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Sigma Australian Shares Strategy

Monthly update as at 31 August 2016

Since Month Quarter 1 year 2 years 3 years 5 years Inception^ % % % % p.a. % p.a. % p.a. % p.a.

Sigma Australian Shares 2.2 4.7 1.4 (0.9) 4.4 8.9 3.7

S&P/ASX 200 Acc. Index (1.6) 2.1 9.3 2.9 6.6 9.7 3.0

Value added (detracted) 3.8 2.6 (7.9) (3.8) (2.2) (0.8) 0.7

*Gross Performance. Past performance is not a reliable indicator of future performance. ^Since Inception: 1st July 2007

Key points  Objective investors can profit by embracing mispriced uncertainty

 Avoiding expensive safe havens that currently dominate that ASX200 Index

 Fund offers portfolio diversity, healthy cash generation, sustainable dividends & unpriced upside

Individual stock performance of note Fund performance was negatively impacted by:

The Australian Share Fund (ASF) outperformed a falling  Media companies, (-25%) and Nine market in August where stock specific factors during Entertainment (-9%), were all weaker post Seven West dominated during reporting season. delivering an in line result but downgrading the outlook for Fund performance was driven positively by: FY17 earnings as the company reinvests to gain more audience;  Scrap maker, (+18%) rallied as management’s outlook comments suggest far more  Childcare operator, G8 Education (-20%) declined after leverage to improving conditions that previously thought. delivering a result below expectations as a result of The higher than expected dividend supported the view; increasing competition. The inability to pass on wage cost increases was clearly evident in the results leading to  Consumer electronics retailers, JB Hi-Fi (+16%) and margin pressures. Consequently the fund sold out of the (+11%) reported strong results supported stock; by a strong housing market and the decline of Dick Smith;  Global commercial insurance giant, QBE (-8%) declined on  Whitehaven Coal (+15%) was again stronger, as thermal a below expectation result, highlighting ongoing pricing coal prices edge higher, and strong cash flow generation pressure and the impact of lower interest rates. With the de-gears the balance sheet rapidly; balance sheet and a sustainable dividend profile restored  Global Fund Manager, (+8%) continued the future will look brighter when macro headwinds abate; climbing towards post GFC highs after re-iterating profit  Wealth manager, AMP (-7%) suffered as life insurance guidance at the AGM in late July; claims set to remain elevated into the next half. The  Regional bank, Bendigo and (+8%) reported a remaining businesses are reported to have performed well, better than expected result that highlighted balance sheet and a reinsurance deal post year end is likely to provide a momentum and margin management on multiple fronts. catalyst for better performance; The market remains far too bearish on Regional bank  The absence of (+18%), Woodside prospects in our view; Petroleum (+10%) and (+19%) impacted  The absence of index heavyweights performance in a relative sense. (-4%), (-5%), (-6%) and CSL (-8%) helped performance in a relative sense;

Portfolio observations, changes and outlook However, embracing the perceived “uncertain and unloved The following table illustrates the Funds returns by financial names” neglected by the prevailing DQY dynamic is not an year: easy road for most investment managers. Most realise they will be compensated for embracing the near term uncertainty ASF Gross Performance by Financial Year but cannot do so as they feel nervous about the near term volatility created within their portfolios, particularly in the post Financial 2013 2014 2015 2016 FYTD17 GFC world where investors are paying up for certainty. Year (%) While Sigma’s Business Risk Assessment has clearly ASF 24.9 19.4 7.0 (11.0) 9.3 indicated the Fund has a higher fundamental risk profile than the market, the relative valuation upside more than Index 20.5 17.4 5.7 0.6 4.6 compensates. As a team we continue to remind ourselves of the first golden rule of investing – Don’t Overpay! Since Relative 4.4 2.0 1.3 (11.6) 4.7 inception in May 2011, the portfolio today has the greatest potential for outperformance as highlighted in the ASF Relative Valuation Upside graph – i.e. we are pregnant with Over the last 18 months or so we have been communicating performance. that ASF’s positioning is more than likely to generate above average returns for investors, however expect the volatility to increase as the “value” lies within the economically sensitive Australian Shares : Relative Valuation Upside sectors of the economy. Accordingly, as world markets have Source: Sigma Estimates, IRESS become concerned with “global growth” in the face of rising 50% US rates the Fund has been caught up in the downdraft with 45% financial year to date returns down more than the market as 40% 35% table above illustrates. 30% 25% Back in 2011 & 2012 during the European Financial crisis, 20% the market had a lot of upside, as highlighted in the following 15% table, showing the valuation upside for ASF and the market 10% 5% at the start of each financial year since 2012: 0% Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Valuation upside at the start of each Financial Year Stocks Added Start – 2013 2014 2015 2016 2017 Aug17 FY* Management (CWY) is a waste business focused on the Municipal, Commercial & Industrial waste ASF 47% 31% 30% 31% 47% 29% collection and disposal business in metro and regional areas.

Index 26% 12% 6% 0% 1% -6% It also has an industrial services arm which has been impacted by the downturn in Australian manufacturing and Relative 21% 19% 24% 32% 46% 35% resources. Management is expected to deliver on integrating *Start of the Financial Year and simplifying the business to allow it to reduce its cost At the start of FY2011 and FY2012 undervaluation was base to be able to focus on growing revenues. Earnings plentiful across a wide universe of stocks as indicated by the appear to have bottomed with growth a real possibility given 23% & 26% upside respectively for the market. While the the focus to drive revenue growth and expanded margins off Fund had substantially more upside (46% and 53% for the a lower cost base. The company is trading on 5.8x same points in time), Sigma’s proprietary Business Risk EV:EBITDA a significant discount to international peers Assessment was showing the Fund’s risk profile was in line which trade between 7-8x EV:EBITDA. with the market or slightly better. Stocks Sold Post the significant rally in markets over FY2013/2014 the G8 Education (GEM) was sold for reasons outlined above. market as a whole is no longer undervalued and the opportunity set has narrowed considerably. The “defensive- quality-yield” (DQY) thematic has resulted in overpayment for certainty with low future returns the most likely result. As approximately 60% of the Australian Equity market falls into this camp (Defensive stocks & Major Banks), we expect returns for the market as a whole to be low going forward.

Top 5 active positions Asset allocation

Stock Active weight % Sector Active weight %

By Large Cap stocks: Materials 7.5

Rio Tinto 5.3 Financials ex-Real Estate 6.1

Bendigo and Adelaide Bank 5.2 Consumer Discretionary 4.6

BHP Billiton 5.2 Information Technology (1.0)

Bank of 4.5 Industrials (1.4)

Harvey Norman Holdings 4.1 Consumer Staples (1.4)

By Small Cap stocks: Utilities (2.0)

Clydesdale Bank 1.4 Energy (2.2)

Whitehaven Coal 1.1 Telecommunications (5.7)

Nine Entertainment 0.9 Health Care (6.0)

Seven West Media 0.7 Real Estate (7.7)

Cleanaway 0.6 Cash & Other 9.2

Note: Active weights refer to positions above benchmark only. Note: Active weights refer to positions above or below benchmark.

 Outperforming by allocating capital to a focused portfolio Strategy summary of undervalued business that increase the probability of Sigma Australian Shares is a concentrated ‘Large-cap’ achieving the Return Objective. strategy blending the highest conviction stock ideas from Sigma’s Large Cap investment team, leading to: About Sigma Funds Management

 Value-style Australian equities manager which aims to Superior outperformance,  outperform without the downside of “value traps” through  Lower risk, and an investment approach called Value: Risk Adjust  Increased consistency.  Sigma is an investment partnership, 51% owned by Aziumt, Itlay’s leading independent asset manager with Features of Sigma Australian Shares: the Executive founders owning the remaining 49%  High conviction value-biased portfolio of 15 to 30 stocks Contact  Focused primarily on the Top 100 stocks listed on the Australian Stock Exchange For more information contact Pinnacle Investment Management, the Fund’s distributor, on 1300 010 311.  Return Objective of 4% over the benchmark over rolling 3-5 year periods See also www.sigmafunds.com.au Benefits of Sigma Australian Shares investment approach:  Capital protection is our first priority, and achieved through an absolute as well as relative valuation focus while maintaining a diversified portfolio of large Australian businesses; DISCLAIMER: This document was prepared by Sigma Funds Management Pty Limited (ACN 137 097 075, AFSL 339901) (‘Sigma’). Sigma does not give any warranty as to the accuracy, reliability or completeness of the information contained in this document, and any persons relying on this information do so at their own risk. This document is provided for general information purposes to wholesale clients only. Accordingly, reliance should not be placed on this commentary as the basis for making an investment, financial or other decision. This document has been prepared without taking account of any person’s objectives, financial situation or needs, and because of that, any person should before acting on the information, consider the appropriateness of the information having regard to the their objectives, financial situation and needs. Past performance is not a reliable indicator of future performance. The Information Memorandum (IM) should be read in full before investing in the Fund and is available upon request. © Sigma 2016.