Firetrail Australian High Conviction Fund MARCH 2020 PERFORMANCE (AFTER FEES) Fund 3 yrs 5 yrs 7 yrs 10 yrs Strategy Month Quarter FYTD 1 yr 2 incept incept (pa) (pa) (pa) (pa) (pa)4 Fund1 -22.97% -28.54% -24.72% -21.65% -11.55% - - - - - Strategy composite3 -22.97% -28.54% -24.72% -21.65% - -2.62% 5.18% 7.51% 5.60% 7.20% Benchmark -20.65% -23.10% -20.74% -14.42% -3.42% 0.83% 3.28% 5.88% 5.01% 5.20% Excess Return -2.32% -5.44% -3.98% -7.22% -8.12% -3.45% +1.84% +1.62% +0.59% +2.00% ABOUT FIRETRAIL FUND DETAILS Firetrail is an investment management boutique which is Unit prices 31 March 2020 majority owned by the Firetrail investment team. Application price $0.7542 Additionally, the investment team is invested alongside Redemption price $0.7504 clients in the investment strategies. NAV price $0.7523 AUSTRALIAN HIGH CONVICTION FUND Fund Details The Australian High Conviction Fund (“Fund”) is a APIR Code WHT3810AU concentrated portfolio (approx. 25 companies) of our most S&P/ASX 200 compelling equity ideas. The strategy is built on Benchmark Accumulation Index fundamental, deep dive research guided by the philosophy Inception date 14 March 2018 that ‘every company has a price’. Number of Holdings 29 INVESTMENT OBJECTIVE Fund size $281m Management fee* 0.95% p.a. The Fund aims to outperform the ASX200 Accumulation Index over the medium to long term. Performance fee* 15% of outperformance *Please read the Product Disclosure Statement for more details PORTFOLIO POSITIONING 31 MARCH 2020 THEMATIC POSITIONING 31 MARCH 2020 Top 3 Overweight Holdings (Alphabetical) Relative to the Benchmark Newcrest Mining Ltd 15.00% Qantas Airways Ltd 10.00% Telstra Corp Ltd 5.00% 0.00% -5.00% -10.00% -15.00% Australia China Global Yield Past performance is not a reliable indicator of future performance. 1. Firetrail Australian High Conviction Fund (‘Fund’). Net Fund returns are calculated based on exit price with distributions reinvested, after ongoing fees and expenses but excluding taxation. 2. Fund inception is 14 March 2018. 3. The Fund has been operating since 14 March 2018. To give a longer-term view of our performance for this asset class, we have also shown returns for the Firetrail Australian High Conviction Strategy Composite (‘Strategy’) which has been operating since 29 November 2005. Strategy performance has been calculated using the monthly returns (after fees) of the Fund from 14 March 2018 to current date, as well as the monthly returns of the Macquarie High Conviction Fund (after fees) between 29 November 2005 to 23 November 2017. The Fund employs the same strategy as was used by the same investment team that managed the Macquarie High Conviction Fund as at 23 November 2017. Firetrail has records that document and support the performance achieved as the Macquarie High Conviction Fund. The composite returns for the Strategy and the S&P/ASX 200 Accumulation Index (Benchmark) exclude returns between 24 November 2017 and 13 March 2018. During this period the investment team did not manage the Strategy. As such, the annualised performance periods stated are inclusive of the combined composite monthly returns, and do not include the period when the team were not managing the Strategy. For example, the annualised return over 3 years for the Strategy and benchmark are inclusive of 36 monthly performance periods available in the composite return period, excluding the period between 23 November 2017 and 13 March 2018. For additional information regarding the performance please contact us through the link on our website. Net Fund returns are in AUD terms. Net Fund returns are calculated based on exit price with distributions reinvested, after ongoing fees and expenses but excluding taxation. Past performance is for illustrative purposes only and is not indicative of future performance. 4. Strategy inception 29 November 2005. PORTFOLIO COMMENTARY The Fund returned (22.97%) for the month ending 31 March 2020, underperforming the ASX200 Accumulation index by 2.32%. The best contributors for the month included Nufarm, Rio Tinto and Aristocrat Leisure (new position). Detractors for the month were Virgin Money, Worley and Qantas. Unprecedented downturn / Unprecedented stimulus There is no real playbook for what is going on at the moment. Businesses aren’t set up to deal with environments where there is potentially no revenue. For many companies out there, it’s all about survival. Minds immediately go back to the GFC for a recent downturn. There are some similarities, but there are some key differences: 1. COVID-19 is a cashflow crisis while the GFC was a liquidity crisis. o In the GFC, if you fixed your balance sheet, your problem was solved. In COVID-19, the key question centres on how long your business can last with revenue down a lot. 2. For COVID-19, the impacts have felt almost instant, with far reaching impacts happening very quickly. Unemployment is likely to spike higher than the GFC quickly. 3. The stimulus, both monetary and fiscal, is unparalleled, and the fiscal stimulus is even higher now than in the GFC. o Stimulus doesn’t solve COVID-19, but it certainly helps cushion some of the blow for many. 4. COVID-19 is really affecting SMEs. o The GFC impacted the big end of town, although that eventually trickled down into other businesses and consumers. How else can we get a read on how it plays out? We can look to China. Everything needs to be caveated with the fact that this is a fast-changing situation. But speaking to people on the ground in China, things are returning to normal. Some of the key points include: • Heavy traffic jams on the road as people shun public transport, preferring personal transport • China focusing mainly on the health of SMEs and consumers rather than big bang stimulus, at this stage • Steel mills are back up and running • Activity has largely returned, and likely to be at close to full tilt by mid-April • Some scepticism as to whether China has really solved COVID-19. More likely the economic pain became too much to bear, so China decided to get back to work. Any signs of life? Today the situation is very negative. It’s hard to see through the fog of pessimism. It’s just so tough for so many out there, with all our friends and families being impacted. But there are some reasons for optimism: 1. Demand surge? There is a real chance of huge pent up demand for many products and services that will be unleashed once the worst of COVID-19 containment measures pass 2. More market share? Many listed companies are market leaders, and as tough as it is for them, it is much tougher for many of their smaller, less capitalised peers 3. What is in the price? Share prices have factored in a lot very quickly. To be clear, this situation can get worse, but few share prices imply the virus situation will get much better 4. Medical advances? Much work is being done on a vaccine. An announcement of a vaccine would see a step change in the outlook for the world economy 5. Whatever it takes? Governments and Banks seem to be in a ‘whatever it takes’ mentality. They can’t fix all the problems, but can cushion the blow for many Consider just how much stimulus is being pumped into the economy: Source: CitiFX Are there any certainties? Our team, now working seamlessly from home, has been very busy. Company and industry calls have been the team’s biggest focus. Through our analysis and company contact, we believe there are two key certainties: 1. Raisings still likely a. Cochlear and Ooh! Media both raised money for investors b. At time of writing IDP Education and Kathmandu are running raisings c. Flight Centre / Webjet are still looking at funding options and may involve equity, convertibles and even private equity d. There are many others out there that we believe could potentially raise. It will be liquidity rather than covenants that are likely to drive raisings given most banks / lenders seem willing to look past temporary dislocations for good businesses. 2. The pain is being shared a. Normally defensive businesses like private hospitals, landlords and even telcos are going to be negatively impacted b. On private hospitals, it is likely the Government will utilise beds to help with overflow. Certain elective surgeries will be cancelled. The biggest question is how much the Government will pay the private hospitals, like Ramsay, to use the beds. c. On landlords, this week Premier (owner of Smiggle & Peter Alexander) announced the closure of all retail stores until 22nd April 2020. Premier does not intend to pay rent globally during this period! d. Telstra announced they were delaying layoffs to avoid inflicting more pain on an otherwise fragile economy Opportunities in many places This is a once in a decade opportunity to buy great businesses at great prices. Our philosophy of “every company has a price” remains at the top of our minds in uncertain times like these. In fact, during times like these, it becomes more important than ever. The natural tendency for investors is to seek safety. When it comes to balance sheets, we totally agree. But we do not believe the COVID-19 impacts we are currently seeing should be extrapolated forever. Perhaps you will feel safe buying a business that hasn’t been impacted by COVID-19, but what price are you willing to pay for that safety? Our view is you need to have some balance in your portfolio because the future remains unknowable.