Ellerston Australian Share Fund PERFORMANCE REPORT March 2017 The investment objective of the Ellerston Australian Share Fund is to outperform the S&P/ASX 200 Accumulation Index (Benchmark). The Fund aims to achieve this by investing in a concentrated portfolio of no more than 25 Australian listed securities. Ellerston Australian Share Fund Performance to 31 March 2017 Gross Benchmark* Excess Net 1 Month 4.11% 3.32% 0.79% 4.02% 3 Months 2.44% 4.82% (2.38%) 2.16% FYTD 2017 17.51% 15.92% 1.59% 16.52% Rolling 12 Months 21.59% 20.49% 1.10% 20.27% 2 Years (p.a.) 7.85% 4.37% 3.48% 6.67% 3 Years (p.a.) 9.63% 7.53% 2.10% 8.45% 5 Years (p.a.) 11.98% 10.89% 1.09% 10.78% Since Inception (p.a.) 11.63% 10.94% 0.69% 10.43% Since Inception (CUM) 141.17% 129.47% 11.70% 121.10% The return figures are calculated using the redemption price for Class A Units and on the basis that distributions are reinvested. The Gross and Excess return figures are before fees and expenses whereas the Net return figures are net of fees and expenses for the Class A Units. Returns of the Fund may include audited and un-audited results. Past performance is not a reliable indicator of future performance. * The benchmark was changed from the S&P/ASX 200 Accumulation Ex REITS Index to the S&P/ASX 200 Accumulation Index on 1 July 2012. Ellerston Capital Limited Level 11, 179 Elizabeth Tel: 02 9021 7797 [email protected] APIR Code: ECL0005AU ABN 34 110 397 674 www.ellerstoncapital.com Street Sydney NSW 2000 Fax: 02 9261 0528 AFSL 283 000 Market Commentary Global share markets squeezed higher during March, with the MSCI World Index up 1.0%, but equities lost momentum towards month end, as the “Trump Trade” seemingly hit the skids. The Dow Jones Industrial Average broke through the critical 21,000 level for the first time in history, but could not hold the gains, closing at 20,663. As expected on March 15, the Federal Reserve tightened US monetary policy by lifting official interest rates by 25 bps and with a dovish tone, announced: “Information received since the Federal Open Market Committee met in February indicates that the labor market has continued to strengthen and that economic activity has continued to expand at a moderate pace. Job gains remained solid and the unemployment rate was little changed in recent months. Household spending has continued to rise moderately while business fixed investment appears to have firmed somewhat. Inflation has increased in recent quarters, moving close to the Committee's 2% longer-run objective; excluding energy and food prices, inflation was little changed and continued to run somewhat below 2%.” “In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 3/4 - 1 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2% inflation.” But the big surprise during the month was the collapse of the House Republican push to overhaul the Affordable Care Act (Obamacare). This highlighted that the ambitions of the Trump administration and Congressional leaders to “reform” the US tax code, face an even more challenging path in coming months than was previously assumed by market participants. At the same time, the administration saw the tax bill as a ‘must do’ initiative following the failure of Congress to repeal Obamacare. Market observers still see a good chance that Congress will approve some form of new tax legislation in 2017, but the focus might shift to individual tax cuts with grandfather clauses. That said, efforts to pass tax legislation still face many hurdles. The imbroglio over the health care bill shows Congressional Republicans, both moderates and archconservatives, are willing to stand up to President Trump. In the Eurozone, the Euro Stoxx 50 index outperformed its developed peers and posted a solid 5.5% rise. The political backdrop was relatively benign, with Mark Rutte fending off the populist anti-EU candidate in the Dutch elections. Across the continent, Prime Minister Theresa May invoked Article 50 of the Lisbon Treaty, effectively setting the time line for Britain’s divorce from the EU, which is expected to take place on March 31, 2019. A recent study found that Britain has a gross liability (for commitments such as pension liabilities for EU staff, EU loans and other programs) of €86.9 billion, pre any offsets. Despite the official commencement of Brexit, the FTSE 100 rose to 7,322.9 points (+0.8%), as the sustained drop in the pound and U.K. unemployment falling to lows of 4.7% helped support markets. In Asia, the MSCI Asia ex Japan index rallied 3.13%, with the “official” gauge of Chinese factory activity hitting a near five-year high in March, as government stimulus spending and rising prices for factory goods bolstered the world’s second- largest economy. The March manufacturing PMI edged up to 51.8, slightly above the median forecast of 51.7, while the government’s non-manufacturing PMI rose to 55.1 from 54.2 in February. China’s foreign reserves unexpectedly increased in February to $3.005 trillion, marking the first rise since June 2016. Overall, the CSI 300 index had an incredibly volatile month, but finished modestly higher. The Nikkei (-0.4%) was one of the worst performing major markets. Australia’s share market surged to its highest point in almost two years, with the S&P/ASX200 Accumulation Index posting a +3.3% return amid rising earnings estimates, increasing takeover activity and renewed confidence that the global economy will continue to recover, despite US President Donald Trump’s setback on his key healthcare reform. The S&P/ASX 200 share index closed at 5,864.9 points, after hitting a 23-month intra-month high of 5,876 points on the back of widespread gains. The best performing sectors included Utilities (+6.3%), underpinned by strong performances from AGL (+9.3%) and APA (+5.9%), Health Care (+5.5%), Consumer Staples (+5.4%) and Consumer Discretionary (+5.0%). Big banks stepped up in the last week of March as they implemented out-of-cycle interest rate hikes, but despite this, Banks closed up 3.9%, modestly outperforming. As was the case globally, the worst performing sub-sector during the month was Resources (+0.7%), weighed down by commodity prices coming off the boil, particularly iron ore which fell 12.0%. Telecoms (+0.2%), also trailed. The top 5 stock contributions were from CBA (+0.41%), WBC (+0.3%), CSL (+0.25%), NAB (+0.24%) and ANZ (+0.18%). Domestically, the big news released on the last day of the month was by Australia’s banking regulator APRA, announcing further macro-prudential measures to mitigate risks in the east coast residential mortgage sector “in response to an environment of heightened risks”. The last time this occurred was in December 2014, which involved serviceability restrictions and a 10% cap on investor lending to cool excessive mortgage growth. 2 Authorized Deposit-Taking Institution’s are now immediately expected to: Limit the amount of interest only loans to 30% of new residential lending (currently around 40% of total system approvals) Within this, banks must place strict internal limits on the volumes of interest-only loans with LVRs above 80% Require justification for interest only loans above 90% Better management to ensure previously instated 10% investor lending caps are not breached Review loans to ensure serviceability measures are met and set at appropriate levels for current conditions Continue to restrain from lending in high risk areas e.g high loan to income and high LVR loans Company Specific News The Hits Treasury Wine Estates (TWE +3.8%) TWE hosted its inaugural investor presentation in the US, highlighting the progress from its “Agricultural to Brand-led” strategy. Key presentations were espoused from all business heads laying out the platform to deliver multi-year growth, driven by its luxury and masstige brand portfolio. In a surprise move, the company also launched a new French portfolio with luxury wines from Bordeaux, Burgundy, Champagne and Provence to be sold in the North Asian market later this year. This capital light model (inventory investment only) could add another significant growth leg to the company. TPG Telecom (TPM +11.7%) TPM released its 1H17 results which beat expectations by ~5%, driven by cost control in its iiNet platform and lower depreciation and interest charges. The company also re-iterated its FY17 EBITDA guidance of $820m-$830m. After de- rating significantly over the last six months, a sense of stabilisation was enough to squeeze the significant short positions held in the company. Spotless Group (SPO +34.8%)/Downer (DOW -12.7%) We all know the game of snakes & ladders and this is a classic example. Downer totally surprised the market in a mid- month raid on cleaning and catering contractor Spotless Group, launching a takeover offer at $1.15/share (representing a 59% premium to last close of $0.725). SPO’s shareholders had endured a tough couple of years, with the share price falling from a high of $2.47 and the bid at least recovered a few rungs on the ladder. That said, DOW’s shareholders felt the full force of the snake’s fangs. The offer was funded through a heavily discounted fully underwritten $1,011m entitlement priced at $5.95 vs the previous close of $7.42.