Fund Review Nikko AM Australian Bond Fund

Transcription

1 Fund Review Nikko AM Australian Bond Fund P 1-9 ANALYST: JUDE MCDONNELL APPROVED BY: DEANNE BAKER ISSUE DATE About this Review ASSET CLASS REVIEWED SECTOR REVIEWED FIXED INTEREST AUSTRALIAN FIXED INTEREST TOTAL FUNDS RATED 11 About this Fund ASIC RG240 CLASSIFIED FUND REVIEWED APIR CODE NO NIKKO AM AUSTRALIAN BOND FUND TYN0104AU PDS OBJECTIVETO OUTPERFORM THE BLOOMBERG AUSBOND COMPOSITE 0+YR INDEX OVER ANY THREE-YEAR ROLLING PERIODS, BEFORE FEES, EXPENSES AND TAXES INTERNAL OBJECTIVE STATED RISK OBJECTIVE DISTRIBUTION FREQUENCY OUTPERFORM THE BENCHMARK BY % P.A. (GROSS) OVER ROLLING THREE-YEAR PERIODS NOT TARGETED. TRACKING ERROR IS EXPECTED TO BE 1.25% P.A. OVER ROLLING THREE-YEAR PERIODS QUARTERLY FUND SIZE $141M (MAR 17) FUND INCEPTION MANAGEMENT FEE RESPONSIBLE ENTITY 0.45% P.A. NIKKO ASSET MANAGEMENT AUSTRALIA LIMITED About the Fund Manager FUND MANAGER NIKKO ASSET MANAGEMENT AUSTRALIA LIMITED OWNERSHIP 100% OWNED BY NIKKO ASSET MANAGEMENT ASSETS MANAGED IN THIS SECTOR $2B (APRIL 17) YEARS MANAGING THIS ASSET CLASS 22 Investment Team PORTFOLIO MANAGER DARREN LANGER INVESTMENT TEAM SIZE 4 INVESTMENT TEAM TURNOVER STRUCTURE / LOCATION HIGH PM & ANALYSTS / SYDNEY / LONDON Investment process BENCHMARK BLOOMBERG AUSBOND COMPOSITE 0+YR INDEX DURATION RISK LIMIT MAXIMUM SUB-INVESTMENT GRADE MINIMUM CREDIT QUALITY AT PURCHASE MAXIMUM SINGLE ISSUER LIMIT +/- 1.5 YEARS NIL BBB- VARIOUS DEPENDS ON THE ISSUER NON-AUD EXPOSURE FULLY HEDGED (TOLERANCE +/- 2%) GEARING / ECONOMIC LEVERAGE Fund rating history MAY 2017 MARCH 2017 MAY 2016 NOT PERMITTED INVESTMENT GRADE FUND WATCH INVESTMENT GRADE What this Rating means The Investment Grade rating indicates that Lonsec has conviction the financial product can generate risk adjusted returns in line with relevant objectives. However, if applicable, Lonsec believes the financial product has fewer competitive advantages than its peers. Strengths Risk is integral to the portfolio management and investment philosophy. Weaknesses Disruption arising from recent loss of a major client and team restructure. Lead Portfolio Manager Darren Langer has yet to build a performance track record with strategy. The Fund has failed to achieve its objective over the medium to longer term. Fund Risk Characteristics BUSINESS SUSTAIN.RISK CAPITAL VOLATILITY CREDIT RISK FOREIGN CCY EXP INTEREST RATE RISK LEVERAGE RISK REDEMPTION RISK SECURITY CONC. RISK SECURITY LIQUIDITY 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 3 equates to a Risk Label of Low to Medium and an estimated number of negative annual returns over any 20 year period of 1 to less than 2. This is a measure of expected frequency (not magnitude) of capital losses, calculated in accordance with AFSA/FSC guidelines. Features and benefits COMPLEXITY 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 2-9 ANALYST: JUDE MCDONNELL APPROVED BY: DEANNE BAKER ISSUE DATE Fee profile FEES VS. UNIVERSE FEES VS. ASSET CLASS FEES VS. SUB-SECTOR LOW MODERATE HIGH Fee BIOmetrics are a function of expected total fee as a percentage of expected total return. What is this Fund? The Fund is an Australian Fixed Interest product managed against the Bloomberg Ausbond Composite 0+Yr Index. It will normally be invested in a mix of bonds paying fixed rate coupons issued by Australian federal and State governments, quasi-government entities and corporates. The quasi-government sector comprises supranational and sovereign agency issuers. The main corporate issuers are banks, property trusts and issuers such as Woolworths. There are also global issuers such as GE Capital and Citigroup who have raised funds in the Australian market. Alpha is expected to be derived from sector allocation (45%), duration (35%), yield curve positioning (10%) and security selection (10%), although this may vary over the course of a market cycle. Derivatives such as interest rates futures or interest rate swaps and credit default swaps may be used to manage risk. Up to 5% of the Fund may be invested in non-a $ securities. The Fund aims to be fully currency hedged, although a 2% hedging tolerance applies. Using this Fund This is General Advice only and should be read in conjunction with the Disclaimer, Disclosure and Warning on the final page. Australian Fixed Interest funds can provide sound diversification benefits when combined with equities as part of a diversified investment portfolio, although they have more limited use as standalone income producing products. Australian Fixed Interest funds will typically form part of the defensive component of a diversified investment portfolio. Australian Fixed Interest funds typically perform better during periods of declining or stable interest rates and contracting or stable credit spreads. Conversely, they will typically perform worse during periods of increasing interest rates (particularly when interest rates increase sharply) and deteriorating credit spreads. Australian Fixed Interest funds generally have lower default risk and higher credit quality than Alternative Income funds and Diversified Fixed Interest funds. 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 Suncorp Group (Suncorp), Nikko AM s largest client by assets under management (around 64% at the last review May 2016) terminated their relationship as at the end of March This resulted in a substantial loss of funds under management, approximately $8bn in total. Subsequent to Suncorp decision, the Nikko AM team underwent a significant restructure in an effort to realign the Australian business in a sustainable way for the future with significantly reduced FUM of approximately $2bn in Fixed Income assets. At this point, Lonsec assigned a Fund Watch, until further comfort was gained in the new team structure. The Australian and London based teams were formally merged under the remit of Andre Severino, Head of Global Fixed Income. James Alexander, previously co-head of Global Fixed Income alongside Severino has transferred to the Multi-Asset team based in Singapore. His position was made redundant in the restructure. Wayne Pielak (Portfolio Manager), Simon Wang (Credit Analyst) and Vladimir Kazakov (Quantitative Analyst) have all departed Nikko AM as part of the restructure. Overall the Australian-based team has reduced from nine to four. The merged team under Severino is split into four sub-teams; Money Markets and Currency Michael Lack (Head of Trading/Senior Portfolio Manager), Angela McLean (Senior Dealer Global Markets). Core Markets Darren Langer (Senior Portfolio Manager), Chris Rands (Portfolio Manager), Steve Williams (Head Portfolio Manager Core Markets), Lucas Irisik (Assistant Portfolio Manager/Senior Analyst). Emerging Markets Raphael Marechal (Head Portfolio Manager Emerging Markets), Matthew Holdgate (Portfolio Analyst). Global Credit Holger Mertens (Head Portfolio Manager Global Credit), Ee- Yung Yip (Portfolio Manager/Senior Credit Analyst), Marco Sun (Portfolio Analyst), John Sorrell (Head of Credit Research), Leo Leslie (Senior Credit Analyst). Roger Bridges, Global Rates and Currencies Strategist a 33-year industry veteran and long-standing team member retired at the end of February His departure is not related to the recent restructure. His role will not be replaced with the broader Nikko AM global team absorbing his responsibilities. Nikko AM has developed a long-term incentive plan (LTI) for the Fixed Income team to reward and retain those staff involved in managing institutional mandates. The plan rewards personnel for both longterm investment performance and growth in AUM.

3 P 3-9 ANALYST: JUDE MCDONNELL APPROVED BY: DEANNE BAKER ISSUE DATE Lonsec Opinion of this Fund People and resources The Fixed Income team of thirteen is led by the Head of Global Fixed Income, Andre Severino, four of whom are closely involved in the portfolio management or credit analysis of the Fund. The size of the responsible team is below average relative to peers and has suffered a substantial diminution in experience in recent times, most recently with the transfer of lead Portfolio Manager James Alexander (27 years investment experience) to a senior role in the Multi-Asset team based in Singapore. A further three positions were also made redundant- Wayne Pielak (Portfolio Manager), Simon Wang (Credit Analyst) and Vladimir Kazokov (Quantitative Analyst). The retirement of Roger Bridges is also significant with the loss of 33 years industry experience, his departure was not related to the restructure in March The most recent changes follow and earlier restructure in mid-2016 which resulted in the departure of Anita Daum (previously lead Portfolio Manager) and Ileria Chan (Portfolio Manager Credit). Lonsec is disappointed by the loss of experienced investors and has yet to build conviction in the leaner, less experienced team. That said, Lonsec has observed a commensurate uptick in the global collaboration in recent times. The most recent restructure was driven by the decision by Suncorp to terminate their existing relationship with Nikko AM resulting in the redemption of approximately $8bn Fixed Income assets. As a result, Nikko AM undertook measures to streamline the Australian based investment team whilst strengthening the integration with the London-based team under the leadership of Andre Severino. The Global Fixed Income is split into four subteams; Money Market and Currency, Core Markets, Emerging Markets, and Global Credit. The remaining Australian team members have been absorbed into the wider platform but remain situated in Sydney. This restructure was the second one in less than 12 months with an earlier effort to better integrate Nikko AM s fixed income capability globally (ex-asia). In mid-2016 the EMEA and Australian fixed income teams merged to form a global fixed income platform. Lonsec understands the teams had been sharing insights for some time supported by significant investments into system roll-outs (e.g. Barclays Point for risk management, Bloomberg AIM for portfolio management) and related process changes (e.g. centralised the risk function, linking remuneration to broader contributions). Unsurprisingly (as clearly flagged in previous reports) the heavy reliance by Nikko AM on Suncorp as their largest client (by assets under management) and the recent decision to terminate the longstanding relationship has resulted in significant disruption for the team and Fund. Nikko AM had made inroads on diversifying its client base, however, this was clearly not advanced enough to withstand the impact of Suncorp s decision. Going forward Lonsec is looking for demonstrated commitment to the Australian market and stability within the global team. While Nikko AM also maintains Asia-focused fixed income teams in Singapore and Japan, they remain separate from the global fixed income team. Nikko AM considers the bond markets in the Asian regions to be sufficiently differentiated to warrant the separation and believes that there are greater synergies between the EMEA and Australian teams. That being said, the teams do not operate in isolation. The sharing of ideas is encouraged across the entire fixed income network and that the teams participate in regular forums to enrich the investment outlook/ strategy for their respective markets. Overall Lonsec believes a global network of resources, may lead to enriched investment discussions and potentially better outcomes for investors. Andre Severino has assumed sole responsibility for the management of the Global Fixed Income team, managing a team of thirteen. Pleasingly Severino has 27 years idustry experience and a decade of tenure at Nikko AM, meaning he is well versed in the Nikko AM philosophy and processes. Severino has a strong credit background, joining Nikko AM in 2007 and navigating through the tumultuous period of the global financial crisis. Lonsec notes the challenges of managing a team in a different timezone, particularly one such as this with the ongoing team disruption and the recent substantial loss of FUM. Darren Langer, Senior Portfolio Manager has been assigned as the lead on the Fund and has assumed responsibility for day to day management with the support of Chris Rands, Portfolio Manager. Langer has 28 years investment experience and prior to the restructure was responsible for the insurance and customised solutions segment of the Australian fixed income offering managing mandates for both Life and General Insurance businesses. Langer will be responsible for duration positioning within the Fund and sector allocation. Lonsec is pleased Langer remains within the team as stabilising influence and considers his skillset complimentary to his assigned areas of expertise. Lonsec is keen to observe his progress as a track record develops. In addition, given the recent upheaval and significantly reduced FUM, key person risk on Langer is considered to be high. John Sorrell, Head of Credit Research remains a key member of the team and in the recent changes is now even more closely aligned with tnikko AM s global credit resources. Lonsec considers the global credit team of five (two Sydney and three London) is lightly resourced compared to most peers running domestic and global strategies. In addition, Sorrell s individual workload is viewed as heavy with the with responsibility for an additional RMBS portfolio on top of his responsibilities for this Fund plus the requirement for him to contribute to the global credit team. Due to the change in circumstances it is expected the London-based team will have much greater influence in the management of the Fund, in particular, Severino. Langer retains a certain amount of autonomy as lead Portfolio Manager but Lonsec is of the understanding this is less than what his predecessor James Alexander enjoyed. Lonsec remains mindful that the Fund is conservative in nature with strict risk limits and has had a strong

4 P 4-9 ANALYST: JUDE MCDONNELL APPROVED BY: DEANNE BAKER ISSUE DATE defensive bias historically. This is not expected to change in the short to medium term but Lonsec is mindful that due the influence of the global team and Severino, the Fund may evolve over time. Lonsec will continue to monitor the situation closely over time. Research and portfolio construction Active fixed interest management is often a blend of art and science. Lonsec considers Nikko AM s investment style to be tilted to the artistic end rather than the model driven end of the spectrum, particularly in terms of macro interest rate decisions. Therefore, there is a greater reliance on manager skill in the Fund. Lonsec is pleased that Nikko AM undertakes a formal credit approval process. Securities which meet the defined criteria are added to an accepted list. In periods of high issuance, the drawback of this approach is perhaps timeliness of decisions. Lonsec, however, believes there is merit in adopting such discipline to credit investing given its asymmetric nature. Further, the team can supplement its research using insights from global peers (useful when analysing kangaroo bonds and local markets), equity teams and third parties (e.g. CreditSights). Nikko AM believes the main focus in managing fixed interest portfolios should be risk the returns will look after themselves. As an active fixed interest manager, Nikko AM seeks to exploit market mispricings, adding value through skill/experience and sound fundamental analysis. Nikko AM employs a team-based consultative approach to portfolio construction and risk management. However, portfolio managers do have some flexibility in managing their portfolios, subject to the relevant mandates under their direct responsibility. In this regard, portfolio construction may at times be optimised within agreed limitations. From Lonsec s observation, this discretion may be used to implement tactical positions around significant economic data releases. That said, there are tight controls around deviations from team strategy which may for the Fund, result in a reduction of risks compared to some other Nikko AM mandates. As portfolio manager of the Fund, Langer will be primarily responsible for implementing the team s views and is also ultimately accountable for the Fund s performance. Additionally, while global peers are expected to contribute greater duration insights going forward (e.g. views on G7 interest rates), Langer is not bound by their inputs. Lonsec considers accountability to be moderate to high. Going forward Lonsec expects the influence of Severino and the global team to increase and is looking for evidence of a collaborative approach and a more convincing integration of the Sydney and London teams. Risk management Lonsec believes that risk management is integral to the portfolio management philosophy at Nikko AM. Perhaps as a result of the insurance fund culture, Nikko AM appears to be focused on risk first with returns a secondary consideration. This is viewed as a positive trait in a fixed income manager, as the asset class is inherently meant to be more defensive in nature. A notable feature of Nikko AM s risk focus is its conservative approach to credit. This is demonstrated by selectively diversifying credit exposures across sectors and diversifying by the number of credit securities held. Additionally, the Fund may utilise itraxx indices to reduce credit risk within the portfolio, but usage is deemed minimal at present. Nikko AM s risk management systems are considered to be adequate with both pre- and post-trade compliance integrated into the Bloomberg AIM dealing system. Furthermore, Barclays Point is used for for investment risk management and performance attribution. Lonsec notes the Barclays POINT business has been acquired by Bloomberg which intends to transit the POINT system clients to Bloomberg s risk analytics tool PORT in due course. Nikko AM has confirmed they will continue to use Barclays POINT until such time they are required to change to PORT. Importantly, risk oversight is a centralised function performed by the Investment Risk Management team (separate to the investment team), which adds to the rigour and integrity of the risk management process. Lonsec is supportive of a group-wide risk management platform, which may facilitate better risk comparison across similar products. Performance Lonsec highlights historical performance cannot be attributed to the current team with the change in circumstances occurring in April The Fund did meet its return objective of outperforming the Bloomberg Ausbond Composite 0+YR Index by % p.a. (gross fees) over the three years to April Fund performance has been below expectation, underperforming the benchmark by 0.25% p.a. (net fees) over this period. However, over the one year period the Fund was successful in achieving its objective returning 2.79% on a net basis. Similarly, net returns over the five and ten year periods have also been well short of both the stated alpha target and benchmark, but broadly in line with peers. Based on analysis supplied by Nikko AM for periods ending March 2017, the Fund s active returns over the last 12 months have predominantly been driven by duration positioning and sector allocation which is an improvement on previous results as duration is expected to be one of the key alpha drivers. Disappointingly security selection detracted over the same time period. Over the longer term threeyear period to March 2017 duration positioning was largely neutral, sector allocation added value and security selection detracted. While the Fund has no risk objective, a tracking error (not targeted) is expected to be 1.25% p.a. over

5 P 5-9 ANALYST: JUDE MCDONNELL APPROVED BY: DEANNE BAKER ISSUE DATE rolling three year periods. The Fund s tracking error was 0.35% p.a. over the three years to April 2017, substantially lower than the expected level. Overall Lonsec has reinstated the Investment Grade rating following the decision by Suncorp to terminate the long-standing investment management arrangement resulting in a substantial reduction in Nikko AM s Australian fixed interest funds under management. In response, Nikko AM restructured the Australian team with the redundancies of four positions, including former Lead Portfolio Manager, James Alexander. The Sydney-based team of four is now managed by Head of Global Fixed Income Andre Severino based in London. Lonsec views Portfolio Manager Darren Langer in a favourable light and considers him appropriately experienced to manage the Fund. However, Lonsec is looking for an extended period of stability within the team and increased conviction in the integration of both teams (London and Sydney) for the rating to be maintained. Furthermore, the Fund s failure to achieve its objective over the medium to longer term is disappointing. Concerns remain that competing demands of both portfolio management and seeking to increase FUM could prove a distraction going forward for the team. People and Resources Corporate overview Nikko Asset Management Australia ( Nikko ) is a wholly-owned subsidiary of Nikko Asset Management ( Nikko AM ), a Japan-based asset management group with offices across Europe, Asia and the Americas. As at April 2017, Nikko AM Global had US$170B of assets under management (AUM). Sydney-based Nikko AM manages $2B of fixed income assets under management as of 30 April Nikko Asset Management Australia ( Nikko ) is a wholly-owned subsidiary of Nikko Asset Management ( Nikko AM ), a Japan-based asset management group with offices across Europe, Asia and the Americas. As at April 2017, Nikko AM Global had US$170B of assets under management (AUM). Sydney-based Nikko AM manages $2B of fixed income assets under management as of April Size and experience NAME ANDRE SEVERINO* DARREN LANGER JOHN SORRELL POSITION HEAD OF GLOBAL FIXED INCOME SENIOR PORTFOLIO MANAGER HEAD OF CREDIT RESEARCH EXPERIENCE INDUSTRY / FIRM 27 / / 9 29 / 8 CHRIS RANDS^ PORTFOLIO MANAGER 6 / 5 LEO LESLIE SENIOR CREDIT ANALYST 36 / 4 ^Back-up portfolio manager to Darren Langer* Based in London Team structure The Sydney-based fixed income numbering four reports to the Head of Global Fixed Income, Andre Severino. Severino is also responsible for the London-based global fixed income network (ex-asia) that combines Nikko AM s expertise across EMEA and Australia. The global fixed income team is split into four key functions, namely Money Markets and Currencies (led by Michael Lack), Core Markets (led by Steve Williams, Darren Langer and Chris Rands are part of this team), Emerging Markets (led by Raphael Marechal) and Global Credit (led by Holger, Mertens, John Sorrell and Leo Leslie are part of this team. The Australian based senior team members (Langer and Sorrell) have responsibility for a specific alpha source (duration, sector and credit, respectively). The role of a portfolio manager is to implement the team s investment strategy on each alpha source consistently across the portfolio, taking into account specific risk limits and requirements. Remuneration Bonuses vary from 0-100% of an individual s base salary package and are paid annually in cash. The bonus calculation takes into account both the Fund s and the team s outperformance of the benchmark, as well as qualitative factors such as feedback from peers and contributions to the broader Nikko AM group. Nikko AM has also recently put in place a long term incentive plan (LTI) for the Fixed Income team to reward and retain those staff involved in managing institutional mandates. This plan is linked to both long term Fund performance and growth of AUM. This incentive is deferred over a minimum three year vesting period. Research Approach Overview Macroeconomic research Top-down strategies are formulated based on the team s overall views on the economic and business environment, and the likely effects on yields, liquidity and credit risk premiums. The team may supplement their views by leveraging the expertise of portfolio managers and strategists across Nikko AM s global network via weekly and monthly meetings. However, portfolio managers are not bound by a house view. Further, the team will typically meet with banks, economists, global and local issuers and government departments to deepen its insights. Proprietary models are also actively employed. These include, for example, a monetary bias indicator, yield forecasting models, credit thermometer and relative value models. Model outputs are combined with the team s macroeconomic outlook to inform decisions on the Fund s yield curve, duration and sector positioning. Credit research Nikko AM believes that risks in fixed income markets, particularly in relation to investment grade credit, are asymmetric where there is limited upside but the potential for large losses. As such, the objective of Nikko AM s credit process is to generate secure income from investments and not necessarily capital gains. The credit research process is a fundamental assessment of an issuer s credit worthiness using a framework similar to that adopted by credit rating agencies and

6 P 6-9 ANALYST: JUDE MCDONNELL APPROVED BY: DEANNE BAKER ISSUE DATE many peers. Credit analysts will meet with issuers where possible, and refer to external research at times (e.g. rating agency reviews, broker reports). Credit research is documented in a standardised template and shared across the entire fixed income network via a database. Shadow ratings are not assigned to credits reviewed. Rather, a Star Rating System is used to express conviction in individual issues on a one (avoid/sell) to five (highly recommended) star scale. Portfolio Construction Overview BENCHMARK SUB-INVESTMENT GRADE BLOOMBERG AUSBOND COMPOSITE 0+YR INDEX TYPICAL NO. OF HOLDINGS The Fund s investment universe comprises of debt securities issued by governments (Commonwealth, State/Territory) and corporates. It is expected to predominantly consist of securities domiciled in Australia but there is the scope to invest in securities domiciled in offshore currencies (up to 5% and fully hedged). Active positions are taken based on the team s consensus view of the likely direction of interest rates, the expected performance of different fixed income sectors and the individual selection of credit securities. Whilst being an active manager, the team also seeks to minimise transaction costs in portfolio construction. Physical bonds are often purchased on a hold-tomaturity basis with active interest rate management implemented via a combination of futures and interest rates swaps due to greater liquidity and lower relative transaction costs. This cost minimisation philosophy carries through to credit securities, where transactions are conducted on a duration-neutral switch basis where possible. The exception is a security at risk of a deteriorating credit profile, in which case it must usually be sold immediately. Risk Management Risk limits DURATION RISK LIMIT MIN. ISSUER CREDIT RATING AT PURCHASE MAX. SINGLE ISSUER WEIGHT CURRENCY EXPOSURE NIL BENCHMARK DURATION +/-1.5 YEARS BBB- GOVERNMENT 100%; SEMI-GOVERNMENT 30%; A1+ RATED AUSTRALIAN BANKS (EX. GOVT GUARANTEE) 15% (ALL OTHERS 5%); A1 RATED AUSTRALIAN BANKS (EX. GOVT GUARANTEE) 7% (ALL OTHERS 3%); A2 AND BELOW RATED AUSTRALIAN BANKS (EX. GOVT GUARANTEE) 2% (ALL OTHERS 1%) 5% (FULLY HEDGED) The risk limits stated are hard limits which must be adhered to. Risk monitoring Portfolio risk is monitored on a day-to-day basis by Investment Risk Manager Chris Collins. Collins forms part of the Investment Risk Management (IRM) team that provides risk oversight to the entire Nikko AM group. Risk reports covering various risk metrics are provided regularly to the investment team. These reports are also discussed formally at monthly Investment Risk Committee meetings that are attended by the investment team, the IRM team and the group s global CIO. Barclays Point is adopted as the group-wide risk management system. Pre- and post-trade compliance checks are conducted via the Bloomberg AIM dealing system. Currency management The Fund is permitted to hold non-a$ denominated assets (up to 5%). Where non-a$ assets are held, the currency exposure will be fully hedged using one month currency forwards or cross currency swaps with a tolerance band of +/-2%. Currency hedging is implemented by the local investment team using a passive approach (i.e. not for alpha generation) 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: Interest rate (or duration) risk Changes to interest rates can directly and indirectly impact investment value and returns. For example, an increase in official interest rates can result in a fall in the value of fixed interest securities, while a decrease in interest rates can result in an increase in value. The magnitude of these changes to the value of an investment will depend mainly on the term to maturity of the security. Generally, a security with a longer term to maturity is likely to be more affected by interest rate changes. Company-specific (or credit) risk Credit risk refers to the risk that the issuer of a debt security 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. Derivative risk The Fund may use derivatives to manage risk (e.g. duration, currency) and take positions in certain markets. Derivatives are not used to gearing purposes. Counterparty risk A special case of credit risk, where a fund is indirectly exposed to the credit risk of a counterparty for the completion of a trade or investment, e.g. over-thecounter derivatives such as interest rate swaps. The use of over-the-counter swaps and options is confined to counterparties with an S&P rating of A- or higher. For exposure limits, counterparty exposure is rolled into the

7 P 7-9 ANALYST: JUDE MCDONNELL APPROVED BY: DEANNE BAKER ISSUE DATE individual risk limits. For domestic interest rate swaps, the margin is 2% of the gross fair value. Currency risk The Fund can invest in assets that are denominated in non-a$ currencies. A rise in the relative value of the A$ vis-à-vis the currencies in which the assets are denominated will negatively impact the market value of the assets (and vice versa) from an Australian investor perspective. The Fund is managed on a currency hedged basis with the aim of minimising the impact of currency movements. Other risks Please refer to the PDS for more details.

8 P 8-9 ANALYST: JUDE MCDONNELL APPROVED BY: DEANNE BAKER ISSUE DATE Quantitative Performance Analysis - annualised after-fee % returns (at ) Performance metrics 1 YR 3 YR 5 YR 10 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 NR NR NR NR NR SHARPE RATIO INFORMATION RATIO TRACKING ERROR (% PA) FUND: NIKKO AM AUSTRALIAN BOND FUND LONSEC PEER GROUP: FIXED INTEREST - AUSTRALIAN FIXED INTEREST BENCHMARK USED: BLOOMBERG AUSBOND COMPOSITE 0+ YEAR 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 10 years Snail trail Risk-return chart over three years Outperformance consistency

9 P 9-9 ANALYST: JUDE MCDONNELL APPROVED BY: DEANNE BAKER 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: 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). 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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. 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