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 ag i Small Mid Large Equity 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.

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. ROE % (TTM) 15.5 15.7 15.6 The portfolio retains leverage to energy with Santos, which we think is cheaper than Woodside Petroleum, and a still substantial weighting to Australian banks. We sell South32 on quality and value grounds, preferring existing high-uncertainty holding Alumina Limited, which is more directly exposed to alumina, and narrow moat-rated Iluka Resources which plays off different themes. Wide moat-rated Brambles is better positioned in the fast-moving consumer goods space, and is more attractively priced relative to outgoing Coca-Cola Amatil. Narrow moat-rated CSL and Ansell add to the portfolio's high-quality health-care Asset Allocation exposure, while wide moat-rated Veda, tied to growth in more extensive consumer credit reporting, diversifies our financials holdings. Portfolio Date: 30/06/2015 % In May, we trimmed our stake in the National Australia Bank (including selling our entitlement rights on- Stock 98.2 market) and reinvested the proceeds in Platinum Asset Management. The transaction improves Cash 1.8 diversification and increases growth potential. Total 100.0 In February, we sold stakes in Alumina Limited and Woodside Petroleum to fund stakes in Computershare and Goodman Group. The transactions improved the portfolio's weighting to moat-rated companies, reduced exposure to high fair value uncertainty companies and enhanced diversification.

Equity Country Exposure In aggregate, the 2015 transactions have improved portfolio performance. Portfolio Date: 30/06/2015 % Australia 98.2 Cash 1.8 Total 100.0

Equity Sectors (GICS) Portfolio Date: 30/06/2015 % Energy 3.9 Materials 14.5 Industrials 8.4 Consumer Discretionary 5.6 Consumer Staples 9.0 Healthcare 11.6 Financials 40.1 Information Technology 3.3 Telecom Services 3.6 Total 100.0

Performance Relative to Peer Group (one month lag) Quarter Performance Peer Group (5-95%): All Managed Investments - Australia - Equity Australia Large Blend The Australian Shares Core Portfolio delivered a return of negative 7.9% in the June 2015 quarter, versus a Top Quartile 2nd Quartile 3rd Quartile Bottom Quartile negative 6.5% return for the S&P/ASX 200 Accumulation Index, underperforming by 1.3%. 22.0 20.0 The key drivers of the underperformance were the correction in ResMed following disappointing trial results; 18.0 the underperformance of Australia and New Zealand and National Australia banks, where we are 16.0 overweight, and the decline in Trade Me Group which mirrored the depreciation of the New Zealand dollar 14.0 12.0 relative to the Australian dollar. Not owning Macquarie Group was also a drag, having outperformed 10.0 significantly in the quarter. 8.0 6.0 Contributors: 4.0

Return YTD 1 year 3 years 5 years Since Santos (overweight): Stabilisation of the oil price, the decline in global drilling activity and the approach of inception meaningful Gladstone LNG cash flow saw Santos outperform. The perceived risk of an equity raise, which Aust Shares - Core S&P/ASX 200 TR we think is unlikely given the ability to sell pipelines if required, also declined. The timing of the downturn in oil is unfortunate for Santos, with the balance sheet at its weakest and cash flow from Gladstone LNG yet to Risk-Reward start. We believe Santos should have sufficient liquidity to survive the downturn and benefit from a cyclical recovery in the oil price. Time Period: 1/08/2004 to 30/06/2015 10.0 Aust Shares - Core QBE Insurance (overweight): Sale of non-core assets to refocus on the core business is positive. 8.0 S&P/ASX 200 TR Encouragingly, the market seems to have taken the latest result as a sign that the recovery is underway,

6.0 confirmed with a positive outlook at the annual general meeting in April. QBE Insurance is on the path to recovery and we see upside from the restructure, improvement in the U.S. economy and an eventual 4.0 increase in interest rates, which drives returns on the insurance premium float.

2.0 Commonwealth Bank (underweight): We think Australia and New Zealand Banking Group and National 0.0 Australia Bank offer better value. We recently sold our underweight position in Commonwealth Bank. While 0.0 3.0 6.0 9.0 12.0 15.0 18.0 Return Commonwealth Bank is the highest-quality franchise of the wide moat-rated banks, we think the qualitative Std Dev differences are largely shades of grey and don’t justify the premium the Commonwealth Bank attracts.

Detractors: Aust Shares - Core - Market Performance ResMed Inc. (overweight): ResMed suffered from disappointing trial results which showed no benefit in Time Period: 1/08/2004 to 30/06/2015 using ResMed's therapy in congestive heart-failure patients. However, we had not factored in the impact of Inv Bmk1 a positive trial result to our valuation, and sales for this application represent less than 2% of ResMed’s total. Up Period Percent 61.07 64.12 We remain comfortable with the core obstructive sleep apnoea business. ResMed brings important Down Period Percent 38.93 35.88 exposure to health care and the underlying drivers of growing wealth, obesity and awareness of the impact Best Month 9.14 7.98 of sleep apnoea. Worst Month -12.71 -12.61 Best Quarter 23.25 21.50 Trade Me (overweight): The share price declined in line with depreciation of the New Zealand dollar in the quarter. We continue to be attracted to Trade Me’s strong market positions in used goods (it’s the eBay of Worst Quarter -16.08 -18.25 New Zealand) as well as in motors and jobs. Encouragingly, the important real estate segment seems to Up Capture Ratio 95.56 100.00 have stabilised after missteps saw listings decline. We still think the network effect in Trade Me is Down Capture Ratio 97.58 100.00 attractive, as is the yield approaching 5%.

Risk Macquarie Group (underweight): Strong improvement in the underlying businesses sees Macquarie’s share Time Period: 1/08/2004 to 30/06/2015 price on a tear. Asset management is improving and provides a more stable base of earnings but the market Inv Bmk1 facing businesses, while recovering from an extended period of underperformance, remain highly cyclical. Return % pa 8.03 8.75 While the cycle can roll on, driving Macquarie’s performance, we prefer the more stable, wide moat-rated Std Dev 13.79 13.66 major retail Australian banks and the cleaner, narrow moat-rated investment managers such as Platinum Downside Deviation 3.82 0.00 Asset Management. Alpha -0.37 0.00 Beta 0.94 1.00 R2 86.38 100.00 Sharpe Ratio (arith) 0.24 0.29 Tracking Error 5.16 0.00

GICS Sector Weights Relative to Benchmark Sector and Industry Weightings Analysis Financials 40.1 47.6 Healthcare is now our largest sector overweight position. The market pullback provided a welcome Materials 14.5 opportunity to add Ansell and CSL, on top of our existing holding in ResMed. The health-care weighting 14.8 leverages the themes of growing wealth, increasing standards of living, and longevity and the aging Consumer Staples 9.0 6.6 population. Telecom Services 3.6 6.0 The consumer staples sector is our second-largest overweight position, underpinned by Woolworths and Consumer 5.6 Wesfarmers. Both are strong, high-quality businesses and should grow their defensive earnings at attractive Discretionary 4.0 rates in most economic conditions. A large proportion of earnings should be paid to shareholders as Healthcare 11.6 6.0 dividends. While competitive threats have grown with the likes of Aldi and Costco, we believe Woolworths Energy 3.9 in particular can reduce prices and successfully defend its market share thanks to its scale and cost 5.1 advantage. We are not expecting a turnaround in the short term, but given valuation, the defensiveness of Industrials 8.4 7.1 the sector and the quality of the franchise, we think it's an attractive investment on a three- to five-year Technology 3.3 view. 0.7 Utilities 0.0 2.0 Technology is our third-largest overweight position via our holding in narrow moat-rated Computershare. However, we believe the sector grouping is slightly misleading as the key earnings drivers for 0.0 10.0 20.0 30.0 40.0 50.0 60.0 Computershare are trading volumes, interest rates and corporate activity globally. We think Computershare is dominant in the space and has further room to grow by consolidating market share. Core Portfolio S&P/ASX 200 TR We are also overweight the consumer discretionary sector, however, our investments are not typical bricks- and-mortar consumer discretionary stores which we generally think are structurally challenged. Our exposure GICS Industry Group Weights Relative to Benchmark comes from Crown Resorts, a play on increased inbound tourism in Australia and growing wealth and

5.6 consumption in China; and Trade Me, which is the dominant online consumer platform in New Zealand. Commercial Services and Supplies Westfield Corporation plays on the theme of rising spending via the company's high-end malls in the U.S and 5.5 Health Care Equipment and Services U.K., and helps diversify the portfolio's currency exposure.

3.2 Food and Staples Retailing

2.5 Software and Services Our largest sector underweight position is to financials, reflecting a significant underweight, but still large in

1.5 absolute terms, exposure to banks. We have greatly increased the diversification of our financials, away Retailing from banks, with the addition of Platinum Asset Management and an increased weighting to Veda Group, on 0.7 Consumer Services top of the pre-existing holdings in Westfield Corporation, Goodman Group and QBE Insurance Group. The lack 0.4 Diversified Financials of exposure to passive real estate and utilities has hurt recent performance, but the risks from asset price

0.1 Insurance inflation build. Our property exposures of Westfield Corporation and Goodman Group are more growth-

0.0 orientated and global facing. Both bring international exposure and benefit from a falling Australian dollar. Consumer Durables and Apparel Our 8.2% industry group underweight to banks reflects the reduction in our National Australia Bank position -0.1 Household and Personal Products and cutting the last of our exposure to Commonwealth Bank. Despite being a fantastic franchise, it's also the -0.1 Automobiles and Components most expensive of the bunch. Banks are the largest single industry allocation at 23% of the portfolio.

-0.1 Real Estate

-0.2 Our second-largest underweight position is to telecommunications services after reducing our exposure to Pharmaceuticals and Biotechnology Telstra to reinvest in cheaper, high-quality stocks. The portfolio also remains devoid of utilities companies, -0.4 Capital Goods which we think will generally face a tougher time in a rising interest rate environment. We are now -0.7 Media underweight energy stocks after selling Woodside Petroleum at close to fair value but retain exposure to

-0.8 Materials improvement in oil through leveraged play Santos. The addition of Iluka sees the portfolio with slight

-0.8 underweighting to materials. Iluka benefits from the industrial recovery in the U.S. and Europe and the likely Food, Beverage and Tobacco consumption of higher quality, more zircon intensive tiles. Other materials exposures are to BHP Billiton and -1.1 Energy Alumina Limited. BHP Billiton is the highest-quality materials company and offers superior diversification -2.0 Utilities while earnings at Alumina Limited should continue to rise with the recovery in alumina.

-2.4 Telecommunication Services

-4.1 Transportation

-8.2 Banks

-12.0-10.0 -8.0 -6.0 -4.0 -2.0 0.0 2.0 4.0 6.0 8.0

Returns Relative to Benchmark As of Date: 30/06/2015 20.0 15.1 15.0 11.8 9.7 10.0 8.8 8.1 8.7 5.7 5.0 3.1 0.1 0.3 0.0 -5.0 -6.5 -10.0 -7.9 -15.0

Return 3 month YTD 1 year 3 years 5 years Since inception (29/07/2004)

Aust Shares - Core S&P/ASX 200 TR

Performance measures are expressed before fees, costs and taxes are deducted. Dividends are reinvested in the portfolio. The performance displayed is for the Morningstar Core Equities Portfolio and represents modelled performance only. This performance will differ from actual performance depending on factors such as transaction timing and any divergence from constituent weightings. * Where inception date is not the beginning of a month, returns are calculated using a start date which is the first day of the month following inception.

Selection Effects Time Period: 1/04/2015 to 30/06/2015

Underperform Outperform Overweight 8.00

Relative Weight 4.00 2 11 1013 96 1 2 5 4 5 4 8 15 0.00 7 Underweight 14 12 13 10 12 6 15 97 14118 3

-4.00

3 -8.00

-45.00 -36.00 -27.00 -18.00 -9.00 0.00 9.00 18.00 27.00 36.00 45.00

Relative Return

Best Selections Investment Type Weight +/- Return +/- Effect Worst Selections Investment Type Weight +/- Return +/- Effect

1 Santos Ltd Stock 3.26 15.99 0.46 1 ResMed Inc DR Stock 5.49 -15.17 -0.92

2 QBE Insurance Group Ltd Stock 4.05 11.16 0.42 2 Trade Me Group Ltd Stock 2.69 -10.71 -0.29

3 Commonwealth Bank of Au... Stock -6.54 -2.53 0.17 3 Macquarie Group Ltd. Stock -1.79 15.62 -0.26

4 Platinum Asset Manageme... Stock 1.80 1.98 0.16 4 Coca-Cola Amatil Ltd Stock 2.12 -8.79 -0.22

5 Goodman Group Stock 2.33 6.79 0.16 5 National Australia Bank Ltd Stock 2.15 -2.44 -0.16

6 Veda Group Ltd Stock 3.23 2.02 0.08 6 James Hardie Industries PL... Stock -0.48 24.23 -0.11

7 Slater & Gordon Ltd Stock -0.12 -43.38 0.06 7 Origin Energy Ltd Stock -0.93 12.16 -0.10

8 Telstra Corp Ltd Stock 2.04 3.63 0.06 8 Scentre Group Stock -1.39 6.59 -0.09

9 Westfield Corp Stock 3.07 1.82 0.05 9 Aurizon Holdings Ltd Stock -0.73 12.10 -0.08

10 Iluka Resources Ltd Stock -0.21 -3.32 0.05 10 Australia and New Zealand ... Stock 3.15 -2.45 -0.08

11 Alumina Ltd Stock 3.36 1.65 0.05 11 Transurban Group Stock -1.30 6.16 -0.08

12 Seek Ltd Stock -0.38 -11.55 0.04 12 Orica Ltd Stock -0.52 14.94 -0.07

13 Ansell Ltd Stock -0.25 -6.23 0.04 13 Crown Resorts Ltd Stock 2.95 -2.42 -0.07

14 BlueScope Steel Ltd Stock -0.14 -21.90 0.03 14 Suncorp Group Ltd Stock -1.18 5.81 -0.07

15 Woodside Petroleum Ltd Stock 0.59 5.49 0.03 15 Sonic Healthcare Ltd Stock -0.55 10.88 -0.06

Allocation Effects Time Period: 1/04/2015 to 30/06/2015

Underperform Outperform Overweight 5.00

3 4 Relative Weight Relative 2.50 3 4 1 5

0.00 Underweight

2 5 -2.50

1 -5.00 -12.50 -10.00 -7.50 -5.00 -2.50 0.00 2.50 5.00 7.50 10.00 12.50 Relative Return

Best Weighting Weight +/- Return +/- Effect Worst Weighting Weight +/- Return +/- Effect 1 Energy 1.18 7.62 0.09 1 Transportation -4.30 6.08 -0.26 2 Media -0.76 -10.31 0.08 2 Diversified Financials -1.71 7.41 -0.21 3 Retailing 1.88 3.27 0.08 3 Food and Staples Retailing 3.47 -4.05 -0.14 4 Telecommunication Services 1.52 3.95 0.05 4 Health Care Equipment and Services 3.09 -3.30 -0.11 5 Commercial Services and Supplies 0.72 0.14 0.05 5 Utilities -2.00 3.97 -0.08

Cumulative Attribution Effects Time Period: 1/07/2014 to 30/06/2015

GICS Industry GroupCumulative Attribution Effects Attribution Effect % Cumulative Allocation Effect 8.00 Cumulative Selection Effect Cumulative Active Return 6.00

4.00

2.00

0.00

-2.00

-4.00

2.00 Attribution Effects Allocation Effect 1.00 Selection Effect Active Return 0.00

-1.00

7-31-2014 8-31-2014 9-30-2014 10-31-2014 11-30-2014 12-31-2014 1-31-2015 2-28-2015 3-31-2015 4-30-2015 5-31-2015 6-30-2015

Equity Sectors (GICS) Time Period: 1/07/2012 to 30/06/2015

100.0 90.0 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 12/2012 06/2013 12/2013 06/2014 12/2014 06/2015 Energy % Materials % Industrials % Consumer Discretionary % Consumer Staples % Healthcare % Financials % Information Technology % Telecom Services % Utilities %

Equity Style Valuation Time Period: 1/07/2012 to 30/06/2015

100.0

90.0

80.0

70.0

60.0

50.0

40.0

30.0

20.0

10.0

0.0 12/2012 06/2013 12/2013 06/2014 12/2014 06/2015 Value % Core % Growth %

Equity Market Capitalization Time Period: 1/07/2012 to 30/06/2015

100.0

90.0

80.0

70.0

60.0

50.0

40.0

30.0

20.0

10.0

0.0 12/2012 06/2013 12/2013 06/2014 12/2014 06/2015 Giant % Large % Mid % Small % Micro %

Investment Methodology and Process Portfolio Mandate and Typical Positioning

Core Portfolio Strategy The Australian Shares Core Portfolio is an actively managed concentrated portfolio consisting of our best ideas in the S&P/ASX 200 Index. The portfolio is constructed with a focus on long-term fundamental value and bias toward businesses with sustainable competitive advantages (economic moats) and predictable cash flows.

Total return from the Core Portfolio will tend to be driven by both capital appreciation and dividend yield with the mix dependent on the opportunities available. Core holdings may overlap with our Income, Growth, and Sustainable Portfolios with the style bias driven by the relative value offered by market prices. Investors in the Core Portfolio simplify their investment decision process by outsourcing the style tilt to Morningstar. Relative value is largely determined by comparing prevailing stock prices to our research team’s price/fair value estimates. The Core Portfolio has a strong bias toward companies with an economic moat and more predictable cash flows (lower uncertainty). This approach helps ensure preservation of capital, low turnover, and reduced volatility while pursuing excess returns.

Investment Strategy Committee Process The Australian equity portfolios are managed by their portfolio managers and Morningstars eight-person investment strategy committee which comprises selected members of the equities research team. Committee meetings reinforce rigor and consistency of research methodology through collaborative debate on proposed and existing holdings. A constant feedback loop between Morningstar’s research team and investment committee members leverages team strengths in vetting stock calls and portfolio holdings. This constant cycle strengthens team culture, expertise and ratings, minimising key-person risk and common behavioural pitfalls.

The committee is experienced and well-resourced, ensuring stability and succession planning. Representation from each sector team ensures cross-market expertise. Committee members have average industry experience of 17 years and average tenure with Morningstar of 10 years. We are not averse to an occasional portfolio manager change, as the driving forces behind our portfolio construction process are our bottom-up research and investment committee overlay.

In-depth research by our large, global, and experienced analyst team is the bedrock of our portfolio management process and facilitates our high conviction investments. We have more than 100 equity and credit analysts globally, covering around 1,700 stocks and 700 debt issuers, making us one of the largest independent research teams in the world. Our 20 Australian and New Zealand-based analysts cover about 230 Australian and New Zealand stocks which includes extensive research reports, timely event analysis, actionable special reports, and deep discounted cash flow modelling on every company. This is complimented by our local credit research to help us assess the complete capital structure and preserve capital while pursing upside opportunities.

Investment Committee Feedback Loop

Portfolio Overview

An actively managed portfolio of Australian equities, with a focus on companies with economic moats that are trading at relatively attractive valuations.

Sector Specialist Managed Accounts Growth Defensive Asset Allocation Return Objective Time Horizon Risk Profile Assets % Assets % Australian Shares S&P/ASX 200 Accumulation Index 7 years High 100 0 Core

Australian Shares S&P/ASX 200 Accumulation Index 7 years High 100 0 High Yield

Australian Shares S&P/ASX Small Ordinaries Accumulation Index 7 years Very high 100 0 Small Cap

Property S&P/ASX 200 REITs Accumulation Index 5 years High 100 0

Global Shares MSCI ACWI Accumulation Index 7 years High 100 0 (Net Dividends Reinvested)

Cash Bloomberg Australian Bond Bill Index 2 years Very low 0 100

This document is issued by Ibbotson Associates Australia Limited (ABN 54 071 808 501, AFS Licence No. 228986) (‘Ibbotson’). Ibbotson is a member of the Morningstar group of companies (‘Morningstar’). © 2015 Morningstar, Inc. All rights reserved. In compiling this document, Ibbotson has relied on information and data supplied by Morningstar and other third party information providers. Whilst all reasonable care has been taken to ensure the accuracy of information provided, neither Ibbotson, Morningstar nor their third party information providers accept responsibility for any inaccuracy or for investment decisions or any other actions taken by any person on the basis or context of the information included. Any Morningstar ratings/recommendations contained in this report are based on the full research report available from Morningstar or your adviser. Past performance is not a reliable indicator of future performance. Neither Ibbotson nor Morningstar guarantees the performance of any investment or the return of capital. The information provided is general advice only has been prepared without reference to an individual person’s objectives, financial situation or particular needs. You should consider the advice in light of these matters and if applicable the relevant disclosure document before making any decision to invest. To obtain advice tailored to your situation, individuals should contact a professional financial adviser. For a copy of the relevant disclosure document, please contact our Distribution Team on 02 9276 4550. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782.

Diversified Managed Accounts Growth Defensive Asset Allocation Return Objective Time Horizon Risk Profile Assets % Assets % Defensive CPI+ 0.75% Rolling 1 year Low 15 85

Conservative CPI+ 1.0% Rolling 3 years Low to Medium 30 70

Balanced CPI+ 2.5% Rolling 5 years Medium 50 50

Growth CPI+ 3.5% Rolling 7 years Medium to High 70 30

High Growth CPI+ 4.5% Rolling 9 years High 85 15

High Growth Plus CPI+ 5.0% Rolling 10 years High 95 5

Diversified Income CPI+ 2.0% Rolling 4 years Medium 40 60