Australian Shares Core Portfolio Quarterly Update June 2015 Mathew Hodge Portfolio Overview Sector Head: Basic Materials, Energy +612 9276 4459 The Australian Shares Core Portfolio delivered a return of negative 7.9% in the June 2015 quarter, versus [email protected] negative 6.5% for the S&P/ASX 200 Accumulation Index, underperforming by 1.3%. The portfolio suffered with the continued outperformance of interest rate facing stocks despite the theme being relatively tired, Peter Warnes and the disproportionate market reaction to ResMed Inc.’s disappointing trial results. Head of Australian Equity Research +612 9904 5331 Longer-term performance is now in line with the index. The past year has been difficult with income stocks [email protected] to the fore, thanks to further declines in already low interest rates, and the oil price rout. We think the likelihood of a further material rally in interest rate sensitive stocks, such as utilities and REITs, is low and Morningstar Style Box that growth-facing stocks are more likely to outperform. The lower interest rate, increasing debt and asset Large MidEquity Small Style % inflation game cannot go on forever but while it rolls on, it's likely to drag on performance. It’s not our style to 27.7 13.4 28.6 Equity Style Value 30.1 buy into a crowded trade. Equity Style Core 28.7 0.0 15.3 12.7 We took the opportunity to add some attractively priced, high-quality stocks during the quarter's selloff. We Equity Style Growth 41.3 also diversified the themes the portfolio is exposed to, which should better enable our moat methodology to 2.4 0.0 0.0 drive performance. Brambles brings broader exposure to fast-moving consumer goods than Coca-Cola Value Blend Growth Amatil, which is struggling against the buying power of the large supermarkets and the consumer turning away from sugar. The upweighting of Veda Group increases our exposure to the likely increase in credit reporting with the recent introduction of comprehensive credit reports. Iluka benefits from the industrial recovery in the U.S. and Europe and the application of new technology in tile manufacturing to make higher- quality tiles. The market pullback provided a rare opportunity in health care, and we added Ansell and CSL. Health care is Core Portfolio - Top 10 Holdings now our largest sector overweight position, leveraging to growing wealth, increasing standards of living and Weighting % longevity and aging population. High-quality international equity manager, Platinum Asset Management, Australia and New Zealand Banking Group Ltd 9.3 plays on growth in Australian superannuation and a growing allocation to international equity. Despite the BHP Billiton Ltd 7.7 sales of Telstra Corporation, Commonwealth Bank of Australia, Woodside Petroleum, Coca-Cola Amatil and Westpac Banking Corp 7.2 South32, we continue to be exposed to telecommunications though a smaller Telstra weighting, banking National Australia Bank Ltd 6.1 through our holdings in the other three majors, oil through Santos, consumer through Brambles and the QBE Insurance Group Ltd 5.4 alumina story through Alumina Limited. We cut our holding in Woodside Petroleum, which has been a refuge ResMed Inc CDR 5.4 for energy investors during the storm. It trades near fair value, but we see better value in Santos, which Veda Group Ltd 5.2 should improve as Gladstone ramps up and free cash flow grows, reducing balance sheet concerns. Overall, Woolworths Ltd 4.6 the portfolio has diversified the themes it is exposed to while remaining focused on buying quality at a Westfield Corp 4.2 discount. Wesfarmers Ltd 4.2 Investment Growth of $10,000 Time Period: 29/07/2004 to 30/06/2015 27,500.0 25,000.0 22,500.0 20,000.0 17,500.0 15,000.0 12,500.0 10,000.0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Aust Shares - Core S&P/ASX 200 TR THIS REPORT HAS BEEN PRODUCED USING PRESENTATION STUDIO, A MODULE OF MORNINGSTAR DIRECT Any Morningstar ratings/recommendations contained in this report are based on the full research report available from Morningstar or your adviser. © 2015 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. Any general advice or ‘class service’ have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement (Australian products) or Investment Statement (New Zealand products) before making any decision to invest. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). Australian Shares Core Portfolio Quarterly Update June 2015 Core Portfolio - Complete List of Holdings Portfolio Date: 30/06/2015 Fair Portfolio Style Economic Code Value Weight Box Moat Uncertainty % Australia and New Zealand Banking Group Ltd ANZ Ç Wide Medium 9.3 BHP Billiton Ltd BHP É Narrow Medium 7.7 Westpac Banking Corp WBC Ç Wide Medium 7.2 National Australia Bank Ltd NAB Ç Wide Medium 6.1 QBE Insurance Group Ltd QBE È Narrow High 5.4 ResMed Inc CDR RMD Ë Narrow Medium 5.4 Veda Group Ltd VED Ì Wide Medium 5.2 Woolworths Ltd WOW Ç Narrow Medium 4.6 Westfield Corp WFD É Narrow Medium 4.2 Wesfarmers Ltd WES È Narrow Medium 4.2 Platinum Asset Management Ltd PTM Ì Narrow Medium 4.2 Santos Ltd STO É Narrow High 3.9 Telstra Corp Ltd TLS È Narrow Medium 3.5 Alumina Ltd AWC Ë None High 3.4 Computershare Ltd CPU Ë Narrow Medium 3.2 Crown Resorts Ltd CWN É Narrow High 3.1 Iluka Resources Ltd ILU Ì Narrow High 3.0 Goodman Group GMG É Narrow Medium 3.0 Ansell Ltd ANN Ë Narrow Medium 3.0 CSL Ltd CSL É Narrow Medium 3.0 Brambles Ltd BXB É Wide Medium 3.0 Trade Me Group Ltd TME Í Wide Medium 2.3 CASH 1.8 Note dividends for Trade Me are imputed for New Zealand residents. Australian residents receive unfranked dividends with a supplementary payment. Morningstar Investment Committee members own the following securities held by the portfolio: AWC, BHP, NAB, QBE, STO, TLS, WES Holdings-Based Style Map Holdings-Based Style Trail Time Period: 31/07/2012 to 30/06/2015 Giant Giant Mid Large Mid Large Micro Small Deep-Val Core-Val Core Core-Grth High-Grth Micro Small Deep-Val Core-Val Core Core-Grth High-Grth Core Portfolio 30/06/2015 S&P/ASX 200 TR 30/06/2015 Core Portfolio 31/07/2012 30/06/2015 S&P/ASX 200 TR 31/07/2012 30/06/2015 The above chart shows the portfolio and index style mix. The shaded area is the region in which The above chart shows the portfolio and index style mix over time, the smallest dot representing the earliest 75% of the portfolio's holdings fall. date. THIS REPORT HAS BEEN PRODUCED USING PRESENTATION STUDIO, A MODULE OF MORNINGSTAR DIRECT Any Morningstar ratings/recommendations contained in this report are based on the full research report available from Morningstar or your adviser. © 2015 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. Any general advice or ‘class service’ have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement (Australian products) or Investment Statement (New Zealand products) before making any decision to invest. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). Australian Shares Core Portfolio Quarterly Update June 2015 Portfolio Fundamentals Transactions in the Quarter Display Benchmark 1: S&P/ASX 200 TR In June, we bought 3% stakes in four high-quality businesses: Iluka, CSL, Ansell and Brambles; and Inv Bmk1 Cat Avg increased our holding in Veda Group. Funding was from the sale of our stakes in Commonwealth Bank of Average Market Cap (mil) 15,397.7 25,388.3 23,740.5 Australia, Woodside Petroleum, Coca-Cola Amatil and South32, as well as approximately halving our stake in P/E Ratio (TTM) 16.0 15.7 16.3 Telstra Corporation. The transactions improved the portfolio's weighting to moat-rated companies, reduced Debt to Capital % (TTM) 32.3 38.7 39.1 exposure to high fair value uncertainty companies, increased the average portfolio discount to fair value ROA % (TTM) 7.2 5.1 5.1 estimates and enhanced diversification.