the related or associated financial products and platforms. You should be aware that the mandate, fees, underlying investments, the issuers of the related and associated financial products and platforms may be different from the financial product specified in this publication. You should satisfy yourself that the related and associated financial products 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 2018 Lonsec Research Pty Ltd (ABN , AFSL No ) (Lonsec). This report is subject to copyright of Lonsec. 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