June 2011 Offer Important Dates Open / Close Date 6 April 2011 / 30 June 2011 Unit Issue Date 30 June 2011 Maturity Dates 5.5 Year Fixed Distribution Classes 3.5 Year Fixed Distribution Classes Variable Distribution Classes Key Information 19 Dec 2016 (5.5 years) 19 Dec 2014 (3.5 years) 30 Jun 2014 (3.0 years) Investment Type Australian unit trust registered as a managed investment scheme Issuer Macquarie Financial Products Management Limited (MFPML) as Responsible Entity for the Macquarie Flexi 100 Trust Security Trustee Bond Street Custodians Limited Reference Assets Australian Equity S&P/ASX 200 Price Index Australian Equity Focus Equally weighted basket of 20 large cap Australian shares Asian Equity Equal weights of: Hang Seng H-Share Index ETF; Tracker Fund of Hong Kong; MSCI Taiwan Index; Kospi 200 Index; MSCI Singapore Index Asia Long Short Macquarie Asian Alpha Fund US Equity BRIC Equity Commodities Select Payoff Categories 5.5 Year Fixed Distribution Classes 3.5 Year Fixed Distribution Classes Variable Distribution Classes Loans Minimum Investment Redemption prior to Maturity Currency Risk S&P 500 Index Equal weights of: ishares MSCI Brazil Index ETF; Market Vectors Russia ETF; S&P CNX Nifty Index; Hang Seng H-Share Index ETF Equally weighted basket of 5 commodities, which is reviewed and reset annually Total fixed distributions of 22% plus any Reference Asset Gain subject to a hurdle of 122% and in some cases a performance cap Total fixed distributions of 16.25% plus any Reference Asset Gain subject to a hurdle of 116.25% and a performance cap Total variable annual distributions equal to positive annual performance of the Reference Asset subject to performance cap (if any) Investors must borrow 100% of the investment amount from Macquarie Specialist Investments Lending Limited (or another Macquarie Group company). Choice of limited recourse or full recourse Investment Loans. An Interest Loan is also available. $25,000 and thereafter $1,000 multiples Quarterly from 30 September 2011. Investors can choose to Walk-Away without making any further payment^ Return at maturity (if any) for Asian Equity, Asia Long Short, US Equity and BRIC Equity are fully subject to currency risk Fees & Commissions Loan Interest Rate Limited Recourse Investment Loan 9.10% p.a.* Full Recourse Investment Loan 8.85% p.a.* Loan Establishment Fee 2.0% of the Investment Loan Amount Management 0.5125% p.a. (inc. GST) of investment amount # Fee Adviser Fees MFPML may pay upfront 2.2% (inc. GST) of the Investment Loan Amount to advisers and a trail of up to 0.55% p.a. (inc. GST) ^ See Investment Loans on page 10 for circumstances where further amounts may be payable. * Indicative only. # This fee is funded out of payments received under the Collateral Agreement. What this Rating Means The Recommended rating indicates that Lonsec has conviction that the fund or product can achieve its objectives and, if applicable, outperform peers over an appropriate investment timeframe. The manager or product has a number of competitive advantages in people, process and product design. The investment is a recommended entry point to access this asset class or strategy. Using this Product This is General Advice only and should be read in conjunction with the Disclaimer, Disclosure and Warning on the final page. Investors are advised to read the Product Disclosure Statement dated 13 September 2010 and Supplementary PDS dated 6 April 2011 prior to making any investment decision. The product may be suitable for investors who: are seeking medium-term leveraged exposure to Australian equities, US equities, Asian equities, emerging market equities and/or commodity markets. Investors should note most units have indicative performance caps, meaning investors may not share in all of the upside should the relevant underlying market perform strongly. This product is therefore less suitable for investors who hold a strong positive view of these markets. are seeking fixed distributions over the investment term (5.5 Year and 3.5 Year Fixed Distribution Classes only). are not reliant on income and are comfortable funding the annual interest payments from their own financial resources. are concerned about break costs associated with redeeming structured products prior to maturity and seek the option to Walk-Away at pre-defined intervals. understand and are comfortable with the risks associated with borrowing to invest in equity markets. understand and are comfortable with currency risk (Asian Equity, Asia Long Short, US Equity and BRIC Equity classes) Unit classes available in this Offer are summarised in Appendix A. Product Risk Characteristics Leverage Liquidity Counterparty Concentration Volatility Low Moderate High Risk categories are based on Lonsec s qualitative opinion of the risks inherent in the product s asset class and the risks relative to other products in the relevant Lonsec sector universe. WE STRONGLY RECOMMEND THAT POTENTIAL INVESTORS READ THE PRODUCT DISCLOSURE STATEMENT 1 This information must be read in conjunction with the Warning, Disclaimer, and Disclosure at the end of this document1
Lonsec Opinion of this Structure The (Macquarie Flexi 100) provides investors with the opportunity to gain leveraged exposure to different Payoff Categories across various Investment Opportunities. The Investment Opportunities include the broad Australian equity market (Australian Equity); an equally weighted portfolio of 20 major Australian large cap stocks (Australian Equity Focus); an equally weighted blend of 5 major Asian equity markets (Asian Equity); a quantitative long short strategy covering pan-asian equity markets (Asia Long Short); the US sharemarket (US Equity); emerging markets (BRIC Equity); and a basket of five commodities (Commodities Select). See Appendix A for a summary of the unit classes available in this Offer. To acquire units in Macquarie Flexi 100, investors must apply for a loan for the full investment amount from Macquarie Specialist Investments Lending Limited (MSIL) or a Macquarie Group company nominated by MFPML. The Investment Loan has the advantage over more traditional forms of leverage such as margin loans in that there are no margin calls. For Limited Recourse Investment Loans, this means there is no obligation to repay the loan from an investor s own funds at maturity and investors have the option to Walk-Away from their investment each quarter (refer to section How does the Product work? ). Investor losses are thus limited to any annual prepaid interest on the Investment Loan. Investors who choose to invest via the Full Recourse Loan can also Walk-Away without paying further amounts, subject to the Collateral Counterparty fulfilling its obligations. The Walk-Away feature may come at a cost in the form of performance caps. For Fixed Distribution Classes, Distributions (if any) will only be paid to investors who have not exercised the Walk-Away feature on or before the relevant Distribution Date. For Variable Distribution Classes, Distributions (if any) will only be paid to investors who have not exercised the Walk-Away feature before the relevant Distribution Date. However, if investors Walk-Away prior to this Distribution Date, the value of their units will reflect the market value of the Investment Linked Swap Agreement. Performance caps only apply to Australian Equity, Australian Equity Focus, US Equity, BRIC Equity and Commodities Select classes, regardless of the Payoff Category selected. Performance caps have become a feature of many structured products following the extreme volatility in financial markets (relative to levels over the past several years). The impact of the performance caps applied to these units means that investors may not share in all of the upside should the Reference Assets perform strongly. These classes are therefore less suitable for investors who hold a strong positive view of Australian, US, BRIC and commodities markets as an investment. Investors should note the calculation to determine the Reference Asset Gain at maturity for the 5.5 Year and 3.5 Year Fixed Distribution Classes is a point-to-point calculation. This means investors receive the full benefit if the Reference Asset increases strongly towards maturity up to the performance cap level (less the total amount of fixed distributions received during the investment term). The calculation method also means any sharp fall close to maturity has the potential to erode earlier gains. Variable Distribution Classes distribute positive annual performance (if any) as annual distributions (subject to an annual performance cap, if any). Investors in the Asian Equity, Asia Long Short, US Equity and BRIC Equity classes will be exposed to AUD:USD currency risk. Fees are charged via the Loan Establishment Fee of 2.00% and Management Fee of 0.5125% p.a. (which is funded by excess payments received under the Collateral Agreement). These fees are reasonably consistent with similar style products. However, pricing of various product features such as performance caps are determined by the Issuer in its discretion closer to the Close Date. As is often the case with structured product pricing generally, these prices will not be transparent to the investor. Investors should also note the Asian Equity and BRIC Equity classes will incur costs associated with the management of the ETFs that comprise the Reference Asset. Investors in Australian Equity will gain exposure to the S&P/ASX 200 Price Index. Lonsec believes the index is appropriate for investors seeking passive exposure to the Australian equities. This index offers broad representation, investability, transparency and is widely recognised in the industry and provides clear rules for security selection and exclusion. Importantly, this index used is sponsored and calculated independently of the Issuer. Investors in Australian Equity Focus will gain enhanced exposure (150%) to a concentrated portfolio of 20 large cap Australian companies listed on ASX. The portfolio is heavily weighted to financial and mining companies. This Investment Opportunity is therefore less suitable for those seeking a more diversified exposure to the Australian equity market. Investors in Asian Equity have exposure to a blend of indices and Exchange Traded Funds that seek to replicate the returns of the Hong Kong, Chinese, Taiwanese, Korean and Singaporean share markets. Investors seeking a highly diversified exposure to the region should note a historically high level of correlation between the Chinese and Hong Kong Tracker Funds (representing 40% of the basket), due in part to a number of common constituents in these portfolios. Investors in Asia Long Short have exposure to an active long/short strategy that invests in the potentially higher returning, but highly volatile Asian region. In Lonsec s experience, these highly quantitative investment techniques are generally less prevalent in Asian countries. Lonsec also considers the performance fee structure for the Reference Asset, which does not include a performance hurdle, to be highly unusual in comparison to the Lonsec peer group. However, the Investment Manager is well resourced and possesses a strong track record of performance from which to capitalise on the opportunities in these markets. Investors in US Equity will gain exposure to the S&P 500 Index. Lonsec believes the index is appropriate for investors seeking passive exposure to US equities. This index offers broad representation, investability, transparency and is widely recognised in the industry and provides clear rules for This information must be read in conjunction with the Warning, Disclaimer, and Disclosure at the end of this document 2
security selection and exclusion. Importantly, this index used is sponsored and calculated independently of the Issuer. Investors in BRIC Equity have exposure to an equally weighted portfolio of one index and three ETFs that seek to replicate the returns of the Brazilian, Russian, Indian and Chinese share markets. Lonsec believes the index and ETFs are appropriate for investors seeking passive exposure to these markets. Investors may be able to obtain more efficient and direct exposure to BRIC markets, however they will not benefit from Product features such as the Walk- Away. Investors in Commodities Select have exposure to a basket of five commodities, which may vary for each Distribution Period (but is fixed during a Distribution Period). Investors should note that this concentrated commodity exposure may lead to distributions (if any) that vary significantly from period to period. Lonsec suggests investors should have a strong 12 month outlook for the five commodities when considering this investment option. Lonsec considers Macquarie to be a very experienced issuer of structured investment products. The group is very well resourced both in Australia and globally. Issuer Profile The Issuer and Responsible Entity of the Macquarie Flexi 100 is Macquarie Financial Products Management Limited (MFPML), which is part of the Macquarie Group. MFPML is responsible for managing Macquarie Flexi 100 in accordance with the Constitution and the Corporations Act but may appoint third parties to assist it in performing those functions. MFPML also acts as the responsible entity for a number of other Macquarie originated funds. MSIL is a wholly-owned subsidiary of Macquarie Bank Limited (Macquarie Bank), a licensed Australian bank, regulated by APRA and a member of the Macquarie Group. Macquarie Group Limited (MGL) is a non-operating holding company and the ultimate listed parent for the Macquarie Group under a new Macquarie Group structure that was formally implemented on 13 November 2007. MGL is listed on the ASX and is regulated by APRA as a non-operating holding company of an authorised deposit-taking institution. Investors should note that Units in Macquarie Flexi 100 do not constitute deposits with Macquarie Bank. How does the Product work? Macquarie Flexi 100 allows investors to select from a number of unit classes each defined by different Payoff Categories and Investment Opportunities. The Issuer will provide a list of available unit classes on the Flexi website. The structure of Macquarie Flexi 100 is illustrated below: Investor Investment Loan Loan Provider* Responsible Entity MFPML Investors buy units in Macquarie Flexi 100 using funds sourced via the Investment Loan from the Loan Provider. Investors should note that interest payments on the Investment Loan and principal and interest payments on any Interest Loan (if applicable) are not capital protected. As Responsible Entity of Macquarie Flexi 100, MFPML invests the proceeds in Investment Linked Swap Arrangements that provide notional exposure to the performance of selected Reference Asset/s (via a Swap Agreement) and Capital Protection (via a Cash Collateral Agreement) at maturity. Macquarie Bank, the Swap Counterparty, is obligated under the Swap Agreement with Macquarie Flexi 100 to provide an amount dependent on the performance of the Reference Asset/s from the Swap Start Date to the Swap Valuation Date (or annual valuation dates for Variable Distribution classes). If Macquarie Bank fails to meet its obligations, Macquarie Flexi 100, and consequently investors, may not receive any return. The Cash Collateral Agreement provides Capital Protection throughout the term as long as the Collateral Counterparty (Macquarie Bank) meets its payment obligations. On the Swap Start Date, the Unit proceeds are invested in a cash collateral account with Macquarie Bank to provide an amount equivalent to the Investment Loan Amount at maturity or on earlier withdrawal. Payoff Categories Units Investment Amount Swap Counterparty * MSIL or another Macquarie group company Macquarie Flexi 100 Macquarie Bank Investment Linked Swap Arrangements Collateral Counterparty Fixed Distribution Classes The two Fixed Distribution Classes are characterised by fixed distributions paid periodically throughout their respective investment terms, and the potential for a return paid at maturity based on the performance of the Reference Asset over the period from the Swap Start Date to the This information must be read in conjunction with the Warning, Disclaimer, and Disclosure at the end of this document 3
respective Swap Valuation Date subject to a hurdle and in some cases a performance cap. Distributions The 5.5 Year Fixed Distribution Classes pay a total fixed amount of 22% (4.0% p.a.) of the investment amount as follows: Years 1 to 5 4.0% of the investment amount (or $0.04 per unit) at the end of each year; and Year 5.5 (Maturity) 2.0% of the investment amount (or $0.02 per unit) at Maturity. The 3.5 Year Fixed Distribution Classes pay a total fixed amount of 16.25% (4.6% p.a.) of the investment amount as follows: Years 1 to 2 6.5% of the investment amount (or $0.065 per unit) at the end of each of the first two years; and Year 3 3.25% of the investment amount (or $0.0325 per unit) at the end of the third year; and Year 3.5 (Maturity) no fixed distribution is paid at Maturity. The total amount of fixed distributions paid throughout the investment term will represent the Hurdle when calculating the Reference Asset Gain at Maturity (see further details below). Fixed distributions will only be paid to investors who have not exercised the Walk-Away feature of the Investment Loan on or before the relevant Distribution Date. Unless investors elect otherwise on their application form, fixed distributions will be automatically applied to pay the interest payable on the Investment Loan for the next period. Any difference needs to be funded by investors. Reference Asset Gain at Maturity An investor s return (if any) at maturity is an amount equal to the Reference Asset Gain, which represents any increase in the Reference Asset from the Swap Start Date to the Swap Valuation Date, in excess of the Hurdle, subject to a performance cap (if any) (see below), and multiplied by 150% for the Australian Equity Focus class. The actual Term and Share Performance Caps will be determined as at the Swap Start Date and listed on the Flexi website. The actual caps could be lower than the indicative caps. If the Term/Share Performance Cap is not equal to at least 85% for the 5.5 Year Fixed Distribution Classes and 55% for the 3.5 Year Fixed Distribution Classes, the units in the respective unit class will be withdrawn. In this scenario, investors will have their units redeemed at $1.00 per unit, any loans will be terminated and any prepaid interest and loan fee fully refunded. In the Australian Equity Focus class, the Share Performance Cap (if applicable) is placed on the individual performance of each of the 20 stocks in the Reference Asset and is expressed as a percentage of each constituent s closing level on the Swap Start Date. For the Asian Equity, Asia Long Short, US Equity and BRIC Equity classes, the return is calculated in USD and converted to AUD at the prevailing AUD/USD exchange rate. As such, the Reference Asset Gain (if any) on these classes is subject to currency risk. Available Investment Opportunities In this Offer of Macquarie Flexi 100, the following 5.5 Year Fixed Distribution Investment Opportunities will be available: 1. Australian Equity with a Term Performance Cap of 100%*; 2. Asian Equity with no Term Performance Cap*; 3. US Equity with a Term Performance Cap of 100%*; 4. BRIC Equity with a Share Performance Cap of 100%*. In this Offer of Macquarie Flexi 100, the following 3.5 Year Fixed Distribution Investment Opportunities will be available: 1. Australian Equity Focus with a Share Performance Cap of 65%*; 2. Asia Long Short with no Term Performance Cap*. * All performance caps are indicative Example of Fixed Distributions The following example is hypothetical and not representative of past or future performance. It uses the same hypothetical assumptions as outlined in section 2.3.2 of the PDS. Assumptions Fixed Distribution Class Australian Equity 5.5 Year Term Performance Cap 100% Total Fixed Distributions Investment Amount 22% of Investment Amount AUD100,000 Reference Asset Level Initial Investment Level 4,300 Closing Level on Swap Valuation Date 8,700 Capped Final Level 4,300+(4,300 x 100%) = 8,600 Hurdle 4,300 x 122% = 5,246 The Reference Asset Gain at Maturity is the greater of: a) zero; and b) Final Investment Level - Hurdle Initial Investment Level Therefore, Reference Asset Gain at Maturity is equal to: X Investment Amount In the BRIC Equity class, the Share Performance Cap (if applicable) is placed on the individual performance of each of the 4 constituents and is expressed as a percentage of each constituent s closing level on the Swap Start Date. This information must be read in conjunction with the Warning, Disclaimer, and Disclosure at the end of this document 4
The Variable Distribution Classes are characterised by potential variable distributions paid periodically throughout the investment term based on the performance of the Reference Asset over the respective period each subject to the relevant performance cap (if any). Performance in a prior distribution period does not impact the potential for a distribution in the current period, thereby allowing the investor to capture any gains in the relevant period. Variable Distribution Classes are not entitled to a Reference Asset Gain at Maturity because the positive performance (if any) of the Reference Asset in any of the three periods will be paid as a distribution. Distributions Investors should note that Variable Distribution Classes do not pay fixed distributions during their 3-year investment term. The three potential annual distributions from Variable Distribution Classes will represent the positive annual performance (if any) of the Reference Asset which in some cases may be subject to the relevant Annual Performance Cap. No Hurdle applies to Variable Distribution Classes. Unless investors elect otherwise on their application form, variable distributions will be automatically applied to pay the interest payable on the Investment Loan for the next period. Any difference needs to be funded by investors. Variable distributions will only be paid to investors who have not exercised the Walk-Away feature of the Investment Loan before the relevant Distribution Date. However, if investors Walk-Away prior to this Distribution Date, the value of their units will reflect the market value of the Investment Linked Swap Agreement. The actual Annual Performance Caps will be determined as at the Swap Start Date and listed on the Flexi website. The actual caps could be lower than the indicative caps. If the Annual Performance Cap for the first Distribution Period is not equal to at least 15% p.a. the units in the respective unit class will be withdrawn. In this scenario, investors will have their units redeemed at $1.00 per unit, any loans will be terminated and any prepaid interest and loan fee fully refunded. Investors should note that Annual Performance Caps for the second and third Distribution Periods may be lower or higher than the actual caps for the first period, and will be based on the terms offered to Macquarie Flexi 100 at the time by the Swap Counterparty. The inability to provide an Annual Performance Cap for the second or third period at least equal to 15% p.a. is likely to trigger an early termination event leading to termination of the investment. 8,600-5,246 For the US Equity class, the return is calculated in USD and X $100,000 converted to AUD at the prevailing AUD/USD exchange rate. 4,300 As such, the distributions (if any) on this class are subject to currency risk. = AUD78,000 Reference Asset Gain at Maturity There is no gain payable at Maturity because the positive performance (if any) of the Reference Asset in the final Variable Distribution Classes distribution period will be paid as a distribution (see above). Available Investment Opportunities In this Offer of Macquarie Flexi 100, the following Variable Distribution Investment Opportunities will be available: 1. Australian Equity with an Annual Performance Cap of 17% p.a.* for Distribution Period 1; 2. US Equity with an Annual Performance Cap of 17% p.a.* for Distribution Period 1; 3. Commodities Select with an Annual Performance Cap of 17% p.a.* for Distribution Period 1. * All performance caps are indicative Example of Variable Distributions The following example is hypothetical and not representative of past or future performance. It uses the same hypothetical assumptions as outlined in section 2.4.1 of the PDS. Assumptions Variable Distribution Class Annual Performance Cap Investment Amount Reference Asset Level Australian Equity 3 Year 17% p.a. (constant over term) AUD100,000 Initial Investment Level 4,300 End of Distribution Period 1 5,100 (+18.6%) End of Distribution Period 2 4,800 (-5.9%) End of Distribution Period 3 5,500 (+14.6%) The Reference Asset Level at the end of Distribution Period 1 is the lesser of: a) 5,100 (Reference Asset Level at end of Period); and b) 4,300 + (4,300 x 17%) = 5,031 (Annual Capped Level) Therefore, the Year 1 distribution is calculated as follows: = = Reference Asset Level at end of Distribution Period 1 Initial Investment Level 5,031 4,300 = AUD17,000-1 X 100,000-1 X Investment Amount This information must be read in conjunction with the Warning, Disclaimer, and Disclosure at the end of this document 5
The Reference Asset Level at the end of Distribution Period 2 is lower than the Reference Asset Level at the end of Distribution Period 1. Therefore, no distribution is payable for the second period. The Reference Asset Level at the end of Distribution Period 3 is the lesser of: a) 5,500; or b) 4,800 + (4,800 x 17%) = 5,616 Therefore, the Year 3 distribution is calculated as follows: Reference Asset Level at end of Distribution Period 3 = - 1 Investment X Amount Reference Asset Level at end of Distribution Period 2 = The total payoff over the investment term is equal to AUD31,583 or 31.58% (10.5% p.a.) excluding fees and interest. The graph below illustrates the distributions for the example above. 35 5,500 4,800 = AUD14,583-1 X 100,000 and index analysts and two Australian Securities Exchange (ASX) representatives. The Index Committee reviews constituents quarterly to ensure adequate market capitalisation and liquidity. Both market capitalisation and liquidity are assessed using the previous six months data. The following table outlines the performance of the Reference Asset over the 7 year period to 28 February 2011: S&P/ASX 200 Price Return Index Period 1 Yr 3 Yrs 5 Yrs 7 yrs Performance (% pa) 4.2-4.6-0.4 5.3 Standard Deviation (% pa) 13.1 17.8 15.8 14.2 Worst Drawdown (%) -11.8-40.9-50.5-50.5 Source: S&P, Lonsec Australian Equity Focus The Reference Asset for Australian Equity Focus is an equally weighted portfolio of 20 companies listed in ASX with a large market capitalisation. Reference Asset constituents are selected based on market capitalisation and liquidity measures, rather than past or expected performance. The following table lists the 20 constituents: Constituent ASX Code Constituent ASX Code Amcor AMC Origin Energy ORG AMP AMP QBE Insurance QBE 30 5,500 5,619 ANZ ANZ Rio Tinto RIO 25 5,399 BHP Billiton BHP Suncorp-Metway SUN Distributions ($'000) 20 15 5,100 31.58 5,179 4,959 Reference Asset Level Brambles BXB Telstra TLS Commonwealth Bank CBA Wesfarmers WES CSL CSL Westfield WDC 10 5 0 4,300 Swap Start Date 17.00 End of Distribution Period 1 Investment Opportunities Australian Equity The Reference Asset for Australian Equity is the S&P/ASX 200 Price Return Index. The S&P/ASX 200 Price Return Index is recognised as the investable benchmark for the Australian equity market. The index is maintained by the S&P Australian Index Committee, a team of five including three Standard & Poor s economists 4,800 End of Distribution Period 2 14.58 End of Distribution Period 3 Total distributions 4,740 4,520 4,300 Foster s Group FGL Westpac WBC National Australia Bank NAB Woodside Petroleum WPL Newcrest Mining NCM Woolworths WOW Except where a corporate event or adjustment event occurs, the constituents and weighting will remain fixed for the investment term. See Risks section of this review for further details. Asian Equity The Reference Asset for Asian Equity is an equally weighted basket of indices or Exchange Traded Funds (ETFs), designed to provide broad exposure to equity markets in Hong Kong, China, Taiwan, Korea and Singapore. This information must be read in conjunction with the Warning, Disclaimer, and Disclosure at the end of this document 6
Reference Asset Hang Seng H-Share Index ETF (weight: 20%) Tracker Fund of Hong Kong ETF (20%) MSCI Taiwan Index (20%) Kospi 200 Index (20%) Description An index-tracking ETF which aims to match, before expenses, the Hang Seng China Enterprises Index, the major index that tracks the performance of Chinese enterprises listed in Hong Kong in the form of H shares. An ETF designed to provide returns that closely correspond to the performance of the Hang Seng Index, the main indicator of the overall equity market performance in Hong Kong. A market capitalisation weighted index that aims to capture 85% (by market cap) of Taiwanese companies that are available to investors worldwide. A capitalisation-weighted index of 200 Korean stocks which make up 93% of the total market value of the Korean Stock Exchange. Std. Deviation (% pa) 18.2 28.3 25.0 22.5 Worst Drawdown (%) -9.4-53.6-58.1-58.1 Kospi 200 Index Performance (% pa) 23.0 5.7 7.6 12.0 Std. Deviation (% pa) 16.2 24.6 22.3 21.8 Worst Drawdown (%) -6.1-41.9-47.0-47.0 MSCI Singapore Index Performance (% pa) 7.2-1.7 3.8 6.4 Std. Deviation (% pa) 13.8 28.0 24.4 21.1 Worst Drawdown (%) -7.5-50.8-58.5-58.5 Source: Bloomberg, Lonsec 450 MSCI Singapore Index (20%) An index comprising stocks traded primarily on the Singapore Stock Exchange. This index is capitalisation weighted and aims to capture 85% of Singaporean companies available to investors worldwide. Where the Reference Asset is an Exchange Traded Fund, it means the Fund itself is listed on an exchange where investors can buy and sell units. These funds may not exactly match the returns of the underlying index, since they do not seek to hold all of the stocks in the underlying index but rather a representative basket. The Asian markets include some of the fastest growing economies in the world. The growth rates in many Asian companies may provide attractive investment opportunities for Australian investors. However, investors should note that historically, these markets have tended to be more volatile than Australian or other OECD share markets. This is due to a range of factors including political instability and less developed corporate governance. 400 350 300 250 200 150 100 50 0 Feb-04 Feb-05 Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Basket HK H-Share ETF HK Tracker ETF MSCI Taiwan KOSPI 200 MSCI Singapore Source: Bloomberg, Lonsec The table below shows the performance of the underlying Reference Assets over a range of performance periods. Performance Reference Assets To 28 Feb 2011 1 Yr 3 Yrs 5 Yrs 7 yrs Hang Seng H-Share Index ETF Performance (% pa) 8.6-3.3 14.1 13.6 Std. Deviation (% pa) 16.1 35.4 35.7 32.8 Worst Drawdown (%) -7.5-53.9-67.6-67.6 Tracker Fund of Hong Kong ETF Performance (% pa) 13.2-1.2 8.0 7.7 Std. Deviation (% pa) 13.0 27.5 25.1 22.5 Worst Drawdown (%) -6.3-49.9-58.7-58.7 MSCI Taiwan Index Performance (% pa) 14.7-2.1 1.9 0.9 This information must be read in conjunction with the Warning, Disclaimer, and Disclosure at the end of this document 7
Asia Long Short The Reference Asset for Asia Long Short is the Macquarie Asian Alpha Fund which utilises a quantitative long short strategy over pan-asian equity markets. Macquarie Asian Alpha Fund Fund Objective Investment Manager To achieve absolute returns with lower risk than Asian equity markets. MQ Specialist Investment Management Limited, wholly owned by Macquarie Group Limited. Fund Inception October 2005 Fees Management Fee of 1.5% p.a. plus performance fee of 20% subject to a high water mark. Stocks in Universe 5,000+ Equity Markets Ave number of positions Turnover Gross Exposure Range Asia-Pacific markets including but not limited to Australia, New Zealand, Japan, Hong Kong, Singapore, Taiwan, Korea, India, Philippines, Thailand, Malaysia, China and Indonesia. >500. Median position size 0.2%. Maximum approx 3%. 250% - 400% p.a. Typically +70% to 300%. (There are also gross exposure limits by country) Net Market Exposure < 30% (typically 0% to 30%). Derivatives Performance since inception to Feb 2011 The Fund is permitted to use derivatives. Monthly Volatility since inception to Feb 2011 Philosophy 11.62% p.a. 6.70% p.a. The aim is to generate alpha (not beta) led returns by exploiting inefficiencies present in the listed equity markets of Asia The strategy aims to achieve absolute returns in a relatively lower risk and more stable manner than the targeted markets. The Fund adopts a probability not perfection approach to investing, leading to a relatively large number of small positions. People & Resources The Investment Manager, MQ Specialist Investment Management Limited, sits in the Alpha Equities division of Macquarie Funds Group. The division is comprised of 7 people; 3 portfolio managers 3 quantitative analysts and 1 trader. There are 3 people directly responsible for the management of this Fund, however the investment team draws on the resources of the wider group. In Lonsec s opinion the investment team has the necessary skills to manage the highly quantitative investment process. Investment Process The core process is based on systematically identifying opportunities where equities deviate from fair value due to human behavioural issues. Factors are assessed based on value, sentiment, quality and momentum e.g. selling stocks considered expensive on a range of valuation measures or buying price distressed stocks that have good short term momentum, strong valuation scores and improving analyst sentiment. Additional non-systematic analysis is also conducted by the portfolio managers based around detailed company analysis. From a portfolio construction perspective the following factors are then taken into account: Gross and net exposure management Country tilts Position weighting Balancing stocks and risk screens Futures management Currency Hedging Quantitative investment managers have traditionally focused on developed and efficient markets. In Lonsec s experience, these investment techniques are generally less prevalent in Asian countries. Lonsec also considers the performance fee structure to be highly unusual relative to the Lonsec peer group. The absence of a performance hurdle means the Manager will be entitled to a performance fee equal to 20% of all positive performance (subject to a high watermark). Lonsec would prefer a fee that rewards the Manager for genuine outperformance of a sector or appropriate absolute return benchmark. This Fund has a track record of over 5 years and enjoys the backing of a very well resourced parent. The Fund s investment thesis is that Asian markets are becoming more suited to quantitative investment techniques for several reasons including improvements in data quality and the depth and breadth of analyst coverage. Lonsec considers the Investment Manager to be well placed to capitalise on the opportunities in these markets. Asian markets The Fund invests in a large number of emerging Asian markets using a long short investment strategy. This type of strategy may be particularly suited to the Asian markets as the inefficiencies it aims to exploit may be stronger. Inefficiencies that may be present in Asia may include those influenced by human behavioural biases, market structure constraints, liquidity flows and information processing limitations. The following table outlines the historical performance of the Eurekahedge Asia Long Short Index (in Local Currency) relative to the performance of the Fund. The Eurekahedge Asia Long Short Index is an index reflecting the performance of 282 long/short hedge funds that invest in the Asian region. Year Eurekahedge Asia Long Short Index Macquarie Asian Alpha Fund CY2010 8.1% 10.3% CY2009 27.3% 14.2% CY2008-22.0% -8.9% CY2007 17.6% 20.2% CY2006 14.9% 20.6% Source: Eurekahedge, MSIML This information must be read in conjunction with the Warning, Disclaimer, and Disclosure at the end of this document 8
US Equity The Reference Asset for US Equity is the S&P 500 Index. The index contains 500 constituents that are leading companies by market capitalisation listed on either the New York Stock Exchange or NASDAQ. The following table outlines the performance of the Reference Asset over the 7 year period to 28 February 2011: S&P 500 Index (USD) Period 1 Yr 3 Yrs 5 Yrs 7 yrs Performance (% pa) 20.2-0.1 0.7 2.1 Standard Deviation (% pa) 18.6 21.9 17.9 15.6 Worst Drawdown (%) -13.1-47.5-52.6-52.6 Source: S&P, Lonsec BRIC Equity The Reference Asset for BRIC Equity is an equally weighted basket of indices or ETFs, designed to provide broad exposure to equity markets in Brazil, Russia, India and China. a range of factors including political instability and less developed corporate governance. The table below shows the performance of the underlying Reference Assets over a range of performance periods. Performance Reference Asset Constituents To 28 Feb 2011 1 Yr 3 Yrs 5 Yrs 7 yrs ishares MSCI Brazil Index Fund Performance (% pa) 8.9-3.5 12.9 24.1 Std. Deviation (% pa) 26.6 40.4 35.8 34.4 Worst Drawdown (%) -16.0-65.3-65.3-65.3 Market Vectors Russia ETF Performance (% pa) 32.7-5.5 n/a n/a Std. Deviation (% pa) 26.2 50.6 n/a n/a Worst Drawdown (%) -18.3-81.5 n/a n/a S&P CNX Nifty Index Performance (% pa) 8.3 0.7 11.6 16.8 Reference Asset ishares MSCI Brazil Index Fund (weight: 25%) Market Vectors Russia ETF (25%) S&P CNX Nifty Index (25%) Hang Seng H-Share Index ETF (25%) Description An ETF designed to provide returns that closely correspond to the performance of the MSCI Brazil Index, which aims capture 85% (by market cap) of Brazilian companies. An ETF designed to provide returns that closely correspond to the performance of the DAXglobal Russia+ Index, which contains 30 Russian constituents made up of ADRs, GDRs and local shares listed at MICEX. A market capitalisation weighted index that represents approximately 63% (by free float market cap) of Indian companies. An index-tracking ETF which aims to match, before expenses, the Hang Seng China Enterprises Index, the major index that tracks the performance of Chinese enterprises listed in Hong Kong in the form of H shares. Std. Deviation (% pa) 19.5 33.1 30.4 28.4 Worst Drawdown (%) -13.1-47.3-55.1-55.1 Hang Seng H-Share Index ETF Performance (% pa) 8.6-3.3 14.1 13.6 Std. Deviation (% pa) 16.1 35.4 35.7 32.8 Worst Drawdown (%) -7.5-53.9-67.6-67.6 Source: Bloomberg, Lonsec 700 600 500 400 300 200 Where the Reference Asset constituent is an ETF, it means the fund itself is listed on an exchange where investors can buy and sell units. These funds may not exactly match the returns of the underlying index, since they do not seek to hold all of the stocks in the underlying index but rather a representative basket. The BRIC markets include some of the fastest growing economies in the world. The growth rates in many BRIC economies may provide attractive investment opportunities for Australian investors. However, investors should note that historically, these markets have tended to be more volatile than Australian or other OECD share markets. This is due to 100 0 Feb-04 Feb-05 Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Basket Brazil Russia India China Source: Bloomberg, Lonsec Note: The Market Vectors Russia ETF commenced on 24 April 2007. The basket calculation prior to April 2007 represents the average performance of the other three constituents. Investors should note the relatively short performance history of the Market Vectors Russia ETF. This information must be read in conjunction with the Warning, Disclaimer, and Disclosure at the end of this document 9
Commodities Select The Reference Asset for Commodities Select is an equally weighted basket of five commodities. The commodity constituents and their weights will be fixed for each Distribution Period. For each Distribution Period, Merrill Lynch International (MLI) will suggest to the Responsible Entity a basket of 5 commodities (from the list of Eligible Commodities), which must come from at least 3 Commodity Sectors, based on MLI s views on possible 12 month price performance and other factors. The Responsible Entity is responsible for determining the basket, taking into account MLI s suggestions and other information it considers necessary from other sources. The constituents will be listed on the Flexi Website approximately 6 weeks prior to the beginning of a Distribution Period. The initial constituents and weights are shown below: Commodity Constituent Weight Corn 20% LME Copper 20% Gold 20% Soybean 20% WTI Crude Oil 20% As the constituents of the basket are not fixed, Lonsec has not performed any historical performance analysis. The return for each Distribution Period is determined based only on the spot price movements for each commodity in the basket, and taking into account the performance cap. Investment Loans Investors have a choice of a full recourse or limited recourse Investment Loan for 100% of the investment amount. The limited recourse loan means MSIL s recourse, as lender, is limited to an investor s units and they cannot pursue the investor for any loss in excess of the value of the units. For SMSFs, a Security Trustee holds the units in a separate trust for each investor. This arrangement means investors are able to Walk-Away from 30 September 2011 (and quarterly thereafter) with no further amounts payable. However, investors who have also taken out an Interest Loan will need to pay the unpaid balance and break costs on this Loan. The Interest Loan is a full recourse loan and is not available to SMSFs. The full recourse loan means MSIL s recourse, as lender, is not limited to an investor s units and they can pursue the investor for any loss in excess of the value of the units if the Collateral Counterparty does not fulfil its obligations. Investors with a full recourse loan are still entitled to Walk-Away from 30 September 2011 (and quarterly thereafter) with no further amounts payable. The only circumstance where there will be further amounts investors will be obliged to pay is if the investor has an Interest Loan and/or if an investor chooses to invest with a Full Recourse Investment Loan and the Collateral Counterparty does not fulfil its obligations. Break Even Rates Based on a 2% Loan Establishment Fee, limited recourse Investment Loan of 9.10% p.a. and full recourse Investment Loan of 8.85% p.a., the annual increases required in the Reference Assets for investors to break even are: Class Limited Recourse Full Recourse 5.5 Yr Fixed Distribution 7.9% p.a. 7.7% p.a. 3.5 Yr Fixed Distribution Australian Equity Focus class Other classes 7.3% p.a. 8.7% p.a. 7.2% p.a. 8.5% p.a. Variable Distribution 9.8% p.a. 9.5% p.a. Source: PDS These figures ignore the effects of tax and the time value of money. Liquidity An investment in Macquarie Flexi 100 is designed to be held until maturity and should be viewed a medium-term investment with liquidity conditions. The Walk-Away feature of Macquarie Flexi 100 allows investors to Walk-Away from the Investment Loan on a quarterly basis without paying any further amounts to the Loan Provider on the Loans including any applicable break costs. However, in some circumstances there will be further amounts an investor will be obliged to pay if they choose to Walk-Away. These circumstances include: 1. if an investor has an Interest Loan, they will have to repay the Interest Loan and pay all outstanding amounts plus any applicable break costs; and 2. if an investor chooses to invest with a Full Recourse Investment Loan and the Collateral Counterparty does not fulfil its obligations under the Collateral Agreement, they will need to use their own funds to cover any shortfall owing under the Investment Loan if the value of their Units is not enough to repay any amount outstanding on their Investment Loan, including any applicable break costs. Investors who exercise the Walk-Away feature will be entitled to receive the value of the Units based on the applicable unit valuation date. For Fixed Distribution Classes, the value of each unit will be $1.00 for Walk-Away on or before 28 June 2012. The funds received will first be applied to repay any amounts owing to the loan provider, and any prepaid interest will not be refunded. Investors in Fixed Distribution Classes who exercise the Walk-Away feature on or before a distribution date will not be eligible to receive the next distribution. Investors in Variable Distribution Classes who exercise the Walk-Away feature before a distribution date will not be eligible to receive the next distribution, however the value of their units This information must be read in conjunction with the Warning, Disclaimer, and Disclosure at the end of this document 10
will reflect the market value of the Investment Linked Swap Agreement. What happens on redemption at Maturity? The Responsible Entity will provide investors with details of the options available at maturity closer to the date. These may include redeeming units for cash or retaining units (after repayment of the investment loans). For the Fixed Distributions classes, investors who redeem at maturity should receive an amount equal to the sum of: (i) the proceeds from redemption of their Units, which should be equal to their initial investment amount, which will be used to repay their loan; (ii) any final fixed distribution payable; and (iii) a further distribution amount equal to the percentage change in the Reference Asset (adjusted for exchange rate movements where applicable) less the total amount of distributions paid over the investment term (subject to any performance caps). For Variable Distribution classes, investors should receive an amount equal to the sum of: (i) the proceeds from redemption of their Units, which should be equal to their initial investment amount, which will be used to repay the loan, and (ii) a final distribution equal to the positive performance of the Reference Asset over the final period (subject to any performance caps). There is no asset gain payable, as positive performance (if any) will have been paid via annual distributions (subject to annual performance caps). Risks An investment in Macquarie Flexi 100 carries a number of standard investment risks associated with investment markets. These include performance, leverage, counterparty, distribution and tax risks. These and other risks are outlined in section 3 of Part I of the PDS and Part 2 of the SPDS and should be read in full and understood by potential investors. Lonsec considers the following to be the major risks: Performance Risk The performance of the Reference Asset is the key determinant of investment returns. There is no guarantee the Reference Asset will increase in value over the investment term. Recent volatility in equity markets increases this risk. Leverage Risk Investment gains and losses are magnified by the use of leverage and borrowing. There is a risk that total returns from the investment will be less than total interest payments and other costs. Counterparty Risk Investors are exposed to risk that the Counterparties to the Swap and Collateral agreements do not meet their obligations, as product returns are dependent on these counterparties performing their obligations as they fall due. The Swap and Collateral Counterparties will be Macquarie Bank. Corporate and Adjustment Event Risk (Australian Equity Focus and Commodities Select classes only) If a corporate event (e.g. capital reduction, rights issue, takeover offer) occurs, Macquarie Bank has broad discretion to adjust the Swap Agreement. If an adjustment event (e.g. insolvency, Macquarie Bank cannot hedge its risk under the Swap Agreement after reasonable efforts, delisting or for Commodities Select, that MLI fails to provide a suggested basket for any Distribution Period), Macquarie Bank will determine the impact of the event on the Swap Agreement and, if material, attempt to replace the asset. Macquarie Bank has discretion to cancel portions of the Swap Agreement or terminate it entirely if the economic terms of the agreement cannot be preserved. Foreign Exchange Risk (Asian Equity, Asia Long Short, US Equity and BRIC Equity classes only) Movements in the AUD:USD foreign exchange rate will affect the value of any distributions or gains payable prior to, or at, maturity. Emerging Market Risk (Asian Equity, Asia Long Short and BRIC Equity classes only) These classes will have exposure to markets that are relatively immature and under-developed. Therefore, there are significant risks associated with investments in these markets, e.g. liquidity risk, political risks, fraud and corruption, credit risk and exchange control. Commodity Risk (Commodities Select class only) The Commodities Select portfolio will be concentrated on a limited number of commodity sectors and therefore may be subject to greater volatility than a more diversified commodities exposure. Furthermore, poor performance of one commodity constituent may have a greater impact on the overall basket as the concentration is high. Given the constituents are fixed during each Distribution Period, the Issuer has limited ability to modify the basket to take advantage of new opportunities or to minimise exposure to market risk. Early Termination Risk The Swap Agreement may be terminated early following certain events such as a change in law or cost of hedging, or hedging disruption. For Variable Distribution classes, the hedging arrangements will be reviewed at least annually and therefore there will be a greater risk of an early termination event occurring. Whilst an early maturity may ensue, investors will not be required to pay further amounts if they have not taken out an interest loan and either they have borrowed using a limited recourse Investment Loan or they borrowed using a full recourse Investment Loan and the Collateral Counterparty fulfils its obligations under the Collateral Agreement. Taxation Macquarie has stated that the ATO Product Rulings, PR 2010/25 for the Limited Recourse Investment Loan and PR 2010/26 for the Full Recourse Investment Loan, apply to the Investment Opportunities in the PDS (see footnote below). This information must be read in conjunction with the Warning, Disclaimer, and Disclosure at the end of this document 11