Product Assessment

Macquarie Special Events Fund

31 Mar 2010

The Macquarie Special Events Fund is a multi strategy, event related fund which seeks to deliver attractive returns from Australian and New Zealand equity markets. Zenith believes the Fund is appealing based on its diverse return drivers that should deliver consistent returns, capital preservation focus and skilled management. Since our last review in December 2007 a number of changes have occurred. Previously managed by MQ Specialist Investment Management Limited (MQ), a wholly owned subsidiary of Macquarie Bank, the Fund now operates within Macquarie Funds Group (MFG), following the integration of MQ with other Macquarie capabilities to form MFG. Operating within the Listed Equities business of MFG the Fund is now managed by 2 dedicated personnel, whereas previously there was a portfolio manager and 2 part-time resources. Tuan Luu remains the Portfolio Manager, having managed the Fund since inception in 2003. He's supported by assistant portfolio manager, Manish Bishnoi, who joined the team in September 2009, having been with MFG since 2007. The team is closely supported in a consultative capacity by the fundamental equities team and the quantitative team as well as the broader credit, property and infrastructure teams. Overall, Zenith believes the changes have been beneficial to the Fund and while there's scope for additional team resources we are confident in the team's ability to successfully execute the underlying strategies. The objective of the Fund is to provide 10% (net of fees) p.a. on a rolling 3 year basis with approximately half the volatility of the S&P/ASX200 Index. The core strengths of the Fund are its focus on capital protection and absolute return which is afforded by its flexible investment mandate. This enables the Fund to selectively capitalise on opportunities throughout the market cycle The Fund's trading ideas can be divided between those driven by corporate event catalysts (strategic corporate events = M&A, Demerger, Capital Raising / Refinancing) and those driven by short-term volatility and opportunities (tactical trading events = targeted Buy-Write, Event-Related Trading, Relative Value). While the Manager targets different return targets depending on the strategy investments are expected to yield 12-30% on an annualised basis, at 5-15% volatility, without adding excessively to portfolio correlation. Portfolio construction is largely a function of the underlying bottom-up analysis undertaken by the manager and an output of its assessment of the deal or an individual security(s). While there are no formal constraints around the allocation to each strategy the Manager attempts to ensure adequate diversification across strategies, market capitalisation bands and GICS sectors. Additionally, a balance is maintained between strategic corporate investments and tactical event opportunities. The portfolio typically holds 50 to 60 stocks but again is function of the opportunity set. A dynamic hedging strategy was enacted from October 2008 to maintain net market exposure and sensitivity to market movements within a tight band of 0 to 25%. Risk management is engrained into the management of the Fund through numerous mechanisms, including setting position sizes such the maximum loss is 1% of Net Asset Value (NAV) per position per month. In Zenith's view one of the major risks facing the Fund is key man risk, with Luu being integral to the management of the Fund. Having managed the Fund since inception he has an intimate understanding of the underlying strategies and his departure would be detrimental to the Fund. However, it should be noted that Luu is well incentivised to remain at the Manager. The Fund charges an annual management fee of 1.55% plus a performance fee of 20% over the hurdle rate (the RBA cash rate), subject to a high water mark, accrued monthly and paid quarterly. There are also operational costs, capped at 0.615% per annum, taking the management expense ratio (MER) to a high 2.17% (excluding any performance fee). Given the non-traditional return drivers of this Fund we believe it should be employed as a component of an investor's Australian equity exposure within a diversified portfolio. Zenith rates the Macquarie Special Events Fund RECOMMENDED.

Key Features

Description

APIR Code

MAQ0360AU

Asset Class

Australian Shares

Sub-Asset Class

Specialist

Investment Style

Multi Strategy

Benchmark

UBS Bank Bill Index

Recommended Investment Timeframe

5 + years

Portfolio Manager

Tuan Luu

Investment Team Size

3

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Performance Analysis Performance Statistics Performance (% p.a.)

5 Yrs

Fund

3 Yrs

1 Yr

13.23

14.02

35.27

5.85

5.74

3.55

Benchmark

The objective of the Fund is to provide 10% (net of fees) p.a. on a rolling 3 year basis with approximately half the volatility of the S&P/ASX200 Index. More generally the Fund aims to have a 2 to 1 Reward/Risk ratio and has a capital preservation focus. Impressively the Fund has had annualised return of 13.05% since inception in October 2003 with an annual volatility of 6.03% (until 31 December 2009). The Fund has also managed to achieve a return of over 10% in all time periods.

Consistency Analysis Consistency Statistics

5 Yrs

3 Yrs

1 Yr

History of Monthly Excess Return (%)

71.67

66.67

83.33

History of Monthly Excess Return (Rising Mkts %)

71.67

66.67

83.33

History of Monthly Excess Return (Falling Mkts %)

0.00

0.00

0.00

Investment Personnel Name

Title

Tenure

Tuan Luu

Portfolio Manager

Manish Bishnoi

Assistant Manager

Portfolio

8 Mth(s)

9 Yr(s)

Bruce Apted

Portfolio (Backup)

Manager

11 Yr(s)

In line with its objective of delivering consistent positive returns with relatively low volatility, the fund has achieved a very high Manager Background level of monthly positive returns. The Special Events Fund is offered by the Macquarie Funds The history of monthly excess returns (over the UBS Bank Bill Group (MFG), a division of the Macquarie Group (Macquarie), Index) indicates the Manager has outperformed the cash a global bank and diversified financial services company listed benchmark in most monthly periods. The History of Monthly on the Australian Stock Exchange. MFG is the full service Excess Return in Falling Markets category is irrelevant in this funds management division of the broader group and was case, given that the cash benchmark does not deliver negative formed in August 2008 from the merger of the funds and fund-based structured product businesses within the Funds performance. Management Group, Equity Markets Group's Funds Products Division and Macquarie Capital Products Division. The merger Risk / Return Analysis eliminated the duplicated functions of the groups and resulted Risk / Return Statistics 5 Yrs 3 Yrs 1 Yr in the integration of the database and quantitative modelling Information Ratio 1.07 0.95 3.54 techniques of the Equity Markets Group and the Funds Management Group that are employed by the Special Events Sharpe Ratio 1.11 0.99 3.57 Fund. Standard Deviation (% p.a.)

6.65

8.37

8.87

Tracking Error (% p.a.)

6.87

8.67

8.96

The Fund aims to deliver half the volatility of the S&P/ASX200 Index which approximately equates to a volatility target of 6-8% p.a. The fund has managed to achieve this objective over the medium term and illustrates the impact on volatility of a product which reduces its market exposure. While the absolute returns from a product of this structure will never compete with long biased Australian equities vehicles during bull market conditions, on a risk adjusted basis they become much more attractive. A Sharpe ratio above 1.0 indicates the fund is delivering additional alpha (return above benchmark) for every unit of risk. Over the longer term the fund has achieved this objective.

The Listed Equities business of the MFG, of which the Special Events Fund falls under, has $9.3 billion Funds Under Management (FUM) as at December 2009. The Special Event Fund manages $54 million (as at December 2009), a comparatively small proportion of this total, having managed $137 million at the peak in December 2007. However, the Manager has indicated that the Fund is profitable at these low levels, indicating capacity is approximately $200 to $250 million, based on deal flow and liquidity. Having ceased promotion of the Fund in recent years the MFG has again committed to promoting the Fund, allocating dedicated resources to this function. Zenith believes that MFG is committed to expanding the fundamental capabilities of the group, as evidenced by the recent additions to these capabilities. Investment Team

Tracking error is irrelevant in assessing this fund, given that Following the formation of MFG in 2008 the MQ investment the underlying benchmark used in this case is cash. team (formerly the Special Events Fund operated under the MQ banner) was integrated into the broader group, experiencing some changes in the process. The team directly

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responsible for the Fund now consists of 2 investment professionals, led by Tuan Luu as portfolio manager. Previously Luu was supported by 2 part-time resources within the MQ team but he now has a dedicated resource, Manish Bishnoi, who is the assistant portfolio manager of the Fund. Bishnoi is responsible for running the strategic corporate event and tactical event screen as well as working with Luu in deal/transaction analysis to assess investment analysis. In addition the back-up portfolio manager for the Fund is Bruce Apted, portfolio manager of the Australian Equity Income Fund. All three team members form the Specialist Portfolio team. Luu's further supported by the broader fundamental equities and quantitative research teams.

Due to the changes in recent years, i.e. the integration of the MQ business into the MFG, team stability is a little more difficult to address. While Luu has been the portfolio manager of the Fund since inception in October 2003 the Fund used the underlying resources of the MQ team on a part-time basis, predominantly Apted and Miron Meydan. While Meydan departed Macquarie in January 2010 and Apted is now devoted to the Australian Equity Income Fund Luu gained a dedicated resource (Bishnoi) in September 2009. The Manager has indicated that with growth in FUM an additional portfolio manager and analyst would be warranted and preferred. Among the broader team there has been considerable turnover among the Fundamental and Quantitative teams. However, with more arrivals than Luu has over 13 years experience in the investment industry, departures due to the expansion of Fundamental capabilities, including previous roles in portfolio management, industrial the majority of this turnover can be viewed as a positive as it equities analysis and fixed income trading. In Zenith's opinion, adds to the depth of the broader capabilities. he's well suited to his current role as portfolio manager of this fund. Prior to moving to MQ at inception, Luu worked as a The team is well incentivised through a competitive salary and derivatives and specialist trading manager for the Macquarie profit share arrangement. The profit share arrangement is Equity Markets Group for 2 years and before that in senior based on the profitability of the overall Listed Equities quantitative trading roles for BNP Paribas Asset Management business, which in a small part is influenced by the overall (6 years) and BZW Equities Research (1 year). profitability of MFG due to the sharing of support costs. However, predominantly this is influenced by profitability of the Bishnoi assumed his current position as assistant portfolio individual equity products with performance fees being an manager in September 2009, having joined MFG in August important contributor to this profitability. As such, remuneration 2007. During his 2 years within the broader MFG he was a is aligned with the performance of the broader group and fund. quantitative researcher, researching new quantitative signals, To ensure team members aren't overly incentivised to enhance improving existing signals and providing analytical support to short term performance at the expense of longer term the senior portfolio managers of the group. Prior to joining performance a portion of this profit share is retained and MFG he worked in Information Technology consulting. While vested over three years. he has limited investment experience his skill set would be particularly useful in developing tools to filter and process the Overall, Zenith believes the changes to the team in recent vast quantity of pertinent information originating from the times are a positive with the addition of a dedicated resource market. further enhancing the capabilities. Although we believe additional resources would be warranted given the extensive Although no longer actively involved in the Fund Apted was range of strategies employed by and the resultant time burden previously one of the part-time resources dedicated to the MQ required to adequately monitor market developments we rate Fund. He was responsible for much of the preliminary the current investment team, particularly Luu, highly and are screening and research, including quantitative event screening confident in their ability to successfully execute the underlying and pre-deal signal research. For the past two and a half years strategies. he has been lead portfolio manager for the Australian Equity Income Fund. Zenith has reviewed this Fund and rates Apted Investment Process highly. He has been with Macquarie since 1999 and has over The objective of the Special Events Fund is to provide 15 years experience in investment management with 11 years investors with consistent superior risk-adjusted returns over experience in trading proprietary absolute return strategies for the medium term. To achieve this objective the Fund employs both Macquarie Bank and Bankers Trust. Beginning his career a multi-strategy approach to target market inefficiencies that at Westpac Investment Management he then spent 4 years cause the mispricing of securities affected by corporate related managing a global derivatives strategy as part of Bankers events and market cycles. The core strengths of the Fund are Trust's proprietary trading desk. its focus on capital protection and absolute return which is The team is further supported in a consulting capacity by the afforded by its flexible investment mandate. This enables the fundamental equity team that consists of eight analysts and Fund to selectively capitalise on opportunities throughout the two portfolio managers as well as the large quantitative team. market cycle As part of the MFG they also have access to the wider credit, The Manager believes that the constant flow of event-driven property and infrastructure teams as well as the chief catalysts, corporate events, capital transactions and earnings economist and his team. While these teams predominantly act changes have a significant impact on share prices, creating as a source of specific information they can also originate inefficiencies that can be exploited. While this is a derivation of investment ideas. Although it shouldn't be emphasised too the general market inefficiency hypothesis it's well supported greatly the global presence of the broader Macquarie Group by historical studies and the track record of the Fund. enables the team to have greater access to deal flow and companies. Security Selection Given the small nature of the team interaction is fluid and continuous with the two members working together on all facets of the Fund. While no formal arrangements exist with the other teams, given the central location of the teams we believe interaction would be of a frequent and regular basis.

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The investment universe for the fund comprises listed securities, or soon to be listed, in Australia and New Zealand and includes instruments such as listed shares (ordinary, preference, options), listed unit trusts, index futures and index options. Currency contracts will also be used where the bidder

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is listed overseas and a short position in the acquiring is a critical part of the assessment as this usually has a direct company is hedged back into Australian dollars to manage impact on the likely success, or value, of a transaction. As part foreign exchange risk. of this process the team is in regular contact with the CEO and senior management of both companies in an effort to assess While the filtering process is dependent on the strategy the progress of the transaction. The investment process employed, in general, investments are expected to yield therefore incorporates both quantitative and qualitative 12-30% on an annualised basis, at 5-15% volatility, without assessment criteria. adding excessively to portfolio correlation. A minimum hurdle rate of 12% return p.a. is required for all investments which This information is then used to evaluate the deal and assess typically filters out 2/3 of all possible investment opportunities. the risks of the deal not proceeding. The team also attempts to assess the likelihood of a competing offer and / or increase in The Fund's trading ideas can be divided between those driven price of the offer. In order to evaluate the probability of the deal by corporate event catalysts (strategic corporate events = proceeding, the manager uses a binary flowchart / matrix as a M&A, Demerger, Capital, Refinancing) and those driven by discipline to assess all possible scenarios. In Zenith's view, this short-term volatility and opportunities (tactical trading events = approach adds discipline and rigour to the process and targeted Buy-Write, Event-Related Trading, Relative Value). ensures all possible scenarios are considered. This is Investment ideas for the former arise from public media, news especially important for assessing the risks in each and industry sources, ASX announcements, broker research transaction. and internal intelligence extrapolated from previous trading. The Manager employs live news feeds, ASX announcement The investment process is active and throughout the takeover screens and comprehensive broker research alerts as period the manager assesses all information flow closely as screening tools. For the latter, investment ideas come from this can create opportunities to trade the positions based on various internal option monitor screens, spread analysis filters price volatility created by the information flow. New information and relative value pricing models. may also lead to the position being exited and / or maintained until completion of the transaction. The fund utilises 8 strategies that can capitalise on opportunities across market cycles (Bullish, Neutral, Bearish). 2. Demerger/Spin-off These include: The Demerger/Spin-off is a Bullish strategy which involves ● Merger and Acquisition (M&A) risk arbitrage; identifying investment opportunities that arise as a result of ● Demerger/Spin-off; demergers and spin-offs. The strategy arises from the ● Targeted Buy-Write; underlying premise that an over-diversified corporate may be ● Event-Related Trading; undervalued compared to the re-rating potential of the different ● Relative Value (Share Class Arbitrage and components. The security must have sufficient free-float Convertible/Hybrid Arbitrage) liquidity to allow the manager to build a meaningful position ● Capital Raising; while also being satisfied that the position can be unwound ● Capital Refinancing; and within a period of 5 trading days in the case of deal break. ● Other Event-Related Trading Strategies. The fund adopts a valuation driven approach to the strategy The key aspects of each of the strategies employed in over the medium term in order to exploit opportunities. These managing this fund are discussed below: events may also lead to M&A opportunities as news spun-off companies become attractive acquisition targets. 1. M&A Risk Arbitrage 3. Targeted Buy-Write Usually a bullish strategy these trades concentrate on listed Australian and New Zealand companies under full takeover, This is a neutral strategy that involves investing in select ASX merger or other related transaction. The security must have 50 Leaders with corporate event signals such as earnings sufficient free-float liquidity to allow the manager to build a upgrades, significant company transactions and related capital meaningful position while also being satisfied that the position activities. Short-dated call options are then written against long can be unwound within a period of 5 trading days in the case positions to generate additional income from the position and of deal failure. provide some capital protection. The premise is that due to investor demand for certainty options tend to be overvalued The strategy seeks to capitalise on shareholders willingness to relative to underlying volatility. The Manager is targeting an accept a discount to bid value once a merger is announced. To annualised return of at least 20% and the security must have assess the value of the deal the Manager uses a decision-tree sufficient free-float liquidity such that the position can be approach that aims to schematically examine all possible unwound within a period of 3 trading days in the case of forced scenarios. Each of these scenarios is then assigned a liquidation. probability weighting based on the manager's assessment of its likelihood of occurring. These probability weightings are A valuation approach is used with internal/external exchange then applied to the expected outcomes which allows the traded option screens used for the option strategy. When the Manager to calculate the deal spread. The manager requires a options mature the team reassesses whether to continue deal spread return of at least 12% p.a. to take a position. holding (rewriting/rolling options) or close down the investments. This is based on further analysis of the risk/return The probabilities used in the assessment process are profiles of the transaction/company at the time. dependent on the deal structure and conditions and are calculated based on the manager's experience and analysis of 4. Event-Related Trading past takeovers. The team also reviews the qualitative aspects of each company including quality of management and A neutral strategy that employs opportunistic switching motive/strategy behind the proposed transaction. This analysis between groups of companies / securities during market

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dislocation events to extract relative performance differentials. These trades are based on the premise that statistically significant relationships exist between groups of securities but that these relationships can break down temporarily due to a variety of reasons such as market disruptions. However, over time these relationships should mean-revert.

8. Other Event-Related Trading Strategies

This category allows the Fund to trade corporate capital events which don't fall within the aforementioned strategies. Examples of these trades include distressed debt and equity and earning revisions. A mixture of quantitative/fundamental/strategic analysis is employed, depending on the strategy, to highlight Quantitative analysis is used to screen for appropriate trade, trades that are expected to yield 12-30% annualised. These targeting spreads of at least 10% (not annualised) and more trades must have an exit catalyst/strategy within one to three than 2 standard deviations away from its historic statistical months from investment. relationship. The security must have sufficient free-float liquidity such that the position can be unwound within a period The diversity of strategies employed within the Fund should enable it add value in all market conditions and Zenith believes of 3 trading days in the case of forced unwinding. this diversity is a core strength of the Fund. All the 5 . R e l a t i v e Va l u e ( S h a r e C l a s s A r b i t r a g e a n d opportunities have a solid theoretical foundation with the Convertible/Hybrid Arbitrage) Manager using an appropriate blend of quantitative tools and qualitative judgement to exploit the opportunities. Although This strategy is a neutral strategy which involves extracting quite a heavy workload for a small team, the Manager, value from the difference in fair value spread between 2 or particular Luu, demonstrates a thorough understanding of the more tradable securities in the same company by drivers of returns and mechanics of the individual strategies. simultaneously holding a long and a short exposure. These positions are then either held to expiry or unwound on more Portfolio Construction profitable terms prior to expiry. Securities traded include but Portfolio construction is largely a function of the underlying are not limited to ordinary shares, preference shares, bottom-up analysis undertaken by the manager and an output convertibles and hybrids and company options. of its assessment of the deal or an individual security(s). While A relative valuation approach is used to assess the value of there are no formal constraints around the allocation to each different securities issued by the same company which drives strategy the Manager attempts to ensure adequate the capital arbitrage strategy. The team targets spreads of at diversification across strategies, market capitalisation bands least 5% (not annualised). In addition, to the valuation and GICS sectors. Additionally, a balance is maintained assessment, the manager also applies a liquidity test to between strategic corporate investments and tactical event attempt to ensure the securities can be easily traded. The opportunities. ability to borrow stock in the underlying company and Position sizes are determined by conviction but limited by a conversion terms are also important considerations. maximum risk limit of 1% of Net Asset Value (NAV) per position per month. This limits individual positions to around 5% of NAV 6. Capital Raisings but typically they are around 2.5%. The portfolio typically holds This strategy tends to be a bearish strategy in which the Fund 50 to 60 stocks but again this is a function of the opportunity participates in IPOs, share placements, sell-downs, rights set. A dynamic hedging strategy was enacted from October issues and entitlement issues with the aim of extracting the 2008 to maintain a net market exposure and sensitivity to discount to market price associated with such capital raisings. market movements within a tight band of 0 to 25% (During The team targets trades with market discounts of at least 10% 2009 net exposure averaged 18%). This is achieved through (not annualised) with an exit path within one month of the management of long and short exposures with the investment. The security must have sufficient free-float liquidity Manager using index futures if necessary to reduce net market such that the position can be unwound within a period of 5 exposure. trading days. The sell discipline is a function of achieving the expected The Capital Raisings strategy is closely related to the M&A risk/return payoff or a deterioration of the risk/return payoff. Risk Arbitrage and Demerger / Capital Restructuring Cash is also a function of the opportunity set with the Fund strategies. While Capital Raisings offer the potential for short remaining in cash if the risk/reward trade-off is inadequate term returns, they also offer insight into related corporate (maximum cash holding is 100% but average 6% in 2009). activities (e.g. M&A and Demerger activities). Given the generally short holding period for most strategies turnover is expected to be high, estimated at 900% p.a. 7. Capital Refinancing/Restructuring This is a bearish strategy that was introduced following the Global Financial Crisis and allows the Fund to trade events based on capital requirement opportunities. These trades capitalise on the fact that during poor market conditions distressed companies are often forced to secure funding through dilutive Capital Refinancing and/or Capital Raisings. The Fund will short sell these companies and participate in subsequent capital raising to offset the short positions.

Risk Management Portfolio Constraints

Description

Net Exposure

0 to 25

Gross Exposure (%)

max: 300%

Turnover (%)

900% p.a. (est)

Short Selling (%)

Used in order to reduce market exposure.

Max 10% of stock's The team employs internal fundamental analysis, targeting Security Limits market capitalisation refinancing spreads of at least 12% annualised. The security must also have sufficient free-float liquidity such that the position can be unwound within a period of 3 trading days in Given the capital preservation focus of the Fund risk management is thoroughly engrained into the process through the case of forced short-covering.

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both informal and formal portfolio constraints. In Zenith's view the manager's risk management approach is robust focusing on controlling both market risk and individual transaction risk. In terms of managing market risk, the objective is to hedge out much of this risk. More broadly the Manager has introduced a dynamic hedging policy whereby the net exposure of the Fund is contained between 0 and 25%. This is achieved through the use of derivatives around individual positions as well shorting individual positions and the index. To protect against single deal and investment risk position sizes are based on maximum limit loss of 1% of NAV per position per month. To ensure the Fund remains liquid the Manager structures the portfolio such that it's possible to liquidate the entire portfolio within 5 days. The portfolio is also structured such that the strategies have minimal correlation to ensure they aren't impacted by the same factors concurrently.

capital preservation focus, it's unlikely this would materially impact performance. While the following list of investment risks is not meant to be exhaustive, it identifies some of the risks which relate specifically to the Special Events Fund: ● ● ● ● ● ●

Deal-failure risk - i.e. that the merger does not proceed; Deal spread compression Market conditions which are not conducive to corporate deal flow; Regulatory and / or political environment which subdues M&A activity; Bid duration - can tie up capital for extended periods; and Liquidity - particularly in some preference shares, options etc.

More formally the Manager employs a risk factor model Applications of the Fund (APT/Factset) to map macro-economic factors and risk 3 years Excess Correlation Table attribution. However, we believe this tool is not a major component of the risk management process with the Fund Name aforementioned constraints and ongoing monitoring the more pertinent factors. Antares Lodestar Australian Absolute Return Fund

Risks of the Fund

Excess Correlation 0.54

Ausbil - Australian Active Equity Fund

0.70

Fidelity Australian Equities Fund

0.68

As is the case with all Australian equities based products, the 0.66 biggest risk to this fund is a sustained downturn in the K2 Australian Absolute Return Fund Australian shares sector, which could lead to negative Perpetual Wholesale Australian Fund 0.70 performance. However, given the capital preservation focus, Wavestone Capital Absolute Return Fund 0.56 low net market exposure and diverse return strategies it's possible the Fund could be minimally impacted by such an As previously stated the fund is an attractive option for those environment. investors seeking an alternative equity based investment with One of the greatest risks to this Fund we believe is key man much of the market based risk removed. The fund is largely an risk. Although Macquarie added a dedicated resource to the arbitrage vehicle in that the majority of its returns are driven team in 2009, Luu remains the key individual in this Fund. He's from investments in M&A activity and capital structure been responsible for the Fund since inception and we believe opportunities. Whilst in an absolute return sense the fund is his departure would be highly detrimental to the Fund. best suited to recovering or bullish market conditions, due to Although his back-up, Apted, is also well regarded by Zenith its lower net market exposure it will tend to underperform its we believe his focus is now the Australian Equity Income Fund mainstream peers in such conditions. This lower net market and his knowledge of the specifics of this Fund would be exposure will provide protection during falling markets. limited. However, it should be noted that Luu is well Zenith expects the high level of portfolio turnover, which is a incentivised to remain at the Manager. bi-product of the strategy, will result in high levels of realised Although not relevant at this point due to the low level of FUM, capital gains within the fund's income distributions. As a result, capacity risk also needs to be considered. Given the this may not be appropriate for high marginal tax rate payers specialised strategies involved in managing the Fund excess who would prefer a greater proportion of their investment levels of FUM would impede performance. However, the returns delivered through capital appreciation. Manager has set a conservative capacity limit of $200 million based on underlying analysis of deal flow in the Australian Given the non-traditional return drivers of this Fund we believe market. Zenith is comfortable with this capacity limit given the it should be employed as a component of an investor's Australian equity exposure within a diversified portfolio. remuneration structure for the team favours performance. Another risk that is somewhat related to capacity is the fact that the Fund operates in a space dominated by hedge funds and proprietary trading desks. While competition will have decreased post the Global Financial Crisis this would still be a competitive market, particularly in the narrow Australian market. However, given its relatively small size (and resultant nimbleness) and the diversification across strategies the Fund should somewhat mitigate this risk. Another risk that pertains to the Fund is that it's able to have a 300% gross exposure to the market (150 long/150 short). While typically the Fund will have a gross exposure of less than this (in 2009 the Fund averaged 170%) the ability adds some risk to the Fund. However, given the Manager's risk and

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Fees The fees relevant to this fund are as follows: a management fee; a performance fee; operational costs; and an exit spread. An annual management fee of 1.55% per annum is charged. While this fee structure is significantly higher than that of a typical Australian equities manager, we acknowledge that it's competitive relative to many hedge funds in the market place that use similar strategies. The performance fee is 20% over the hurdle rate (the RBA cash rate), subject to a high water mark, accrued monthly and paid quarterly. The percentage of the performance fee is at the high end of the normal 10%-20% range and our preference

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would be for the hurdle rate to include the impact of fees (i.e. index + MER). Operational costs are capped at 0.615% per annum but take the management expense ratio (MER) to a high 2.17% (excluding any performance fee). Author:   Steven Tang Investment Analyst Email:   [email protected] Ph: (03)9642 3320 Fax: (03)9642 3319 DISCLAIMER: This report is prepared exclusively for clients of Zenith Investment Partners (Zenith). The report contains recommendations and advice of a general nature and does not have regard to the particular circumstances or needs of any specific person who may read it. Each client should assess either personally or with the assistance of a licensed financial adviser whether the Zenith recommendation or advice is appropriate to their situation before making an investment decision. The information contained in the report is believed to be reliable, but its completeness and accuracy is not guaranteed. Opinions expressed may change without notice. Zenith accepts no liability, whether direct or indirect arising from the use of information contained in this report. No part of this document is to be construed as a solicitation to buy or sell any investment. The performance of the investment in this report is not a representation as to future performance or likely return. The material contained in this report is subject to copyright and may not be reproduced without the consent of the copyright owner. Zenith usually receives a fee for assessing the fund manager and product(s) described in this document against accepted criteria considered comprehensive and objective.

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