Pengana Absolute Return Asia Pacific Fund ARSN 145 116 810 APIR PCL0004AU Product Disclosure Statement Dated 31 March 2016 Pengana Capital Limited ABN 30 103 800 568 AFSL 226 566 The Responsible Entity, Issuer and Investment Manager of the Pengana Absolute Return Asia Pacific Fund is PENGANA CAPITAL LIMITED 1
DISCLAIMER None of Pengana Capital Limited ABN 30 103 800 568 ("Pengana") or any company in the Pengana Group guarantees or makes any representations as to the future performance of the Pengana Absolute Return Asia Pacific Fund ("Fund"), the maintenance or repayment of capital, income tax and other taxation consequences of investing in the Fund or any specific rate of return. An investment in the Fund is subject to investment risk, which may result in the loss of capital invested and failure to receive income. Operators and other Investors should assess whether the Fund is suitable for their investment objectives and whether they should talk to their financial adviser before deciding to invest in the Fund. IMPORTANT INFORMATION This PDS contains important information regarding the Fund. The Fund is a managed investment scheme, registered in Australia (ARSN 145 116 810). Pengana is the responsible entity and investment manager of the Fund. It is also the issuer of this PDS and of units in the Fund. This PDS should be read carefully before making a decision to invest in the Fund. When an electronic copy of this PDS is printed, all pages of this PDS must be printed. A printed version can be obtained free of charge by contacting Pengana at the contact details provided in the Fund Directory on page 41. Further information about the Fund or investing in the Fund, including a copy of the Constitution and information which has previously been made generally available to the public or might reasonably influence the decision whether to acquire this product, can also be obtained by contacting Pengana. The information contained in this PDS is general advice only. It does not take into account individual objectives, financial situation or needs. Because of that, Investors should consider the appropriateness of this product having regard to their objectives, financial situation and needs. Pengana recommends Investors seek advice from their financial adviser before investing. The offer made in this PDS relates to a single class of units in the Fund and is available only to persons receiving this PDS in Australia.
CONTENTS SUMMARY OF FEATURES OF THE PENGANA ABSOLUTE RETURN ASIA PACIFIC FUND... - 1 - SUMMARY OF PENGANA CAPITAL... - 2 - SUMMARY OF BENCHMARKS AND DISCLOSURE PRINCIPLES... - 3 - DEFINITIONS... - 13 - ABOUT THIS FUND... - 16 - WHO MANAGES THIS FUND?... - 16 - WHO CAN INVEST IN THE FUND THROUGH THIS PDS?... - 16 - WHAT IS THE FUND'S INVESTMENT STRATEGY?... - 17 - HOW ARE UNITS IN THE FUND VALUED?... - 19 - WHAT ARE THE BENEFITS?... - 19 - WHAT ARE THE RISKS?... - 20 - FEES AND OTHER COSTS... - 23 - ADDITIONAL EXPLANATION OF FEES AND COSTS... - 25 - HOW TO INVEST AND ACCESS INVESTMENTS... - 29 - TAXATION... - 30 - UNDERLYING FUND AND MASTER MUND... - 32 - OTHER MATTERS... - 34 - FUND DIRECTORY... - 41 -
FUND FEATURES SUMMARY OF FEATURES OF THE PENGANA ABSOLUTE RETURN ASIA PACIFIC FUND Features Details Page Reference Fund Investments Principally listed securities in Asian (including Japan, Australia and New Zealand) companies which are subject to corporate events 17-19 Income Distribution Annually within 60 days of 30 June each year 30 Entry Fee Nil 24 Exit Fee Nil 24 Management Fee 1 1.50% per annum of the net asset value of the Underlying Fund. This management fee is charged in respect of the Fund s investment in the Underlying Fund. This management fee is paid directly from the Underlying Fund and is reflected in its share price. 24-28 Performance Fee 1 20.5% (including GST net of reduced input tax credits) of any percentage increase in the Net Asset Value of the Class which is greater than the RBA Cash Rate converted to a daily rate and adjusted for applications, redemptions and distributions to Investors. The performance fee is calculated after the Class pro-rata share of the Underlying Fund s management fee has been accrued into the Net Asset Value of the Class. 24-28 Buy/Sell Spread 0.25%/0.25% 26 Note: 1. Please refer to section on 'Additional Explanation of Fees and Costs' for further information regarding the fees and costs which apply to this Fund. - 1 -
SUMMARY OF PENGANA CAPITAL Pengana is an independent funds management group founded in 2003 and headquartered in Sydney, with offices in Melbourne and Singapore. National Australia Bank is a minority strategic investor with the majority of the remaining shares owned by our directors and staff. Pengana holds an Australian Financial Services Licence (AFSL) issued by the Australian Securities and Investments Commission (ASIC). At Pengana, we offer investment management expertise across a range of investment strategies and a commitment on ensuring we manage our clients money within a focused and disciplined investment framework. Our investment philosophy also includes attention to risk management and on achieving risk adjusted returns, not just returns. Our small and nimble structure also allows for efficient and timely investment decision making. We believe the optimal active funds management environment exists when the interests of expert fund managers are aligned with the interests of investors. Our fund managers all hold a significant ownership stake in their respective business units and have their own money invested in their funds. This strong alignment of interest extends to our management team who are all owners of the business and invest their own money in one or more of the Pengana funds. - 2 -
SUMMARY OF BENCHMARKS AND DISCLOSURE PRINCIPLES The following table contains a summary of the information required under the ASIC benchmarks and disclosure principles for the Fund. The Fund implements its investment strategy by investing in a class of Australian dollar denominated shares issued by the Pengana Asia Special Events (Offshore) Fund ("Underlying Fund"), which in turn implements its investment strategy by investing in a class of the Australian dollar denominated shares issued by the Pengana Asia Special Events Master Fund ("Master Fund"). The investment structure of the Fund, Underlying Fund and Master Fund (collectively, the "Funds") was structured in this manner to provide Australian and overseas investors efficient exposure to the Funds' investment strategy. The Underlying Fund and Master Fund are significant underlying funds of the Fund. Therefore, this table also contains a summary of the information required under the ASIC benchmarks and disclosure principles for the Underlying Fund and Master Fund. Feature Description Benchmarks: Valuation of Assets The assets of the Fund, Underlying Fund and Master Fund are valued by an independent administrator, thereby satisfying ASIC s benchmark requirements. Periodic Reporting Pengana provides annual, semi-annual and monthly periodic reports on key information about the Fund, Underlying Fund and Master Fund to Investors, thereby satisfying ASIC s benchmark requirements. These reports are available on Pengana's website. Disclosure principles: Investment Strategy The investment objective and investment strategy are the same for the Fund, the Australian dollar denominated participating shares of the Underlying Fund and the Australian dollar denominated participating shares of the Master Fund. The trading and risk management activities described in this PDS occur in the Master Fund. The trading portfolio of the Master Fund is referred to as the "Underlying Portfolio" in this PDS. Investment objective The investment objective of the Fund is to generate a net annualised return greater than 5% above the RBA s Cash Rate Target over a 3 to 5 year period with low volatility and low correlation to Asian security markets, by principally obtaining exposure to listed Asian companies that are subject to corporate events or from trading related securities that are believed to be mispriced by the market. The Funds aim to deliver consistent returns that have a low correlation to the Asian security markets. Investment strategy The Funds employ an event driven investment strategy, which involves investing in opportunities created by significant transactional events such as mergers and acquisitions, capital management initiatives, earnings surprises, index changes, industry restructurings, directors' trades, stub trades and capital structure arbitrage. It is believed that significant corporate events can often create inefficiency in a company s share price which the Funds seek to exploit. The Investment Manager's absolute return focus provides the Investment Manager with an opportunity to capture returns by taking calculated exposure to certain risks that the - 3 -
Investment Manager is prepared to assume due to its experience, research and expected returns for taking on that specific risk. The Investment Manager also seeks to hedge away risks, such as broad market risks, which the Investment Manager believes do not provide adequate returns for the risk taken. The Investment Manager strategically allocates the Underlying Portfolio's capital to authorised investment strategies and regions on a deal specific basis. The Investment Manager analyses the risk return ratio within the existing portfolio and amongst the available deal universe. Investment decisions are made in order to optimise a risk versus return trade off. The Funds invest primarily in securities of an equity or hybrid equity nature listed, or with the intention of being listed, on approved Asian (including Japan, Australia and New Zealand) security markets (and other markets where related securities may be listed) and in securities which are listed on approved markets outside of Asia where more than 70% (by assets or earnings) of the underlying business originates from an Asian country. The Funds may also invest in cash, Cash Equivalents, Derivatives and currency contracts. Leverage may be employed by the Underlying Portfolio to enhance returns. The amount of leverage will change over time depending on the investment opportunities within the investment strategy of the Master Fund. The Underlying Portfolio may also employ derivatives and short selling to take opportunities to increase returns (e.g. to build a position or to gain exposure to changes in value between two related securities) and for risk management purposes (i.e. to hedge the Underlying Portfolio's investments). Investment guidelines and risk management The Investment Manager aims to invest the Funds within the following guidelines: Individual Long holdings limited to +5% of the net asset value of the Underlying Portfolio. This investment guideline may be increased up to +20% of the net asset value of the Underlying Portfolio if the investment is involved in a merger or acquisition and meets certain criteria; Individual Short positions limited to -5% of the net asset value of the Underlying Portfolio. This investment guideline may be increased up to -20% of the net asset value of the Underlying Portfolio if the investment is involved in a merger or acquisition and meets certain criteria; Absolute value of any security holding may not exceed 10% of the market capitalisation of that security; Investments outside the major markets of Australia and Japan are limited to 35% of the net asset value of the Underlying Portfolio and some developing countries are limited to 10% of the net asset value of the Underlying Portfolio; Maximum Net Long Exposure limited to +125% of the net asset value of the Underlying Portfolio; Maximum Net Short Exposure limited to -25% of the net asset value of the Underlying Portfolio; Maximum Gross Market Exposure limited to +250% of the net asset value of the Underlying Portfolio; and Pengana limits investments with low liquidity. Strong risk management practices are an integral part of the Funds' investment process and objectives. The Investment Manager employs techniques to measure portfolio risk and ensure the Funds invest within the guidelines listed above. Adherence to risk limits is monitored daily by an independent risk management team. These risk and investment guidelines should be viewed as objectives only and not absolute - 4 -
limits. Risks associated with the investment strategy A summary of the risks associated with the Funds' investment strategy is detailed below. Please refer to the 'What are the risks?' section on page 20 for a full description of the risks associated with the Funds. International investing risk The Underlying Portfolio primarily comprises of investments in Asian securities listed on approved exchanges. Risks of international investing may include currency fluctuations, foreign tax, different market and settlement practices, adverse political and economic developments, limited liquidity, foreign exchange controls and investment restrictions. Regulatory intervention can also materially affect the Funds' ability to effect their investment strategy and adversely affect the Funds' performance. Leverage risk - The Underlying Portfolio may employ leverage with Short sales, Derivatives or borrowed funds. The use of leverage may magnify the potential gains and losses achieved by the Funds. Losses from the use of leverage can be substantial and exceed the original amount invested. Currency risk - The functional currency of the Underlying Portfolio is United States Dollars and investments can occur in other countries. If the currencies of those countries change in value relative to the United States dollar, the value of these investments may change and may negatively affect the value of the Underlying Portfolio's investments. Deal Risk A number of factors may cause the likelihood of a deal (or corporate transaction) completing to deteriorate or may lead to the terms of a deal worsening. The Investment Manager seeks to mitigate such risk through thorough analysis of opportunities under different scenarios. Changes to the investment strategy If Pengana makes any material changes to the Funds' investment strategy, Direct Investors in the Fund will be given notice of these changes where required by the Corporations Act. Fund's investment in the Underlying Fund The Underlying Fund and Master Fund were selected for investment by the Fund to provide an efficient exposure to the Fund's desired investment strategy. Investment Manager Pengana acts as the investment manager of the Fund, Underlying Fund and Master Fund. The following key investment personnel are involved with implementing the investment strategy of the Funds: Antonio Meroni Fund Manager Antonio has over 25 years experience in financial markets and as an investment manager for similar funds. He has a degree in Business from KV Zurich Business School and is a Chartered Financial Analyst. Vikas Kumra Fund Manager Vikas has over 10 years experience as an analyst and fund manager in Asian equities. He holds a First Class Honours degree in Accountancy from Nanyang Technological University in Singapore. These investment personnel spend as much time as required implementing the investment strategy of the Funds. The Underlying Fund and the Master Fund may terminate Pengana's appointment as investment manager if Pengana has acted with fraud, wilful misconduct, dishonesty or negligence, is liquidated or the core members of Pengana's investment management team are no longer involved in the investment management of the assets of the Underlying Fund and - 5 -
Master Fund. Fund Structure The Fund is an unlisted registered managed investment scheme domiciled in Australia. The Fund accepts money from investors and implements its investment strategy by investing in the Australian dollar denominated shares issued by the Underlying Fund which in turn implements its investment strategy by investing in a class of Australian dollar denominated shares issued by the Master Fund. The Master Fund implements the investment strategy and risk management activities described in this PDS. The Underlying Fund and the Master Fund are both exempted limited liability companies domiciled in the Cayman Islands and registered with the Cayman Islands Monetary Authority as regulated mutual funds. Please refer to the diagram below for an outline of the investment structure for the Funds. Key service providers of the Fund BNP Paribas ( BNP ) is the administrator and custodian of the Fund. BNP has been outsourced the custody and administration roles for the Fund, which include the provision of accounting, unit pricing, fund administration, custodial and registry services. Please refer to the 'Administration and Custody Services for the Fund' sub-section on page 40 for further information. PricewaterhouseCoopers is the independent auditor of the Fund and has been engaged as the auditor of the Fund's compliance plan and financial reports. Pengana regularly monitors the performance of the Fund's key service providers against the service levels documented in its service agreements with each key service provider. Key service providers of the Underlying Fund and Master Fund Pengana Capital Limited is the investment manager of the Underlying Fund and Master Fund. Please refer to the 'Investment Manager' section above for further information. Citco Fund Services (Cayman Islands) Limited ("Citco"), a specialist global funds administrator, is the administrator of the Underlying Fund and Master Fund. Citco provides certain administrative, accounting, registrar and transfer agency services to the Underlying Fund and Master Fund. PricewaterhouseCoopers is the auditor of the Underlying Fund and Master Fund. Deutsche Bank AG, acting through its London Branch is the prime broker and custodian of the Master Fund. The services provided by the Prime Broker include the provision of custody, - 6 -
settlement, financing and reporting services to the Master Fund. All key service providers utilised by the Underlying Fund and Master Fund have been recommended to these funds by Pengana. Pengana also assists the Underlying Fund and Master Fund with the ongoing monitoring of these key service providers against the service levels documented in their service agreements. Aggregate fees and expenses for the Underlying Fund and the Master Fund The following aggregate fees and expenses are payable in respect of the Fund's investment in the Underlying Fund (including any fees and expenses payable in respect of the Underlying Fund's corresponding investment in the Master Fund): Management fee equal to 1.50% p.a. of the net asset value of the Underlying Fund, which is paid directly from the Underlying Fund and reflected in its share price. The Fund will bear its pro-rata share of this management fee based on its investment in the Underlying Fund. The Underlying Fund and Master Fund will incur expenses incidental to their respective operations and business. As at the date of this PDS, Pengana has determined to pay for certain Underlying Fund and Master Fund expenses if these expenses exceed a predetermined limit. Pengana may cease to pay these expenses in the future. The aggregate estimated amount of the expenses paid by the Underlying Fund and Master Fund is not expected to exceed 0.3% p.a. of the net asset value of the Underlying Fund as at the date of this PDS. The Fund will bear its pro-rata share of these expenses based on its investment in the Underlying Fund. Please refer to the 'Fees and Other Costs' section on page 23 for further information on these fees and expenses. Risks associated with the investment structure of the Funds A summary of the risks associated with the Funds' investment structure is detailed below. Please refer to the 'What are the risks?' section on page 20 for a full description of the risks associated with the Funds. Custody risk Since some of the Underlying Portfolio's investments may be domiciled overseas, the Prime Broker may hold these investments in their local jurisdiction. Assets held in their local jurisdiction may be registered in the name of a custodian, due to the nature of law or market practice in the relevant jurisdiction, if it is in the best interests of the Master Fund or not feasible to do otherwise. These assets and any cash held by that custodian will not be segregated from the custodian s own assets and may not be well protected. Any cash held by the Custodian or the Prime Broker will also not be segregated from the Custodian's or the Prime Broker's own money. Similarly any collateral transferred to the Prime Broker as security for transactions, will not be segregated from the Prime Broker s own assets and may be available to third party creditors of the Prime Broker in the event of the insolvency of the Prime Broker. Counterparty risk - There is a risk of loss caused by a counterparty to the Funds or issuer defaulting on their financial obligations, failing to perform their contractual obligations or becoming insolvent. The Fund's counterparties include BNP and the Underlying Fund. The Underlying Fund's and Master Fund's counterparties include Deutsche Bank AG, Citco and counterparties to derivative contracts. Currency risk - Since the functional currency of the Fund is Australian dollars and the functional currency of the Underlying Fund and Underlying Portfolio is United States Dollars, changes in value of the Australian dollar to the United States dollar may negatively affect the value of the Fund. The Master Fund will hedge a proportion of the net asset value of its Australian dollar denominated shares against the United States Dollar to reduce the exposure - 7 -
to foreign exchange fluctuations between the Australian dollar and the United States Dollar. Additionally, any hedging of foreign exchange exposures undertaken by the Master Fund may not provide complete protection from adverse currency movements or a counterparty to such hedging transactions may default on their obligations to the Master Fund. Fund risk - There is the risk that the Fund, Underlying Fund or Master Fund could terminate or the fees and expenses payable by these funds could change. The Underlying Fund and Master Fund are also not subject to the same regulatory requirements as the Fund. Class risk - While there are separate classes of shares issued by the Underlying Fund and Master Fund (e.g. United States Dollar and Australian dollar denominated share classes), all the assets of each fund may be available to meet all the liabilities of its share classes. Therefore, the investors in the Underlying Fund (including the Fund) to some extent bear the risk of losses made by other investors in different share classes in the Underlying Fund. Valuation, Location and Custody of Assets Fund The assets and liabilities of the Fund are generally valued on each Business Day at market value by BNP in accordance with BNP's valuation policy (which has been adopted by Pengana for the Fund) and the unit pricing policy of the Fund. Generally, the Net Asset Value of the Fund or a Class is determined on each Business Day based on the market value of the Fund's or the Class' (as applicable) assets and liabilities as at the relevant Business Day. For further information on the Fund's unit pricing policy, please refer to the How are units in the Fund valued sub-section on page 19. The Fund primarily invests its assets in a class of Australian dollar denominated shares issued by the Underlying Fund and may hold some cash or Cash Equivalents for working capital purposes. The assets of the Fund are held by a third party custodian on behalf of Pengana. Pengana has appointed BNP as the custodian of the Fund in respect of all the Fund's assets. Master Fund and Underlying Fund The assets and liabilities of the Underlying Portfolio that is attributable to the Fund's investment in the Underlying Fund and the Underlying Fund's investments in the Master Fund are generally valued each Business Day at market value by Citco in accordance with the valuation policies and procedures adopted by the Master Fund, which are set out in the Master Fund's offer document. Generally, the net asset value of the Underlying Portfolio that is attributable to the Fund's investment in the Underlying Fund and the Underlying Fund's investments in the Master Fund is determined each Business Day based on the market value of the Underlying Portfolio's assets and liabilities at the close of business in the last relevant market to close on the relevant business day for the Master Fund. The net asset value of a class of the Master Fund is determined each Business Day based on the market value of the assets and liabilities attributable to the class. The asset types, allocation and valuation methodology for assets the Underlying Portfolio may invest in are detailed in the table below: Asset type Allocation range Valuation Australian listed equities 0-50% On market Australian unlisted equities 0-50% Valued by Custodian or third party pricing provider Australian Other (Convertible Securities) 0-50% Valued by Custodian or third party pricing provider - 8 -
International listed equities 0-250% On market International unlisted equities 0-250% Valued by Custodian or third party pricing provider International Other (Convertible Securities) 0-250% Valued by Custodian or third party pricing provider Exchange-traded derivatives 0-250% On market Over-the-counter derivatives 0-100% Prices obtained from relevant clearer or broker Currency contracts 0-250% Prices obtained from relevant clearer or broker Cash and Cash Equivalents 0% 1-100% As held by the Master Fund's custodian The Underlying Portfolio invests primarily in securities listed on approved Asian security markets (including Japan, Australia and New Zealand) but may hold securities listed outside of Asia if more than 70% of the underlying business originates from an Asian country. Investments outside the major markets of Australia and Japan are limited to 35% of the net asset value of the Underlying Portfolio and some developing countries are limited to 10% of the net asset value of the Underlying Portfolio. The Underlying Portfolio has material assets (greater than 10% of the Underlying Portfolio's net asset value) in Australia, Hong Kong, Singapore, Japan, Thailand and United States. However the Underlying Portfolio may hold material assets in any market around the world, including emerging markets. The assets of the Underlying Portfolio are held by third party custodians. The Master Fund has appointed Deutsche Bank AG, acting through its London Branch, as the custodian of the Master Fund in respect of all the Master Fund's assets except those assets held by the cash custodian from time to time. The Master Fund also has a bank account with Westpac Banking Corporation, which is used to hold excess cash to minimise Counterparty risk. The valuation policies and procedures of the Underlying Fund are the same as the valuation policies and procedures of the Master Fund described above. However, the Underlying Fund substantially invests in unlisted shares in the Master Fund and these shares are valued at their redemption price offered by the Master Fund, which is determined with reference to the market value of the Underlying Portfolio's assets and liabilities as set out above. The Underlying Fund may invest in international unlisted equities (asset allocation: 0-250%) or cash and Cash Equivalents (asset allocation: 0-100%). The Underlying Fund has material assets in the Cayman Islands. The assets of the Underlying Fund, which include shares issued by the Master Fund, Cash Equivalents and cash, are directly held by the Underlying Fund. Liquidity Master Fund The Master Fund primarily invests in securities listed on major global securities exchanges. Therefore, under normal market conditions, the Master Fund reasonably expects to be able to realise at least 80% of the Underlying Portfolio's assets at market value within 10 Business days. As such, the Underlying Portfolio is considered liquid. 1 Please note that as the Master Fund can borrow the cash balances of the Underlying Portfolio can be negative - 9 -
Underlying Fund The Underlying Fund's investments in the Master Fund that is attributable to the Fund's investment in the Underlying Fund may generally be redeemed on each Business Day under normal market conditions. In the event the Underlying Fund cannot realise its investment in the Master Fund due to the Master Fund suspending withdrawals or the calculation of its net asset value, the Underlying Fund may also suspend withdrawals. Fund The Fund may generally withdraw from the Underlying Fund in line with the withdrawal time lines for the Fund provided in this PDS. However, the Fund s liquidity is dependent on the Underlying Fund s and Master Fund s liquidity. If the Underlying Fund or Master Fund do not have sufficient liquidity to immediately meet redemption requirements (e.g. due to adverse market conditions), then redemptions may be temporarily suspended. In the event that the Fund is no longer liquid, withdrawals from the Fund will only be possible under a withdrawal offer made in accordance with the Corporations Act. In the event the Fund cannot realise its investment in the Underlying Fund due to the Underlying Fund or Master Fund suspending withdrawals or the calculation of their net asset value, the Fund may also suspend withdrawals. Leverage Leverage may be employed by the Underlying Portfolio to enhance returns. The amount of leverage will change over time depending on the investment opportunities within each of the investment strategies. The Underlying Portfolio's maximum Gross Market Exposure is +250% of the net asset value of the Underlying Portfolio. Leverage is acquired by the Underlying Portfolio through the use of derivatives, short selling and a leverage facility with the Prime Broker. In order to secure the obligations to the Prime Broker, the Master Fund is required to provide collateral and charge the Underlying Portfolio's assets held in custody by the Prime Broker in favour of the Prime Broker. Any collateral held by the Prime Broker will not be segregated from its own assets. This lack of segregation for assets held by the Prime Broker and the Prime Broker s right to appropriate for its own account or deal with the Underlying Portfolio's assets are additional risks for the Underlying Portfolio and the Funds. Please refer to the Prime Broker and Custodian Credit Risk' sub-section on page 21 for further details on these risks. The maximum allowed level of leverage employed by the Underlying Portfolio is 250% of the Underlying Portfolio s net asset value so, for every $1 of the Underlying Portfolio's net asset value, the Underlying Portfolio is able to be leveraged a further $1.50. As a worked example, if $1,000,000 of the Underlying Portfolio's cash is utilised to purchase $1,000,000 worth of investments, the Underlying Portfolio is not using leverage. Any increases or decreases in the value of these investments represent the exact amount of the gain or loss on the money invested. If the maximum leverage is employed, an additional $1,500,000 of gross exposure would be created via the use of a combination of derivatives, short selling and borrowing. The additional leverage of $1,500,000 would be invested with $1,000,000 of the Underlying Portfolio's cash to create $2,500,000 worth of investment exposure. The Underlying Portfolio is now using leverage and the Underlying Portfolio has a gross value of $2,500,000. If these investments increase in value by 10%, the gross value would be $2,750,000. The gain of $250,000 represents a net return of 25.00% on the $1,000,000 invested. Conversely, if the value of the assets decreases by 10%, the gross value would be $2,250,000. This loss of $250,000 represents a 25.00% net loss on the $1,000,000 invested. As demonstrated, the - 10 -
use of leverage can increase the size of any potential gains or losses for the Underlying Portfolio. Leverage is not employed by the Fund or the Underlying Fund. Derivatives The Underlying Portfolio may employ derivatives to take opportunities to increase returns (e.g. to build a position) and for risk management purposes (e.g. to hedge the Underlying Portfolio's investments). The Underlying Portfolio may invest in both exchange traded and OTC derivatives. The types of derivatives typically used by the Underlying Portfolio are index futures, currency forwards, index options and VIX Futures. The Underlying Portfolio will minimise any counterparty risk in relation to derivatives by selecting counterparties that are considered appropriate for each derivatives transaction based on the counterparty satisfying certain credit rating criteria and operational criteria. Counterparties are monitored on an ongoing basis to ensure they remain appropriate for the Underlying Portfolio. The Underlying Portfolio's derivatives trading is secured by either the cash or other assets of the Underlying Portfolio. The collateral for exchange traded derivatives is held by a third party central clearing facility. However, collateral for OTC derivatives positions is held directly by the derivatives counterparty and is not segregated from the derivatives counterparty s own assets. As such, in the event of a counterparty becoming insolvent, the Underlying Portfolio may not be able to recover the collateral in full. Please refer to the What are the risks? section on page 20 for further details on these risks. Derivatives are not employed by the Fund or the Underlying Fund. Short Selling The Underlying Portfolio may employ short selling to take opportunities to increase returns (e.g. to build a position or to gain exposure to changes in value between two related securities) and for risk management purposes (e.g. hedge the Underlying Portfolio's investments). In creating a short position the Underlying Portfolio will borrow a security from a securities lender and sell it with the intention of repurchasing the security when the price of the security falls. If the price of the security rises, a loss is incurred which may be much greater than the purchased value of the security. There is also the risk that the securities lender recalls the security at a time when the price has risen, and the Fund may be forced to buy back the security at a loss to meet its obligations. In theory the potential loss on a short position can be infinite where the market price of the asset sold short rises. The cost of covering the short position can rise without limit. The risk of loss from short selling is greater than holding a Long Position. The Underlying Portfolio's maximum Net Short Exposure is limited to -25% of the net asset value of the Underlying Portfolio and individual Short positions are limited to -5% of the net asset value of the Underlying Portfolio (this investment guideline may be increased up to - 20% of the net asset value of the Underlying Portfolio if the investment is involved in a merger or acquisition and meets certain criteria). Short selling is not employed by the Fund or the Underlying Fund. Withdrawals Withdrawals by Direct Investors from the Fund Withdrawals by Direct Investors are generally processed on each Business Day if the withdrawal request is provided to BNP by 2:00pm on that Business Day. Withdrawals will be processed using the exit unit price on that Business Day and payment generally made within - 11 -
8 Business days after the exit unit price is determined. In addition, the period for payment may be extended in certain circumstances outside Pengana's control. Pengana is permitted to stagger the payment of large withdrawal requests and in certain circumstances, such as when there are adverse or emergency market conditions, to suspend withdrawals from the Fund for a reasonable period (including the payment of withdrawal proceeds). Pengana may also suspend withdrawals for a reasonable period when the Underlying Fund or Master Fund suspend withdrawals or the calculation of their net asset value. If the Fund is illiquid, withdrawals from the Fund will only be possible if Pengana makes a withdrawal offer in accordance with the Corporations Act. Please refer to Withdrawals for Direct Investors sub-section on page 29-30 for further information. Withdrawals by Indirect Investors from the Fund Withdrawals by Indirect Investors are made in accordance with their arrangements with their Operator. Indirect Investors should contact their Operator to obtain these details. Notifications Investors will be notified of any material changes that affecting their withdrawal rights in the Fund in accordance with the Corporations Act. - 12 -
DEFINITIONS Term Definition AFSL Australian Financial Services Licence. "Aggregate Fee" Performance The performance fee for each year ending 30 June which is calculated as the sum of the daily performance fees for that year ending 30 June. ASIC The Australian Securities and Investments Commission. BNP BNP Paribas as administrator and custodian of the Fund. Business Day A day other than Saturday, Sunday, a bank holiday or public holiday in Sydney. "Cash Equivalents" Assets that are readily convertible into cash such as money market holdings, short term government bonds, treasury bills and commercial paper which matures within 3 months or less. "Class" The class of units in the Fund offered under this PDS. Constitution The document dated 21 April 2010 as amended from time to time which, together with the Corporations Act 2001 and other applicable laws, governs the Fund s operation. Derivative A financial contract whose value depends on, or is derived from assets, liabilities or indices (the underlying asset). Derivatives may be used for both risk management purposes (that is, to protect the Fund, Underlying Fund or Underlying Portfolio from either being invested or uninvested) and to take opportunities to increase returns (for example, to gain access to markets not readily available to foreign investors, to build a position in selected companies and to create Short positions). Direct Investors A person who acquires units directly in the Fund. "Directors" The directors of the Master Fund and the Underlying Fund. "Entities" Pengana and BNP and any of their respective subsidiaries, affiliates, agents, permitted delegates and sub-delegates. "FOS" The Financial Ombudsman Service. Fund The Pengana Absolute Return Asia Pacific Fund (ARSN 145 116 810). Gross Market Exposure The sum of the value of the Long Positions and the absolute value of the Short Positions GST Goods and Services Tax. "Hurdle" The RBA Cash Rate converted to a daily rate. - 13 -
IDPS An investor directed portfolio service or IDPS-like scheme including a master trust or wrap account. Indirect Investors A person investing in the Fund through an IDPS. Investor A person investing in the Fund. Leverage When the Gross Market Exposure exceeds the Net Asset Value. Long" or "Long Position Refers to an asset which is held with the expectation that the value of the asset will appreciate. "Management Share" A voting non-participating US dollar denominated management share of the Underlying Fund or Master Fund. "Master Fund" The Pengana Asia Special Events Master Fund, an exempted limited liability company incorporated in the Cayman Islands on 28 May 2008 and registered as a regulated mutual fund with the Monetary Authority. "Monetary Authority" The Cayman Islands Monetary Authority. Net Asset Value (NAV) The value of the Fund s total assets less the value of the Fund s total liabilities (excluding any obligations to unitholders), including any accrued but unpaid positive Aggregate Performance Fee. "Net Exposure" The sum of the value of the Long Positions minus the absolute value of the Short Positions. Operator An IDPS operator. PDS This Product Disclosure Statement. Pengana or Investment Manager Pengana Capital Limited (ABN 30 103 800 568). Pengana Group Pengana Holdings Pty Ltd and its subsidiaries. "Prime Broker" The prime broker of the Master Fund, Deutsche Bank AG, acting through its London branch. "Prime Brokerage Agreement" The prime brokerage agreement between the Prime Broker and the Master Fund. RBA Cash Rate The Reserve Bank of Australia s Cash Rate Target. Short" or "Short Position" or "Short Selling Refers to an investment technique in which an asset is borrowed and then immediately sold in the expectation that the asset will then depreciate. The borrowed asset is repaid by buying back the asset on the market with the intention of obtaining it at a lower price. The asset is then returned to the original lender. - 14 -
Transaction Costs The costs associated with buying and selling investments within a portfolio, notably brokerage costs and stamp duties. "Underlying Fund" The Pengana Asia Special Events (Offshore) Fund, an exempted limited liability company incorporated in the Cayman Islands on 28 May 2008 and registered as a regulated mutual fund with the Monetary Authority. "Underlying Portfolio" The trading portfolio in the Master Fund. - 15 -
ABOUT THIS FUND This Fund is an unlisted registered managed investment scheme that will provide investors with Long and Short exposure to a portfolio of principally listed Asian companies which are subject to corporate events. The Fund will implement its investment strategy by investing its assets in a class of Australian dollar denominated shares issued by the Underlying Fund which in turn implements its investment strategy by investing in a class of Australian dollar denominated shares issued by the Master Fund. The Master Fund is where all trading and risk management activities described in this PDS occur ("Underlying Portfolio"). The investment objective and investment strategy for the Underlying Fund and Master Fund are the same as those of the Fund. The Underlying Fund and the Master Fund are both exempted limited liability companies incorporated in the Cayman Islands on 28 May 2008 and registered with the Cayman Islands Monetary Authority as regulated mutual funds. The administration of the Underlying Fund and the Master Fund has been outsourced to Citco Funds Services (Cayman Islands) Limited, a specialist global funds administrator. The custodian and prime broker of the Master Fund is Deutsche Bank AG, acting through its London branch. See the section titled 'Underlying Fund and Master Fund' on page 32 for more details. Depending on individual circumstances, Pengana expects this Fund to be suitable for investors looking to invest for at least 5 years. Investors should be aware that the Fund is not suitable for short term investment. Pages 3, 4 and 5 of this PDS contain specific information regarding the investment strategies adopted for the Fund. Like most managed funds, this Fund is a unit trust. When an Investor invests in the Fund, their money buys units in the Fund to which rights (such as distributions) are attached. The number of units that an Investor receives depends on the amount invested and the current unit price. The unit price reflects the net value of the Fund s investments. If the net value of the Fund increases, the unit price increases. Likewise, if the net value of the Fund falls, the unit price falls. Investors investing through an IDPS, namely Indirect Investors, should seek details of their rights from their Operator. WHO MANAGES THIS FUND? Pengana is an Australian based investment management firm that holds an AFSL (licence number 226 566) issued by the Australian Securities and Investments Commission. Pengana is the responsible entity of the Fund and the investment manager for both the Underlying Fund and the Master Fund. WHO CAN INVEST IN THE FUND THROUGH THIS PDS? The offer made in this PDS is available only to Direct Investors and Operators receiving this PDS in Australia. Investment in the Fund can be made directly or through an IDPS. For Direct Investors, the initial investment amount must be for a minimum of $20,000. Indirect Investors investing through an IDPS may rely on information in this PDS for the purpose of directing an Operator to invest in the Fund on their behalf. Operators will advise Indirect Investors about how to invest through their IDPS, including the minimum initial investment amount. The rights of unitholders in the Fund specified in this PDS generally refer to the rights - 16 -
exercisable by Direct Investors. Indirect Investors investing through an IDPS do not themselves become unitholders in the Fund, nor do they acquire the same rights as Direct Investors, under this PDS. Indirect Investors investing through an IDPS are encouraged to seek details of their rights as an investor from the Operator through which they are investing. See the section titled 'Investor Status' on page 38 for more details. WHAT IS THE FUND S INVESTMENT STRATEGY? Investment Objective 2 The investment objective of the Fund, Underlying Fund and Underlying Portfolio is to generate a net annualised return greater than 5% above the RBA s Cash Rate Target over a 3 to 5 year period with low volatility and low correlation to Asian security markets, by obtaining exposure to companies that are primarily subject to corporate events or from trading related securities that are believed to be mispriced by the market. The Fund, Underlying Fund and Underlying Portfolio obtain exposure to securities which are listed on Asian (including Japan, Australia and New Zealand) securities markets (and other markets where related securities may be listed) and in securities which are listed on approved markets outside of Asia where more than 70% (by assets or earnings) of the underlying business originates from an Asian country. The Fund, Underlying Fund and Underlying Portfolio aim to deliver consistent returns that have a low correlation to the Asian security markets. Investment Strategy The Underlying Portfolio will employ an event driven investment strategy. Event driven strategies involve investing in opportunities created by significant transactional events, such as mergers and acquisitions, earnings surprises, capital management initiatives, capital structure arbitrage and index changes. It is believed that significant corporate events can often create inefficiency in a company s share price which the Underlying Portfolio then seeks to exploit. A list of the kind of events that the Underlying Portfolio is likely to invest in is set out below. Mergers and acquisitions. Merger arbitrage involves buying securities in companies which are subject to announced takeover or merger offers, in anticipation that the prices of those securities will increase on the successful acquisition of the target companies. The Underlying Portfolio will invest either when a takeover or merger of a listed company is announced or where a listed company announces that it has entered into takeover or merger discussions with a named counterparty. In the event that the share price of a target company trades at a premium to an offer and the Investment Manager believes that the target company is unlikely to receive an increased offer, the Underlying Portfolio may exploit this mispricing by short-selling the shares of the target company. The Underlying Portfolio also employs a post-completion investment strategy which involves investments in the successful acquirers of companies. Capital management initiatives. Capital management initiatives include share buy-backs (where a company seeks to buy back some of its own shares either off-market or on-market), special dividends (nonrecurring dividends that are exceptional in terms of either size or date issued), corporate reorganisations (including spin-offs and dual listings as well as capital restructurings), and capital raisings (such as equity and hybrid equity raisings and including participation in primary and secondary raisings and raisings in issuers prior to an initial public offer). Earnings surprises. Earnings surprises occur when a company announces to the market a change to its profit forecast or a profit result which is above or below market expectations. Index changes. Index changes refers to the trading of shares that are likely to or have been subject to the inclusion, exclusion or changes of their weightings within recognised share indices. Industry restructurings. Industry restructurings refer to events or catalysts that are likely to lead to significant changes to the structure of an industry. Directors trades. Directors' trades mean the sales or purchases of equities by directors of companies which can, on occasion, provide a valuable insight into the future prospects of a company. Stub trades. Stub trades refer to the investment in the securities of a holding company against shares of its listed subsidiaries in expectation of a convergence of price performance. Investments are only undertaken around specific event catalysts. Capital structure arbitrage. Capital structure arbitrage aims to profit from the market s mispricing of different classes of securities from a single issuing entity. Examples are American Depository Receipt premium trades, rights issues, stock splits, foreign premium trades and cross boarder arbitrage. 2 The investment objective is a target and as such its achievement cannot be guaranteed. - 17 -
Investment Philosophy The absolute return focus of the Investment Manager provides a basis from which performance is skill based, rather than being driven by the market. It provides the Investment Manager with an opportunity to capture returns by taking calculated exposure to certain risks that the Investment Manager is prepared to assume due to its experience, research and expected returns for taking on that specific risk. At the same time the Investment Manager seeks to hedge away risks, such as broad market risks, which the Investment Manager believes do not provide adequate returns for the risk taken. With respect to mergers and acquisitions, the Investment Manager believes that positive spreads (the difference between the prices of two related securities) result from a tendency by investors to discount excessively for deal completion risk or attribute insufficient weight to the probability of increased offers. This is the inefficiency that the Underlying Portfolio seeks to exploit. The Underlying Portfolio may be prepared to pay more than the market for securities in companies that are under bid, thereby creating positive spreads. The fundamental driver underpinning the investment strategy is that shareholders (typically retail investors) in target companies are willing to accept a discount to fair value to transfer the risk to specialist merger arbitrageurs who are better equipped to manage the risk through expertise and diversification. It is also believed that the spreads for deals involving small to mid cap targets are larger than for large cap targets and that the timing of position taking can enhance returns, particularly where stock borrowing is difficult. With respect to other special events, the trading philosophy has likewise been based on strong research and market experience. Each of the special events that are incorporated into the Underlying Portfolio provide signals to the market, which due to the time frame (often in months) and detailed working knowledge the Investment Manager has about these events, provides an opportunity to gain a competitive advantage. With respect to capital structure arbitrage opportunities, the Investment Manager believes that there is consistent opportunity due to the size of the listed Asian universe, its complex dealing environment and the high incidence of companies with multiple investment vehicles. The Investment Manager has had significant experience in trading these opportunities. Investment Process and Guidelines Central to achieving the Underlying Portfolio s investment objective is the active selection of appropriate opportunities in which to invest (and the determination of how much to invest). The Investment Manager strategically allocates the Underlying Portfolio s capital to authorised investment strategies and regions on a deal specific basis. The Investment Manager will analyse the risk return ratio within the existing portfolio and amongst the available deal universe. Investment decisions are made in order to optimise a risk versus return trade off. The Underlying Portfolio invests primarily in listed securities such as ordinary shares, units, preference shares, synthetic equity swaps, convertible securities and other securities of an equity or hybrid equity nature listed, or with the intention of being listed, on approved Asian (including Japan, Australia and New Zealand) security markets (and other markets where related securities may be listed) and in securities which are listed on approved markets outside of Asia where more than 70% (by assets or earnings) of the underlying business originates from an Asian country. The Underlying Portfolio, Underlying Fund and Fund may also invest in cash, Cash Equivalents, Derivatives and currency contracts. The Underlying Portfolio does not invest in distressed securities situations. The investment means by which the Underlying Portfolio exploits these corporate events may involve the Underlying Portfolio either buying Long or Short positions in investments subject to the special event. Leverage may be employed, with the Gross Market Exposure not exceeding 250% of the portfolio (see page 10 for further explanation regarding the use of Leverage). Where appropriate, the Underlying Portfolio's investments will be combined with the systematic hedging of broad market and foreign currency risk. The hedging of broad market risk typically involves the use of security market index futures. For merger arbitrage investments where a bidder offers its own shares as consideration, the Underlying Portfolio will short sell the bidder s shares to hedge the market risk associated with owning shares in the target for the duration of the transaction. Foreign currency risk is hedged using forward foreign exchange contracts, or by funding in local markets. The portfolio is diversified so as to reduce the impact of any one investment under-performing. The highest conviction stocks form the nucleus of the Underlying Portfolio s investments. All investments are actively monitored in light of both changes in expected investment returns and qualitative developments. Strong risk management practices are an integral part of the Investment Manager s investment process, objectives and business principles. The Investment Manager will employ techniques to measure portfolio risk and ensure the Underlying Portfolio operates within its risk guidelines. Adherence to risk limits is monitored daily by an independent risk management team. The Investment Manager aims to invest the Underlying Portfolio within the following guidelines: Individual Long holdings limited to +5% of the net asset value of the Underlying Portfolio; o This investment guideline may be increased up to +20% of the net asset value of the Underlying Portfolio if the investment is involved in a merger or acquisition and meets certain criteria; - 18 -