Australian Shares Core Managed Account Portfolio Q22018 Quarterly Performance Update All data and information as at Portfolio Date: 30/06/2018 Top Holdings Market Commentary Weighting % The Australian equity market rocketed higher by 8.5% in the second quarter, nearly double the 4.5% Cash Account 11.6 generated by equity markets globally. Most local sectors outperformed their global counterparts, particularly QBE Insurance Group Ltd 5.5 materials (+12%), as BHP Billiton Limited (+20%) was the largest contributor to the S&P/ASX 200 total Healthscope Ltd 5.4 return. Materials have been a primary driver of Australian equity market returns for several years. Crown Resorts Ltd 5.4 Australian growth stocks (+11%) nearly doubled the return of value (5.8%) in the second quarter, just as they Medibank Private Ltd 4.9 have over the last three years (11% vs 6.5%). Buying expensive stocks that have already increased in price ResMed Inc DR 4.9 has been a winning recipe, while buying value-priced quality – as we tend to do – has lagged. All cycles Westpac Banking Corp 4.7 turn eventually, and this one has been running for longer than most. National Australia Bank Ltd 4.6 Portfolio Update Carsales.com Ltd 4.6 Woodside Petroleum Ltd 4.4 The Core Portfolio generated a 4.1% return in the second quarter driven mostly by Woodside Petroleum (+22%), Healthscope (+14%), and CSL (+24%). Higher oil prices, which are often used to set the price of liquid natural gas cargoes, have generated a strong bid for Woodside. Healthscope is surrounded by suitors, moving the share price higher, but has so far fended them off, despite weak trends in the underlying Investment Growth of $10,000 business. We see the bids as opportunistic given Healthscope will soon finish a massive capital expenditure cycle and hope to see higher bids materialise or for it to remain an independent entity. CSL continues to Time Period: 1/07/2004 to 30/06/2018 execute as the world leader in its primary segments, although we must admit the valuation has become 35,000.0 increasingly demanding. 30,000.0 Weighing on the portfolio’s return was Telstra (-17%), Brambles (-11%), and Link Administration (-12%). It was more of the same from Telstra – reduced guidance, vague strategy, and investor capitulation. More on 25,000.0 this in a moment. Brambles has been pressured by higher energy prices, competitive intensity, and higher costs and uncertainty stemming from President Trump’s various trade tirades. Link unexpectedly became 20,000.0 collateral damage from a government proposal to close small superannuation accounts to protect small investors from high fees. Link has since estimated the impact to be mild and shares have begun to recover. 15,000.0 10,000.0 As the largest position in the portfolio (after cash), and a constant underperformer over the last two-plus 2008 2013 2018 years, Telstra deserves additional commentary, but not quite an obituary. It’s hard to find a more disappointing stock and company in the equity market, certainly considering Telstra’s size, brand-awareness, employee base, number of customers, and widely-held status among Australian investors. Stakeholders of Portfolio S&P/ASX 200 TR AUD all shapes and sizes have been disappointed by the company’s flat-footedness. Cost-cutting and innovation should be bearing fruit today. Instead, they’re just becoming urgent priorities as management responds to roll-out of the NBN (the slowest moving train wreck in history) and new competition in TPG Telecom. Returns Relative to Benchmark Interestingly, Telstra isn’t alone. The telecommunications sector globally looks cheap to us as competition As of Date: 30/06/2018 peaks before the decade-old fourth-generation (“4G”) specification is replaced by 5G in the next few years. 16.0 This brings the opportunity for mobile internet to bypass fixed line (NBN) and to grow in the internet of 14.0 13.0 things (autonomous cars, drones, and ever-growing smart-connected devices). The potential is hard to 12.0 estimate, but nonetheless significant, even if the exact timing is uncertain. The next year or two remain 10.0 10.0 9.0 tenuous, but we have no plans to sell our current position in Telstra. 8.5 8.8 8.0 7.0 7.4 6.0 5.1 5.5 Outlook 4.1 4.0 3.3 The Core Portfolio is a concentrated strategy, so deviation from the benchmark, positive and negative, is the 2.0 1.5 norm. Sharp stock market appreciation, particularly from materials and growth stocks, has left our quality- 0.0 and value-oriented positions and cash level out of step. Taking on ever-more risk has been a winning Return 1 month 3 month 1 year 3 years 5 years Since Incp p.a p.a % p.a strategy for nearly a decade since the financial crisis. Now is not the time to be daring, in our view. Key attributes for future performance of current portfolio holdings are limited exposure to the most cyclical parts Portfolio S&P/ASX 200 TR AUD of the economy (mining, minerals, construction, and capital markets), and large investments in defensive competitively-advantaged companies. As of 30/06/2018 Asset Allocation Transactions in the Quarter Portfolio Date: 30/06/2018 There were no transactions in the quarter. % Stock 88.4 Cash 11.6 Total 100.0 Equity Region Exposure Average Relative Weights over the Quarter Portfolio Date: 30/06/2018 11.5 % Health Care Equipment and Services Australia 91.8 8.2 France 2.7 Software and Services United States 5.5 6.6 Total 100.0 Insurance 2.7 Real Estate 2.4 Telecommunication Services 2.2 Transportation 2.2 Consumer Services 2.1 Commercial Services and Supplies 1.5 Food, Beverage and Tobacco -0.1 Equity Sectors (GICS) Consumer Durables and Apparel -0.1 Portfolio Date: 30/06/2018 Household and Personal Products % -0.2 Consumer Discretionary 6.1 Automobiles and Components Consumer Staples 7.9 -0.5 Energy 5.0 Media Financials 22.2 -0.7 Healthcare 20.5 Capital Goods Industrials 11.9 -0.8 Retailing Information Technology 11.4 -1.4 Materials 0.0 Energy Real Estate 10.1 -1.8 Telecom Services 4.8 Pharmaceuticals and Biotechnology Utilities 0.0 -2.0 Total 100.0 Utilities -2.6 Food and Staples Retailing -5.2 Diversified Financials -15.2 Banks -18.4 Materials -40.0 -20.0 0.0 20.0 As of 30/06/2018 Market Performance Risk-Reward Time Period: Since Inception to 30/06/2018 Time Period: 1/07/2004 to 30/06/2018 Inv Bmk1 10.0 Up Period Percent 59.52 63.69 8.0 Down Period Percent 40.48 36.31 6.0 Best Month 9.14 7.98 Worst Month -12.71 -12.61 4.0 Best Quarter 23.25 21.50 2.0 Worst Quarter -16.08 -18.25 0.0 Return 0.0 3.0 6.0 9.0 12.0 15.0 Std Dev Portfolio Australia Fund Equity Australia Large Blend Risk Multiple Investment Sector Exposure Chart Time Period: Since Inception to 30/06/2018 Portfolio Date: 30/06/2018 Inv Bmk1 Consumer Discretionary Return % pa 7.44 8.77 Consumer Staples Energy Std Dev 13.26 13.03 Financials Max Drawdown -48.58 -47.18 Healthcare Industrials Information Technology Materials Real Estate Telecom Services Utilities 0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 Portfolio S&P/ASX 200 TR AUD Complete List of Holdings Portfolio Date: 30/06/2018 Total Portfolio Style Ret 3 Code Weight Box Mo % (Qtr-End) Cash Account 0.489 11.645 QBE Insurance Group Ltd QBE È 1.142 5.474 Healthscope Ltd HSO Ë 14.212 5.450 Crown Resorts Ltd CWN É 6.383 5.421 Medibank Private Ltd MPL Ë 0.690 4.907 ResMed Inc DR RMD Ë 14.457 4.852 Westpac Banking Corp WBC Ç 5.660 4.663 National Australia Bank Ltd NAB Ç -0.316 4.596 Carsales.com Ltd CAR Ì 11.917 4.572 Woodside Petroleum Ltd WPL É 21.272 4.375 Sydney Airport SYD É 9.463 4.362 Telstra Corp Ltd TLS Ç -16.561 4.285 Brambles Ltd BXB È -11.022 3.984 Coca-Cola Amatil Ltd CCL Ê 6.113 3.611 CSL Ltd CSL É 23.903 3.525 Scentre Group SCG È 14.621 3.430 Link Administration Holdings Ltd LNK Ë -12.110 3.422 Wesfarmers Ltd WES È 18.768 3.339 Vicinity Centres VCX È 10.871 3.079 Ansell Ltd ANN Ë 7.641 2.784 WFD Unibail-Rodamco NV ADR URW Ç 2.404 Qube Holdings Ltd QUB Ì 10.550 2.187 MYOB Group Ltd MYO Î -5.246 2.075 Ramsay Health Care Ltd RHC É -13.383 1.530 OneMarket Ltd Ordinary Shares OMN 0.029 As of 30/06/2018 This document is issued by Morningstar Investment Management Australia Limited (ABN 54 071 808 501, AFS Licence No. 228986) (‘Morningstar’). © Copyright of this document is owned by Morningstar and any related bodies corporate that are involved in the document’s creation. 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