Product Assessment. RARE Emerging Markets Fund

Transcription

1 Report data as at 30 Sep 2012 Rating issued on 16 Nov 2012 Product Assessment RARE Emerging Markets Fund Highly Recommended Recommended Approved Not Approved Redeem APIR Code TGP0015AU Asset Class International Shares Sub-Asset Class Listed Infrastructure Investment Style Value Investment Objective To provide investors with exposure to the growth of emerging markets infrastrucutre and to outperform the Citigroup Global Emerging Market Sovereign Bond Investment Grade USD Index + 5% p.a. Zenith Assigned Benchmark S&P Global Infrastructure Index (Net Total Return $A Unhedged) Key People Richard Elmslie Investment Director, Senior Portfolio Manager Nick Langley Investment Director, Senior Portfolio Manager Charles Hamieh Portfolio Manager and Senior Investment Analyst Investment Team Size 14 Net Returns (% p.a.) 3 yrs 2 yrs 1 yr Fund Benchmark Median Income (% p.a.) Income Total FY to 30 Jun FY to 30 Jun FY to 30 Jun Fees (% p.a.) Management Fee: 1.23% Performance Fee: 10.25% of investment returns made in excess of the benchmark plus hurdle Analyst Jonathan Baird Investment Analyst (03) Jonathan.Baird@zenithpartners.com.au VIEWPOINT & RATING The RARE Series Emerging Markets Fund (the Fund) is a high quality offering, providing investors with access to the potential growth of infrastructure within emerging markets. RARE focuses on regulated and user pays infrastructure assets and limits exposure to competitive and social assets, which have a less attractive risk return profile. RARE employs a bottom-up research approach to identify infrastructure securities, which possess high quality assets, operate in a monopolistic environment, and can deliver resilient and predictable cash flows. In Zenith's view, the Fund is well structured and managed by a high calibre investment team. Zenith rates the Fund RECOMMENDED. RARE Infrastructure Limited (RARE) was founded in 2006 by Richard Elmslie and Nick Langley. RARE is 64% owned by staff and 36% by the ASX-listed Treasury Group. RARE specialises exclusively in global listed infrastructure investments. The RARE investment team consists of 15 investment professionals, all based in Sydney. The investment team is led by Richard Elmslie and Nick Langley. Elmslie and Langley possess extensive knowledge of global infrastructure and its various sub-sectors and Zenith regards them highly. Elmslie, Langley and Charles Hamieh (portfolio manager and senior analyst) drive the Fund's portfolio construction process. Zenith has met with the majority of RARE's investment team and has been impressed by the depth, experience and structure of the team. The team's high level of experience ensures strong coverage of the investible universe and the collegiate approach promotes healthy internal debate regarding investment ideas. RARE employs a series of quantitative and qualitative screens (liquidity, gearing, coverage ratios, predictability of cash flows, high yield, low earnings volatility) to reduce its initial investment universe of 350 stocks down to a 'RARE Emerging Market 150 universe'. Intensive fundamental research is then employed which culminates in a detailed research report for each company. Portfolio construction is benchmark unaware in nature and portfolio weights are therefore expected to deviate significantly from the benchmark. The Fund will hold between 25 and 60 stocks. In Zenith's view, RARE's portfolio construction process is an appropriate blend of fundamental research by the analyst team and portfolio manager skill. The Fund applies a management fee of 1.23% p.a. which is high relative to its peers which primarily investment in developed markets. The Fund's performance fee of 10.25% is roughly in line with that of peers. Zenith believes the performance fee is well structured as it is based on positive outperformance relative to the benchmark plus an appropriate hurdle and is capped at 0.3% p.a. (The fees mentioned above are reflective of the flagship version only, fees may differ when the product is accessed through an alternate investment vehicle such as a platform.) FUND FACTS Benchmark unaware and actively managed High convcition portfolio, holding between 25 and 60 securities Portfolio turnover is expected to average ~50% p.a. over the long-term Unhedged currency exposure ABSOLUTE RISK (SECTOR) VERY HIGH HIGH MODERATE LOW VERY LOW INCOME DISTRIBUTIONS PER MONTH QUARTER 6 MONTH ANNUM RELATIVE RISK (FUND WITHIN SECTOR) Active Derivatives - Net Mkt Exp > 1 Active Derivatives - Net Mkt Exp <= 1 Active - High Conviction Active - Benchmark Aware Index - Enhanced/Fundamental Index INVESTMENT TIMEFRAME 1-2 YRS 3-4 YRS 5-6 YRS 7+ YRS Page 1 of 10

2 APPLICATIONS OF INVESTMENT SECTOR CHARACTERISTICS Infrastructure includes the following sub-asset classes: social infrastructure (Courts, Hospitals), regulated assets (Water and Sewage, Pipelines), user demand assets (Seaports, Toll Roads) and market-priced infrastructure (Telecommunication assets). The level of regulation, pricing power and competition differs significantly by sub-asset class. The fundamental drivers of revenue within this asset class tend to be changes in macroeconomic factors and demographic trends. The universe of Infrastructure managers reviewed by Zenith focus on listed infrastructure companies that primarily own and operate either regulated or user-demand assets. Typical features of infrastructure assets which can be supportive of a monopolistic environment include: High barriers to entry assets normally require a significant initial capital investment, but will generally have a low marginal cost of production. This makes it difficult for new entrants to compete with the incumbent provider. Regulation - regulated entities are often required to sell a particular service at an approved price that is sufficient to cover operating costs and provide a certain return on capital. Regulatory constraints may also prevent competing assets being constructed nearby. Inelastic Demand - due to the essential service and product provided to support a functioning society or economy (e.g. water, gas or electricity) a price increase will generally not result in a material decline in demand. Financial Leverage - operations typically require a significant level of debt, although the underlying asset's relatively stable and re-occurring income streams provide a greater level of certainty to financiers, generally resulting in access to capital at relatively attractive rates. Long life assets while the assets generally require high initial capital investment, this is payed back through consistent cash flows over the relatively lengthy life of the asset. It is also important to note that from an investor s perspective the asset lifespan can be finite, in that many assets are handed back to the government at a certain date; as is the case with many toll roads. Given the nature of the assets held within the infrastructure sector, it is expected to display greater defensive attributes relative to the broader equities market. These attributes include lower volatility and a higher and a more consistent distribution return. PORTFOLIO APPLICATIONS Zenith believes the inclusion of listed infrastructure in an investor's international equities exposure provides significant diversification benefits, with the potential to improve the risk/return profile of the overall portfolio. Infrastructure securities generally provide a long-term reliable income stream, which can be resilient to changing economic conditions, is largely protected from inflation (based on income indexed to inflation), and provides less volatility with a lower correlation to other asset classes over the medium to longterm. While infrastructure has historically been seen as a more defensive asset class, with a lower correlation to the overall economic cycle, it should be noted that listed infrastructure performed poorly during the global market downturn in The Fund maintains an absolute return focus, based on a bottom-up driven investment process that aims to identify infrastructure securities with a bias towards regulated and user demand assets. Zenith believes the Fund would complement a growth biased equity holding or could be used as a relatively defensive stand alone exposure to emerging market equities, within a well diversified portfolio. Portfolio turnover within the Fund is expected to be ~50% p.a. over the long-term, which Zenith views as moderate in absolute terms and relative to its competitors in this sector. Based on the moderate level of portfolio turnover, Zenith anticipates a large proportion of realised capital gains within the Fund to benefit from the 50% Capital Gains Tax (CGT) discount afforded to assets held within the trust beyond a 12 month period. RISKS OF THE INVESTMENT SECTOR RISKS The broad risks of investing in listed infrastructure are comparable to global equities, for example: MARKET RISK: Infrastructure companies tend to have a lower beta relative to broader equity markets due to their more predictable earnings; however, significant market downturns can directly impact the returns of the Fund. REGULATORY / SOVEREIGN RISK: Many infrastructure assets are heavily regulated and changes to the regulations may materially impact returns. GEARING / INTEREST RATE RISK: Owing to the capital intensive nature of the industry, infrastructure assets often carry high levels of debt on the balance sheet. Rising interest rate conditions could materially impact operating cash flow and valuations. DEMAND RISK: Demand, usage or patronage for the service provided by an infrastructure asset may vary unexpectedly over time. FUND RISKS Zenith has identified the following key risks associated with the Fund; this is not intended to highlight all possible risks: BUSINESS RISK: RARE currently manages ~$A 4.9 billion (as at 30 June 2012). While the business is profitable, there remains a possibility that under certain circumstances (e.g. a sustained global market downturn) the business could suffer. KEY PERSON RISK: Zenith considers Richard Elmslie and Nick Langley to be the key personnel responsible for the Fund and the departure of either member would be considered a material loss for RARE warranting an immediate review of Zenith's rating. Page 2 of 10

3 Zenith does however consider this risk to be low, as both maintain a significant equity stake in the business. In addition, Zenith acknowledges the high level of experience across the team reduces the reliance on any one individual. Zenith believes the firm's employee equity scheme and bonus scheme linked to the success of the Fund aid with staff retention and provide a strong alignment of interests between employees and investors. CAPACITY/LIQUIDITY RISK: Excessive levels of funds under management (FUM) can inhibit a manager's ability to trade portfolio positions effectively, and can therefore limit a Fund's outperformance potential. Given the Fund's current level of FUM, and RARE's relatively conservative capacity estimate, Zenith does not believe this is a current concern. Zenith will monitor the Fund's level of FUM closely to ensure this does not become an issue. SOVEREIGN RISK: The Fund's exposure to emerging markets exposes the portfolio to regulatory, political and sovereign risk. QUALITATIVE DUE DILIGENCE ORGANISATION RARE Infrastructure Limited is a boutique investment management company that specialises exclusively in global listed infrastructure in both developed and emerging markets. The RARE business is 62% owned by staff (the majority by Elmslie and Langley) and 38% by ASX-listed Treasury Group. Treasury provides RARE with back office support. This structure enables the investment team to focus entirely on investment management functions, which is ideal in Zenith's opinion. RARE has grown significantly since its inception in 2006, with FUM as at 30 June 2012 totalling approximately $A 4.9 billion. FUM has increased by ~$A600 million for the 12-month period ending 30 June INVESTMENT PERSONNEL Name Title Tenure Richard Elmslie Nick Langley Investment Director, Senior Portfolio Manager Investment Director, Senior Portfolio Manager 6 Yr(s) 6 Yr(s) Jonathan Mirrlees-Black Head of Research 1 Yr(s) Charles Hamieh Portfolio Manager and Senior Investment Analyst 2 Yr(s) The RARE investment team consists of 14 investment professionals, with a wide range of investment experience. The team is located in Sydney and operates in an open plan environment to facilitate internal debate regarding investment ideas. The RARE investment team is led by Richard Elmslie and Nick Langley, who co-founded the firm in Elmslie has more than 20 years of global infrastructure experience, including roles as Head of Power and joint Head of Infrastructure at UBS Investment Bank. Langley has 13 years experience in the infrastructure sector, including four years with AMP Capital's infrastructure funds management team. Langley worked alongside Elmslie at ABN AMRO between 1998 and Elmslie and Langley possess extensive knowledge of global infrastructure and its various sub-sectors. Zenith regards Elmslie and Langley highly. Elmslie, Langley and Charles Hamieh (portfolio manager and senior investment analyst) form the Investment Committe and are responsible for the portfolio construction process for the RARE Emerging Markets Fund, with investment ideas based on the stock research conducted by the extended investment team. The most recent senior addition to the investment team is Jonathan Merrlees-Black who was employed as Head of Research in November He replaces Rod Chisholm who currently remains part of RARE's investment team, but has stood down as Head of Research to pursue sporting endeavours. Mirrlees-Black has over 20 years experience in the infrastructure sector and was previously an external member of RARE's Investment Advisory Board (IAB). Senior members of the research team (excluding Mirrlees- Black) are divided by both regional and sub-sector coverage, while less experienced analysts form the Analyst Pool from which they assist senior investment staff. RARE uses the Analyst Pool to develop the less experienced investment staff, with high performing members promoted out of the pool and given more responsibilities as experience is gained. Zenith regards the Analyst Pool as a good way to develop new talent and ensure the team is well structured. In early 2012, RARE hired two additional research analysts in Sue Xu and Daniel Chu. Both analysts have been placed within the Analyst Pool. In mid 2010, RARE experienced the departure of three analysts from the investment team, including the emerging market Fund co-portfolio manager and senior analyst. At the time, RARE was in the process of a global recruitment search to increase the investment team numbers, which meant RARE was able to appoint new analysts to the team relatively quickly. The new additions to the team were: Charles Hamieh (emerging markets co-portfolio manager and senior analyst), Ben May, Shane Hurst, Dan Simmonds and Ann Chau. Zenith has met with a number of the new team members, and has been impressed with their experience and the level of both industry and valuation experience. RARE has an Investment Advisory Board, which currently has three internal members in Elmslie, Langley and Mirrlees-Black and two external members. The external Board members are David Bowers, Managing Director/Absolute Strategy Research, and David Hale of Hale Economics. Zenith believes the industry experience and industry contacts of the external Advisory Board members add another positive dimension to the investment process. The remuneration structure for the investment team includes a highly competitive base salary plus a bonus structure tied to the profitability of the business. RARE also has an attractive employee equity plan which further aligns the interest of the team to the overall success of the business. In light of the departures mentioned above, RARE revised its employment contracts, with changes being made to notice and restraint Page 3 of 10

4 periods, in addition to offering and extending equity to several members of the investment team. In Zenith's view, RARE's remuneration policy, ownership structure and employee equity scheme should assist with staff retention. Overall, Zenith believes RARE is a well structured and well run business, with the ownership arrangement with Treasury allowing the RARE investment professionals to focus on investing. Zenith has met with all senior members of the RARE investment team, including Elmslie, Langley, Jonathan Mirrlees-Black, Rod Chisholm, and Charles Hamieh, and has been highly impressed with the firm's level of experience and the structure of the team. Elmslie and Langley are the major equity shareholders within the firm; however Zenith believes RARE has and will continue to extend equity to senior professionals within the firm. Furthermore, Zenith believes that the equity arrangement that RARE has in place align the interests of staff and investors, in addition to encouraging team stability. RARE experienced a significant level of personnel turnover in mid 2010, and while Zenith acknowledges that three departures at the same time is not ideal, Zenith believes RARE was effective in ensuring the team has remained well resourced and that the personnel changes had minimal impact on the Fund. INVESTMENT PROCESS RARE seeks to provide investors with exposure to the growth of emerging market infrastructure. The Fund aims to outperform the Citigroup Global Emerging Market Sovereign Bond Investment Grade USD Index plus 5% p.a. over the longterm. RARE focuses on regulated assets such as utilities and user pays assets such as toll roads, whilst generally limiting exposure to the higher risk/return subcategory of competitive assets such as telecommunications and the lower risk/return subcategory of community and social assets. SECURITY SELECTION There are two broad components to the RARE security selection process: 1. Initial Screening The Fund's investment universe includes only those stocks from the global universe of listed securities that meet the definition of Utilities and Transport (excluding airlines & marine), with at least 50% of the company's EBITDA being derived from emerging markets, in addition to a number of hand-picked stocks that display infrastructure characteristics but are classified in different sectors. This leaves a remaining universe of approximately 350 stocks. From here, RARE screens out stocks with a market capitalisation of less than USD$ 100 million, and on a number of basic financial parameters including gearing (Net Debt/Enterprise Value and EBIT/Interest), cash flow and valuation measures (Enterprise Value to EBITDA and Price/Earnings multiples). Small/micro cap stocks below the USD$ 100 million threshold may be considered if RARE is comfortable with the liquidity of the stock. The resultant investible universe includes approximately 150 stocks. The remaining 150 stocks are ranked based on the same financial parameters. The investment team chooses stocks from each industry sub-sector that it considers will provide the most attractive opportunities for further qualitative and quantitative analysis. The 'Focus List', consisting of securities, will proceed to the full fundamental research stage. RARE's initial screening stage ensures that a broad range of stocks are given preliminary consideration, yet the final focus list is sufficiently small for the team to conduct intensive analysis on each remaining stock. Zenith believes the financial parameters considered by the team at this early stage appear sound and should help the team to identify attractive potential investment opportunities. 2. Fundamental Research The fundamental research process begins by sourcing extensive information on each company on the focus list and the market. Primary information sources include: information releases from the company; economic and industry statistics and market data; regulatory or other statutory body reports; and information obtained from company visits. Secondary information sources include: external databases (e.g. Bloomberg); credit analysis and reports; broker analysis; and broker/industry sponsored conferences. Company visits are a critical component of the RARE process. The investment team undertakes a minimum of 10 international trips per annum, of two to three weeks duration. Generally, two team members travel per quarter. RARE's travel budget is large. In addition, frequent company contact via telephone calls, conference calls, and webcast are used as a supplement. RARE uses this research and information to build an in-depth understanding of the markets, sectors and/or regions in which a company operates. A standard research report is prepared for each company, which includes analysis of various quantitative and qualitative attributes. Specific components of the report include: divisional analysis, meeting notes, peer analysis, SWOT analysis, industry information and valuation. Detailed financial models are produced and maintained for each company, with the forecast cash flows from the models used to construct RARE's discounted cash flow valuations (DCF). RARE spends considerable effort in determining an appropriate discount rate for each company to use in the models. This is an area where RARE believes it can use its insight to add considerable rigour to the valuation process. RARE considers both stock specific risks (e.g. quality of management and corporate governance, structural complexity, acquisition strategy, refinancing upside) and risks relative to the company's peer group (e.g. level of maintenance capex, earnings volatility and monopoly characteristics). These factors are weighted to arrive at the cost of both debt and equity which are then combined to produce the discount rate. The output of the DCF model is an Internal Rate of Return (IRR) and target entry/exit prices for each company on the Focus List, which are used in the portfolio construction process. Following its analysis, RARE will discuss its findings with management of the target company and other industry participants (including competitors and regulators), which can help generate new ideas or clarify existing assumptions. RARE's Investment Advisory Board meets every two months to evaluate high level global macroeconomic issues on a sector Page 4 of 10

5 and regional basis, with output filtering into RARE's investment process. In Zeniths view, the Investment Advisory Board complements the existing process by providing a pure topdown global macroeconomic assessment. intuitive extension of RARE's bottom-up security selection process and provides an appropriate blend of fundamental research and portfolio manager skill to select a 'best of breed' portfolio of infrastructure securities. Overall, Zenith believes that RARE's approach to fundamental research is comprehensive and very well structured. Furthermore, the high level of experience across the investment team ensures that a significant number of companies are analysed at an in-depth level. PORTFOLIO CONSTRUCTION RARE's portfolio construction process is undertaken by the three member Investment Committee. The first consideration is the IRR of each stock on the Focus List. RARE then uses a ranking matrix to set maximum stock limits relative to expected IRR's and as a guide to determine individual security weights within these bands. The ranking matrix limits are as follows: Rank 1: 17%+ IRR = maximum 6% weight; Rank 2: 15-17% IRR = maximum 5% weight; Rank 3: 13-15% IRR = maximum 4% weight; and Rank 4: 11-13% IRR = maximum 3% weight. The portfolio will predominately consist of stocks ranked 1 and 2, with stock weights permitted to drift via market movement up to an additional 1/3rd of the maximum weights. RARE estimates that individual stock weights are 80% based on the stock's IRR and 20% based on subjective opinion. Additional factors considered include the overall portfolio allocation across the infrastructure sub-sectors and regions, as well as macro-economic inputs. The macro-economic inputs are compiled by RARE, who surveys a panel of five brokers on a quarterly basis to provide a three to five year outlook. The macro-economic inputs are used in stock specific models as well as in the portfolio construction process. RARE believes approximately 20% of its value-add is derived from top-down influences, with the remaining 80% coming from bottom-up stock selection. The portfolio construction process is benchmark unaware and portfolio weights are therefore expected to deviate significantly from those of the standard infrastructure sector benchmarks at a stock, sub-sector and regional level. The Fund will generally contain around stocks, each typically with a minimum 1% weight. Portfolio turnover is expected to average 50% p.a. over the long-term. RARE has a strong focus on liquidity to ensure that its buy/sell decisions can be executed in a timely manner. The Investment Committee uses the target entry/exit prices to trade the portfolio. Each week an IRR stock ranking list is printed and any changes in rank are examined. In addition to a change in IRR ranking, a number of trigger events will also prompt a stock valuation review. These include: fundamental changes to the business model that impact RARE's view on the stock's prospects; a significant market price decline; or a stock is excluded from the "investment universe" during a screening process. Where a stock price declines, RARE will reassess the company's fundamentals to determine if the stock should be sold or the holding increased. Overall, Zenith believes the portfolio construction process is an Page 5 of 10

6 OPERATIONAL DUE DILIGENCE RISK MANAGEMENT Portfolio Constraints Sector Parameters - Essential Service (%) Description 20% to 80% Sector Parameters - Transport (%) 20% to 80% Sector Parameters - Communications (%) Sector Parameters - Community & Social (%) 0% to 20% 0% to 20% Sector Parameters - Cash (%) 0% to 20% Regional Parameters - Developing (%) 80% to 100% Regional Parameters - Cash (%) 0% to 20% Asset Maturity Parameters - Greenfield (%) Asset Maturity Parameters - Developing (%) 0% to 20% 0% to 30% Asset Maturity Parameters - Mature (%) 60% to 100% Security Holdings 25 to 60 Risk management is an integral component of RARE's investment process, predominantly driven by the firm's extensive bottom-up research. INVESTMENT FEES The sector average in the table below is based on the average management fee of all flagship global listed infrastructure funds surveyed by Zenith. The list of funds includes actively managed, index replication, global and emerging market funds. The Fund applies a management fee of 1.23% p.a., which is higher than the Fund's peers in the global developed infrastructure universe. This is a reflection of the increased costs associated with trading in emerging markets. The Fund also has a performance fee of 10.25% which is roughly in line with that of the its peers. Zenith believes the performance fee is well structured, being based on positive outperformance relative to the benchmark plus an appropriate hurdle. Additionally, the performance fee is capped at 0.3% p.a. which Zenith views positively. A buy/sell spread of 0.3% is applied to entry and exit of the Fund. Fees Type Fund Sector Average (Wholesale Funds) Management Fee 1.23% p.a. 0.96% p.a. Performance Fee Description 10.25% of investment returns made in excess of the benchmark plus hurdle Buy Spread Sell Spread Buy / Sell Spread 0.30% 0.30% RARE aims to identify high quality securities with solid and recurring cash flows that operate in markets with minimal price sensitivity. The portfolio is constructed with broad region, sector and stock constraints, while maintaining a benchmark unaware style approach. Portfolio construction guidelines, as displayed in the above table, are guidelines only and not hard limits. All guidelines are of an absolute nature, not relative to an index. It should be noted that RARE measures exposure to region and sub-sector based on the location/sector of the assets the company owns, not the stock listing location or GICS classification (the more traditional approach). Zenith believes this "look through" analysis undertaken by RARE helps provide a more realistic and accurate measure of the risk exposures in the portfolio. The Fund is not managed to a Tracking Error target. Overall, Zenith has a high degree of confidence in RARE's approach. Zenith believes RARE's risk management process is extremely thorough and embedded in all stages of the investment process. Page 6 of 10

7 PERFORMANCE ANALYSIS Report data: 30 Sep 2012, product inception: Sep 2008 Monthly Performance History (%) JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC FUND YTD BENCHMARK YTD Benchmark: S&P Global Infrastructure Index (Net Total Return $A Unhedged) 1 Yr % Rolling Excess Return ABSOLUTE PERFORMANCE ANALYSIS Return Incpt. 3 yr 2 yr 1 yr Fund (% p.a.) Benchmark (% p.a.) Median (% p.a.) Ranking within Sector Incpt. 3 yr 2 yr 1 yr Fund Ranking 1 / 9 8 / 9 8 / 9 7 / 10 Quartile 1st 4th 4th 3rd Standard Deviation Incpt. 3 yr 2 yr 1 yr Fund (% p.a.) Yr % Rolling Return Range (Date range as above) Median (% p.a.) Downside Deviation Incpt. 3 yr 2 yr 1 yr Fund (% p.a.) Median (% p.a.) Risk/Return Incpt. 3 yr 2 yr 1 yr Sharpe Ratio - Fund Sortino Ratio - Fund Minimum and Maximum Returns (% p.a.) RARE benchmarks the Fund against the Citigroup Global Emerging Market Sovereign Bond Investment Grade USD Index plus 5% p.a. (before tax); however, for consistency purposes Zenith benchmarks all funds categorised within our Global Listed Infrastructure asset class against the S&P Global Infrastructure Net Total Return Index (A$ Hedged). Accordingly, all performance and risk measurements are calculated with the Zenith assigned index. All commentary is as at 30 September For the period since inception to 30 September 2012, the Fund had underperformed RARE's internal benchmark by 0.7% p.a. (net of fees). In absolute terms, the Fund has performed well since inception, with the Fund outperforming both the Zenith assigned benchmark and the median manager. It should be noted that the relevance of the performance comparison of this Fund to the median manager is limited given that the median manager is based on all flagship global and emerging markets listed infrastructure funds surveyed by Zenith. That is, the Page 7 of 10

8 median manager is not a 'pure' emerging market infrastructure funds universe. The Fund's absolute risk, as measured by the Standard Deviation of returns, has generally been low in absolute terms and versus the median manager. (market risk) of the investment and benchmark. The greater the slope the greater the risk. Often the blue line will cross with the red line at some point and this indicates that investment outperformance is better in certain market conditions (and vice versa). RELATIVE PERFORMANCE ANALYSIS Alpha Statistics Incpt. 3 yr 2 yr 1 yr Excess Return (% p.a.) % Monthly Excess (All Mkts) % Monthly Excess (Up Mkts) % Monthly Excess (Down Mkts) Beta Statistics Incpt. 3 yr 2 yr 1 yr Beta R-Squared Tracking Error (% p.a.) Risk/Return Incpt. 3 yr 2 yr 1 yr Information Ratio All commentary below is as at 30 September Zenith seeks to identify funds that can achieve an outperformance ratio above 50% of months in all market conditions, as we believe this reflects persistence in manager skill. INCOME/GROWTH ANALYSIS Income / Growth Returns Income Growth Total FY to 30 Jun % -1.50% -0.50% FY to 30 Jun % 2.10% 3.40% FY to 30 Jun % 14.30% 21.00% The Fund aims to provide investors with exposure to the growth of emerging markets infrastructure, and to outperform the benchmark. The Fund does not have a specific income or growth target. The Fund has consistently shown an ability to generate a significant level of outperformance above the Zenith assigned benchmark during falling markets. Given the benchmark consists of both developed and emerging market stocks and the Fund only invests in emerging markets (which are generally expected to be more volatile), Zenith believes these results reflect RARE's ability to build a truly defensive infrastructure exposure within emerging markets. Monthly Return Scattergram The following Monthly Return Scattergram Chart provides an insight into the skill of the manager, the risk profile of the manager (both absolute and relative) and the market conditions which favour the manager. The dot points represent the monthly returns of the fund (y-axis) and benchmark (x-axis) since inception or the past five years for funds with long histories. As a guide: A green dot point indicates the fund has outperformed in that month. A red dot indicates the fund has underperformed in that month. The blue line is a line of best fit of the fund returns and the red line is the breakeven line or benchmark line of best fit. The blue line crossing the y-axis above zero indicates investment outperformance (and vice versa) The slope of these lines provides an indication of the beta Page 8 of 10

9 METHODOLOGIES & DISCLAIMER Ratings Methodology Zenith s ratings are based on the output of a proprietary scoring model. This model and its broad factors are shown in the following diagram. Please note we do not disclose the weightings of factors and sub-factors change for each sector. This information should be used as a guide only. Ratings Bands Based on the scores assigned by Zenith s analysts for the above mentioned proprietary scoring model, a rating of Highly Recommended, Recommended, Approved or Not Approved is applied to all funds that have undergone full due diligence by the Zenith research team. As shown in the following table the ratings are determined based on the overall score out of 100. Funds may also be screened prior to conducting full due diligence based on qualitative or quantitative concerns as Zenith s research model aims to focus on the best investments in each sector. Rating Scoring Output (%) Zenith View of Standing within Peer Group (guide only) Confidence in Meeting Objectives Zenith Recommended List Highly Recommended > 80 Top Decile Very High YES Recommended > Top Quartile High YES Approved > Above Median Moderate NO Redeem =< 55 Below Median Low NO Other Ratings Not Approved Under Review In most cases these funds have failed a preliminary quantitative or qualitative screen which leads us to believe the fund will not achieve the minimum threshold required to receive a Recommended rating or above. In some cases funds may have passed the filter but managers declined the opportunity to be rated. The fund rating has temporarily been placed under review due to qualitative and/or quantitative issues that need to be addressed by the Zenith Research Team. Page 9 of 10

10 ABSOLUTE RISK RATING The Absolute risk rankings should be viewed as a guide to potential capital volatility (in both gains and losses) of the relevant investment strategy (Zenith Asset Class / Sub Asset Class classification) of this product. A number of factors have been considered in setting this risk level. For liquid asset classes, we have typically used the underlying historical return volatility of the product s benchmark if the benchmark is a reasonable proxy for returns for this strategy. Where the risk of an investment cannot be reasonably estimated by historical benchmark return analysis, we have made a qualitative assessment of absolute risk and considered factors such as illiquidity risk, transparency, strategy risk, operational risk etc. VERY HIGH HIGH MODERATE LOW VERY LOW Funds classified as Very High risk are exposed to sectors with very high historical absolute volatility (16+% p.a. plus standard deviation over 20 years to June 30, 2011). Where the risk of an investment cannot be reasonably estimated by historical return analysis, we have considered a range of qualitative risks in assigning a Very High absolute risk level. Funds classified as High risk are exposed to sectors with high historical absolute volatility (8-16% p.a. standard deviation over 20 years to June 30, 2011). Where the risk of an investment cannot be reasonably estimated by historical return analysis, we have considered a range of qualitative risks in assigning a High absolute risk level. Funds classified as Moderate risk are exposed to sectors with moderate historical absolute volatility (4-8% p.a. standard deviation over 20 years to June 30, 2011). Where the risk of an investment cannot be reasonably estimated by historical return analysis, we have considered a range of qualitative risks in assigning a Moderate absolute risk level. Funds classified as Low risk are exposed to sectors with low historical absolute volatility (2-4% p.a. standard deviation over 20 years to June 30, 2011). Where the risk of an investment cannot be reasonably estimated by historical return analysis, we have considered a range of qualitative risks in assigning a Low absolute risk level. Funds classified as Very Low risk are exposed to sectors with very low historical absolute volatility (<2% p.a. standard deviation over 20 years to June 30, 2011). Where the risk of an investment cannot be reasonably estimated by historical return analysis, we have considered a range of qualitative risks in assigning a Very Low absolute risk level. RELATIVE RISK RATING The relative risk rankings should be viewed as a guide to the relative risk of a product within its sector. The relative risk levels are listed from high to low and are intended to provide some insight into the potential divergence of the investment s return profile relative to its assigned benchmark. RATING & REPORT DISCLAIMER The Zenith Investment Partners ( Zenith ) ABN rating referred to in this document is limited to General Advice (as defined by section 766B of Corporations Act 2001) and based solely on the assessment of the investment merits of the financial product on this basis. It is not a specific recommendation to purchase, sell or hold the relevant product(s), and Zenith advises that individual investors should seek their own independent financial advice before investing in this product. The rating is subject to change without notice and Zenith has no obligation to update this document following publication. Zenith usually receives a fee for rating the fund manager and product against accepted criteria considered comprehensive and objective. This report is prepared exclusively for clients of Zenith Investment Partners (Zenith). The report contains recommendations and advice of a general nature and does not have regard to the particular circumstances or needs of any specific person who may read it. Each client should assess either personally or with the assistance of a licensed financial adviser whether the Zenith recommendation or advice is appropriate to their situation before making an investment decision. The information contained in the report is believed to be reliable, but its completeness and accuracy is not guaranteed. Opinions expressed may change without notice. Zenith accepts no liability, whether direct or indirect arising from the use of information contained in this report. No part of this document is to be construed as a solicitation to buy or sell any investment. The performance of the investment in this report is not a representation as to future performance or likely return. The material contained in this report is subject to copyright and may not be reproduced without the consent of the copyright owner. A copy of Zenith's Financial Services Guide can be viewed at. ANALYST CERTIFICATION & DISCLOSURE Analyst remuneration is not linked to the rating outcome. Analysts do not own investment products unless disclosed. Any interests held must be disclosed and insufficiently material to compromise the rating. The Analyst certifies that the views expressed in the Product Assessment accurately reflect their personal, professional opinion about the financial product to which this Product Assessment refers. Page 10 of 10