Ellerston Australian Market Neutral Fund PERFORMANCE REPORT August 2017

Fund performance^ (Net)

Net Jan Feb Mar April May June July Aug Sept Oct Nov Dec YTD 2017 0.54% -0.98% 0.47% -0.01% -0.57% 1.64% -0.40% 0.87% 1.55% 2016 -0.97% -1.03% 0.80% 0.10% 1.34% 0.55% 0.71% 1.93% 0.73% -0.53% 0.29% 0.02% 3.96% 2015 -0.15% 1.09% 1.41% 1.04% -0.11% 1.29% 0.71% 1.11% 0.88% 0.59% 1.37% 1.09% 10.81% 2014 2.50% 0.33% 0.93% -0.47% 2.31% 3.60% 1.24% 2.42% 3.16% -0.82% 1.53% -0.95% 16.82% 2013 0.48% 1.12% 1.74% 1.38% 2.87% -0.34% 2.54% 10.18%

^ The net return figure is calculated after fees & expenses. The gross return is calculated before fees & expenses. Past performance is not a reliable indication of future performance. The benchmark is the RBA Cash Rate. The Fund commenced on 3 June 2013.

Return Net BM Alpha Gross Portfolio Metrics

1 Month 0.87% 0.13% 0.74% 1.02% Positive months 76%

3 Months 2.12% 0.38% 1.74% 2.69% No. Relative Value positions 105

6 Months 2.00% 0.75% 1.25% 2.88% No. Special Situations 24

1 Year 2.07% 1.50% 0.57% 3.47% Net Equity Exposure +24.9%

2 Year p.a 4.78% 1.70% 3.08% 6.90% Gross Portfolio Exposure 150.6%

3 Year p.a 6.38% 1.90% 4.48% 8.91% Beta Adjusted +2.6%

Since inception p.a 10.11% 2.08% 8.03% 13.57% Correlation Coefficient (vs ASX 200 Accum) -11.03%

Net Sharpe Ratio ( RFR = RBA Cash) 2.10

Ellerston Capital Limited Level 11 Tel: 02 9021 7797 [email protected] APIR Code: ECL0013AU ABN 34 110 397 674 179 Elizabeth Street Fax: 02 9261 0528 www.ellerstoncapital.com AFSL 283 000 Sydney NSW 2000

Performance

The Fund returned +0.9% during August, outperforming the benchmark return of 0.1% in the period. The performance of the Fund was buoyed by our holding in Astro Japan Property (+14.0%), which announced an agreement to sell the Trust’s assets to Blackstone, with the proceeds to be distributed to shareholders and Astro to be delisted and wound up.

Net exposure of the Fund was +24.9% with a beta-adjusted net of +2.6%. Gross exposure closed the period at 150.6%.

It was a busy month for GDI Property (+8.4%) with management announcing the sale of 66 Goulburn Street, Sydney, the purchase of Westralia Square at 141 St Georges Terrace, Perth and the conditional purchase of IKEA’s retail store in Innaloo. The sale of Goulburn Street was a fantastic result, netting approximately $228m after purchasing the asset in July 2014 for $136m. Westralia Square was purchased on a passing yield of 11.3%, however the building is over rented and has a WALE of just 2.5 years. The market is finally giving management the credit they deserve, with the stock one of the best performing REITs in the period, despite closing the month at a modest discount to NTA. GDI features as a long in a number of paired positions within our portfolio, though the hedged short position in Charter Hall Retail (-4.1%) was the largest contributor to the Relative Value strategy.

A paired position between Centuria Capital (+13.2%) and GPT Group (+4.4%) added value in the period, following good results from both property groups. Centuria grew FUM by 118% during the year, primarily led by the 360 Capital acquisition in January. Recurring revenue jumped to 75% (from 55%), whilst the Investment Bond FUM increased to almost $800m. GPT also had an excellent result, with FFO growth of 3.5% and all divisions performing well.

The share price of Aveo (+7.0%) rebounded modestly in the month, with the company initiating an on-market buyback following the announcement of their FY17 results. Given the recent media campaign, the results presentation was a sombre affair with management taking the opportunity to announce a number of initiatives to address some of the key issues. Despite the negative publicity, we think Aveo represents one of the best investment opportunities within the sector and retain a long position as one leg of a number of pairs. The position hedged with a short in (+2.2%) added to the performance during August, with the Dexus result a lacklustre affair.

Our paired position between printing companies IVE Group (-5.9%) and PMP (+0.0%) detracted from the performance of the Fund, following an unexpectedly large equity raise from IVE in the period. Along with their FY17 results, IVE announced the acquisition of SEMA Holdings, together with the acquisition of a second Large Format Web Offset (LFWO) press for the Franklin WEB business in NSW. SEMA is a 35-year old company that provides cross-channel communications solutions including multi-channel marketing, digitisation and security. Whilst the market liked the results and the acquisitions, the raising was larger than expected and will take a little while to be digested.

As previously mentioned, our position in Astro Japan Property provided the largest contribution to performance in the month. Since the initial approach from Lone Star in March, we felt that the REIT was “in play” and that it was only a matter of time before an acceptable bid would be presented. Whilst the transaction has taken longer than hoped, we have been comfortable accumulating stock at around a 20% discount to NTA, confident that there was a decent margin of safety in the trade. The current timetable looks to have the REIT delisted in mid-October, with the bulk of the proceeds to be paid at the end of that month.

Our holdings in healthcare companies Oneview Healthcare (-15.1%) and Impedimed (-10.1%) both detracted from performance, following underwhelming results during the period. Our recently established position in Hansen Technologies (-16.0%) also underperformed, with the market disappointed with the subdued growth estimates.

Activity

Relative Value – Gross Contribution 0.7%

We initiated a position in Viva Energy REIT (+0.5%) in the period, hedging the position with shorts in Charter Hall (+9.2%), Dexus (+2.2%), Goodman (+4.1%) and (+6.9%). Viva owns a portfolio of service station sites throughout Australia, with the bulk of them operating as Coles Express. With a WALE of 14.2 years and a yield of 6.4%, we believe the stock is relatively cheap, particularly when compared with listed peers. In addition, the Viva portfolio has not been revalued since December 2015 and is scheduled for a full revaluation at the end of this year. A modest contraction in cap rate would lead to a significant jump in NTA (-30bp to the cap rate would lead to a 14% increase in NTA), which we would expect to be reflected in the share price.

Following the results release from both companies, we established a pair between packaging companies Pact Group (- 8.2%) and Orora (+12.3%). Whilst the Pact result was slightly below market, cashflow and debt was better than expected and the company has guided to higher revenue and earnings growth in 2018. Orora’s result on the other hand was ahead of market expectations, however there were signs that higher costs will crimp forecasts with electricity and OCC costs in particular expected to increase in the coming year. Despite their differences, we believe the multiple gap between the two companies is unwarranted, with Pact trading on a P/E of 14.1x whilst Orora trades on 18.7x.

The increase in volatility during August provided opportunities to unwind existing positions. In particular, paired positions between (+5.5%) and Mirvac (+6.9%), Suncorp (-6.0%) and Insurance Australia Group (-3.9%) and NZ generation-retailers Meridian Energy (+2.4%) and Mercury (-2.8%) were all closed down. We also unwound the residual paired position between Centuria Industrial (+1.6%) and Charter Hall (+9.2%).

Special Situations – Gross Contribution 0.3%

We participated in the sell down of shares in Abano Healthcare (-4.5%), a NZ-listed healthcare and medical services company operating in New Zealand, Australia and Asia. Abano owns and operates NZ’s largest corporate dental centre network and is on its way to having the second-largest network in Australia. The company recently raised equity (via a rights-issue) to accelerate their growth in Australia with the raising supported by existing shareholders.

We continued to add to our Subordinated Note holdings in Caltex (+0.5%) and APT Pipelines (+0.5%) ahead of their expected redemptions in September (Caltex) and March 2018 (APT Pipelines).

Following the agreement with Blackstone and the subsequent share price jump, we reduced our holding in Astro Japan Property. We also exited our position in Touch (+21.6%), following a strong rally in the share price.

Sector Allocation

Sector Long Equity Short Equity Net Equity

Banks 0.5% 0.0% 0.5%

Div Financials 0.2% 0.0% 0.2%

Insurance 0.8% 0.0% 0.8%

Regional Banks 0.0% 0.0% 0.0%

REITs 50.2% -39.5% 10.7%

Financials 51.7% -39.5% 12.2%

Builders 0.0% 0.0% 0.0%

Consumer Disc 4.0% -0.1% 3.9%

Consumer Staples 0.8% -0.1% 0.7%

Gaming 0.0% 0.0% 0.0%

General Industrials 0.3% 0.0% 0.3%

Health Care 5.8% 0.0% 5.8%

Information Technology 1.4% 0.0% 1.4%

Infrastructure 0.0% 0.0% 0.0%

Materials 0.9% -0.9% 0.0%

Media 2.7% -0.6% 2.1%

Telcos 0.0% 0.0% 0.0%

Utilities 0.4% -0.2% 0.2%

Industrials 16.3% -1.9% 14.4%

Bulk Metals 16.6% -16.4% 0.2%

Energy 0.2% 0.0% 0.2%

Gold 0.0% 0.0% 0.0%

Resources 16.8% -16.4% 0.4%

Hedge 0.0% -2.2% -2.2%

Index 0.0% -2.2% -2.2%

Total 84.8% -60.0% 24.9%

Market Commentary

The equity markets kicked off on a reasonably positive note in August, with key indices such as the S&P500 hitting new record highs, at least until investors quickly pressed the 'risk-off' button as geopolitical tensions in the Korean peninsula escalated. US Equities finished August higher, with the Dow Jones (+0.65%) and S&P 500 (+0.3%) notching five-month winning streaks, and the Nasdaq recording its 9th positive month of the last 10. US/North Korean tensions further ratcheted up, with President Trump warning North Korea about facing “fire and fury” if the regime of Kim Jong-un continued threatening the US. North Korea responded by saying it was “carefully examining” its strategy of a missile strike on the island of Guam. Towards month end, North Korea tested a missile which travelled over Japan’s northernmost island, Hokkaido. President Trump's continuing political battles and Hurricane Harvey in the Gulf didn't help sentiment.

Against this backdrop, in Europe, the Euro Stoxx 50 Index (-0.7%) floundered while Asian equities were mixed through August. The Nikkei 225 fell 1.4%, whilst Singapore and Korean markets both fell 1.6% respectively. Hong Kong’s Hang Seng was the best performer, finishing 2.4% higher, despite the arrival of Tropical Cyclone Hato.

Emerging markets also outperformed (MSCI World Emerging Markets index +2.1%), aided by rising commodity prices.

The main feature in commodity markets during the month was the sharp rally in base metal prices, with aluminium, copper, nickel and zinc hitting multi-year highs on optimism around synchronized global growth, ongoing supply constraints and a weakening U.S. Dollar. Not surprisingly, the gold price rallied in August to close at a 9 month high of US$ 1,321/oz, as US/North Korean tensions persisted and investors rushed into the yellow metal as a store of value/safe haven.

Economic data was generally supportive, as the OECD noted that all 45 countries it tracks were poised to grow this year, the first period of synchronised growth since 2007. In the US, employment remained strong, as non-farm payrolls for July rose a stronger-than-expected 209,000 (consensus 180k) and the unemployment rate fell to 4.3%. The CPI for July also rose a weaker-than-expected 0.1%m/m (vs. consensus +0.2%). Real GDP for Q2 was revised up to a better-than-expected 3.0%q/q annualised (consensus: 2.7%) from a previously estimated 2.6% print.

In Europe, activity indicators were also strong, with the flash Eurozone manufacturing PMI for August rising to a stronger- than-expected 57.4 (consensus: 56.4).

The Australian equity market absorbed an incredibly volatile reporting season, bouncing off an index low of circa 5,680 five times through the month, but also failing to break the 5,800 point threshold on the upside. The S&P/ASX200 Accumulation Index finished +0.71%, but with significant variation between sector returns. The positive August total return was due entirely to the +80bps dividend contribution, with the ASX200 price index falling 0.1% in the period.

Energy (+5.7%), Consumer Staples (+5.3%), Industrials (+4.6%), Materials (+4.6%) and Utilities (+3.2%) were the best performing sectors. Materials added the most value in August, largely driven through the Miners (BHP Billiton, , ), with support from the Energy (+23 bps), Consumer Staples (+38 bps) and Industrial (+33 bps) sectors. Financials (-82 bps) provided the largest drag on performance, with Banks (-72 bps) and Insurance (-16 bps) accounting for most of the sector losses.

The domestic reporting season was primarily one of missed expectations. The ratio of misses to beats stood at ~1.3x, with the average EPS miss being penalized by -3.8% on results day. At the top line, 16% of companies beat on revenue, while 22% missed. Most importantly, of the ASX 200 stocks that reported, ~55% provided guidance, of which 44% triggered FY18e EPS downgrades, versus only 27% of stocks that received an upgrade.

Contribution

Relative Value Gross Contribution 0.7% Special Situations Gross Contribution 0.3%

Positive Positive

CHARTER HALL RETAIL REIT - GDI PROPERTY GROUP 0.21% ASTRO JAPAN PROPERTY GROUP 0.73%

CENTURIA CAPITAL - GPT GROUP 0.14% PARAGON CARE 0.06%

RIO TINTO - RIO TINTO PLC 0.12% APPEN 0.04%

AVEO GROUP - DEXUS PROPERTY GROUP 0.10% CENTURIA URBAN REIT 0.03%

CHARTER HALL RETAIL REIT - PEET 0.09% ABANO HEALTHCARE GROUP LTD 0.03%

Negative Negative

IVE GROUP - PMP -0.15% ONEVIEW HEALTHCARE -0.20%

INGENIA COMMUNITIES GROUP - MIRVAC GROUP -0.09% IMPEDIMED -0.13%

CHARTER HALL GROUP - VIVA ENERGY REIT -0.08% HANSEN TECHNOLOGIES LTD -0.13%

MIRVAC GROUP - VIVA ENERGY REIT -0.08% S&P/ASX 200 INDEX PUT OPTIONS -0.08%

OOH!MEDIA - QMS MEDIA -0.07% FINANCE NOTE -0.06%

Distribution of Net Returns Key Information

Fund Inception Date: 3 June 2013 Date of Launch xx 30

Liquidity: Daily xx Distributions 25 Management Fee: 1.20%

Management Fee 01.2% p.a Performance Fee: 20% of outperformance

20 Buy/Sell Spread 0.2% Buy/Sell Spread: 0.25%

15 Performance Fee 20% Application price: $1.1526

Frequency Redemption price: $1.1468 Fund Size $12.25M

10 Market Neutral Fund AUM: $662.85M Redemption Unit Xx

5 Australian Equity Team AUM: $2.90bn Liquidity Daily Firm AUM: $5.05bn

0

01 to 12 to 23 to 34 to 45 to -1 -1 0 to -2 -1 to Key Service Providers gccg ECL0013AU % Return for the month  Registry: Link Market Services Limited ECL0013AU

 Auditor: Ernst & Young Date of Launch xx

 Prime Broker & Derivative Counterparty:

TOP RELATIVE VALUE POSITIONS Morgan Stanley Intl & Co PLC Distributions xx

 Administrator: State Street Australia Limited  BHP BILLITON - BHP BILLITON PLC Management Fee 01.2% p.a

 RIO TINTO - RIO TINTO PLC Buy/Sell Spread 0.2%  MIRVAC GROUP – VIVA ENERGY REIT Material Matters Performance Fee 20%  AVEO GROUP - DEXUS PROPERTY GROUP During the month there were no material  AUSTRALIAN UNITY INVESTMENT REAL ESTATE - GPT GROUP changes to the Fund in terms of its risk profile, Fund Size $12.25M investment strategy or changes to investment  INGENIA COMMUNITIES GROUP - MIRVAC GROUP staff which would impact this strategy. There Redemption Unit Xx  have been no changes to the key service - INGENIA COMMUNITIES GROUP providers described above. Liquidity Daily  GROWTHPOINT PROPERTIES - INGENIA COMMUNITIES GROUP

ECL0013AU  CHARTER HALL RETAIL REIT - GDI PROPERTY GROUP  CHARTER HALL GROUP – VIVA ENERGY REIT Closure of the Market Neutral Fund Distributions xx Please note that the Ellerston Australian Market TOP SPECIAL SITUATION POSITIONS Neutral Fund was closed on the 31st October Management 01.2% p.a

2016. From 1 November, the Fund ceased to Fee  accept new or additional applications. ASTRO JAPAN PROPERTY GROUP Redemptions from the Fund will be processed as  NUFARM FINANCE NOTE Buy/Sell 0.2% normal.  S&P/ASX 200 INDEX PUT OPTIONS Spread

NOTE Further Information Performance 20%  IMPEDIMED Fee  ONEVIEW HEALTHCARE Contact:

 TURNERS AUTOMOTIVE GROUP LTD Andrew Seddon 0417 249 577 Fund Size $12.25M [email protected]  SUNCORP FLOATING RATE NOTE Redemption Xx  SUPERLOOP Simon Glazier 0410 452 949 Unit [email protected]  MULTIPLEX SITES TRUST Liquidity Daily

DISCLAIMER

This newsletter has been prepared by Ellerston Capital Limited ABN 34 110 397 674 AFSL 283 000, the responsible entity of the Ellerston Australian Market Neutral Fund ARSN 168 025 670 (Fund) without taking account of the objectives, financial situation or needs of investors. Before making an investment decision about the Fund persons should obtain advice from an appropriate financial adviser and consider their own individual circumstances and obtain a copy of the Product Disclosure Statement dated 27 August 2015 for the Fund which can be obtained by contacting [email protected]. Actual performance for your account will be provided in your monthly account statement which may vary from that set out in this newsletter and will vary for investments made in different classes, or at different times throughout the year.

This material has been prepared based on information believed to be accurate at the time of publication. Assumptions may have been made which may prove not to be accurate. Ellerston Capital undertakes no responsibility to correct any such inaccuracy. Subsequent changes in circumstances may occur at any time and may impact the accuracy of the information. To the full extent permitted by law, none of Ellerston Capital Limited, or any member of the Ellerston Capital Limited Group of companies makes any warranty as to the accuracy or completeness of the information in this newsletter and disclaims all liability that may arise due to any information contained in this newsletter being inaccurate, unreliable or incomplete. Past performance is not indicative of future performance.