Kinetic Wholesale Emerging Companies Fund Quarterly report - December 2016

Performance 1 month 3 months FYTD 1 year 3 years 5 years Inception* % % % % % p.a. % p.a. % p.a. Portfolio Return (Gross) 2.69 -3.04 5.88 8.04 3.61 7.42 3.43 S&P/ASX Small Ordinaries Index 3.61 -2.45 5.84 13.18 6.25 4.87 -0.75 Active Return (Gross)^ -0.92 -0.59 0.04 -5.14 -2.64 2.55 4.18

* Portfolio's inception: 12 March 2007 ^ Numbers may not add due to rounding

Top ten holdings Sector exposure

Security % Kinetic Wholesale Emerging Companies Fund (%) Ltd 4.26 S&P/ASX Small Ordinaries Index (%) NEXTDC Ltd 4.02 50 Independence Group NL 3.60 G8 Education Ltd 3.41 Skycity Entertainment Group Limited 2.85 40 Group 2.81 BT Investment Management Ltd 2.68 30 Mineral Resources Ltd 2.55 Nanosonic Limited 2.54 ARB Corp Ltd 2.45 20

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Cash Global Growth Property Cyclicals Cyclicals Domestic Defensives Market overview

Australia’s Small Ordinaries Index fell -2.5% in the quarter ending December 2016, as Small Industrials (-2.6%) under-performed Small Resources (-1.7%). However, CY2016 performance for the Small Ordinaries Index (+13.2%) was more bifurcated given the ten-fold performance in Small Resources (+59.5%) over Small Industrials (+6.2%). Within the GIC sectors the two best performers in CY2016 were Energy +64.9% and Utilities +44.3% with the two worst (and only negatives) being consumer Staples -15.7% and Health Care -6.5%.

If 2016 reminded us of one thing it is that history repeats – given that for the umpteenth year in a row everything that was forecast to happen didn’t and vice-a-versa. We started 2016 worrying about deflation, lower oil prices and lower for longer rates. By Christmas we were assessing reflation, higher oil prices and debating how many upward move in US rates were forthcoming. In between the world was surprised with the outcome of the Brexit vote and the election of Donald Trump as the 45th US President, while domestically the once popular PM Turnbull narrowly won the 2 July Federal Election with a one-seat majority.

Notwithstanding such surprises we consider the two more relevant influences on equities to be the FED’s second rate rise in eight-years and increased potential for a policy shift from monetary to fiscal. While higher rates pose risk to valuation multiples fiscal stimulus often provides an offset via earnings surprise. Arguably, and given markets are forward looking, the divergent performance of GIC sectors in 2016 suggests investors are already buying fiscal stimulus beneficiaries. Locally, the first negative GDP read since 2011 (and only the fourth since the 1991 recession) prompted concern ’s AAA credit rating could be at risk which may add downside risk to the A$.

Fund performance summary

The S&P/ASX Small Ordinaries Index returned -2.45% for the quarter. The fund underperformed the market and delivered a -3.04% return over the quarter.

Performance of key securities

Key contributors

Security name Sector Active weight % Value added % Orocobre Ltd Global Cyclicals 3.65 0.71 Resolute Mining Limited Global Cyclicals -0.64 0.29 Mayne Pharma Group Ltd Growth -1.24 0.52 G8 Education Ltd Growth 2.52 0.45 Limited Global Cyclicals -0.67 0.34

Orocobre Ltd (Portfolio quarterly return: 21.40%) The September quarter activities report showed good production numbers and strong operating cash flow. Management reiterated significant production growth for the December quarter and expectations that prices will be above US$10,000 a tonne. This news potentially resulted in some short sellers rethinking their strategy. The positive scoping study for expansion released during December also bolstered investor sentiment.

G8 Education Ltd(Portfolio quarterly return: 20.09%) The company’s September quarter under-performance was reversed in the December quarter following a string of positive announcements, including better-than-expected earnings guidance; a new (internally appointed) CEO and a positive funding update.

Mayne Pharma Group Ltd (Not held. Index quarterly return: -32.75%) Not owned. The share price fell on the back of market rotation out of highly priced growth stocks (such as MYX) and MYX updating the market regarding Department of Justice (DoJ) investigation into anti-competitive marketing and pricing behaviour. Multiple US states have now commenced legal proceedings against MYX. Key detractors

Security name Sector Active weight % Value added % ImpediMed Ltd Growth 2.14 -1.02 Troy Resources NL Global Cyclicals 0.00 -0.31 Limited Global Cyclicals -1.38 -0.42 NEXTDC Ltd Growth 3.33 -0.41 Skycity Entertainment Group Limited Domestic Cyclicals 2.28 -0.32

ImpediMed Ltd (Portfolio quarterly return: -34.96%) The share price fell following a company roadshow in which we suspect they had confused investors regarding their business strategy. More specifically, the rationale of going into heart failure and what that might suggest regarding the value of their existing lymphedema technology. We believe they failed to articulate the substantial potential of both these products.

NEXTDC Ltd(Portfolio quarterly return: -13.75%) Share-price under-performance in the December 2016 quarter can only be attributed to non-fundamental reasons, given most recent update from company, meeting with management and industry feedback continues to support the long-term growth outlook for NXT. We believe the continuing trend for companies to migrate from in-house IT to cloud-based and outsourced data storage remains a positive structural tailwind for Next DC.

Sims Metal Management Limited (Not held. Index quarterly return: 39.76%) Not owning SGM detracted from quarterly performance. Following a combined 60% rise in coal and iron-ore costs the economics of scrap steel used in blast furnaces has improved. Consequently, the outlook for near-term earnings has improved given a 10-15% rise in global scrap prices and improved steel-mill utilisation (currently at 65% vs. long-run average of 77%).

Outlook

While our process does not require us taking a ‘whole of market’ view our focus on individual companies effectively achieves the same result. Our company outlooks are a function of earnings delivery (relative to consensus) and valuation. With respect to earnings, we have already observed a marked deterioration in outlooks during the latest AGM season compared to the result season just four-months earlier. For the December quarter we counted 70 downgrades versus 35 upgrades to FY17 forecasts for the Small Industrials. Consequently, we maintain a very high company visitation schedule to minimize the risk of adverse surprise.

On valuation, we know rising bond-yields will lower our cash-flow based valuations and cap upside to earnings based multiples. However, given the still elevated absolute debt levels we cannot see rates reverting to pre-GFC highs – meaning liquidity injected by central banks post the GFC will not disappear. Sustained liquidity also means equity multiples have less downside risk compared to past cycles. In any case, as a valuation buffer, the risk-free rates used by Kinetic have consistently been higher than market quoted rates (i.e. bond-yields).

Regardless of where valuation multiples settle, we believe the best portfolio insurance will come from investing in higher quality companies. Consequently, the Kinetic investment process remains true to its bottom-up origins which have delivered alpha in 16 of the teams 19 calendar year history. Our bottom-up process seeks to identify companies capable of growing earnings regardless of prevailing macro conditions, operating with strong balance sheets, making sensible capital allocation decisions and, importantly for our CFROI process, generating strong cash flows.

The information in this publication is current as at the time of issue unless otherwise specified and is provided by Fidante Partners Limited ABN 94 002 835 592 AFSL 234 668 (Fidante Partners). It is intended solely for use by wholesale clients, as defined in the Corporations Act 2001 (Cth) (Act) and must not be passed on to any retail client, as defined in the Act. Fidante Partners is the responsible entity and issuer of interests in the Kinetic Wholesale Emerging Companies Fund ARSN 123 209 218 (Fund). It is intended as general information only and not as financial product advice, an offer, invitation or recommendation in relation to any particular financial product and has been prepared without taking into account any person's objectives, financial situation or needs. Each person should obtain and consider the information (including about risks) in the product disclosure statement (PDS) and any additional information brochure (AIB) for the Fund before making any investment decisions. If any person acquires or holds an investment in the Fund we will receive the fees and other benefits disclosed in the PDS and any AIB for the Fund. Neither Fidante Partners nor any related party of Fidante Partners nor any investment manager nor any sub-adviser guarantees the repayment of your capital or the performance of the Fund or any particular taxation consequence of investing. Past performance is not a reliable indicator of future performance. This information may include statements of opinion, forward looking statements, forecasts or predictions based on current expectations about future events and results. Any such statements are subject to change and actual results may be materially different from those shown. This is because outcomes reflect the assumptions made and may be affected by known or unknown risks and uncertainties that are not able to be presently identified. In preparing this information, publicly available information and sources believed to be reliable, have been used however the information has not been independently verified. While due care and attention has been exercised in the preparation of this information, no representation or warranty, either express or implied, is given as to the accuracy, completeness or reliability of that information. The information presented is not intended to be a complete statement or summary of the industries, markets, securities or developments referred to in the presentation. A copy of the PDS and any AIB can be obtained from your financial advisor, our Investor Services team on 13 51 53 or on our website: www.fidante.com.au