Quarterly report

Prepared for Antares Ex-20 Australian Equities Model

Portfolio

September 2015

Table of Contents

Quarter in review ...... 3

Fund performance ...... 4

Quarterly attribution analysis ...... 5

Major factors contributing to performance ...... 6

Portfolio activity ...... 7

Outlook and strategy ...... 8

Contact Details

Client Services

Phone: 1800 671 849 Fax: +61 3 9220 0285 Email: [email protected]

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Quarter in review

The Australian sharemarket followed global markets lower, with the S&P/ASX 200 Accumulation Index ending the quarter down 6.6%. The market was impacted by growth fears in China, the sell-off in emerging markets and uncertainty over monetary policy tightening in the US. The weakest sectors were energy (-24.1%) and resources (-16.3%) in response to further falls in commodity prices. The banks (-11.3%) also underperformed significantly as the announcement of more large capital raisings weighed heavily on sentiment.

The weakness in dollar (-9.0%) supported the industrial (+3.4%) and healthcare (-0.5%) sectors. Defensive sectors such as utilities (+2.4%), consumer staples (+1.5%) and REITs (+1.1%) also outperformed given the uncertain global environment.

The August reporting season was mixed, with Bloomberg data suggesting that 50% of companies beat analysts’ expectations whilst 48% disappointed. However, there was a clear trend towards earnings downgrades for FY16 as companies are continuing to find the current trading environment very tough. Capital management remained a dominant theme, particularly capital raisings and share buybacks.

Merger and acquisition activity was a focus, with Asciano (AIO) agreeing to a takeover bid launched by Canadian based Brookfield Infrastructure Group valued at $8.9 billion. This comprises cash of $6.94 and 0.0387 Brookfield shares for each AIO share. Utility company DUET also announced its proposal to acquire 100% of the shares in Energy Developments (ENE) which would be financed via a $550 million placement.

Corporate activity was also evident in the energy sector, with (WPL) launching a takeover bid for (OSH). The all stock bid (0.25 WPL share per OSH share) was valued at $11.6 billion but it was rejected by the OSH Board. (ORG) went into trading halt at the end of the month and announced a $2.5 billion equity raising in response to the weak oil price environment.

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Fund performance

The following table shows the performance of the Antares Ex-20 Australian Equities Model Portfolio relative to its benchmark.

Gross Net fund Gross fund Benchmark Net excess Period excess return1 % return2 % return3 % return % return %

3 months 2.3 2.5 -2.8 5.1 5.3

6 months - - - - -

1 year - - - - -

3 years p.a. - - - - -

Since Inception p.a. -6.8 -6.6 -9.1 2.3 2.5 (26/05/2015)

1 Performance is based on the income and market value of the Model Portfolio and is net of fees. The performance of individual portfolios may differ to the performance of the Model Portfolio due to cash flows, portfolio reweighting and timing issues. 2 Gross returns are provided to show performance against the investment objective. 3 S&P/ASX 200 Accumulation Index excluding the S&P/ASX 20 Leaders Accumulation Index.

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Quarterly attribution analysis The major factors positively contributing to performance were:

Basis point Stocks Positioning contribution4

Asciano Overweight 193

BlueScope Steel Overweight 97

Qantas Airways Overweight 92

Santos Not owned 76

Cash Overweight 71

Aristocrat Leisure Overweight 57

Flight Centre Travel Group Overweight 51

Treasury Wine Estates Overweight 50

Henderson Group Overweight 48

Orica Not owned 45

The major factors negatively contributing to performance were:

Basis point Stocks Positioning contribution4

Crown Resorts Overweight -111

Sydney Airport Not owned -53

Iluka Resources Overweight -53

Ansell Overweight -50

Seek Overweight -50

Transurban Group Not owned -37

Slater & Gordon Overweight -36

Medibank Private Not owned -31

AGL Energy Not owned -17

TPG Telecom Not owned -14

4 Approximate basis point contributions and are not additive.

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Major factors contributing to performance The Ex-20 Australian Equities Model Portfolio returned 2.3% (net of fees) for the September quarter, outperforming its benchmark, the S&P/ASX 200 Accumulation Index excluding the S&P/ASX 20 Leaders Accumulation Index that returned -2.8%.

Contributors to performance

Major contributors to performance over the quarter included:

• Going into the quarter, the fund’s largest position was Asciano (AIO), which received a takeover bid on the first day of the quarter from Canadian infrastructure manager, Brookfield Infrastructure Partners. The bid valued AIO at $9.05. AIO has been investing significantly into the automation of its port operations and new trains, which will assist in servicing new coal haulage contracts. With both these programmes maturing, investors were due to receive significantly increasing cash returns. The receipt of the bid accelerates these returns to shareholders given its premium to the share price.

• BlueScope Steel (BSL) rallied strongly on news that the company was examining the future prospects of its Port Kembla steel works. With global steel markets depressed by the seemingly endless surplus steel production in China, BSL has been making losses on a significant proportion of the steel it produces and exports. Confirmation that a strategic examination is underway came with a stronger than expected results and this helped the stock move higher again.

• Airways (QAN) has enjoyed a very strong quarter. The market has realised there is a structural change occurring in the domestic airline industry. Rival Virgin (VAH) continues to struggle to break even, and with changes to address this at VAH, capacity has been reduced and prices for domestic airfares are starting to rise. Further, this reduced capacity has helped asset utilisation (less flights to carry the same number of passengers), which helps earnings as fixed costs like maintenance and depreciation are amortised across more seats. Meanwhile, the international business has enjoyed the bulk of the benefits of the Qantas Transformation program. This program has allowed QAN to begin to return cash to shareholders, initially via a capital return scheduled to commence in October 2015. We expect this to be an ongoing feature of QAN and remain a positive factor.

Major detractors from performance over the quarter included:

• (CWN) significantly underperformed our benchmark during the quarter. The reasons for the underperformance were a disappointing annual result, and concerns around its Macau investment, Melco Crown. Looking at the result, CWN’s domestic casinos performed well, as we had expected, but there was a significant rise in corporate overheads which disappointed the market. In addition, there was further regulatory tightening in Macau which has set back any hopes of a recovery in that market, impacting Melco. However, we continue to consider CWN positively. It has excellent domestic assets and following the rebasing of Macau revenues, we think the market is significantly underestimating Chinese demand for gambling.

• Airport (SYD) detracted from performance because it performed well in the quarter but we do not own it. We believe that many of these infrastructure names will be shown to be significantly over valued should long term bond rates begin to return to more normal levels. Hence, despite the enviable position of the SYD assets, we will not be adding it to the portfolio.

• (ILU) is the portfolio’s only exposure to the resources sector, and like most resources companies listed on the ASX, ILU was heavily sold as the market questioned China’s medium term growth prospects. However, our investment belief in ILU is strong, because the key markets for its products – Zircon and Titanium Dioxide – are in Europe and the United States, not China. Still, all resources companies are seen to be equal in such times and ILU fell like the others.

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Portfolio activity

As the strategy has only recently been established, there has not been a need for major changes to the portfolio. In terms of additions or eliminations, we have added Contact Energy (CEN), (MTS) and (TWE), while we have sold our position in Qube (QUB). We have also added to existing positions in Crown Resorts and Slater & Gordon, while reducing our exposure to Asciano, Qantas Airways and .

We added CEN somewhat opportunistically, given the sell-down by the controlling shareholder, Origin Energy (ORG). ORG had been under significant balance sheet pressure so the sale price of CEN shares was very attractive. Given its advantage in intellectual property and the stable nature of demand, we felt the discount was excessive and added a position.

We have added a deep-value, contrarian position in Metcash (MTS). The catalyst for our addition of MTS was the appointment of two new executives to the business. The first of these was a new head of the Supermarkets division, Steven Cain, whom we rated highly during his short tenure as head of Coles. The other appointment was Mark Hewlett, as head of new channels to market. We have been watching MTS for a long time and believe that there are genuine transformational activities occurring at the business. New Chairman, Rob Murray has stabilised the balance sheet and has made some sensible appointments. With the stock trading on a single digit EPS multiple, we think it looks very interesting. Further, there is potential option value should Woolworths decide to exit its struggling home improvement business Masters, given MTS’ ownership of rival .

We also created a position in TWE as we believed the market was overly concerned about the impact on its earnings of the change in timing of its Penfolds’ release. We consider the change in release date from April to October to be sound, as it means the business has more time to sell its best wine, rather than rushing into year end. We also observed the marked improvement of Australian wine export volumes into Asia, on the back of various free trade agreements signed recently. Asia is a very high margin region for TWE and this augured well for TWE earnings. With a dynamic executive changing the culture and positive results starting to appear, we are confident that TWE will be more than just this good harvest.

We exited our position in QUB as we became increasingly concerned around the outlook for domestic freight volumes. This, coupled with the perilous state of some of QUB’s resources clients (QUB hauls production volume by road for smaller operators and this is much higher cost than rail), suggested to us that the earnings outlook was not captured in the company’s market valuation. While we remain positive on management, there is not much that could be done about the industries in which the business operates. In our opinion, the market has become too optimistic about the near term opportunities associated with QUB’s Moorebank Intermodal Terminal.

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Outlook and strategy

With the recent correction in the market, we are optimistic that the period ahead will be a better one for equities. We are not macro investors but we think that many of the risks that have led to the recent sell-off are well-known and well-understood. China’s economy is in transition and this will take time. Investors seem to be concerned that the transition will not be successful (despite twenty years of managed growth). While we have no particular insight into this, we note that China’s interaction with other markets is much less than the sheer size of its economy might suggest – less than 2% of US exports for instance end up in China. Hence it is actually more an insular economy in its impact on others.

Much has also been made of the reluctance of the US Federal Reserve to raise interest rates and what this means for global growth. Again, we have no insights into the reasons for this decision, and this move was actually harmful to performance as we have very little exposure to “bond proxy” type of stocks (infrastructure and real estate trusts). However, we observed on a recent trip to the United States that activity seemed to be thriving, and weakness was confined to segments associated with and oil production.

We continue to try to identify longer term themes that will help assist stock selection. If something is structurally shifting in a certain direction, we like to invest with that shift, not against it.

There are two structural changes which are apparent in the portfolio. One is the aging, and increasingly wealthy, demographic of the Australian population. As the population ages but remains working, its disposable wealth increases dramatically – no more school fees or mortgages are the reasons generally, while incomes remain high. This is where is at now, and so we think leisure is a key theme. As baby-boomers approach retirement they are able to exercise their long-held travel ambitions. Further, this is all part of a general shift we have observed in the retail segment towards the experiential economy.

Chart 1: Changing Consumer Preferences

14%

12%

10%

8%

6%

4%

2%

0%

-2% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Tourism Retail Ex Food Ex Eating Out

Source: ABS and JP Morgan

Consumer culture has taken a back seat to the experiential economy and facilitators of this are businesses that seem to be enjoying this tail wind. This underscores our investments in Crown Resorts, Flight Centre, Mantra and Qantas Airways – all of which benefit from this structural shift in demand.

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The second structural shift we see is away from commodities. Australians know that the world has recently experienced one of the biggest commodity booms in history. Undreamed of prices became standard for iron ore, coal and oil, and led to vast increases in production. Naturally, this supply response has arrived at a time when demand has peaked as China, the main driver of the incremental demand, has begun to reposition its economy away from hard manufacturing towards more service industry.

Hence we have seen prices collapse. With more supply coming we do not feel the need to be invested in commodity stocks unless there are very compelling valuations. The portfolio does include BlueScope Steel, but with its large Colourbond business, we view it more as a beneficiary of falling commodity prices as margins expand for Colourbond. The portfolio also includes Iluka Resources, but, as discussed above, demand for its product is linked to the United States and Europe, not Asia. Finally, Oil Search remains our only oil investment due to its high quality PNG exposure. Hence, our exposure to commodity linked stocks is driven by stock specific factors.

To counter these company specific investments, we have large weightings in companies that use commodities, and benefit from a fall in their price, e.g. with latex and cotton; , as US consumers benefit from lower oil prices and Qantas Airways, which does similarly.

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Contact

Website Postal address www.antarescapital.com.au GPO Box 2007, , Vic 3001 Address Antares Capital Partners Limited P +61 3 9220 0300 Level 20, 8 Exhibition Street, F +61 3 9220 0333 Melbourne, Vic 3000

The statements of opinion contained herein, and the information upon which they are based, are of a general nature only. They are not intended to be relied upon for the purpose of making an investment decision. It is not intended as financial advice to retail clients. Further information or professional advice should be sought. Except for any liability which cannot be excluded, the directors and employees of Antares Capital Partners Limited ABN 85 066 081 114, AFS Licence No. 234483 disclaim all responsibility for any loss suffered, directly or indirectly by any person acting in reliance Quarterlyupon the informationReport prepared contained for Antaherein.res Past Ex-20 performanc Australiane does Equities not guarantee Model Portfolio future performance.September 2015 10