ASX Small Caps Systematic Monthly Performance Report

September 2019 Performance Overview The Blue Orbit Australian Small Caps Systematic Alpha strategy returned -0.58% during September, underperforming the benchmark S&P/ASX Small Ordinaries Accumulation index which returned 2.61%. Month FYTD 1 Year 2 Years Inception* (p.a.) Blue Orbit ASX Small Systematic (paper) -0.58% 0.98% 4.38% 13.88% 14.14% S&P/ASX Small Ordinaries 2.61% 3.11% 3.94% 11.33% 12.03% Excess -3.19% -2.13% 0.44% 2.55% 2.12% * Paper portfolio inception date of 31/08/2017, annualised returns. ** All figures calculated using FactSet.

Global markets finished the month higher, with the S&P 500 1.87% (in USD) and MSCI World Gross AUD up 2.1%. September saw a sharp reversal in global factor performance, with value factors rebounding strongly from a lengthy period of poor performance, and growth and momentum factors seeing a sharp drawdown after months of strong performance. The Australian market was also positive with the S&P/ASX 100 up 1.83% for the month. Small caps stocks outperformed larger cap stocks, with the Small Ordinaries index up 2.61%. Within small cap stocks, Bellamy’s was the strongest performer, up 73.6% on news of a takeover bid from China Mengniu Dairy. Some of the smallest stocks had a strong run, with Speedcast, Liquidifed Natural Gas, Mesoblast, Ioneer, and Flexigroup all up more than 40%. On a sector basis, Financials (+9.8%) and Utilities (+8.9%) performed strongly, while Information Technology (-3.86%) and Energy (-1.71%) were detractors.

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ABN: 74 623 916 816 | AFSL: 513710 Commercial in Confidence 1 ASX Small Caps Systematic Monthly Performance Report

Portfolio Characteristics As at 30 September 2019 Characteristic Portfolio Benchmark # of Securities 106 200 Market Capitalization 2,926 1,979 Active Share 50.5 -- Dividend Yield 3.1 3.0 Price/Earnings 19.7 19.2 Price/Cash Flow 13.4 12.4 Price/Book 2.4 1.9 ROE 17.5 13.4 PEG using FY1 Est 3.1 5.0 LT Debt to Capital 16.3 19.2

Alpha Signal Attribution 12 Month 12 Month 1 Month 1 Month 12 month Alpha Signal Tracking Information Return Excess Excess Error Ratio Small Ords +2.61% Defensive Alpha Signal +4.12% +1.51% +6.54% 4.10% 1.6 Quality Alpha Signal +1.76% -0.85% +8.43% 3.61% 2.3 Trend Alpha Signal +0.06% -2.55% +5.93% 5.12% 1.2 Diversified Alpha Signal +1.99% -0.62% +7.06% 1.85% 3.8 Systematic Alpha Portfolio (Model) -0.58% -3.19% +0.44% 4.12% 0.1 Systematic (Live) - -

Defensive Alpha Signal The Defensive Alpha Signal outperformed significantly in September. Sector allocation contributed 71bp, mostly due to the large overweight to Financials and large underweight to Information Technology. Stock selection contributed 0.80%, mostly within Financials and Consumer Discretionary. Communications Services and Consumer Staples were the only detracting sectors. Largest stock contributors were overweight positions in (+15.6%) and IOOF (+30.2%), and an underweight position in Appen (-18.2%). The only notable detractors were underweights in Bellamy’s Australia (+73.6%) and Mesoblast (+49.1%). Companies that are dividend payers returned 2.8% for the month, while non-dividend paying companies returned 5.2%.

Quality Alpha Signal The Quality Alpha signal underperformed by 0.85% during September. Sector allocation detracted 39bp, with more than that from the large overweight to Information Technology, while the underweight to Real Estate added some value. Stock selection detracted 0.46%, with 0.84% of the detraction coming from Health Care, and 1.06% detraction from Materials. Good stock selection in Consumer Staples contributed 0.97% to performance. ABN: 74 623 916 816 | AFSL: 513710 Commercial in Confidence 2 ASX Small Caps Systematic Monthly Performance Report

All of the top stock contributors were due to overweight positions – Flexigroup Ltd (+40.3%), Bellamy’s (+73.6%), and EML Payments (+11.4%) were the key contributors. The large overweight to Pro Medicus (-24.3%) detracted 79bp, while overweights to Ramelius Resources and Silver Lake Resources, and not holding IOOF Holdings (+30.2%), detracted a further 71bps. Companies that had positive free cash flow returned 3.2% for the month. The cap-weighted portfolio of stocks with zero or negative free cash flows returned 3.3% for the month.

Trend Alpha Signal The Trend Alpha Signal strongly underperformed the benchmark by 2.6% in September. Sector allocation detracted 54bp, half of which came from the overweight position to Information Technology. Poor stock selection detracted 2.02%, particularly in Financials and Health Care. The large overweight position to Appen Ltd (-18.2%) detracted 31bp, and not holding Bellamy’s (+73.6%) or IOOF (+30.2%) collectively detracted a further 51bp. Despite the significant underperformance of the Trend signal in the market environment, the Trend signal still significantly outperformed a naïve momentum factor for the month (outperformed by 89bps). Diversified Alpha Signal The Diversified Alpha Signal underperformed by 62bp in September. Sector allocation was a small detractor, with stock selection detracting 55bp. The big detractors were poor stock selection in Materials and Health Care. The biggest stock contributors were due to overweight positions in Bellamy’s (+73.6%), Touch (+15.8%), and Janus Henderson (15.6%). Biggest stock detractors were the overweight to Pro Medicus (-24.3%), not holding Mesoblast (+49.1%), A.P. Eagers (+17.7%) or Zip Co (+29.5%).

Systematic Alpha versus Diversified Alpha Signal The Systematic Portfolio underperformed the Diversified Alpha Signal by 2.57%, which was almost all due to poor stock selection. The Systematic Portfolio was overweight Information Technology, which was a key detractor for the month, detracting 1.11%. The increased overweight to Appen provided nearly half of the detraction, with increased weights to Bravura Solutions, and Wisetech the other half. Poor stock selection within the Financials and Health Care sectors detracted a further 90bps. The Systematic Portfolio has a structural tilt toward larger capitalisation stocks compared to the Diversified Alpha Signal. With the stocks elevated to the ASX100 included, this was on average 26% overweight the largest quintile of stocks by size in the benchmark, slightly underweight the second quintile, and well underweight the three smallest quintiles. Size tilt was the big culprit here in terms of underperformance to the Diversified Signal, with the two smallest quintiles by size in the benchmark returning by far the strongest total returns. Relative to the Diversified Alpha signal, the larger cap tilt of the Systematic Alpha portfolio detracted 0.90bps alone. Stock selection within the largest quintile of stocks detracted a further 0.97%.

ABN: 74 623 916 816 | AFSL: 513710 Commercial in Confidence 3 ASX Small Caps Systematic Monthly Performance Report

The Diversified Alpha Signal had outperformed the benchmark for the previous 13 months in a row, and finally saw underperformance when Small and Value rallied together. The Systematic Alpha portfolio naturally increases tilts towards larger stocks, and increases sector and stock active positions. In September the hit rate of stock contributors was only 45.9%, which is well below the targeted 65%. The underperformance is evident when this low hit rate is combined with the top 5 contributors summing to 0.85%, and bottom five detractors summing to 1.71%.

Sector and Stock Attribution

GICS Sector Aus. Small Caps Systematic Alpha S&P/ASX Small Ordinaries Attribution Analysis

Average Contrib. To Average Total Contrib. To Allocation Selection Total Return Total Effect Weight Return Weight Return Return Effect Effect

Total 100.00% -0.58% -0.58% 100.00% 2.61% 2.61% -0.43% -2.76% -3.19%

Real Estate 10.75% -0.25% -0.03% 12.88% -0.98% -0.13% 0.08% 0.08% 0.15% Consumer Discretionary 18.31% 5.19% 0.94% 15.16% 5.41% 0.80% 0.09% -0.04% 0.06% Energy 5.78% 0.55% 0.04% 3.14% -1.71% -0.04% -0.12% 0.14% 0.01% Communication Services 5.39% 3.19% 0.17% 5.32% 3.30% 0.18% 0.00% -0.01% -0.01% Utilities 0.27% 1.02% 0.00% 0.57% 8.85% 0.05% -0.02% -0.02% -0.04% Industrials 6.60% -2.51% -0.16% 8.08% -0.26% -0.02% 0.04% -0.12% -0.08% Consumer Staples 4.93% 2.67% 0.13% 7.53% 8.12% 0.59% -0.13% -0.27% -0.39% Materials 17.18% -0.82% -0.13% 21.02% 1.99% 0.42% 0.01% -0.46% -0.45% Financials 10.94% 4.47% 0.47% 10.97% 9.77% 1.03% 0.00% -0.55% -0.55% Health Care 6.22% -11.46% -0.78% 7.69% 0.39% 0.03% 0.03% -0.81% -0.77% Information Technology 13.65% -8.84% -1.24% 7.65% -3.86% -0.30% -0.41% -0.70% -1.12%

ASX_SMALL_SYSTEMATIC S&P/ASX Small Ordinaries Variation Company Name Average Total Contrib. Average Total Contrib. Contrib. Weight Return To Return Weight Return To Return To Return

Top 5 Contributors Premier Investments Limited 1.72% 30.28% 0.47% 0.84% 30.28% 0.23% 0.24% Holdings Ltd 4.85% 5.72% 0.27% 1.56% 5.72% 0.09% 0.18% Afterpay Touch Group Ltd. 0.97% 15.78% 0.16% 0.00% 0.00% 0.00% 0.16% Limited 3.03% 6.10% 0.18% 0.71% 6.10% 0.04% 0.14% Corporation Limited 2.05% 13.39% 0.25% 0.89% 13.39% 0.11% 0.13% Bottom 5 Detractors Independence Group NL 1.17% 19.86% 0.10% 1.55% 19.86% 0.28% -0.18% IOOF Holdings Ltd 0.05% 30.23% 0.02% 0.95% 30.23% 0.25% -0.23% Bellamy's Australia Ltd. 0.01% 0.93% 0.00% 0.48% 73.60% 0.26% -0.26% Pro Medicus Limited 2.32% -24.31% -0.69% 0.67% -24.31% -0.19% -0.50% Appen Ltd. 3.87% -18.20% -0.79% 1.24% -18.20% -0.25% -0.54%

The Systematic Alpha Portfolio underperformed the Small Ords by 3.19%. Sector allocation was a moderate detractor, nearly all of which came from the large overweight to Information Technology. Stock selection has provided most of the underperformance. Stock selection in Information Technology, Health Care, and Materials was strongly negative.

ABN: 74 623 916 816 | AFSL: 513710 Commercial in Confidence 4 ASX Small Caps Systematic Monthly Performance Report

As a group, the six stocks that had previously been elevated in the S&P/ASX100 underperformed, detracting 33bp. Altium and Wisetech were the biggest detractors, although Afterpay did outperform. These overweight positions were reduced during the month during the normal rebalancing process.

The following attribution shows that size allocation detracted 85bp in September, with stock selection within each size group detracting a further 2.35%.

Market Cap Quintile Aus. Small Caps Systematic Alpha S&P/ASX Small Ordinaries Attribution Analysis Average Total Contrib. To Average Total Contrib. To Allocation Selection Total Effect Weight Return Return Weight Return Return Effect Effect Total 100.00% -0.58% -0.58% 100.00% 2.61% 2.61% -0.85% -2.35% -3.19% MC Quintile 1: 2013.8 - 11702.3 63.72% -1.45% -0.88% 37.55% 0.80% 0.31% -0.44% -1.41% -1.86% MC Quintile 2: 1226.7 - 2009.6 21.03% 2.83% 0.55% 28.49% 3.68% 1.03% -0.08% -0.20% -0.28% MC Quintile 3: 744.7 - 1223.8 13.34% -1.94% -0.25% 17.97% 2.91% 0.50% -0.01% -0.63% -0.64% MC Quintile 4: 472.8 - 734.7 1.32% -1.49% -0.02% 10.86% 4.98% 0.52% -0.21% -0.09% -0.30% MC Quintile 5: 70.2 - 455.6 0.58% 3.25% 0.02% 5.13% 4.89% 0.25% -0.10% -0.02% -0.12% The Systematic Alpha portfolio naturally increases tilts towards larger stocks, and increases sector and stock active positions. Of the 92 stocks that the Diversified Alpha Signal was overweight, the Systematic Portfolio further overweighted 22. Overweighting of these 22 stocks collectively detracted 1.9% from performance against the benchmark, although 9 of the stocks were actually positive contributors.

Naïve Factor Returns The following table shows the returns over the last 12 months for some naïve factor portfolios. Each portfolio has stock active weight limits of ±3.0% relative to the benchmark, as well as 5 times benchmark weight limit.

Month Ending S&P/ASX Equal Low 12 Month Price to Dividend Small Ords Weight Volatility Momentum Earnings Yield 31/10/2018 -9.60% -9.49% -7.64% -14.56% -7.29% -7.23% 30/11/2018 -0.37% -0.68% -0.58% 0.31% -0.02% -0.22% 31/12/2018 -4.18% -3.75% -2.29% -6.78% -1.42% -1.58% 31/01/2019 5.56% 4.24% 3.54% 7.72% 4.33% 3.57% 28/02/2019 6.78% 7.18% 6.42% 9.02% 6.45% 6.89% 31/03/2019 -0.12% -0.79% -0.20% 0.87% -1.10% -0.87% 30/04/2019 4.11% 4.32% 3.41% 5.11% 2.49% 3.66% 31/05/2019 -1.25% -0.39% -0.18% 0.58% -1.12% -1.03% 30/06/2019 0.92% 0.41% 1.23% 2.49% 1.18% 1.28% 31/07/2019 4.51% 4.51% 4.47% 2.93% 4.37% 3.66% 31/08/2019 -3.85% -2.37% -1.73% 0.14% -3.77% -2.90% 30/09/2019 2.61% 3.24% 2.08% -0.83% 2.93% 3.82%

12 Month Total 3.94% 5.41% 8.04% 4.82% 6.39% 8.56%

Three of the naïve factors outperformed the Small Ords in September, with Dividend Yield outperforming by 1.21%, and Equal Weight by 0.63%. Momentum had a big reversal compared to last month, its 3rd monthly reversal in a row. Over 12 months, all five of the naïve factors are now outperforming, with Low Volatility and Dividend Yield both up by over 4%.

ABN: 74 623 916 816 | AFSL: 513710 Commercial in Confidence 5 ASX Small Caps Systematic Monthly Performance Report

Conclusion

As always there were a few surprises with the August reporting season. What followed in September was one of the strongest value rallies in history across global equities. The value rally wasn’t quite as strong in Australian Small Caps, but this is the type of market environment where the Blue Orbit Australian Small Caps Systematic Alpha strategy is generally expected to underperform.

What we saw was that investors from the very high PE stocks such as Appen, Pro Medicus and Altium, took the opportunity to realise some of their strong gains over the last 12 months. Some of these profits were reinvested in the smaller and cheaper stocks in the Small Ords.

The Systematic Alpha portfolio suffered an underperforming month against its alpha signals and the general market in September. The key contributors to underperformance were the strong performance of both small cap stocks and value styles, with associated drawdowns in momentum and larger capitalisation securities to which the portfolio has an overweight exposure.

Disclaimer

This presentation has been prepared for the general information of clients and professional associates of Blue Orbit Asset Management Pty. Ltd., ABN: 74 623 916 816 | AFSL: 513710 (Blue Orbit AM). This presentation has been prepared for use by wholesale clients only (within the meaning of the Corporations Act 2001 (Cth) and no other persons.

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ABN: 74 623 916 816 | AFSL: 513710 Commercial in Confidence 6