MERCER MULTI-MANAGER FUNDS QUARTERLY REPORT THREE MONTHS TO 30 June 2016

Transcription

1 MERCER MULTI-MANAGER FUNDS QUARTERLY REPORT THREE MONTHS TO 0 June 2016 This Report is issued by Mercer Investments (Australia) Limited ABN (MIAL), Australian Financial Services Licence #24485 as the Responsible Entity of the Mercer Multi-Manager Funds (MMF). MERCER and Mercer SmartPath are Australian registered trademarks of Mercer (Australia) Pty Ltd, ABN

2 MERCER MULTI-MANAGER FUNDS QUARTERLY REPORT CONTENTS ECONOMY & MARKETS 1-2 SECTORS -28 SHARES Australian Shares -4 Australian Shares Socially Responsible 5-6 Australian Shares Tax Exempt Investors 7-8 Australian Small Companies 9 International Shares 10-1 Global Small Companies 14 Emerging Markets 15 PROPERTY AND INFRASTRUCTURE Global Listed Property 16 Australian Direct Property 17 Global Listed Infrastructure 18 Global Unlisted Infrastructure 19 ALTERNATIVE ASSETS Global Natural Resources 20 Diversified Alternatives 21 FIXED INTEREST Australian Sovereign Bonds 22 Global Sovereign Bonds 2 Australian Inflation-Plus /Absolute Returns 24 Global Credit 25 Emerging Markets Debt 26 CASH Cash & Term Deposits 27 DIVERSIFED FUNDS 28-2 Mercer Diversified Shares 28 Mercer Growth, Select Growth 29 Mercer High Growth 0 Mercer Income Plus, Moderate Growth 1 Mercer Conservative Growth, Defensive 2 MERCER SMARTPATH FUNDS -7 CLOSED FUNDS 8 Mercer Australian Listed Property 8 IMPORTANT NOTES 9 ECONOMY & MARKETS Strong investor sentiment continued over the first two months of the quarter as commodity prices continued to improve. However, the June 2016 quarterly market news would inevitably be characterised by the referendum decision of the United Kingdom (UK) to leave the European Union (EU). The most immediate impact to financial markets following the revelation came through a plunge in the Pound Sterling dropping to some 0-year lows the day of the referendum count. Uncertainty following the Brexit is expected to continue as the world waits for the UK to invoke article 50 to officially begin the process of separating from the EU. In the US, non-farm payrolls disappointed in May, growing by 8,000, significantly lower than the expected 160,000. This contributed to the decision by the Federal Open Market Committee (FOMC) to leave interest rates unchanged at its 15 June 2016 meeting, along with the uncertainty surrounding the upcoming Brexit decision. However the payrolls turned around significantly in June. The release exceeded expectations for 180,000 by recording a strong 287,000 increase. Chinese foreign currency reserves grew in June following a long sustained period of sell-offs due to the People s Bank of China (PBoC) defending the overvalued Renminbi to protect against severe capital outflow. Despite the increase being relatively small (from US$.19 trillion to US$.21 trillion), this move indicates a potential shift of trade policy to forcing the Renminbi lower to help exporters. A move that will unlikely be taken well by major international trading partners. Adding to China s worries was a fall in the Caixin Manufacturing purchasing managers index (PMI) to 48.6 in June, following a May reading of Despite the negative movement following the Brexit vote, Australian equities were strong across the market spectrum over the June quarter. A strong performance from commodities over April contributed to this result. Bond markets were also positive for the quarter with the Bloomberg Ausbond Composite index returning 2.9% for the period. Australian 10-year bond yields fell 51 basis points (bps) to 1.98% as the Treasury index rose.%. US Headline consumer price index (CPI) rose 0.2% MoM and 1.0% YoY to May, behind expectations for 0.% and 1.1%, respectively. Core CPI rose 0.2% MoM and 2.2% YoY, on par with expectations for the month. The China Caixin Manufacturing PMI printed 48.6 in June, behind expectations for 49.2 and behind the 49.2 reading in May. Production and new orders both declined. Meanwhile, the official PMI decreased to 50.0 in June, in line with expectations. European core CPI estimates indicate an increase to 0.9% over the year to June, from 0.8% in May, ahead of estimates for 0.8%. The unemployment rate fell to 10.1% in May, in line with expectations. The RBA cut the interest rate by 0.25% in May, and then left the interest rate unchanged in its June and July meetings, at 1.75%. RBA Governor, Glenn Stevens, noted in his July release that Australian growth is continuing despite a large decline in business investment. Inflation remains quite low and is expected to for some time given very subdued growth in labour costs and very low cost pressures elsewhere in the world. Lower interest rates have been supporting domestic demand and a lower exchange rate has helped the trade sector. He also noted that most markets have continued to function effectively for the initial period following the UK referendum. This wary but optimistic stance is consistent with previous recent statements. Australian seasonally adjusted employment rose 17,900 in May, ahead of expectations for 15,000 while April employment was revised up from 10,800 to 11,600. The unemployment rate remained at 5.7%, in line with market expectations. The participation rate was steady at 64.80%, behind expectations for 64.90%. Australian Retail Sales rose 0.2% month on month (MoM) in seasonally adjusted terms over May, behind expectations for 0.%, following a 0.2% increase in April. The strongest gains were in other (+0.5%) and the weakest was department stores (0.0%). In trend terms, retail sales rose.% year on year (YoY), down from.4% over the year to April.The Australian house price index was released for Q1, showing a 0.2% reduction in house prices for a 6.8% 12 month growth rate ending March This trailed expectations for a 0.8% quarter increase and a 7.5% year on year increase. The theme of political uncertainty continued closer to home as speculation was rife over the 2016 Australian election. Increasing likelihood of a minority government and further difficulty in navigating a hostile senate has led to speculation that Australia s AAA sovereign bond rating could be at risk as the budget deficit trend looks likely to continue. A significant change in the June quarter was the rate cut by the Reserve Bank of Australia (RBA) to a record low of 1.75% in May, following lower than expected inflationary pressures. This level has been maintained through June as the RBA attempts to direct the Australian economy transition following the mining boom. OUTLOOK We remain cautious on the outlook for markets in equity valuations are on the high side and bond markets offer limited value. Unlisted property offers the most attractive value of prospective medium term returns. 1

3 QUARTER ENDING JUNE 2016 FINANCIAL MARKET RETURNS TO 0 June 2016 NOTE: Past performance is not a reliable indicator of future performance. Performance shown only for asset classes that are applicable to sector MMFs benchmarked against a single index. # Fully hedged return ^ Unhedged return 2

4 MERCER MULTI-MANAGER FUNDS QUARTERLY REPORT SHARES Refer to page 9 Important notes about this Report - for further information on the calculation of returns AUSTRALIAN SHARES Australian equities were strong over the quarter despite a weak turnaround over June, with the S&P/ASX 00 Accumulation Index returning 4.0% for the period. There were positive results across the market cap spectrum, with the best performer being the Mid 50; returning 6.0% for the quarter. The best performing sectors were Materials and Healthcare (over 10%). The weakest performing sectors were Financials ex Prop (0.4%) and Consumer Staples (-.9%). The largest positive contributors to the return of the index were BHP, CSL and Newcrest Mining with absolute returns of 12.%, 11.0% and 5.6% respectively. On the other hand, the most significant detractors from performance were Qantas, AMP and Westpac with absolute returns of -0.7%, -9.8% and -1.6% respectively. AUSTRALIAN SHARES FUNDS Benchmark weight by sector (%) S&P/ASX 00 Accumulation Index Benchmark sector returns for the three months to 0 June 2016(%) S&P/ASX 00 Accumulation Index ** In this Quarterly Report, Australian Shares Funds refers to: Mercer Australian Shares Fund (the Core Fund ) Mercer Australian Shares Plus Fund (the Plus Fund ) Only the sector exposure differs between the Funds. Benchmark weights etc. apply to both Funds. Sector Exposure Overweight/Underweight positions as at 0 June 2016 (%) Mercer Australian Shares Fund Mercer Australian Shares Plus Fund

5 QUARTERLY ENDING JUNE 2016 SHARES NOTE: Past performance is not a reliable indicator of future performance Refer to page 9 - Important notes about this Report - for further information on the calculation of returns AUSTRALIAN SHARES FUNDS** AUSTRALIAN SHARES Top 10 Australian share holdings Listed (right) are the 10 largest Australian share holdings in aggregate within the Australian shares funds at quarter end compared to their respective benchmarks. Mercer Australian Shares Fund % of Fund % of B mark Mercer Australian Shares Plus Fund % of Fund % of B mark Commonwealth Bank Commonwealth Bank Westpac Banking Corporation Westpac Banking Corporation Telstra Corporation Telstra Corporation National Australia Bank National Australia Bank ANZ Banking Group ANZ Banking Group BHP Billiton.5 4. CSL CSL.2.7 BHP Billiton Wesfarmers Macquarie Group Macquarie Group Aristocrat Leisure Transurban Group Wesfarmers The Fund underperformed the benchmark in the quarter mainly due to stock selection decisions. At the sector level the fund was underweight the better performing utilities sector but this was offset by being underweight the weaker performing financials and consumer staples sectors. Mercer Australian Shares Fund Total Returns Before fees : Benchmark* Return : Excess Return Before fees : Mercer Australian Shares Plus Fund Total Returns Before fees : Benchmark* Return : Excess Return Before fees : Total Returns (%) After Fees Mercer Australian Shares Fund Mercer Australian Shares Plus Fund * S&P/ASX 00 Accumulation Index, which is the benchmark used for the fund. Alternate benchmarks may apply to managers individually Nikko and Wavestone underperformed over the June quarter. Nikko s underperformance was largely driven by overweight holdings in Henderson and Qantas, while detractors for Wavestone were overweight holdings in P Learning, BT Investment Management and Sirtex Medical. Fidelity s positioning outside the largest 50 names in the ASX provided a strong tailwind to its performance contribution over the quarter. Proportion of assets managed at quarter end Managers Core Plus Fund Fund Ausbil Dexia Fidelity Goldman Sachs Greencape JCP Nikko Plato Vinva Wavestone Managers Ausbil Dexia Fidelity n/a n/a Goldman Sachs n/a n/a Greencape n/a n/a JCP Nikko Plato n/a n/a Vinva n/a Wavestone n/a n/a * S&P/ASX 00 Accumulation Index, which is the benchmark used for the fund. Alternate benchmarks may apply to managers individually. 4

6 MERCER MULTI-MANAGER FUNDS QUARTERLY REPORT SHARES Refer to page 9 Important notes about this Report - for further information on the calculation of returns AUSTRALIAN SHARES SOCIALLY RESPONSIBLE Australian equities were strong over the quarter despite a weak turnaround over June, with the S&P/ASX 00 Accumulation Index returning 4.0% for the period. There were positive results across the market cap spectrum, with the best performer being the Mid 50; returning 6.0% for the quarter. The best performing sectors were Materials and Healthcare (over 10%). The weakest performing sectors were Financials ex Prop (0.4%) and Consumer Staples (-.9%). The largest positive contributors to the return of the index were BHP, CSL and Newcrest Mining with absolute returns of 12.%, 11.0% and 5.6% respectively. On the other hand, the most significant detractors from performance were Qantas, AMP and Westpac with absolute returns of -0.7%, -9.8% and - 1.6% respectively. MERCER SOCIALLY RESPONSIBLE AUSTRALIAN SHARES FUND Benchmark weights by sector (%) S&P/ASX 00 Accumulation Index Sector Exposure Overweight/Underweight positions as at 0 June 2016(%) Benchmark sector returns for the three months to 0 June 2016 (%) S&P/ASX 00 Accumulation Index 5

7 QUARTERLY ENDING JUNE 2016 SHARES NOTE: Past performance is not a reliable indicator of future performance Refer to page 9 - Important notes about this Report - for further information on the calculation of returns AUSTRALIAN SHARES SOCIALLY RESPONSIBLE MERCER SOCIALLY RESPONSIBLE AUSTRALIAN SHARES FUNDS Top 10 Australian share holdings Listed (right) are the 10 largest Australian share holdings in aggregate within the Mercer Socially Responsible Australian Shares Fund at quarter end compared to the benchmark. Stock % of Fund % of Benchmark Commonwealth Bank ANZ Banking Group Westpac Banking Corporation National Australia Bank Telstra Corporation CSL BHP Billiton Freedom Foods Group Macquarie Group QBE Insurance Group Total & Excess Returns (%) Total Returns Before fees : Benchmark* Return : Excess Return Before fees : *S&P/ASX 00 Accumulation Index Total Returns After fees : All managers underperformed over the quarter. Perpetual was the key detractor from performance, due in part to its overweight exposure to Henderson Group which sold off post the UK referendum outcome. Overweight exposure to Qantas and underweight holdings in Newcrest Mining were significant detractors from BT and Acadian s performance over the quarter. Proportion of assets managed at quarter end Manager % BT 6.6 Acadian 8.1 Perpetual 25. Managers BT Acadian -0.5 n/a n/a n/a Perpetual *S&P/ASX 00 Accumulation Index, which is the benchmark used for the Fund. Alternate benchmarks may apply to managers individually 6

8 MERCER MULTI-MANAGER FUNDS QUARTERLY REPORT SHARES Refer to page 9 Important notes about this Report - for further information on the calculation of returns AUSTRALIAN SHARES TAX EXEMPT INVESTORS Australian equities were strong over the quarter despite a weak turnaround over June, with the S&P/ASX 00 Accumulation Index returning 4.0% for the period. There were positive results across the market cap spectrum, with the best performer being the Mid 50; returning 6.0% for the quarter. The best performing sectors were Materials and Healthcare (over 10%). The weakest performing sectors were Financials ex Prop (0.4%) and Consumer Staples (-.9%). The largest positive contributors to the return of the index were BHP, CSL and Newcrest Mining with absolute returns of 12.%, 11.0% and 5.6% respectively. On the other hand, the most significant detractors from performance were Qantas, AMP and Westpac with absolute returns of -0.7%, -9.8% and - 1.6% respectively. MERCER AUSTRALIAN SHARES FUND FOR TAX EXEMPT INVESTORS Benchmark weights by sector (%) S&P/ASX 00 Accumulation Index : Grossed up for franking credits Sector Exposure Overweight/Underweight positions as at 0 June 2016 (%) Benchmark sector returns for the three months to 0 June 2016 (%) S&P/ASX 00 Accumulation Index: Grossed up for Franking Credits 7

9 QUARTERLY ENDING JUNE 2016 SHARES NOTE: Past performance is not a reliable indicator of future performance Refer to page 9 - Important notes about this Report - for further information on the calculation of returns AUSTRALIAN SHARES TAX EXEMPT INVESTORS MERCER AUSTRALIAN SHARES FUND FOR TAX EXEMPT INVESTORS Top 10 Australian share holdings Listed (right) are the 10 largest Australian share holdings in aggregate within the Mercer Australian Shares Tax Exempt Fund at quarter end compared to the benchmark. Stock % of Fund % of Benchmark Commonwealth Bank Westpac Banking Corporation Telstra Corporation ANZ Banking Group National Australia Bank Wesfarmers..2 BHP Billiton.2 4. CSL.1.7 Rio Tinto Macquarie Group Total & Excess Returns (%) Total Returns Before fees : n/a Benchmark* Return : n/a Excess Return Before fees : n/a *S&P/ASX 00 Accumulation Index: Grossed up for franking credits. Total Returns After fees : n/a Over the quarter Macquarie and Plato each performed largely in line with the benchmark while JCP underperformed. JCP s underperformance over the quarter was largely due to overweight holdings in AMP and QBE Insurance as well as an underweight exposure to Newcrest Mining. Plato s performance was relatively flat as the underperformance through the April low quality rally was made back in May and June as the managers income oriented factors outperformed. Proportion of assets managed at quarter end Manager % Macquarie 49.9 Plato 0.0 JCP 20.1 Managers Macquarie n/a Plato n/a JCP n/a *S&P/ASX 00 Accumulation Index: Grossed up for franking credits. 8

10 MERCER MULTI-MANAGER FUNDS QUARTERLY REPORT SHARES Refer to page 9 Important notes about this Report - for further information on the calculation of returns AUSTRALIAN SHARES SMALL COMPANIES Small companies performed well in the quarter, mainly due to a rally in small resources stocks, in particular, the gold sector. Australian small vs large company performance MERCER AUSTRALIAN SMALL COMPANIES FUND Total & Excess Returns (%) Total Returns Before fees : Benchmark* Return : Excess Return Before fees : * S&P/ASX Small Ordinaries Accumulation Index. Total Returns After fees : All managers in the Australian Small Companies Fund underperformed during what proved to be a difficult quarter for active management. An underweight exposure to gold stocks as well as overweight holdings in Pulse Health and Sundance Energy contributed to Perennial s underperformance over the quarter. Avoca s underperformance was largely due to overweight holdings in Virgin Australia and Henderson Group and not holding gold producer Northern Star Resources. Proportion of assets managed at quarter end Manager % Avoca 21.1 IFM. CFS 20.2 Perennial 25.4 Managers Avoca n/a n/a IFM n/a n/a CFS n/a n/a Perennial * S&P/ASX Small Ordinaries Accumulation Index, which is the benchmark used for the fund. 9

11 QUARTERLY ENDING JUNE 2016 SHARES NOTE: Past performance is not a reliable indicator of future performance Refer to page 9 - Important notes about this Report - for further information on the calculation of returns INTERNATIONAL SHARES The broad MSCI World ex Australia Index was up 1.7% in hedged terms and up 4.4% in unhedged terms over the quarter, as the Australian dollar depreciated against the major currencies with the exception of the Pound Sterling. The strongest performing sectors were Energy and Healthcare, while Consumer Discretionary and Financials (1.2%) were weak. INTERNATIONAL SHARES FUNDS** Benchmark weights by sector (%) MSCI World Index (ex Australia) - in $A with net dividends reinvested The Australian dollar depreciated against most major currencies over the June quarter except for the Pound Sterling, finishing at US$0.745 with a Trade Weighted Index of The Australian dollar depreciated 1.0% against the Euro, 11.% against the Yen and.2% against the US dollar, but appreciated 4.0% against the Pound Sterling following its post-brexit dive. On a trade-weighted basis, the local currency decreased.0% over the quarter. Benchmark sector returns for the three months to 0 June 2016 (%) MSCI World Index (ex Australia) - in $A with net dividends reinvested ** In this Quarterly Report, International Shares Funds refers to: Mercer International Shares Fund Mercer Hedged International Shares Fund (the Core Funds ) Mercer International Shares Plus Fund Mercer Hedged International Shares Plus Fund (the Plus Funds ) Benchmark weights etc. apply to all four Funds. Sector Exposure Overweight/Underweight positions as at 0 June 2016 (%) Mercer International Shares Fund Mercer Hedged International Shares Fund Mercer International Shares Plus Fund Mercer Hedged International Shares Plus Fund 10

12 MERCER MULTI-MANAGER FUNDS QUARTERLY REPORT SHARES Refer to page 9 Important notes about this Report - for further information on the calculation of returns INTERNATIONAL SHARES INTERNATIONAL SHARES FUNDS** Benchmark weights Top 10 countries (%) MSCI World Index (ex Australia) - in A$ with net dividends reinvested Top 10 countries benchmark returns for the three months to 0 June 2016 (%) MSCI World Index (ex Australia) - in A$ with net dividends reinvested ** In this Quarterly Report, International Shares Funds refers to: Mercer International Shares Fund Mercer Hedged International Shares Fund (the Core Funds ) Mercer International Shares Plus Fund Mercer Hedged International Shares Plus Fund (the Plus Funds ) Benchmark weights etc. apply to all four Funds. Exposure to top 10 countries - Overweight/Underweight positions as at 0 June 2016 (%) Mercer International Shares Fund Mercer Hedged International Shares Fund Mercer International Shares Plus Fund Mercer Hedged International Shares Plus Fund 11

13 QUARTERLY ENDING JUNE 2016 SHARES NOTE: Past performance is not a reliable indicator of future performance Refer to page 9 - Important notes about this Report - for further information on the calculation of returns INTERNATIONAL SHARES MERCER INTERNATIONAL SHARES FUND MERCER HEDGED INTERNATIONAL SHARES FUND Top 10 International share holdings Ten largest international share holdings held in aggregate within the Mercer International Shares Fund and Mercer Hedged International Shares Fund as at quarter end, compared to their respective benchmarks: Stock % of Fund % of Benchmark Facebook Incorporation Apple Microsoft Corporation Amazon Pfizer Inc Nestle S.A Philip Morris International Incorporation Cisco Systems Johnson & Johnson Pepsico Inc Note that a composite benchmark was used for this fund from its inception to August In that month, the benchmark was standardised to the 1 MSCI World Index (ex Australia) - in A$ with net dividends reinvested. 2 MSCI World Index (ex Australia) - in Hedged A$ with net dividends reinvested Mercer International Shares Fund Total Returns Before fees: Benchmark 1 Return Before fees: Excess Return Before fee: Mercer Hedged International Shares Fund Total Returns Before fees: Benchmark 2 Return Before fees: Excess Return Before fees : Total Returns (%) After Fees Mercer International Shares Fund Mercer Hedged International Shares Fund Hexavest s outperformance over the quarter was largely due to its overweight exposure to the Materials sector and underweight exposure to the Information Technology sector. An overweight exposure to the Canadian Materials sector and an underweight to the Japanese Consumer Discretionary sector were the key contributors to Arrowstreet s outperformance over the quarter. During the quarter, LSV were added to the configuration. Proportion of assets managed at quarter end Managers % Arrowstreet 22.8 Baillie Gifford 17.8 BlackRock 2.0 Hexavest 16.6 Schroder 25.6 LSV Asset Management 15.2 Managers 1 Year Arrowstreet n/a Baillie Gifford n/a BlackRock n/a Hexavest Schroder LSV Asset Management n/a n/a n/a n/a * MSCI World Index (ex Australia) - in A$ with net dividends reinvested, which is the benchmark used for the unhedged funds. 12

14 MERCER MULTI-MANAGER FUNDS QUARTERLY REPORT SHARES Refer to page 9 - Important notes about this Report - for further information on the calculation of returns INTERNATIONAL SHARES MERCER INTERNATIONAL SHARES PLUS FUND MERCER HEDGED INTERNATIONAL SHARES PLUS FUND Top 10 International share holdings Ten largest international share holdings held in aggregate within the Mercer International Shares Plus Fund and Mercer Hedged International Shares Plus Fund as at quarter end, compared to their respective benchmarks: Stock % of Fund % of Benchmark Facebook Incorporation Philip Morris International Incorporation Amazon Cisco Systems Pfizer Inc Citigroup Inc Nestle S.A Pepsico Inc Naspers Microsoft Corporation Note that a composite benchmark was used for this fund from its inception to August In that month, the benchmark was standardised to the 1 MSCI World Index (ex Australia) - in A$ with net dividends reinvested. 2 MSCI World Index (ex Australia) - in Hedged A$ with net dividends reinvested Mercer International Shares Plus Fund Total Returns Before fees: Benchmark 1 Return Before fees: Excess Return Before fees Mercer Hedged International Shares Plus Fund Total Returns Before fees: Benchmark 2 Return Before fees: Excess Return Before fees: Total Returns (%) After Fees Mercer International Shares Plus Fund Mercer Hedged International Shares Plus Fund Hexavest s outperformance over the quarter was largely due to its overweight exposure to the Materials sector and underweight exposure to the Information Technology sector. An overweight exposure to the Canadian Materials sector and an underweight to the Japanese Consumer Discretionary sector were the key contributors to Arrowstreet s outperformance over the quarter. During the quarter, LSV were added to the configuration. Proportion of assets managed at quarter end Manager % Arrowstreet 0.6 Baillie Gifford 2.9 BlackRock 2.7 Hexavest 22. Schroder 0.0 LSV Asset Management 20.5 Managers 1 Year Arrowstreet n/a Baillie Gifford n/a BlackRock n/a Hexavest Schroder LSV Asset Management n/a n/a n/a n/a *MSCI World Index (ex Australia) - in A$ with net dividends reinvested, which is the benchmark used for the funds. 1

15 QUARTERLY ENDING JUNE 2016 SHARES NOTE: Past performance is not a reliable indicator of future performance Refer to page 9 - Important notes about this Report - for further information on the calculation of returns GLOBAL SHARES SMALL COMPANIES Overseas small vs large company performance MERCER GLOBAL SMALL COMPANIES SHARES FUND Total & Excess Returns (%) Total Returns Before fees : Benchmark* Return : Excess Return Before fees : * MSCI World Small Cap Index. Total Returns After fees : Arrowstreet s outperformance over the quarter was largely driven by asset allocation, in particular its overweight exposures to the Canadian Materials sector and the US Consumer Staples sector. Fidelity s underperformance was largely driven by stock selection, in particular overweight exposures to Cavium, Bruker and Natural Grocers. Proportion of assets managed at quarter end Manager % Allianz 29.8 Arrowstreet 0.9 Fidelity 9. Managers Allianz n/a n/a Arrowstreet n/a Fidelity * MSCI World Small Cap Index, which is the benchmark used for the fund. 14

16 MERCER MULTI-MANAGER FUNDS QUARTERLY REPORT SHARES Refer to page 9 - Important notes about this Report - for further information on the calculation of returns The broad MSCI World ex Australia Index was up 1.7% in hedged terms and up 4.4% in unhedged terms over the quarter, as the Australian dollar depreciated against the major currencies with the exception of the Pound Sterling. The strongest performing sectors were Energy (+14.2%) and Healthcare (+9.1%), while Consumer Discretionary (-0.8%) and Financials (1.2%) were the worst performers. In Australian dollar terms, the Global Small Cap sector rose 5.1% while Emerging Markets were up, returning 4.0%. EMERGING MARKETS Emerging Markets vs large company performance Top 10 benchmark weights (MSCI Emerging Markets Index MERCER EMERGING MARKETS SHARES FUND Total & Excess Returns (%) 1 Year Total Returns Before fees : Benchmark* Return : Excess Return Before fees : *MSCI Emerging Markets Index Total Returns After fees : Investec s outperformance over the June quarter was largely driven by its exposure within the Information Technology sector; in particular holdings in NetEase, Tencent, Silicon Motion Technology and Samsung Electronics. The majority of Blackrock s outperformance came in May as all underlying factor signals contributed positively. Country selection and big data signals were key drivers of outperformance. Proportion of assets managed at quarter end Manager % AQR 12.2 BlackRock 8.1 Investec 25.1 Macquarie 24.6 Managers AQR n/a n/a BlackRock Investec n/a n/a Macquarie n/a n/a * MSCI Emerging Markets Index, which is the benchmark used for the fund. 15

17 QUARTERLY ENDING JUNE 2016 GLOBAL LISTED PROPERTY The broad MSCI World ex Australia Index was up 1.7% in hedged terms and up 4.4% in unhedged terms over the quarter, as the Australian dollar depreciated against the major currencies with the exception of the Pound Sterling. The strongest performing sectors were Energy (+14.2%) and Healthcare (+9.1%), while Consumer Discretionary (-0.8%) and Financials (1.2%) were the worst performers. In Australian dollar terms, the Global Small Cap sector rose 5.1% while Emerging Markets were up, returning 4.0%. REAL ASSETS Refer to page 9 - Important notes about this Report - for further information on the calculation of returns Australian Listed vs global listed property cumulative performance Note The indices used in the graph (above) are: 1. S&P/ASX 200 Property Trusts Accumulation Index for Australian Listed Property 2. FTST EPRA/NAREIT Developed Hedged $A index MERCER GLOBAL LISTED PROPERTY FUND Total & Excess Returns (%) Total Returns Before fees : Benchmark* Return : Excess Return Before fees : *FTSE EPRA/NAREIT Developed Hedged $A Index Total Returns After fees : Stock selection within the US, UK and Australian markets were key contributors to CenterSquare s outperformance over the quarter, in particular within the US shopping centre and apartments sectors. Brookfield s outperformance was largely driven by stock selection within the Diversified sector and an underweight exposure to the Self-Storage sector. Proportion of assets managed at quarter end Manager % Brookfield 25.1 Principal Global Investors 7.2 CenterSquare 7.7 Managers Brookfield n/a Principal Global Investors n/a CenterSquare n/a Note: The Mercer Australian Listed Property Fund is closed to new investors. * FTSE EPRA/NAREIT Developed Hedged $A Index 16

18 MERCER MULTI-MANAGER FUNDS QUARTERLY REPORT REAL ASSETS Refer to page 9 - Important notes about this Report - for further information on the calculation of returns The June quarter marked another positive quarter for Australian property. Domestic Real Estate Investment Trusts (REITs) returned 9.2%, while Global REITs returned 4.0% on a fully hedged basis. The unlisted property sector rose 2.5% over the quarter on a one-month lagged basis. Meanwhile, Global Core Listed Infrastructure 50/50 index returned 5.6% for the quarter in hedged terms. AUSTRALIAN DIRECT PROPERTY Direct Property 12 month Rolling Benchmark Return Note: The indices used in the graph (above) are: Before1/9/2009: Mercer/IPD Australian Pooled Property Fund Index After 1/1/2016 CPI +4% MERCER AUSTRALIAN DIRECT PROPERTY FUND Total & Excess Returns (%) Total Returns Before fees : Benchmark* Return : Excess Return Before fees : * Before 1/9/2009: Mercer Unlisted Property Funds Index From 1/9/2009: Mercer/IPD Australian Pooled Property Fund Index From 1/1/2016 CPI + 4% Total Returns After fees : All managers provided positive gross returns over the June quarter, led by Charter Hall Retail which experienced multiple positive revaluations on underlying properties. Goodman and Investa also experienced positive revaluations across their portfolios during the period, including 420 George Street Sydney and 242 Exhibition Street Melbourne within Investa s portfolio. Proportion of assets managed at quarter end Manager % Charter Hall Industrial 26.0 Charter Hall Retail 19.8 Goodman 2. Investa 6.7 Lend Lease Investment Management 15.2 Managers Charter Hall Industrial n/a n/a Charter Hall Retail n/a n/a Goodman Investa Lend Lease Investment Management * CPI +4% (from 1/1/2016). Mercer/IPD Australian Pooled Property Fund Index (from 1/9/2009) and Mercer Unlisted Property Funds Index (before 1/9/2009) are/were the benchmarks used for the fund. 17

19 QUARTERLY ENDING JUNE 2016 GLOBAL LISTED INFRASTRUCTURE The June quarter marked another positive quarter for Australian property. Domestic Real Estate Investment Trusts (REITs) returned 9.2%, while Global REITs returned 4.0% on a fully hedged basis. The unlisted property sector rose 2.5% over the quarter on a one-month lagged basis. Meanwhile, Global Core Listed Infrastructure 50/50 index returned 5.6% for the quarter in hedged terms. REAL ASSETS Refer to page 9 - Important notes about this Report - for further information on the calculation of returns Listed Infrastructure 12 month Rolling Return Note The index used in the graph (above) is the FTSE Global Core 50/50 Index. MERCER GLOBAL LISTED INFRASTRUCTURE FUND Total & Excess Returns (%) Total Returns Before fees : Benchmark* Return : Excess Return Before fees : *The benchmark used for this fund was the UBS Global 50/50 Infrastructure and Utilities Index - in A$ (Hedged) until 1/4/2015, thereafter FTSE Global Core 50/50 Index Total Returns After fees : Colonial First State outperformed over the June quarter largely due to its underweight exposure to the Satellite sector and its overweight exposures to the Electric Utilities and Highways and Rail sectors. RARE s underperformance was largely driven by negative contributions from its holdings in the Toll Roads, Airports and Ports sectors. Proportion of assets managed at quarter end Manager % Colonial First State 65.8 RARE 4.2 Managers Colonial First State RARE * The benchmark used for this fund was the UBS Global 50/50 Infrastructure and Utilities Index - in A$ (Hedged) until 1/4/2015, thereafter FTSE Global Core 50/50 Index. Alternate benchmarks may apply to managers individually. 18

20 MERCER MULTI-MANAGER FUNDS QUARTERLY REPORT REAL ASSETS Refer to page 9 - Important notes about this Report - for further information on the calculation of returns The June quarter marked another positive quarter for Australian property. Domestic Real Estate Investment Trusts (REITs) returned 9.2%, while Global REITs returned 4.0% on a fully hedged basis. The unlisted property sector rose 2.5% over the quarter on a one-month lagged basis. Meanwhile, Global Core Listed Infrastructure 50/50 index returned 5.6% for the quarter in hedged terms. GLOBAL UNLISTED INFRASTRUCTURE Unlisted Infrastructure 12 month Rolling Return (A$) Breakdown by Industry sector MERCER GLOBAL UNLISTED INFRASTRUCTURE FUND Total & Excess Returns (%) Total Returns Before fees : Benchmark* Return : Excess Return Before fees : *CPI + 5% (lagged one quarter) Total Returns After fees : Colonial First State s outperformance over the quarter was assisted by a positive revaluation on underlying asset Finerge. The Macquarie Asia Infrastructure Fund s performance was also assisted by positive revaluations. Over the quarter multiple acquisitions were made including the purchase of Vector Gas and Maui Pipeline within the Colonial First State portfolio as well as the purchase of Nippon Vopak within the Macquarie Asian Infrastructure portfolio. Proportion of assets managed at quarter end Manager % Macquarie 5.2 Colonial First State 27. IFM 15.4 KKR 9.1 MAIF Investment Trust 9.7 CFS Finerge.2 Managers Macquarie Colonial First State IFM n/a n/a KKR n/a n/a MAIF Investment Trust n/a n/a n/a CFS Finerge n/a n/a n/a n/a * CPI + 5% which is the benchmark used for the fund. Benchmark used in this report is lagged one quarter. Alternate benchmarks may apply to managers individually. 19

21 QUARTERLY ENDING JUNE 2016 GLOBAL NATURAL RESOURCES Commodities enjoyed a strong rise during the quarter, particularly oil. REAL ASSETS Refer to page 9 - Important notes about this Report - for further information on the calculation of returns Commodities Index - A$ Hedged Cumulative Returns Note The indices used in the graph (above) are a 75%/25% combination of the: - 75%: Dow Jones-UBS Index (DJ UBS Index), which tracks broad commodities - 25% S&P GSCI, which tracks agricultural commodities MERCER GLOBAL NATURAL RESOURCES FUND Total & Excess Returns (%) Total Returns Before fees : Benchmark* Return : Excess Return Before fees : *45% DJ UBS Index plus 15% S&P GSCI - in A$ (Hedged) plus 40% CPI + 5%, Total Returns After fees : H provided a strong contribution to Fund performance in absolute terms as commodity markets staged a comeback with energy prices rebounding, however strong gains in the natural gas spot markets impacted on H s relative returns. Soft commodities were also strong over the quarter, led by soybean meal with prices boosted by adverse weather conditions in Argentina and Brazil, severely impacted supply. Proportion of assets managed at quarter end Manager % Global Commodities 19.2 H Global Advisors 50.6 New Forests 0.2 Managers Global Commodities H Global Advisors New Forests *45% DJ UBS Index plus 15% S&P GSCI - in A$ (Hedged) plus 40% CPI + 5%, which is the benchmark used for the fund. Alternate benchmarks may apply to managers individually. 1 Track record partly reflects manager s previous inclusion in alternative assets. 20

22 MERCER MULTI-MANAGER FUNDS QUARTERLY REPORT ALTERNATIVES Refer to page 9 - Important notes about this Report - for further information on the calculation of returns MERCER DIVERSIFIED ALTERNATIVES FUND ALTERNATIVE ASSETS Total Returns (%) Total Returns After fees and costs 1 : Benchmark* Return : *Bloomberg Bank Bill Index 1 The Total return after fees and costs (ie management costs) allows for a deduction of the investment management fee expense allowance and any applicable performance based fee. See the PDS for details of the current fees and costs. Within the Mercer Liquid Alternatives Strategies Fund the largest contributors to performance over the quarter were the Macro focused manager GMO, Long/Short equity manager Marshall Wallace and Relative Value manager DW Partners. Relative Value manager Makuria was a largest detractor due to its exposure to UK companies. Managers Mercer Liquid Alternatives Strategies n/a Babson Capital Australia * Bloomberg Bank Bill Index, which is the benchmark used for the fund. Alternate benchmarks may apply to managers individually. Manager Allocation Mercer Diversified Alternatives as at 0 June

23 QUARTERLY ENDING JUNE 2016 FIXED INTEREST NOTE: Past performance is not a reliable indicator of future performance Refer to page 9 - Important notes about this Report - for further information on the calculation of returns AUSTRALIAN SOVEREIGN BONDS Domestically, Australian 10-year bond yields fell 51bps to 1.98% while fiveyear (-4bps to 1.65%) and two-year (-0bps to 1.60%) bond yields also fell. As a result, Australian bond returns provided some return relief for investors. All Bloomberg Ausbond indices returned positive results with the Treasury index performing best returning.% for the quarter. The Bloomberg Ausbond Composite Bond index returned 2.9%. Australian 10-Year Bonds Yields* * Source: Thomson Reuters Datastream MERCER AUSTRALIAN SOVEREIGN BOND FUND Total & Excess Returns (%) Total Returns Before fees : Benchmark* Return : Excess Return Before fees : * Benchmark: Before 1/1/2010: UBSWA Composite Bond Index (All Maturities) From 1/1/2010: Bloomberg Australian Treasury Bond Index 0+ (All Maturities) Index Total Returns After fees : The underlying active manager BT outperformed the benchmark over the quarter, largely due to positive contributions from its duration and yield curve strategies. Proportion of assets managed at quarter end Manager % BT 25.6 Challenger Crown 48.9 Macquarie 25.5 Managers BT n/a Challenger Crown n/a Macquarie * Bloomberg Australian Treasury Bond Index 0+ (All Maturities) from 1/1/2010 and UBSWA Composite Bond Index (All Maturities) Before 1/1/2010 are/were the benchmarks used for the fund. Note: Performance history includes the returns of the Mercer Australian Fixed Interest Fund (now closed to new investors), from which the Mercer Australian Sovereign Bond Fund evolved. 22

24 MERCER MULTI-MANAGER FUNDS QUARTERLY REPORT FIXED INTEREST NOTE: Past performance is not a reliable indicator of future performance Refer to page 9 - Important notes about this Report - for further information on the calculation of returns Global sovereign bonds produced relatively strong returns over the June quarter for hedged Australian investors, with yields broadly falling over the period, particularly later in the quarter. Ten-year bond yields fell across most developed economies as demonstrated by Germany (-28bps to -0.1%), the US (-29bps to 1.49%), Japan (-19bps to -0.2%) and the UK (-52bps to 0.90%). Two-year bond yields saw a similar fate with the US (-18bp to 0.58%), the UK (-4bps to 0.11%), Japan (-9bps to -0.0%) and Germany (-17bps to -0.65%) bond yields falling. * Source: Thomson Reuters Datastream GLOBAL SOVEREIGN BONDS 10 Year Bond Yields UK and US* MERCER GLOBAL SOVEREIGN BOND FUND Total & Excess Returns (%) Total Returns Before fees : Benchmark* Return : Excess Return Before fees : * Benchmark: Before 1/1/2010: Barclays Aggregate Bond Index - in A$ (Hedged) From 1/1/2010: JP Morgan Global Government Index - in A$ (Hedged) Total Returns After fees : H2O was the largest detractor over the quarter, largely due to its short G4 government bond duration as core bond markets rallied on poor investor sentiment. An overweight to Italian and Portuguese government bonds also detracted from performance. During June AB was replaced within the configuration with Colchester Global Investors. Proportion of assets managed at quarter end Manager % Challenger 42.8 H20 Asset Management 0.7 Colchester Global Investors 26.4 Managers Challenger Financial Services H20 Asset Management n/a Colchester Global Investors n/a n/a n/a n/a * JP Morgan Global Government Index - in A$ (Hedged) from 1/1/2010 and Barclays Aggregate Bond Index - in A$ (Hedged) Before 1/1/2010 are/were the benchmarks used for the fund. Alternate benchmarks may apply to managers individually. 2

25 QUARTERLY ENDING JUNE 2016 FIXED INTEREST NOTE: Past performance is not a reliable indicator of future performance Refer to page 9 - Important notes about this Report - for further information on the calculation of returns AUSTRALIAN INFLATION PLUS / ABSOLUTE RETURN BONDS Real bond yields drifted lower in the quarter. Australian vs US Indexed Bond Yields* * Source: - Reserve Bank of Australia (Aust.) - Thomson Reuters Datastream MERCER AUSTRALIAN INFLATION PLUS / ABSOLUTE RETURN BONDS Mercer Australian Inflation Plus Total & Excess Returns (%) Total Returns Before fees Benchmark* Return Excess Return Before fees * From 01/08/2014 Australian Consumer Price Index. Previously Bloomberg Govt Inflation Linked Bond Index (All Mat) Index Total Returns (%) After Fees Mercer Australian Inflation Plus QIC underperformed over the quarter as Australian inflation numbers came in under market expectations. The UK referendum led to general risk off sentiment in markets, reducing expectations for a rise in global inflation. Ardea managed to outperform despite difficult market conditions due to its positioning in the nominal and break even yield curves and its interest rate protection strategies. Australian Inflation Plus: Proportion of assets managed at quarter end (Mercer Growth) Manager % Ardea 6.8 Challenger 26.2 QIC 7.0 Managers Mercer Absolute Return Bonds:Total & Excess Returns (%) Ardea n/a n/a Challenger QIC n/a n/a * Bloomberg Govt Inflation Linked Bond Index (All Mat) which is the benchmark used for this Fund. Total Returns Before fees & taxes: n/a n/a Benchmark* Return: n/a n/a Excess Return Before fees & taxes: n/a n/a Kapstream and Insight both outperformed over the June quarter. Kapstream s outperformance continued to be driven by its above market portfolio yield. Insight s relative outperformance was driven by a strong return in April, largely due to a short position in UK government bonds offset by an equivalent long Australian bond position. A short duration bias in the Italian and German markets also contributed positively. * Bloomberg Bank Bill Index Absolute Return Bonds :Proportion of assets managed at quarter end (Mercer Growth) Manager %^ Kapstream. Insight.4 Pioneer. Managers Kapstream n/a n/a Insight n/a n/a Pioneer -0. n/a n/a n/a 24

26 MERCER MULTI-MANAGER FUNDS QUARTERLY REPORT FIXED INTEREST Refer to page 9 - Important notes about this Report - for further information on the calculation of returns Credit markets benefitted from the general rally in duration over the quarter. GLOBAL CREDIT US 10-Year Corporate Bond Yield Spread over 10-Year Treasury Bond* MERCER GLOBAL CREDIT FUND Total & Excess Returns (%) Total Returns Before fees : Benchmark* Return : Excess Return Before fees : *60% Barclays Global Aggregate Corporate Index - in A$ (Hedged); 40% Barclays Capital Global Aggregate ex Government ex Treasuries Index - in A$ (Hedged) Total Returns After fees : CFS outperformed over the quarter as the Fund shifted its exposure with CFS to an investment grade credit only mandate. The shift was rewarded as credit spreads widened over the quarter. Wellington outperformed the benchmark over the quarter as stock selection in investment grade industrials names contributed positively, in particular within energy and non-cyclical consumer sectors. Proportion of assets managed at quarter end Manager % AXA IM 1.5 Colonial First State 5.2 Wellington. Managers AXA IM n/a n/a Colonial First State Wellington * 60% Barclays Global Aggregate Corporate Index - in A$ (Hedged) and 40% Barclays Capital Global Aggregate ex Government ex Treasuries Index - in A$ (Hedged), which are the benchmarks used for the Fund. Alternate benchmarks may apply to managers individually. 25

27 QUARTERLY ENDING JUNE 2016 FIXED INTEREST Refer to page 9 - Important notes about this Report - for further information on the calculation of returns EMERGING MARKETS DEBT Emerging versus Developed Yields MERCER EMERGING MARKETS DEBT FUND Total & Excess Returns (%) Total Returns Before fees : n/a Benchmark* Return : n/a Excess Return Before fees : n/a * JP Morgan GBI-EM Global Diversified Index Total Returns After fees : n/a All managers outperformed over the June quarter. One of the underlying managers, BlackRock, was the most positive contributor to relative performance largely due to the managers short FX positioning in low yielding currencies. Security selection and currency positioning contributed to Wellington s outperformance while Investec benefitted from its underweight exposure to Malaysian and South Korean currency. Proportion of assets managed at quarter end Manager % Mercer (Dublin) Emerging Markets Debt Fund

28 MERCER MULTI-MANAGER FUNDS QUARTERLY REPORT CASH Refer to page 9- Important notes about this Report - for further information on the calculation of returns Currency markets developed over the quarter as the RBA reacted to lower inflation figures, cutting the cash rate to 1.75% CASH & TERM DEPOSITS Mercer Term Deposits Breakdown by provider ANZ Westpac CBA ME NAB ING Bendigo Suncorp Term Deposit Maturity buckets at 0 June 2016 (%) 0 to 90 days to 180 days to 270 days to 65 days Mercer Cash Term Deposit Units Average maturity (months) 6.1 Average yield 2.6 MERCER CASH FUND Mercer Cash Fund Cash Units Total & Excess Returns (%) Total Returns Before fees: Benchmark* Return : Excess Return Before fees Mercer Cash Fund Term Deposit Units Total & Excess Returns (%) Total Returns Before fees: Benchmark* Return : Excess Return Before fees * Bloomberg bank Bill Index Total Returns (%) After Fees Mercer Cash Fund Cash Units Mercer Cash Fund Term Deposit Units Challenger term deposits outperformed the benchmark over the quarter while BlackRock performed inline. Proportion of assets managed at quarter end Manager % Challenger 49.6 Blackrock 50.4 Managers Challenger Blackrock n/a n/a * Bloomberg Bank Bill Index, which is the benchmark used for the Fund. 27