Spectrum Wholesale Enhanced Income Fund ARSN 105 974 454 Product Disclosure Statement Dated 24 September 2010 Issued By: Spectrum Asset Management Limited ABN 31 096 442 198 www.spectruminvest.com.au Australian Financial Services Licence No. 225069
What s in this document? Topic Brief Summary Where is it Before you start a quick overview page 4 Who manages this Fund about Spectrum page 4 About this Fund investment objectives Page 5 How do we manage your money? investment strategy page 5 What does the Fund invest in? investment portfolio page 6 What are the benefits? features of the Fund page 6 What are the significant risks? risks of this Fund page 7 How much does the Fund cost? fees and other costs page 11 Additional Explanation of Fees Example of Annual Fees and Costs What about Fund performance and size? a description of other fees that may be charged worked examples with and without performance fees how the Fund has performed since inception page 13 page 15 page 17 How do I start? applying for units page 18 Cooling off your rights under the law page 18 Withdrawing your investment when and how you can get your money page 19 Distributions how and when you get income page 19 Keeping you informed reports we send you on your investment What about tax? you will probably need to pay tax on this investment Our responsibilities to you there are some limits on our responsibilities Enquiries and complaints contact details and complaints process Investing through a master trust or wrap account? Investors through a master trust or wrap have different rights page 20 page 20 page 21 page 21 page 22 Privacy your rights page 22 Directory contact details page 23 Application Form investors investing directly in the Fund use this form to apply for units Page 24 1229045-v5\SYDDMS\AUSDJ4 2
Important Information You should read this Product Disclosure Statement ('PDS') in its entirety before making a decision to invest in the ARSN 105 974 454 ('Fund'). This PDS has been prepared and issued by Spectrum Asset Management Limited ('Spectrum') in its capacity as the responsible entity of the Fund (referred to throughout this PDS as the 'Responsible Entity', 'Spectrum', 'us' or 'we'). Spectrum has authorised the use of this PDS as disclosure to investors and prospective investors of an investor directed portfolio service, master trust, wrap account or investor directed portfolio service-like scheme. Neither Spectrum nor any of its related parties or any of their respective employees, agents or officers promise that you will earn any return on your investment or that your investment will gain or retain its value and we do not guarantee the success, repayment of capital or any rate of return on income or capital or investment performance of the Fund. Past performance is no indication of future performance. Units in the Fund are offered and issued by Spectrum on the terms and conditions described in this PDS and the underlying constitution ('Constitution') for the Fund. You should read this PDS and the Constitution because you will become bound by these documents if you become a unit holder of the Fund. Your investment can be subject to investment risk, including possible delays in repayment and loss of income and capital invested in the Fund. Spectrum does not in any way stand behind the capital value and/or investment performance of the Fund. This PDS is prepared for your general information only. It is not intended to be a recommendation by Spectrum, any associate, employee, agent or officer of Spectrum or any other person to invest in the Fund. This PDS does not take into account the investment objectives, financial situation or personal needs of any particular investor. Accordingly, nothing in this PDS should be construed as a recommendation by Spectrum, or any associate of Spectrum or any other person concerning an investment in the Fund. Investors should not rely on this PDS as the sole basis of a decision to invest in the Fund. You should consider the Fund's suitability in view of your financial position and investment objectives and individual needs and we recommend you seek independent financial, legal and taxation advice, as appropriate, before making a decision to invest in the Fund. This PDS is dated 24 September 2010. This PDS has not been lodged with the Australian Securities & Investments Commission ('ASIC') and is not required to be lodged with ASIC. ASIC takes no responsibility for the contents of this PDS. If you received this document electronically we will provide you with a paper copy (together with the application form) free if you ask us. Please call Spectrum on (02) 9299 2288 to request a copy. This PDS can only be used by investors receiving it (electronically or otherwise) in Australia. This PDS is not an offer or invitation in relation to the Fund in any place in which, or to any person to whom, it would not be lawful to make that offer or invitation. Certain information in this PDS is subject to change. We will notify you of any changes that have a materially adverse impact on you or other significant events that affect the information in this PDS. Spectrum may make available updated information relating to this PDS. Investors may access this information at www.spectruminvest.com.au, or alternatively may request a paper copy of this information free of charge from your adviser or by contacting Spectrum on (02) 9299 2288. The information that Spectrum will make available by way of these updates is subject to change from time to time and will not be information that is materially adverse to investors. Unless otherwise stated, all fees quoted in the PDS are inclusive of GST, after allowing for an estimate for Reduced Input Tax Credits ('RITC'). All amounts are expressed in Australian dollars. 1229045-v5\SYDDMS\AUSDJ4 3
Before you start You should read this PDS carefully before investing, as it will help you to decide if the Fund will meet your needs and assist you to compare the Fund to others you may be considering. You can invest in the Fund if you are investing through a master trust or wrap account. You can only invest in the Fund directly if you have a minimum investment of $500,000. For more information on Spectrum's legal relationship with you, refer to the section 'Our responsibilities to you' on page 21 of this PDS. Spectrum invites you to invest in the Fund. We are the issuer of this PDS and of interests in the Fund (called units ). The Fund is an enhanced income fund, investing in debt and hybrid debt securities (which is a term used to describe a complex security consisting of virtually any combination of two or more risk management items such as bonds, notes or swaps). We expect that an investor in the Fund would be seeking predominantly income. The Fund is not a short term investment, and we suggest that investors look to invest for three years or more and accept that the value of an investor s investment can go up or down. We recommend that you get professional advice (from as necessary, an appropriately licensed financial adviser and/or tax adviser) before investing. Who manages this Fund? Spectrum manages the Fund. Spectrum is a specialised investment management company that was formed by a group of executives seeking to satisfy Australian investor s appetite for an enhanced income product. Spectrum draws on the extensive experience of its executives, who have been managing credit portfolios as a team for 8 years and who have each had more than 25 years experience in the Australian debt markets, to invest in and monitor the investment portfolio of the Fund. Neither we nor any of our associates, employees, agents or officers promise that you will earn any return on your investment or that your investment will gain or retain its value and we do not guarantee the success, repayment of capital or any rate of return on income or capital or investment performance of the Fund. Past performance is no indication of future performance. Your investment can be subject to investment risk, including possible delays in repayment and loss of income and capital invested in the Fund. We do not in any way stand behind the capital value and/or investment performance of the Fund. 1229045-v5\SYDDMS\AUSDJ4 4
About this Fund This Fund will give you exposure to a diversified portfolio of debt and hybrid debt securities which may be issued by Government bodies, corporations and, to a limited extent, specialist financing vehicles. The securities may be listed on the Australian Securities Exchange ('ASX') or issued by Australian companies listed on foreign exchanges or offered for purchase through the interbank market. See the section 'What does the Fund invest in' on page 6 for more detail. We actively manage the Fund using various analysis techniques to make decisions about the selection of individual investments as well as changing the mix of securities held in the portfolio on an ongoing basis. We hold a diversified portfolio of securities to minimise any loss of income and capital of the Fund associated with investment risk. Our aim is to achieve higher returns than traditional cash management and fixed interest investments, over the short to medium term 1. The Fund primarily seeks high current income and there is a possibility for some franking credits. The Fund seeks to outperform its benchmark, the Reserve Bank of Australia ('RBA') Cash Rate by a margin of 1.5% p.a. in the short term (i.e. over 90 day periods) and aims to generate a total return of 8% p.a. over the medium term (i.e. over 3 years). 2 Like most managed funds, this Fund is a unit trust. In exchange for your invested money you are issued units. Certain rights (such as a right to any income and a right to vote) attach to your units. You may also have obligations in respect of your units. These rights are outlined in the Constitution for the Fund. We expect a typical investor in the Fund to look for regular income, without the volatility that may be associated with pure hybrid or equity investments. We expect a typical investor in the Fund to be satisfied with a stable level of income at a rate in excess of a cash management trust. The Fund is best suited to those investors: who seek enhanced income opportunities without the potential volatility of equity markets; who are looking for medium to longer term investments; who are looking for an alternative investment opportunity that will offer diversification to existing investment portfolios; that are comfortable with a higher investment risk than is generally associated with more traditional fixed income and cash funds; that are seeking to utilise the expertise of an active, specialist investment manager for part of the cash/fixed income component of their investment portfolio. How do we manage your money? Spectrum utilises a disciplined investment process that combines fundamental research with disciplined portfolio construction and risk controls. Spectrum is an active manager of credit and adopts a quantitative approach to identify and select securities we consider worthwhile. Our investment model imposes certain limits on security type, credit risk, industry and issuers to maintain a diversified portfolio structure. The type of securities and investment limits are described in more detail in the next section. We supplement our own research with external research from local and international sources. When making investment decisions for the Fund, we do not take into account labour standards or environmental, social or ethical considerations when selecting, realising or retaining assets of the Fund. The Fund may borrow for short-term needs, although it is not the intention to borrow on a regular basis. 1 There is no guarantee that these aims will be achieved. The aims are not intended to be a forecast. They are merely an indication of what the Fund aims to achieve over the short to medium term. The Fund may not be successful in meeting these aims. Returns are not guaranteed. 2 See note above. 1229045-v5\SYDDMS\AUSDJ4 5
What does the Fund invest in? We invest in a diversified portfolio of debt and hybrid debt securities that are issued by Government bodies, corporations and to a limited extent specialist financing vehicles. The Fund will mostly invest in securities issued by corporations, banks and other financial institutions in the Australian market (these may be listed on the ASX or offered through the interbank market), however we may invest in securities issued by Australian companies in offshore markets if we are able to purchase in Australian dollars (and these would be offered for purchase through the interbank market). 3 Spectrum will seek to maximize the available investment opportunities by investing in a range of instruments, which may include securities of a hybrid nature, including: floating rate notes; corporate bonds; government and semi-government securities; convertible / converting securities; perpetual (non call) step-up preference securities; cash deposits; mortgage backed securities; and structured and subordinated debt. The Fund will invest in a portfolio which is diversified by security type, credit risk, industry and issuer. We may use derivatives to reduce risk or gain exposure to other types of credits when we think it appropriate. The composition of the Fund may vary over time and any change, depending upon the strategy, outlook and economic environment, which may in turn alter the return achieved by the Fund. Returns are not guaranteed. What are the benefits? One of the main benefits we aim to achieve is regular enhanced income distributions without the volatility of equity investments. Generally you can withdraw your investment at any-time, subject of course to the notice period. Managed funds such as the Fund have other benefits. Your money is managed by a specialist investment manager, with extensive experience in fixed income and hybrid (debt/equity) investments who will actively manage the Fund's investments. The relatively large amount of money in a fund allows access to wholesale investment opportunities, markets and diversity which ordinary investors usually can t manage on their own. Managed funds can often invest for less cost than ordinary investors, and can often access investment and risk management techniques not available to ordinary investors. They can also access products that may not be available for retail distribution. You have the right to receive any income distributions we make from the Fund (usually shortly after each quarter ending September, December, March and June each year). Distributions may also carry imputation credits. You can also have the benefit of capital gains (or suffer losses) when you dispose of your investment such as by exiting the Fund or selling or giving your units away. As an investor you also participate in any other distributions (such as capital distributions if the Fund is terminated). 3 The interbank market refers to the market where Australian and international banks operating in Australia trade debt securities which are usually settled through Austraclear. 1229045-v5\SYDDMS\AUSDJ4 6
What are the significant risks? About risk and return All investments are subject to varying risks and it is possible for them to go down as well as up in value (i.e. you can experience investment gains or investment losses). Changes in value can be significant and they can happen quickly. Different types of investments perform differently at different times and have different risk characteristics and volatility. These are some of the reasons why you should consider investing in different types of investments (often called diversification). This Fund offers some diversification across some types of investments. What about the risks of this Fund? It is important that investors understand the risk that is inherent in an enhanced income portfolio and how their investment may be affected. When considering an investment in this Fund, investors should be aware that the Fund invests in lower rated securities that are more susceptible to factors such as credit risk or changes to market conditions. The significant risks for this Fund, and the ways we aim to manage them, are discussed below. We can t eliminate all risks and can t promise that the ways we manage them will always be successful. If these adverse events happen, your income distributions may be lower than expected or there may be none, and the value of your investment could fall. The significant risks for this Fund are: Individual investment risk or credit risk Individual investments we buy can and do fall in value for many reasons such as changes in a company's internal operations or management, or in its business environment. The risk that an issuer of a security will be unable to meet its obligations under the terms of the relevant security is usually referred to as credit risk. These obligations may include scheduled interest payments and or repayment of principal. We aim to reduce these risks with careful analysis of research from many sources and making qualitative and quantitative credit assessments of issuers of the security using available research. Market risk Economic, technological, political or legal conditions, unexpected major world events, and even market sentiment, can (and do) change, and this can mean that changes in the value of investment markets (eg the Australian corporate bond market) can affect the value of the investments in the Fund. These changes can all directly or indirectly create an environment that influences the value of your investments. We use our own and external research and analysis to form a view on these matters as best we can and then rebalance the investment mix of the Fund with the aim of reducing the impact of market risk. Sector Specific Risk Companies in certain industries face unprecedented change and competitive pressures. Accordingly, the securities of these companies may be subject to high price volatility. These companies face competition from technologies and processes (being developed or to be developed in the future) which may make their products or services obsolete. 1229045-v5\SYDDMS\AUSDJ4 7
Interest Rate Risk Changes in interest rates can have a positive or negative impact on investment values and returns. The price of fixed income securities will generally rise in a falling interest rate environment and fall in a rising interest rate environment. Floating rate instruments which have their coupons adjusted on a regular basis will be less sensitive to interest rate movements. We seek to maintain more than 50% of our investments in floating rate securities. We may undertake some interest rate management strategies. This is often called hedging. Hedging is an investment made with the goal of reducing the risk of loss, but which might also reduce the potential gain, from another investment. Liquidity Risk There may be times when securities are not able to be readily sold (i.e. there is a low volume of trade with respect to that security). This risk becomes an issue if the Fund needs to sell a security and is not able to sell it for a fair price because the market is thin (or not in demand) for a particular security or an event has occurred affecting the market generally. In these circumstances, illiquid securities may trade at a substantial discount to the market. We constantly review markets generally and trading volumes for securities held in the portfolio to monitor liquidity risk. We review securities on a case by case basis and seeks to reduce the Fund's exposure to securities that are considered to be less liquid. If there is an interruption of regular trading in the market generally, or for a particular asset of the Fund, there may be delays in processing withdrawal requests. We do not guarantee the liquidity of the investments of the Fund. Sovereign Risk This is the risk that may result from changed circumstances of a particular country. The risks may be perceived or actual, relating to ratings changes, perceptions of default, or currency movements and may impact the liquidity and trading spreads of securities. Structural Risk This is the risk that structured securities such as CLOs, CDOs and RMBS (i.e Collateralised Loan Obligations, Collateralised Debt Obligations and Residential Mortgage-Backed Securities respectively) may not perform as expected. This may be due to changes in credit ratings, non performance of underlying asset pool(s) or counterparty default and may result in non payment of interest, or delay / non payment of capital. Extension Risk The risk that issuers of products the Fund invest in may elect to extend the repayment of certain securities and pay a higher interest rate to the Fund. While the issuer will pay a higher rate of interest to the Fund, the delayed repayment of capital of a security may cause a delay in the reinvestment of capital. Reinvestment Risk This is the risk that arises if the Fund receives significant amounts of cash from securities that mature or are redeemed and there is a lack of suitable securities for the Fund to invest in, within the terms of our investment model. Downgrade Risk Downgrades result when ratings agencies lower their rating on a bond for example a change by Standard & Poor s from A to BBB. Downgrades are usually accompanied by price declines as the market requires higher credit margins. 8
Company and industry event risk Event risk encompasses a variety of factors that may result in a company s securities performing poorly. These factors may include poor management, changes in management, failure to anticipate shifts in the company s markets, rising costs of raw materials, regulation and new entrants. Events that affect an industry may have an effect generally on securities issued by members of that industry (e.g. telecoms). Hybrid Securities Risk The Fund invests in hybrid securities. Hybrid securities have characteristics of both fixed interest (debt) and equity investments. They are exposed to interest rate risks as well as market risk associated with equity markets. Some hybrid securities can convert from bonds to shares, meaning the risk profile changes from a debt to equity risk profile. Hybrid securities may not be readily exchanged for cash or equivalent asset value. Regulatory Risk Regulatory risk arises when there are changes enforced by legislation. Such changes could include changes in law, changes in taxation, and changes by Government. Derivatives Risk The Fund may use derivatives to reduce risk or gain exposure to investments as we consider to be appropriate. Such use of derivatives can enhance returns (both positive and negative). The use of derivative positions to hedge the risk of physical securities will involve 'basis risk', which refers to the possibility that derivative positions may not move perfectly in line with the physical security. As a consequence, the derivative positions cannot be expected to perfectly hedge the risk of the physical security. Other potential risks associated with derivatives include the potential illiquidity of the derivative, that the Fund cannot meet payment obligations as they arise and that the counterparty to the derivative contract may not be able to meet its obligations under the contract. The Fund may invest in securities denominated in non-australian dollars. Where this occurs, the Fund will generally look to hedge the impact of currency so that the Fund is exposed to Australian dollars. Where such investments are not hedged, the overseas currency exposure may adversely affect the Australian dollar value of investments, interest and any dividends received by the Fund, realised gains and losses and any distributions to be made by the Fund. Options, futures and other derivatives may be used to manage the currency exposure (but are not used speculatively).] Key Personnel Risk We are currently dependent upon the expertise of our existing management team the performance of the Fund could be adversely affected if key members of the investment team do not continue to provide their services. Fund Risk As with all managed funds, there are risks particular to the Fund including that it could terminate, the fees and expenses could change, we could be replaced as responsible entity for the Fund or our investment professionals could change. 9
Risk reduction strategies In addition to the risk reduction strategies discussed above, we employ a number of portfolio management techniques designed to manage the portfolio risks. These include: predetermined protocols such as limits that reduce exposure to any one issuer, sector, security type and set minimum ratings for securities; maintenance of portfolio diversification across a range of issuers in accordance with the Fund s investment model and protocols noted above; and regular review of investment markets for buying and selling opportunities with the aim of maximising returns for the unit holders. Ways you can assist to reduce risk include: seeking professional advice. You should understand your personal financial situation and needs; and investing for the recommended time frame (minimum of 3 years). 10
Fees and other costs DID YOU KNOW? Small differences in both investment performance and fees and costs can have a substantial impact on your long-term returns. For example, total annual fees and costs of 2% of your Fund balance rather than 1% could reduce your final return by up to 20% over a 30 year period (for example, reduce it from $100,000 to $80,000). You should consider whether features such as superior investment performance or the provision of better member services justify higher fees and costs. You may be able to negotiate to pay lower management costs where applicable. Ask the Fund or your financial adviser. TO FIND OUT MORE If you would like to find out more, or see the impact of the fees based on your own circumstances, the Australian Securities and Investments Commission (ASIC) website (www.fido.asic.gov.au) has a managed investment fee calculator to help you check out different fee options. This document shows fees and costs that you may be charged. These fees and costs may be deducted from your money, from the returns on your investment or from the Fund assets as a whole. Taxes are set out in another section of this PDS on pages 20-21. You should read all of the information about fees and costs as it is important to understand their impact on your investment. TYPE OF FEE OR COST Amount How and When Paid Fees when your money moves in or out of the Fund 4 Establishment Fee: This is the fee to open your investment. Contribution fee: The fee on each amount contributed to your investment in the Fund. Withdrawal fee: The fee on each amount you take out of your investment. Termination fee: The fee to close your investment. Management Costs 5 Nil Nil Nil Nil Not applicable Not applicable Not applicable Not applicable 4 You may also incur a buy-sell spread when your money moves in or out of the Fund. For an explanation of the buy-sell spreads, please see "Additional explanation of fees and costs" on page 14. 11
The fees and costs for managing your investments. Management fee 0.77 % pa + Expense recovery 0.21 % pa = 0.98 % pa For a worked dollar example of the Management Costs, see 'Example of annual fees and costs' on page 15. The management fee is calculated and accrued weekly and paid to us each quarter in arrears and is based on the value of the assets of the Fund. Expense recoveries are calculated and accrued in the monthly unit price. Please refer to 'Expense recovery' on page 13 for more information. Management Costs can be negotiated. Please refer to "Differential Fees" under the heading "Additional explanation of fees and costs" on page 13 for more information. Performance fee: This is the fee charged when we satisfy a certain performance level for the Fund. 20.05% of the performance over the benchmark plus 1.5% for the relevant financial year (the benchmark of the Fund is the RBA Cash Rate). For a worked dollar example of the Management Costs (both inclusive and exclusive of performance fees), see 'Example of annual fees and costs' on pages 15-18. The performance fee is charged by us to the Fund. This is a per annum fee accrued monthly and payable out of Fund assets at the end of the financial year. For more information on the performance fee, please refer to the "Additional explanation of fees and costs" on page 13. The performance fee cannot be negotiated. Service Fees 6 Investment switching fee: The fee for changing the investment options. Nil Not applicable 5 Management costs include all direct and indirect costs for managing the Fund. The Responsible Entity may pay some master trusts and wrap account operators or custodians of investor directed portfolio services (IDPS) or IDPS-like services an annual fixed product access payment for offering the Fund on their menus (a product access payment). The product access payment is negotiated directly with the relevant IDPS operator and is based on the volume of business generated by the IDPS operator. Product access payments are not an additional fee paid by you, they are deducted from the management cost and does not reduce any returns you may receive. 6 For information on other service fees (such as adviser service fees), please refer to 'Adviser service fees' under the heading Additional explanation of fees and costs on page 14 for more information. 12
Additional explanation of fees and costs Performance fees Where the performance of the Fund in respect of a financial year exceeds the performance of the benchmark (being the RBA Cash Rate) over that financial year plus 1.5% then we are entitled to a performance fee equal to 20.05% of such excess applied to the average net asset value at the end of each month of that financial year. For example, where the performance of the Fund in respect of a financial year (say 9%) exceeds the performance of the benchmark over that financial year plus 1.5% (say the benchmark is 5% plus 1.5%), then we are entitled to a performance fee equal to 20.05% of such excess applied to the average net asset value at the end of each month of that financial year. In this example: 20.05% of (9% less (5%+1.5%)) = 20.05% of 2.5% = 0.50125% x net asset value. For a worked dollar example, please refer to the 'Example of annual fees and costs' on page 15. Expense recovery The Constitution of the Fund provides that expenses incurred by us in relation to the proper performance of our duties in respect of the Fund are payable or reimbursable out of the assets. This includes trust and manager establishment, promotion, licensing and termination costs. Current expenses are estimated to be 0.21% p.a. Actual expenses may be more or less than our estimate and we will recover these without notice to you. There is no cap on out of pocket expense recoveries. Differential fees We may individually negotiate our fees with wholesale investors (as defined in sections 761G or 761GA of the Corporations Act) and otherwise in accordance with ASIC policy. The size of the investment and other relevant factors may be taken into account. The terms of these arrangements are at our discretion. Adviser service fees There are no adviser service fee arrangements associated with this product. Any amounts that you agree to pay your adviser for financial advice are separate to the fees we charge you in respect of your investment in the Fund. Bank or government charges In addition to the fees and costs set out above, standard government fees, duties and bank charges may also apply to investments and withdrawals (including dishonour fees, conversion costs and bank cheques) and are paid by the investor. If your application cheque or direct debit is dishonoured we will charge you a dishonour fee, currently $35, together with any bank dishonour fee we incur. Transaction costs / buy-sell spread Transaction costs (such as brokerage costs, government or bank charges and the buy and sell spread for underlying funds) are the costs associated with the buying and selling of the Fund's investments. Transaction costs will be paid by the Fund. The transaction costs currently charged by the Fund are the "buy-sell spread". A buy-sell spread is an adjustment to the unit price reflecting the Responsible Entity's estimate of the transaction costs that may be incurred as a result of the purchase/sale of assets arising from the issue/withdrawal of units. A buy-sell spread is designed to ensure that investors are treated equally and are not out of pocket as a result of the costs that are incurred when other investors transact within the Fund. The buy-sell spread is reflected in the issue/withdrawal price. The buy-sell spread is not paid to us but retained in the Fund to cover these transaction costs. 13
The buy-sell spread is currently estimated to be 0.3% of the price of the unit when an investor acquires units and 0.3% of the price of the unit when an investor redeems units. For example, if you invest $500,000 in the Fund and the unit price is $1.00, all other things being equal, it would cost you $1,500 as the buy spread. If you then later withdrew $500,000 and the unit price was $1.00, it would cost $1,500 as the sell spread. In practice, money is not deducted from your application or redemption amount. Instead, the entry price is made 0.3% higher and the exit price is made 0.3% lower. These charges will not impact you unless you invest or withdraw. These charges are not paid to us, but are paid to the Fund. These charges are incorporated monthly into the entry and exit prices of units in the Fund. We have a policy in place which sets out the guidelines and relevant factors for calculating transaction costs, including the buy-sell spread. We keep records of any exercise of discretions which are outside the scope of or are inconsistent with the policy. A copy of this policy is available free on request. Financial planner commission No commissions are paid to your financial planner. We maintain an Alternate Forms of Remuneration Register. The register, which you can review by contacting us, outlines some alternative forms of remuneration that we may pay to or receive from licensees, fund managers or representatives (if any is paid or received at all in relation to the Fund). Taxation The fees in the table on pages 11-12 take into consideration the net effect of GST which incorporates the benefits of RITC. For more information on tax, refer to page 20 of this PDS. Change in fees and costs Fees and costs may change within limits allowed by the Constitution and Spectrum will notify unitholders of any increases in fees and costs at least 30 days before we implement them. Reasons for changes may include changing economic conditions or changes in regulation. If we ever sought to charge fees above the maximums permitted in the Constitution, we would seek unitholder consent. 14
Example of annual fees and costs This table gives an example of how the fees and costs for the Fund can affect your investment over a one year period. You should use this table to compare this product with other managed investment products. EXAMPLE 1 - where no performance fee is payable BALANCE OF $500,000 INCLUDING A CONTRIBUTION OF $5,000 7 AT THE BEGINNING OF THE YEAR. Contribution fees Nil For every additional $5,000 you put in, you will be charged $0 8. Plus Management And for every $500,000 you have in the Fund you Costs 9 0.98% 10 will be charged $4,900 each year. Plus Performance fee 11 20.05% of the performance over the benchmark plus 1.5% for the relevant financial year (the benchmark of the Fund is the RBA Cash Rate). If the requirements for a performance fee to be paid are not met no performance fee will paid. If this occurs you will be charged $0. Equals Cost of Fund If you invest $5,000 at the beginning of the year and your balance is $500,000 over the course of the year, you will be charged $4,900 12 What it costs you will depend on the fees you negotiate with the Fund or financial adviser. 7 The additional contribution amount of $5,000 in this example is prescribed by the Corporations Regulations. Please note the minimum additional investment in the Fund is actually $10,000. 8 Assuming a unit price of $1.00, you will incur a $150 buy spread which is not paid to us, but retained by the Fund to offset against costs associated with purchasing securities. See 'Transaction cost/buy-sell spread' in the 'Additional explanation of fees and costs' on page 13 for further detail. 9 See 'Management Costs' in the table on pages 11-12 for a more detailed description of how the Management Costs are calculated. 10 Management costs include all direct and indirect costs for managing the Fund. 11 See 'Performance fee' in the table on page 12 for a more detailed description of how Performance fees are calculated. 12 This example is calculated on the basis that your balance remains constant at $500,000 throughout the year (i.e. no further contributions are made and the Fund's unit price does not change) and that a performance fee is not payable. The example does not include any commissions, adviser service fees or financial planner commissions that you may independently negotiate and does not take into account any bank or government charges, which may reduce the value of your investment further. The example does not include the effect of any abnormal expenses which may be incurred by the Fund and assumes that fees are not individually negotiated with us. Numbers may not add exactly due to rounding. 15
EXAMPLE 2 - where a performance fee is payable BALANCE OF $500,000 INCLUDING A CONTRIBUTION OF $5,000 13 AT THE BEGINNING OF THE YEAR. Contribution fees Nil For every additional $5,000 you put in, you will be charged $0 14. Plus Management Costs 15 0.98% 16 And for every $500,000 you have in the Fund you will be charged $4,900 each year. Plus Performance fee 17 20.05% of the performance over the benchmark plus 1.5% for the relevant financial year (the benchmark of the Fund is the RBA Cash Rate). And if the Fund meets the criteria to be paid a performance fee, you will be charged $2,506.25, based on the following example: For example, if the performance of the Fund for the year is 9% and the benchmark plus 1.5% is 6.5% then you will be charged a performance fee equal to 20.05% of the excess applied to the average net asset value at the end of each month of that financial year. In this example: 20.05% x 2.5% x $500,000 = $2,506.25. Equals Cost of Fund If you invest $500,000 at the beginning of the year and your balance is $500,000 over the course of the year, you will be charged $7,406.25 18 What it costs you will depend on the fees you negotiate with the Fund or financial adviser. 13 The additional contribution amount of $5,000 in this example is prescribed by the Corporations Regulations. Please note the minimum additional investment in the Fund is actually $10,000. 14 Assuming a unit price of $1.00, you will incur a $150 buy spread which is not paid to us, but retained by the Fund to offset against costs associated with purchasing securities. See 'Transaction cost/buy-sell spread' in the 'Additional explanation of fees and costs' on page 13 for further detail. 15 See 'Management Costs' in the table on pages 11-12 for a more detailed description of how the Management Costs are calculated. 16 Management costs include all direct and indirect costs for managing the Fund. 17 See 'Performance fee' in the table on page 12 for a more detailed description of how Performance fees are calculated. 18 This example is calculated on the basis that your balance remains constant at $500,000 throughout the year (i.e. no further contributions are made and the Fund's unit price does not change) and that the Fund meets all the requirements for payment of a performance fee. The fact that this assumption is made is in no way a promise that the Fund (or the benchmark) will achieve the assumed performance. The example does not include any commissions, adviser service fees or financial planner commissions that you may independently negotiate and does not take into account any bank or government charges, which may reduce the value of your investment further. The example does not include the effect of any abnormal expenses which may be incurred by the Fund and assumes that fees are not individually negotiated with us. Number may not add exactly due to rounding. 16
What about Fund performance and size? The latest performance, portfolio profile and size of the Fund can be obtained for free on request by emailing info@spectruminvest.com.au Remember, when reviewing any performance information, performance of the Fund may vary from year to year as market conditions fluctuate. Potential investors should be aware that past performance is not a reliable guide to future performance. Neither the Responsible Entity, nor any of its related parties or any of their respective employees, agents or officers guarantee the capital, any rate of return on income or capital or investment performance of the Fund. If you are interested in: up to date Fund performance; the current size of the Fund; or our past fees, then ask also your adviser. They will give you paper copies of the information free of charge. You can also visit our website - our details are at the end of this PDS. 17
How do I start? Simply complete a current application form and send it to us. We also need your cheque or confirmation of your electronic funds transfer. If you are investing directly with us, generally you need a minimum investment of $500,000. This amount may be less if you are investing through a master trust or wrap account, in which case you should refer to the operator s guidelines. We will confirm with you when we accept your application. To invest more, simply use another application form, or just write to or fax us (don t forget your investor number). Your cheque for additional investments generally needs to be at least $10,000. Further investment is made on the basis of the then current PDS. We process applications in accordance with the Constitution on the first business day of each month. However, at our absolute discretion, we may process applications more frequently than once a month. Application prices and redemption prices are calculated in accordance with our Constitution. Application money must be received by us before 2pm (Sydney time) at least two business days before the start of the month. Applications received after the monthly cut-off date will not be invested until the next processing date, nor will they accrue any return or interest payment prior to the monies being invested. Any interest earned will be credited to the benefit of the Fund. If you're investing through a master trust or wrap account, don't complete our application forms. Instead, complete the forms the master trust or wrap account operator requires and if you have enquiries or complaints, that operator can help you. Investors investing via a master trust or wrap account should also take into account the fees and charges of the operator of that service. In addition to reading this PDS, investor should read the guide which explains the master trust or wrap account. Cooling Off? It is expected that direct investors in the Fund will be wholesale investors (as defined in section 761G or 761GA of the Corporations Act). Wholesale investors do not have cooling off rights under the Corporations Act in relation to the Fund. To the extent the Fund accepts investments directly from retail investors then such retail investors will have cooling off rights. Retail investors have access to a cooling off period. If a retail investor decides that they don t want the units we have issued them in the Fund, we must repay their money. We are allowed to (and generally do) make adjustments for market movements up or down, as well as any tax and reasonable transaction and administration costs (for example, if you invest $500,000 and the value of the units falls by 1% between the time you invest and the time we receive notification that you wish to withdraw your investment, we will charge you $5,000, being the amount of the reduced unit value. If a retail investor changes their mind, that person has 14 days to tell us, starting on the earlier of: when we send the retail investor confirmation that they are invested; or the end of the 5th day after the day on which we issue the units to you, the retail investor. Units are issued on the last business day of each month. This right terminates immediately if you, as a retail investor, exercise a right or power under the terms of the product, such as selling part of your investment or voting on any units held by you. For any subsequent investments made under a distribution reinvestment plan or regular savings plan, those cooling off rights do not apply. Investors investing in the Fund via a master trust or wrap account should speak to the operator of that service to determine whether cooling off rights apply. 18
Withdrawing your investment In the case of direct investors, simply contact us and tell us (in writing) how much you need to withdraw. We process withdrawal requests on the first business day of each month. Withdrawal requests must be received by us 10 business days before the first business day of the month. Withdrawal requests received after the cut off date will be redeemed at the unit price struck on the first business day of the next month. However, at our absolute discretion, we may process withdrawal requests more frequently than once a month, but we will have regard to investors' interests as a whole when doing this and ensure withdrawal procedures are fair to all members. In the case of indirect investors, once we have processed and paid a request to withdraw units from the Fund, the master trust or wrap operator will need to receive and process our payment before they can pay your withdrawal request. Indirect investors will receive reports from your master trust or wrap operator. Enquiries should be directed to your master trust or wrap operator. We calculate unit prices in three steps. First, we calculate the net asset value of the Fund and make an adjustment for the buy-sell spread (up for the entry price, to take account of the costs of buying investments or down for the exit price to take account of the costs of realising investments to pay to you - please see page 13). Then we divide this result by the number of units we have on issue. These steps gives us a per unit price. We can delay withdrawal of your money in some circumstances: if there are not enough investments which we can easily turn into cash (the law dictates this) - we don t anticipate the Fund becoming illiquid but if it did, the law says we can (if we wish) make some money available, and requires us to allocate it on a pro rata basis amongst those wanting to exit; something outside our control impacts on our ability to properly or fairly calculate the unit price (for example, if the investments are subject to restrictions or if there is material market uncertainty like a stock market crash) then we can delay payment for so long as this goes on; or when we receive a quantity of withdrawal requests representing more than 20% of the value of the investments of the Fund, then we can stagger withdrawal payments. We can give you back your invested money We can also withdraw some or all of your units without asking you if: you are a direct investor (ie you are not investing through a master trust or wrap account) and your account falls below $100,000; you breach your obligations to us (for example, you provide misleading information in your application form); or we need to pay any amount you owe us or we owe to someone for you (for example, tax office). Distributions Distributions are normally paid by direct transfer to your nominated account if you have provided us with your account details, or otherwise by cheque within 3 weeks after at the end of June, September, December and March each year. Income distributions (if any) may be reinvested. Use the application form to tell us, or contact us anytime, if you would to like to have you distributions reinvested. Keep this PDS (and any supplementary documents updating or amending this PDS) handy for ongoing investing ~ if you want a copy at any time, ask us and we ll send it free. 19
Keeping you informed We will: confirm transactions you make (including confirmation of the acquisition of units, additional contributions (other than through a distribution reinvestment plan or regular savings plan) and any variation to the terms of the product and redemption of units); report to you quarterly on money you invest, your opening and closing balances, a summary of all transactions and any return on investments during the reporting period. This report will also include distribution details for the quarter; after June each year send you a report to help you with your tax return; post the annual accounts of the fund on our website. Alternatively, you may request a copy and we will send you a copy, free of charge; and notify you of any material changes to this PDS and any other significant event. The Fund may become a disclosing entity and if this occurs, will be subject to regular reporting and disclosure obligations under the Corporations Act. We will follow ASIC's good practice guidance in satisfying our continuous disclosure obligations via website notices available at: www.spectruminvest.com.au On request, we will provide you free of charge with copies of the most recent annual financial report for the Fund lodged with ASIC, any half yearly financial report lodged with ASIC after lodgement of the annual report and any continuous disclosure notices posted on our website. You can also call Spectrum on (02) 9299 2288 to request copies of the above documents. If you are investing through an IDPS, speak to your IDPS operator. We would usually use email to contact you but you can use the application form to tell us if you don't want us to. There s plenty of information about the Fund on our website, including recent performance history and the current investments of the Fund, and you can always call us during Sydney business hours if you need more information. If you are investing through a master trust or wrap account then reports on your investment will come from the operator of that service, not from us. What about tax? In all likelihood you will need to pay tax in relation to your investment in this Fund - generally income tax, but you might be able to claim some tax credits or have the benefits of some concessions. Your tax liability ultimately depends on your circumstances, for example, whether you are an Australian resident. So it s important that you seek professional advice before you invest or deal with your investment. We will send you all the information you need each year to complete your tax return. Will I be liable to pay tax on money I receive from the Fund? Probably yes, whether the money is actually paid to you or reinvested. The tax impact for you depends on what makes up the distributions. Distributions could comprise: income (like dividends and interest); or tax credits (such as franking credits attached to dividend income). Do I need to give you my tax file number (TFN) or Australian business number (ABN)? It's up to you, but we recommend it strongly. Use the application form. 20