Australian Equities High Conviction Portfolio Performance Report – June 2020

Market overview and portfolio performance Portfolio overview

Investment bias Style neutral Designed for Investors with a medium-term investment objective focused on achieving portfolio growth with less focus on generating excess income and is prepared to accept Jamie Nicol Scott Bender higher volatility in pursuit of higher Chief Investment Officer Portfolio Manager growth

Benchmark S&P/ASX 200 Accumulation The DNR Capital Australian Equities High Conviction Index Portfolio outperformed its benchmark for the period. Investment objective To outperform the S&P/ASX 200 Key stock contributors were SEEK (SEK), Treasury Accumulation Index by 4% p.a. Wine Estates (TWE) and REA Group (REA). Key stock (before fees) over a rolling three detractors were of (CBA, year period no holding), (LLC) and Investable universe ASX listed securities with a focus (RHC). on the S&P/ASX 200 The S&P/ASX 200 Accumulation Index was up 2.61% Number of stocks 15–30 during June. The best performing sector was Information Technology (+6.0%), which was largely the result of Asset allocation Australian equities 80–100% Cash 0–20% strong outperformance from (APT, +33.6%). Consumer Discretionary (+5.4%) also outperformed Stock limit 15% maximum weighting as a series of sales updates from retailers showed Minimum suggested 5 years significant growth upon the removal of COVID-19 investment timeframe restrictions. Underperforming the market were the REITs (-2.7%). The sector suffered from outflows as concerns about valuations linger. The COVID-19 period has accelerated the uptake of digital retail and ‘work from home’, negatives for Retail and Office REITs respectively. Industrials (-1.7%) also lagged the broader market in a somewhat anti-cyclical mood, as key stocks including (TCL, -3.0%) and CIMIC Group (CIM, -4.3%) moved lower.

Gross active return

1mth 3mth 6mth 1yr 3yr 5yr 7yr 10yr Incep.* % % % % % % % % % High Conviction Portfolio 3.80 25.04 -12.15 -3.94 4.46 7.51 9.99 10.71 12.24 S&P/ASX 200 Accumulation Index 2.61 16.48 -10.42 -7.68 5.19 5.95 7.48 7.80 8.53 Excess Return 1.19 8.56 -1.73 3.74 -0.73 1.56 2.51 2.91 3.71 * Inception date—October 2002

Excess return (calendar year)

Source: DNR Capital

Performance data relates to the DNR Capital model portfolio. Performance of an investment in this model portfolio through a Portfolio Service may have different performance to the performance in this monthly update as a result of different policies and procedures at different Portfolio Service operators. Past performance is not an indication of future performance. No allowance has been made for taxation and fees are not taken into account. Page 1 of 10 Portfolio attribution the resumption of in-person property inspections, live Sector weightings % auctions and a more engaged property market. While listings are down, we view this as a temporary decline, likely to reverse later in the year. The top stock detractors were: } Commonwealth Bank of Australia (CBA, no holding)— Outperformed over the month as signs that the depth of the recession may not be as bad as feared encouraged the rotation. The financial sector overall rebounded after some months of underperformance.

} Lendlease (LLC)— Underperformed over the month, falling in step with the broader property sector, which took a breather after a heavy participation in the April and May market recovery. On a stock level, post-raise Source: DNR Capital sell downs from investors and premature concern over the potential impact of underperforming projects affecting the upcoming result likely contributed to the underperformance. 12 month - top contributors and detractors } Ramsay Health Care (RHC)—Underperformed over the period as news of rising COVID-19 cases around Top 3 contributors Alpha* the globe overshadowed the comeback of elective Overweight 2.28% surgeries. Domestically, news of cases in Victoria had investors concerned over the re-introduction of Domino's Pizza Enterprises Overweight 1.41% elective restrictions in Australia. Investors were also ANZ Banking Group No Holding 1.24% cautious over the realistic limitations of getting back to full capacity, with access to nurses and adequate protective equipment more uncertain in a COVID-19 Top 3 detractors environment. CSL No Holding -2.38% Virgin Money UK Overweight -1.40% Monthly - top contributors and detractors Overweight -0.84% Top 3 contributors Alpha* The top stock contributors were: SEEK Overweight 0.24% } SEEK (SEK)—Outperformed during the month with a group update providing revenue and EBITDA guidance Overweight 0.20% marginally ahead of consensus. SEEK also wrote REA Group Overweight 0.18% down investments in highly affected Latin America, but we view these as immaterial to the group’s prospects. Market confidence returned as balance Top 3 detractors sheet concerns dissipated and the easing of social Commonwealth Bank of No Holding -0.44% restrictions provided a clear pathway to businesses Australia rehiring. Lendlease Overweight -0.31% } Treasury Wine Estates (TWE)— Outperformed over Ramsay Health Care Overweight -0.23% the period thanks to positive retail data coming out of China and the US. Chinese retail sales in May were better than expected and improving trends * Alpha is the portfolio return less benchmark return. These tables represent the stocks contribution of alpha to overall supported the thesis of a slow but steady recovery portfolio alpha and is determined by the stocks active weight in the company’s highest margin region. In the US, relative to the benchmark and share price return relative to the off-premise wine sales for the four weeks to mid-June benchmark. rose 22% yoy and as restrictions ease, we would expect on-premise to stage a recovery as well.

} REA Group (REA)—Outperformed during the month as the stock continued to recover from a steep sell-off during the March volatility. Having previously outlined a range of measures designed to support its liquidity position and its customers, the group has been successful in reducing costs to match its temporarily depressed revenue base. The easing of social restrictions now provides a clear pathway to

Page 2 of 10 Performance Report June 2020

earnings are late cycle. Following the collapse in the Portfolio positioning oil price we have a low level of confidence regarding Our current positioning is as follows: the earnings trajectory of this component of its business. In addition, Worley has flagged the earnings } Strong global franchise stocks—James Hardie are less cyclical thanks to an acquisition of the Jacobs Industries (JHX), SEEK (SEK), Cochlear (COH), ECR chemical business as well as other efforts. (ALL). However, in past cycles, the chemicals’ business } Strong domestic franchise stocks—REA Group (REA), proved to be reasonably cyclical and our discussions Ramsay Health Care (RHC), (WES) and with US chemical players indicate capex budgets have Cochlear (COH). been cut.

} Quality mid-caps—Domino’s Pizza Enterprises (DMP), } (S32) and Holdings (AZJ)—These IRESS (IRE), (CPU) and Qube small positions were cut to concentrate the porfolio in Holdings (QUB). higher quality areas of the market which offered higher returns and greater clarity around long-term earnings. } Resources—Overweight (RIO) and BHP Group (BHP). } Airport Holdings (SYD)—Our concern regarding the recovery in flights has been reinforced } Underweight banks. after discussions with corporates. They indicate an increased willingness to reduce travel. Key risks Purchase of Corporation (TLS) Key risks to the portfolio include: Telstra has underperformed the market by >20% since the market rally commenced on 24 March 2020. } COVID-19 disruption. The longer and deeper the disruption from the COVID-19 pandemic, the greater This has provided an opportunity to add Telstra to the the negative impact on equity markets. porfolio. After nearly two decades of disruption in the telecommunication space (from the internet disrupting } Interest rates. Low interest rates are the prime driver Yellow Pages, to the reduced use of fixed line, to NBN of markets at present. Any change to the inflation disrupting home broadband) the disruption is easing – outlook would have a significant impact on valuations. we are close to the end of the road and Telstra will be a strong mobile business, an NBN reseller and an owner } Inflation. Given valuations have been supported by low interest rates, the emergence of inflation and higher of telecommunication infrastructure assets and ready to bond yields could be a negative for markets. grow earnings again from FY22 and beyond. Competition has also eased, with confirmation of TPG’s merger with } Political environment. It is an election year in the Vodafone meaning there will only be three players in the US, which adds to potential uncertainty. Further mobile market. geopolitical uncertainty could create negative implications for stocks and porfolio’s. Telstra meets DNR Capital’s five-point quality web: 1. Industry structure—Has improved with TPG’s } Growth. Rising interest rates in the US increase the merger with Vodafone and Optus walking away from risk of an economic slowdown. Potential disruption to competing on price after failing to win significant global growth is largely expected by the market so the market share. Telstra retains a network advantage alternative, which is a pickup, could have a greater compared to peers, and the disruption headwinds of impact on valuations of defensive holdings. recent years is easing. We do, however, recognise } Emerging market risks. Implications of slowing growth competition will remain robust in the space and the in emerging markets and impacts from currency rate of technological change is rapid, requiring ongoing instability. investment and substantial capex. The NBN created a once-in-a-lifetime forced churn event. Consumers had no choice but to switch and this caused many Portfolio moves to review their requirements. It also caused telcos We have undertaken a range of moves in recent weeks to compete aggressively on price. However, market aimed at building further resilience in the porfolio. shares barely altered and the competition didn’t We have cut some volatile names and increased the achieve anything other than destroying profits. The quality of the porfolio, adding to areas of the market that near completion of the NBN combined with the are generating strong returns with improving industry realisation that this was a bad strategy meant that structures. NBN and mobile prices have broadly stabilised over the last six months. Sale of Worley (WOR), South32 (S32), Aurizon Holdings (AZJ) and Holdings (SYD) We have trimmed a number of stocks that have performed well in the recovery, like James Hardie Industries (JHX) and SEEK (SEK). In addition, we have sold:

} Worley (WOR)—The company is highly leveraged to global capex, especially in oil and gas. Typically, the

Page 3 of 10 Performance Report June 2020

NBN and mobile pricing has stabilised over the last infrastructure assets to unlock additional value over the six months next 18–24 months.

Increased holding in Cochlear (COH) Cochlear is a manufacturer and distributor of cochlear implantable devices for the hearing impaired. Cochlear has operations in more than 20 countries distributing its products in America, Asia Pacific, Europe, Middle East and Africa. It offers three main products: cochlear implants, baha bone conduction implant system and cochlear wireless accessories. Cochlear meets DNR Capital’s five-point quality web: 1. Industry structure—Cochlear is the global leader in the design and manufacture of cochlear implants with more than 60% market share. The scale advantage Source: Morgans is further enhanced by a strong research and 2. Earnings strength—We believe Telstra’s underlying development program, which should help sustain the earnings will bottom over FY21 and expect mid-single dominant market positon. digit growth beyond. Lower competition will assist 2. Earnings strength—It has a long history of low double- mobile margins and a medium-term opportunity exists digit profit growth and we expect this to remain the to replace NBN with wireless. Australia has the fourth- case following the impact of the postponement of fastest mobile speed in the world (averaging 64mbps) elective surgeries. and the 57th fastest fixed-line speed in the world (averaging 39mbps). Logic would therefore dictate 3. Balance sheet—Cochlear has net cash on hand of that, cost aside, Australian consumers would be more over $600m and total available liquidity in excess inclined to substitute fixed for mobile. 5G should of $1.6b. This extremely strong position will provide further improve speeds and lower costs. flexibility to continue research and development spends and maintain all staff during the COVID-19 3. Balance sheet—The balance sheet is solid with FY20e shutdown. ND/EBITDA at ~1.5x. 4. Management—Dig Howitt joined Cochlear in 2000 and 4. Management—Having recently set the performed a range of roles in the business, including strategic direction, it is now in execution phase. as COO before being appointed as CEO in 2018. While management consists of experienced The executive leadership team is experienced and telecommunication executives, there has been well-resourced, with seven members having been at significant turnover in the executive ranks over the last Cochlear for more than 10 years. three years. 5. Environment, social and governance (ESG)—Cochlear 5. Environmental, social and governance (ESG)—The manufactures and sells cochlear implant technology company has a low ESG exposure. and as such failure to meet product quality and safety regulatory requirements could lead to recalls and Key risks customer litigation. This risk is actively managed There are a number of key risks: 1) Execution risk around through all levels of the business, however the ~$2.5b productivity improvements to offset the ~$3.5b company has previously been subject to a processor EBITDA hole from NBN; 2) It needs to defend its strong recall. Additionally, product innovation plays a key role market position in mobiles and could be vulnerable to in Cochlear’s strategy, which triggers exposure to risks competition should it re-emerge and 3) Management related to potential involvement in intellectual property turnover. disputes over its patent portfolio.

Valuation Valuation We estimate that Telstra’s infrastructure assets account Cochlear trades on 34x forward earnings and is forecast for ~50% of our valuation. This leaves the core business to grow earnings at >20% for the next four years. trading on 4–5x FY20 EBITDA. We estimate Telstra’s fair value is ~$4, implying a yield of ~5% (plus franking). This Conclusion represents a total return of ~15% pa over the next three Cochlear is arguably the best-quality business in the years (including the dividend and franking). Australian market and as such rarely trades under 40x forward earnings. The postponement of elective surgeries Conclusion will impact near-term earnings, however the long-term We see Telstra offering improving quality. The market demand for cochlear implants is highly unlikely to be has been concerned regarding the loss of roaming fees affected. We see the sell-down in Cochlear on near-term during the pandemic, but we see this as a temporary earnings concerns as an opportunity to buy a high- issue and the core as highly defensive. The 12-month quality business at an attractive entry point. Our channel forward grossed-up dividend yield of ~6% is attractive in checks indicate Cochlear is winning share against its key the context of record low interest rates and will be a key competitor, who has recently had a product recall. differentiator in a market where many stocks are reducing dividends over the next 12–24 months. We also note the potential for the demerger or partial sale of Telstra’s Page 4 of 10 Performance Report June 2020

Purchase of (COL) margin improvement. Given its cleaner group structure We have added Coles Group to the porfolio. It operates and current discount to Woolworths, it is our preferred Coles supermarkets, a portfolio of liquor, petrol and supermarket exposure. convenience retailing. Having spun out of Wesfarmers (WES) in late 2018, Coles has simplified its portfolio of Investment strategy operating businesses and continues to execute on a range of programs to modernise its supply chain and The Australian Equities High Conviction Portfolio has technology capabilities. an investment style best described as ‘style neutral’. The security selection process has a strong bottom-up Coles Group meets DNR Capital’s five-point quality discipline and focuses on buying quality businesses at web: reasonable prices. We define quality businesses as being 1. Industry structure—Coles operates in a well-structured those with the following five attributes: duopoly, sharing in excess of 80% market share with Woolworths Group (WOW). Aside from Aldi, there } earnings strength (particularly improving return) is a tail of mostly independently run stores supplied } superior industry position by (MTS). Market share has continued to consolidate among the large chained stores, yielding } a sound balance sheet significant buying power. The competitive dynamics of } strong management the domestic supermarkets has materially improved, with the withdrawal from Australia of Kaufland in late } low environmental, social and governance (ESG) risk. 2019. Where we are satisfied that a security possesses 2. Earnings strength—More rational competition, quality characteristics, then it is eligible for inclusion including that of discounter Aldi, has led to modest in the portfolio. However, it must also represent value food inflation, and provides industry tailwinds to and sit comfortably within our portfolio construction profitability. Moderate, defensive sales growth is requirements. underpinned by population growth and cost-out A range of valuation methodologies are used depending programs provide upside to the margin profile. on the nature of the business being assessed to identify 3. Balance sheet—Initial concerns harboured at the time mispriced opportunities. of listing around balance sheet strength have been The portfolio construction process is influenced by a allayed through a number of strategic divestments and top-down economic appraisal and also considers the high cash-flow generation. Coles has a ND/EBITDA risk characteristics of the portfolio, such as security and ratio of 0.2x FY21. sector correlations. 4. Management—We view Coles’ management as competent given its performance to date. CEO Investment philosophy Steven Cain has broad experience in Australian food retail and has been clear with his strategy. With the DNR Capital believes a focus on quality businesses will management team having a more limited tenure than enhance returns when it is combined with a thorough peers, we continue to closely monitor its stewardship valuation overlay. We seek to identify quality businesses of capital and execution against the annunciate goals. that are mispriced by overlaying a quality filter, referred to as the ‘quality web’, with a strong valuation discipline. 5. Environmental, social and governance (ESG)—Having The portfolio is high conviction and invests for the divested its interest in gaming, we see Coles offering medium term. low ESG risk. We note a historic wages underpayment issue, but this is minor when compared to peers. Platform access

} AMP PPS Key risks Key risks include a resumption of deflationary price } BT Panorama (Direct, Compact and Full) competition witnessed in the latter half of last decade, } Colonial First State FirstWrap entrance of an offshore competitor, and the execution of large-scale capital programs currently underway. } Federation Alliance

Valuation } HUB24 We view the defensive characteristics of Coles as } Linear warranting a premium to ASX 200 and our current } Macquarie Wrap discounted cash flow valuation of $17.35 sees upside to its current FY21 PE multiple of 22.7x, with a fully franked } Mason Stevens dividend of 3.6%. } Netwealth

Conclusion } OneVue Coles Group is operating in an improving industry } Powerwrap structure, is benefiting from greater entertainment at home, offers defensive earnings growth with upside } Praemium from an investment program delivering cost savings and } Wealthtrac

Page 5 of 10 Market review

The market has enjoyed a strong bounce back from its Google mobility trends – Australia lows and the economy continues to open up. Concerns linger regarding the strength of the economic recovery amidst a pick-up in COVID-19 cases. We believe it is sensible for investors to look through the short-term weakness attached to COVID-19 and price stocks off the likely FY22 and beyond earnings. Clearly, however, there is uncertainty regarding that earnings trajectory. This month we examine the key bull and bear points impacting the outlook for the market. In our view the risks now appear more balanced than in recent months. Key bull points: 1. Economy is recovering – through the worst of the COVID-19 crisis. The easing in monetary and fiscal policies has cushioned the economic blow from COVID-19. Household and business lending interest rates have fallen as the cash rate was lowered to 0.25%, the 3-year bond yield is being Source: Google, Macquarie Macro Strategy anchored at ~0.25% and the RBA is providing 3-year funding to banks at 0.25%. Encouraging signs are being observed that consumers are returning to venues as social restrictions are eased. The main game is, and will be, fiscal policy. Federal Government measures to support Australian households Number of seated diners and businesses are expected to be at least $125b from April to September. This is equivalent to ~13% of GDP over that period. Add in early superannuation withdrawals by households, of which around $16b has already been paid, and the support is ~16% of GDP. That’s a huge number. On top of this has been other fiscal support from state and local governments.

Government benefits and super withdrawals

Source: OpenTable, Macquarie Macro Strategy

But foot traffic in bricks and mortar stores has recovered significantly

Source: APRA, DSS, Treasury, Macquarie Macro Strategy

While Australia’s technical recession will be confirmed in the June quarter, early economic indications are that activity may have bottomed in April. Google mobility trends point to sustained recovery in activity and a trend towards normalcy in Australia.

Source: ShopperTrak, Macquarie Macro Strategy Page 6 of 10 A return to growth was potentially seen in June as Daily reported cases composite PMI expanded.

Surveyed forward orders

Source: Department of Health, States & Territories Report 5/7/2020

3. Supportive fiscal and monetary stimulus. Globally, central banks have proved willing to leverage their balance sheets, engaging in synchronised fiscal and monetary action. The IMF estimates that US$9t in direct budget support and quasi-fiscal operations3 has been deployed since the onset of the crisis.

Source: CBA/IHS Markit, NAB, Macquarie Macro Strategy Announced fiscal measures in G20 economies, % of GDP The latest ABS retail sales data also suggest stimulus is flowing into the economy, with data from May painting a picture of surprising resilience. Despite outsized volatility over the past few months, sales have returned to near trend in aggregate.

ABS retail sales ($b)

Source: National authorities; and IMF staff estimate as of May 13, 2020

The scale of the stimulus is unprecedented in history, dwarfing that of the global financial crisis in quantum and speed. Source: DNR Capital, ABS Fiscal stimulus is greater today than it was during the 2. Potential vaccine or treatments to further enable a great recession recovery. Efforts to re-open the global economy will ultimately require effective treatments. Dozens of vaccines are in the pipeline and while a widely available treatment is several months away, a handful are already in late stage trials1. Treatments for the virus are closer at hand with several showing encouraging results for a range of drugs already approved for human consumption. Of dexamethasone, a readily available and cheap steroid, The Economist noted recent clinical trials at Oxford “…reduced deaths by a third among the most severely ill covid-19 patients” and is set become standard care within the NHS2.

Despite upticks in Victoria, Australia’s reported cases have stayed supressed and the death rate remains low by Source: BCA Research global standards.

1 https://www.who.int/publications/m/item/draft-landscape-of- covid-19-candidate-vaccines 3 https://blogs.imf.org/2020/05/20/tracking-the-9-trillion-global- 2 https://www.economist.com/britain/2020/06/20/dexamethasone- fiscal-support-to-fight-covid-19/ cuts-covid-19-deaths Page 7 of 10 Domestically, the raft of programs targeted at maintaining ASX 200 – Consensus PE Ratio (x) employment and supporting households is finding its way to consumers. Government transfer payments are providing significant support to household disposable income

Source: Morgan Stanley Research Aggregate consensus annual EPSg (%)

Source: ABS, Macquarie Macro Strategy

4. Equities better value than most asset classes As discussed in recent months, equities are doing well owing to a lack of alternatives and strong liquidity. Source: RIMES, IBES, Morgan Stanley Research Investors tend to be positioned overweight cash and underweight equities. 5. Positioning still cautious. The market remains Cash and fixed interest offer little return, while office overweight cash and underweight equities. and retail property carry significant risks at present. Despite a renaissance in day trading and an explosion The following chart highlights the attractiveness of in retail stockbroker accounts, a significant amount equities relative to bonds, currently representing close of institutional capital remains on the sidelines. With to the best value over its history. This implies investors negligible returns available from bonds and fixed interest are so uncertain regarding the value of equities, they investments, global pension, superannuation and other would prefer next to no return from bonds. Clearly there institutional funds need greater equity exposure to achieve are substantial risks in stocks as we emerge from the their return targets. darkness of an unprecedented shutdown. The speed and shape of the recovery will have a substantial impact on Implied equity allocation by non-bank investors the valuation of various equities. globally

Earnings yields versus bond yields

Source: DNR Capital

Forward earnings multiples have rebounded astonishingly quickly from the crisis, reflecting the market’s willingness to look through the next two years to a strong bounce Source: J.P. Morgan back in FY22 earnings.

Page 8 of 10 Cash as % of equity market capitalisation Notwithstanding global markets showing remarkable willingness to look through a near-term earnings recession, markets remain susceptible to the inevitable outbreaks as social restrictions are scaled back. As previously noted, the performance of the market will be tied to the shape of the economic recovery. Large uncontrolled outbreaks threaten to turn a V-shaped recovery into a W-shaped recovery.

US Equity prices vs US Google searches for Coronavirus/COVID-19

Source: Google Trends, FactSet, Macquarie Research, June 2020

2. Is the economy simply enjoying a pent-up demand bounce? Can the economic recovery be sustained? Source: Alpine Macro The sharp rebound in economic activity has been pronounced and confounded many economic forecasts. Porfolio manager cash balance remain elevated and have Given shelter-in-place directives forced a reduction in manifested a challenging performance headwind. This discretionary spend, there is concern that the snap back positioning provides a tailwind to equities and reinforces a in spending is just catch-up consumption drawing on “buy the dip” mentality during periods of volatility. increase savings and temporary government handouts. If this is case, then the release of pent-up demand is just Key bear points: masking the effects of the underlying recession and rather 1. COVID-19 second wave than entering a sustainable recovery, economic activity will fade as we fall off the fiscal cliff. This would produce a Despite successes in Europe and Asia, much of the more drawn out recession and weigh heavily on equities. world (developing nations in particular) never flattened their curves and the US is suffering a second wave of 3. US election infections. As the expected outcome (according to betting markets) Weekly confirmed COVID-19 cases by area, ‘000 of the upcoming US election has swung from a likely Trump second term to a Biden victory, questions now arise about the market’s likely reaction to a Democrat presidency and potential Democratic-controlled Senate. With an enunciated goal of rolling back Republican corporate tax cuts and restoring a top marginal tax rate of 39.6%, Wall Street is wary of Democratic policies with the potential to lower corporate earnings and business confidence. Trump, however, also poses risks for markets given the deterioration in trust of global institutions and uncertainty in negotiations with the US. Much will depend on who Biden selects as vice president and whether he follows the tried and tested path of pushing to the centre now that he has won the primary.

Source: WHO; Johns Hopkins University CSSE

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4. Geopolitical uncertainty A range of geopolitical issues currently pose risks to global markets. Recent development in Hong Kong with China’s imposition of new security laws have served to escalate tensions between the US and China and compounding an existing trade war. A deterioration in relations between Australia and China has also been observed since the government threw support behind an investigation into the source of COVID-19, threatening trade with our largest partner. Social unrest is even higher than usual in North America as the Black Lives Matter movement has spread, with protests breaking out around the world.

Conclusion The risks appear more balanced than they did a few months ago. While we expect ongoing economic recovery and see equities as better value (in the long run) than most asset classes, the uncertain climate, strong bounce and lack of absolute value support suggests volatility can emerge and should be expected. As a consequence, we have made a number of moves aimed at shoring up the resilience of the porfolio. An uncertain environment is an opportunity for quality companies to win market share and we have seen a number of companies in our porfolio step up their plans. Companies like James Hardie Industries (JHX) and Cochlear (COH) are winning market share and investing in new product while peers retreat. We will continue to focus on those companies where we see opportunities to enhance their value in the current climate.

Disclaimer This document has been prepared by DNR Capital Pty Ltd, AFS Representative - 294844 of DNR AFSL Pty Ltd ABN 39 118 946 400, AFSL 301658. It is general information only and is not intended to be a recommendation to invest in any product or financial service mentioned above. Whilst DNR Capital has used its best endeavours to ensure the information within this document is accurate it cannot be relied upon in any way and you must make your own enquiries concerning the accuracy of the information within. The information in this document has been prepared for general purposes and does not take into account the investment objectives, financial situation or needs of any particular person nor does the information constitute investment advice. Before making any financial investment decisions you should obtain legal and taxation advice appropriate to your particular needs. Investment in a DNR Capital managed account can only be made on completion of all the required documentation. DNR Capital does not guarantee the repayment of capital from the portfolio or the investment performance of the portfolio. If you have invested in the Australian Equities High Conviction Portfolio via a service such as investor directed portfolio service, managed account service or separately managed account (‘Portfolio Service’), you can obtain information from the Portfolio Service operator. If you invest via a Portfolio Service, different terms may apply to your investment. You should read the disclosure document for that Portfolio Service and consider your circumstances prior to investing.

Office address Postal address Telephone Email Website Level 23 GPO Box 3263 07 3229 5531 [email protected] www.dnrcapital.com.au 307 Queen Street Brisbane QLD 4001 Brisbane QLD 4000 DNRHCII.4.10.2006

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