superior … · - identify the long term commercial potential of the responsible entity/investment...

Supervised Global Income Fund

Superior

This report has been prepared for financial advisers only

INTRODUCTION

Key PrinciplesThe underlying principles of the assessment process are to:

- identify the long term commercial potential of the Responsible

Entity/Investment Manager;

- evaluate management’s capabilities, previous performance in the

specific industry and the stability of the organisation;

- evaluate identified markets (domestic and international existence,

stability and growth potential);

- benchmark key performance assumptions and variables against

industry peers;

- weigh up the relevant risks of the Responsible Entity/Investment

Manager;

- assess structure and ownership;

- determine if the Responsible Entity/Investment Manager is

structured in such a way as to protect investor’s interests; and

- allow an opinion to be formed regarding the investment quality of

the Responsible Entity/Investment Manager.

AssessmentSQM Research conducts a detailed site inspection of the projects/properties within the Responsible Entity’s/Investment Manager’s managed funds.

- The site assessment considers the following areas:

- sustainability of the site for the purpose intended;

- management skills, qualifications, capabilities and experience; and

- associated property risks and their management.

4½ stars and above

Outstanding Highly suitable for inclusion on APLsThe fund most often outperforms its peers and benchmark. In all cases the fund is operating to its mandate and product disclosure statement (PDS). There are no corporate governance issues. Management is extremely experienced and skilled and has access to significant resources.

High Investment grade rating

4 stars to 4¼ stars

Superior Suitable for inclusion on most APLsThe fund outperforms (or is likely to) its peers and benchmark the majority of the time. The fund most of the time has been operating within its mandate and PDS. There are very little to no corporate governance concerns. Management is of a very high calibre.

High Investment grade rating

3¾ stars Favourable Consider for APL inclusionThe fund may outperform its peers and benchmark the majority of the time or SQM believes this is a fund that has potential to be an outperforming fund over the medium term. Management is of a quality calibre but may not yet be fully tested. There are no corporate governance concerns or they are of a minor nature.

Approved

3½ stars Acceptable Consider for APL inclusion, subject to advice restrictionsThere is some degree of additional risk attached to the fund by way of performance. The fund may periodically underperform its peers and benchmark or it has not been fully tested. There may be some additional concentration risk. Management is generally experienced and capable. There might be corporate governance issues of a mid-level or corners over the Responsible Entities/Parent Entities financial position/performance.

Low investment grade rating

3¼ stars Caution required Not suitable for most APLsPerformance has been significantly under-benchmark and peers. There is a greater than average risk of underperformance over the medium term. There is a risk of the fund not operating to mandate or to its PDS. There are corporate governance concerns. Management has been operating in an average manner.

Unapproved

3 stars Strong Caution Required

Not suitable for most APLsThe fund is unlikely to perform to its mandate over the near term. There might be some greater than average corporate governance concerns. SQM has a number of concerns of management.

Unapproved

Below 3 stars Avoid or redeem Not suitable for most APL inclusion Unapproved

Star Rating*Investment products are awarded a star rating out of a possible five stars and placed on the following websites: www.sqmratings.com.au

Licensed Investment AdviserSQM Research is licensed as an Australian Financial Services Licensee, Licence No. 421913, pursuant to section 913B of the Corporations Act 2001. The licence authorises SQM Research to carry on a financial services business to provide general financial product advice only.

Privacy PolicySQM Research collects only a limited amount of personal information from its clients. Our privacy policy can be viewed at www.sqmratings.com.au. This will enable you to understand your rights, our obligations and what SQM Research does with any information it collects about you.

Fees charged for ReportSQM Research has received a fee from the fund manager for this report and rating.

General Financial Product AdviceThis advice will not take into account your, or your clients, objectives, financial situation or needs and will not be provided in respect of any other financial products. Accordingly, it is up to you and your clients to consider whether specific financial products are suitable for your objectives, financial situations or needs.

Report Date: 1 August 2017

Hold – The rating is currently suspended until SQM Research receives further information. A rating is typically put on hold for a period of two days to four weeks.

Withdrawn – The rating is no longer applicable. Significant issues have arisen since the last report was issued, and investors should avoid or redeem units in the fund.

Not rated – The fund has not been rated by SQM.

Star Rating Description Definition Investment Grading

CONTENTS

Summary 2

Fund Summary 3

SQM Research’s Review 4

Strengths of the Fund 7 Weaknesses of the Fund 7 Key Changes Since the Last Review 7

Investment Process & Portfolio Construction 8 Investment Process Diagram 8 Process Description 8

Corporate Governance/Business Strategy 11 Key Counterparties 11 Parent Company 11 Investment Manager / Fund Manager 11 Responsible Entity 11 Management Risk 12

Management & People 13 Investment Team 13 Staffing Changes 14 Remuneration and Incentives 15

Product Features - Fees & Redemption Policy 16 Buy/Sell Spread 16 Ongoing Fees 16 Performance Fees 16 Overall Fees 16

Quantitative Analysis 17 Quantitative Insight 17 Returns 19 Risk-Return & Efficiency 20

Asset Allocation & Risk Parameters 21


SUMMARY 2

SQM Rating

Fund Details

Fund Name Supervised Global Income Fund

ARSN 600244102

APIR Code SIA0001AU

Manager Supervised Investments Australia Limited

Address Level 7, 65 York Street, Sydney

Responsible Entity One Managed Investment Funds Limited

Custodian JP Morgan

Superior. Suitable for inclusion on most APLs.

Investment Details

Fund Inception 1 April 2009

Fund Size $19.7m

Fund Type Fixed Income

Return Objective (PDS) Outperform Bloomberg AusBond Bank Bill Index (net of fees)

Internal Return Objective Bloomberg AusBond Bank Bill Index plus 250 basis points (net of fees)

Risk Level (PDS) Medium

Internal Risk Objective Capital preservation

Benchmark Bloomberg AusBond Bank Bill Index plus 250 basis points (net of fees)

Number of positions in portfolio 15 to 20

Gearing (Fund) Not Applicable

Investment Specifications Summary

Minimum Application $10,000.00

Minimum Withdrawal $10,000.00

Redemption Policy Daily

Distribution Frequency Quarterly

ICR 1.00%

MER 1.00%

Performance Fee Not Applicable

Buy/Sell Spread Varies with credit market spreads – see fee section for details

Currency Hedging 100% hedged into $A

Time Horizon for Investment 2 to 5 years

Other

Turnover Low

Top 10 Holdings Weight 57.2%

Total Firm FUM AU $19.72 (as at Mar-2017)


SUMMARY 2 SUMMARY 3

Fund Summary

Description

The Supervised Global Income Fund (the Fund) is a concentrated fixed income strategy combining top-down macro analysis with a detailed bottom-up security selection process, unconstrained by any benchmark. The strategy has historically focused on securitised instruments, particularly RMBS, and CLOs, but is not confined to those. It seeks individual fixed income securities that provide high yield with low downside risk on stressed scenarios.

It is structured as an open-ended unlisted registered managed investment scheme. The benchmark for performance measurement purposes is the Bloomberg Ausbond Bank Bill Index.

Investable Universe

The Fund draws from securities available in markets it deems has appropriately stringent legal, governance, regulatory and supervisory institutional structures.

The manager formally defines the authorised universe for investment as:

“Any negotiable debt security or derivative over such a security issued under the rule of insolvency law and sovereign risk that provides a known, proven right of enforceability within a stable political environment.

In practice, this rules out many emerging market countries, and in fact, the manager states “Investments are therefore targeted only in Australia, NZ, European Union, The United Kingdom, United States of America, Canada, Norway, Switzerland and some Asian and South American jurisdictions.”

The Fund has traditionally been invested in Australia and the US.

Fund Rating

The Fund has been upgraded (previously 3.75 stars) and has achieved the following rating:

Star Rating

Description Definition Investment Grading

4.00 stars Superior Suitable for inclusion

on most APLsHigh Investment

Grade Rating


The improved rating reflects a considerable building of professional resources in the management, governance and investment functions at SIAL through a number of key appointments, complemented by ongoing solid Fund performance. A variety of other factors also play an important role in the final assessment, including consideration of the following:

Size and Resources of the Fund Management Company

• SIAL has been established since 1999 and has a stable Board who are also significant long-term shareholders. The two largest shareholders, a director and the CEO, are also investors in the Fund.

Qualifications and Experience of the Investment Team

• Mr. Phil Carden, the Portfolio Manager, is well-qualified and highly experienced in the capital markets. Mr. Carden’s incentives are well-aligned as he is both a shareholder in SIAL and an investor in the Fund.

• There is significant key person risk as relates to Mr Carden. The firm has moved to reduce this somewhat through the recent hiring of Javier Quintanilla to provide analytical support and develop as an “understudy” to Mr Carden and the appointment of Doug Goldsmith to the Investment Committee. SQM Research also notes that Mr Carden is incentivised to remain in his key investment role as he is a shareholder in SIAL and an investor in the Fund.

Investment Process / Philosophy

• An investment process that is rigorously based on detailed fundamental analysis of fixed income securities with significant stress tests applied at the security level in the research process, combined with rigorous ongoing monitoring.

Risk Management

• A thorough stress testing process based on scenario analysis of up to 50% of the loans within the securitised structure defaulting, and assessing the impact across all tranches in the structure.

Liquidity

• The market for CLOs and certain asset-backed securities can be very shallow at times, which will likely exacerbate market price risk in times of risk-off sentiment.

SUMMARY 4

• In the scenario where large requests for withdrawals are made simultaneously, the Fund may face liquidity risk. This is most likely to manifest as having to sell at deeply discounted prices to generate redemption funds required. An inability to fully raise the required funds due to liquidity in a stressed market is also a possibility, although less likely.

Correlation to Equities, Defensive Nature

• Low correlation to mainstream asset classes (particularly equities) and defensive characteristics of return profile.

Length and Quality of Track Record

• The Fund has long track record of outperformance, just shy of 8.5 years.

Volatility of Fund and Drawdown Experience

• The Fund has produced lower volatility than its peers and only one drawdown month.

Fees

• Relatively high base fee structure, no performance fee.

Governance

• One Managed Investment Funds Limited is the independent Responsible Entity for the Fund. One Investment Group operates a number of Responsible Entities. Each holds an Australian Financial Services Licence and is licensed, pursuant to the Corporations Act, to operate financial services businesses and to act as a Responsible Entity for registered managed investment schemes.

• SIAL has enhanced its management and governance with the recent appointments of Michael Ohlsson as CEO and the Honourable Helen Coonan as Chair of the Board.

• SIAL has also appointed Jenni Harding from Harbridge Investment Partnerships as an external compliance consultant.

SQM’s Research Review

About the Manager

Supervised Investments Australia Limited (SIAL) is a privately owned funds management company with no parent company. SIAL was set up in May 2007 by David Constable, who has remained a majority shareholder. The private shareholders who together own all the equity in SIAL are people associated with, or companies owned and controlled by the Constable, Cooper and Carden families. Helen Coonan, the independent chairman of SIAL, also became a shareholder effective 30 June 2017.

Return Objective & Performance

The return objective officially stated in the PDS is that the Fund aims to “outperform Bloomberg AusBond Bank Bill Index (net of fees)”.

SQM Research considers that a reasonable expectation for the Fund’s outperformance to benchmark before fees over the medium term is 3.50% p.a. This alpha target is an opinion based on considering the Fund’s fee structure (1.00%) and its typical volatility and tracking error.

This alpha range is roughly the equivalent of an excess return after fees of 2.50% per annum.

Over the twelve-month period to May-2017, the Fund returned 8.25% (after fees) compared to 1.83% for the benchmark. This is an outperformance of 6.42%.

Fund Excess Returns - Annual (%)


1.74 1.841.63

1.06

0.46

3.75

2.22

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Jun 14 Dec 14 Jun 15 Dec 15 Jun 16 Dec 16 May 17

Exc

ess

Ret

urn

s

latest figure = 5 months ending May-17

2017 figure = 5 months ending May-17

SUMMARY 4 SUMMARY 5

Risk Objective

The Fund’s PDS states that the risk level of the Fund is considered to be”medium.”

The Fund’s volatility (standard deviation of monthly returns) over the year to May-2017 was 0.98% p.a. compared to a peer average of 1.57% p.a. and 0.04% p.a. for the benchmark.

Investment Philosophy, Style, Security Selection and Screening

SIAL describes its investment philosophy as “conservative opportunism”. This combines a fundamental research driven approach with security-level risk articulation and management practices.

The Fund integrates a top-down macro-analytical framework with a credit-intensive bottom-up process, unrestrained by market benchmarks. Key attributes include:

• Scanning the universe for sectors that have strong cash flow prospects based on broad themes such as recovery from price-dislocating shocks (e.g. GFC), oligopolistic market share, clear demographic trends such as ageing population

• Seek out high yielding securities with the potential for limited downside

• Measure the downside under extreme stress testing using metrics that are relevant to the security being assessed (e.g. property prices for RMBS, corporate default rates for CLOs)

Investment Team - Experience and Stability

The Fund is managed by Phil Carden, who acts both as a portfolio manager and security analyst. Mr. Carden is a former Executive Director of Macquarie Bank and has over 35 years’ experience in the finance industry. He provides the macro overview and security selection for the Fund, with the support and oversight of the Investment Committee (shown below) and the assistance of a recently hired junior analyst - Javier Quintanilla. One of the Investment Committee members is also on the Board of SIAL.

Fee Structure

The base management fee is 1.00% per annum of the Fund’s Net Asset Value (“NAV”) calculated daily and paid monthly.

There is no additional expense recovery fee disclosed in the PDS. The buy/sell spread varies depending on prevailing Australian credit market spreads – full details are provided in the Fee Section. As per the Fund’s PDS dated 15th August 2016, the buy/sell spread was set at a total of 0.30% (0.15% buy / 0.15% sell).

There are no performance fees applied.

The combination of management fee (1.00%) and expense reimbursements (0.00%) produces an annual charge of ) of 1.00%. This is higher than the peer group average of 0.70%.

Governance

One Managed Investment Funds Limited is the independent Responsible Entity for the Fund. One Managed Investment Funds Limited has extensive experience in acting as Responsible Entity for registered schemes and trustee for unregistered schemes and is currently the Responsible Entity/Trustee for in excess of 120 managed investment schemes. One Managed Investment Funds Limited has worked with numerous investment managers to establish registered schemes in a variety of asset classes.

FUM (Funds under Management)

The Supervised Global Income Fund had FUM (funds under management) (million) as follows over recent years:

Jun-14 $22.7

Dec-14 $21.9

Jun-15 $20.1

Dec-15 $19.4

Jun-16 $18.0

Dec-16 $17.9

Mar-17 $19.7

The portfolio manager for SGIF also recently won an A$22m separate mandate to invest in BB rated US CLOs only.


SUMMARY 6

Distributions

The Fund has discretion in choosing the frequency of distributions. Distributions occur on a quarterly basis, subject to the availability of distributable income.

In a scenario where the Fund’s realised losses and expenses exceed income in a distribution period, the Fund may elect not to make a distribution during that time.

DistributionDate

Distribution CPU

Unit price $

Distribution %

30-Jun-15 23.92 $12.36190 1.94

30-Sep-15 10.54 $12.40460 0.85

31-Dec-15 9.51 $12.42700 0.77

31-Mar-16 9.15 $12.39140 0.74

30-Jun-16 28.72 $12.24500 2.35

30-Sep-16 12.50 $12.36648 1.01

31-Dec-16 18.00 $12.48790 1.44

31-Mar-17 23.00 $12.54700 1.83

30-Jun-17 34.30 $12.35390 2.78

A General Note on Distributions for Managed Funds

The Responsible Entity of a Managed Fund will generally provide for a regular schedule of distributions, such as monthly / quarterly / semi-annual or annual. This is subject to the Fund having sufficient distributable income.

The official total distributable income available to pay to investors is determined for the period of that Fund’s financial year. By distributing the net taxable income of the Fund to investors each year, a Fund itself should not be liable for tax on its net earnings.

If a Fund makes distributions more frequently than once over the financial year, those distributions will generally be made based on estimates of the distributable income for that distribution period. The final total amount of distributable income available

Growth of $10,000

$10,000

$12,000

$14,000

$16,000

$18,000

$20,000

$22,000

Mar

09

Se

p 0

9

Mar

10

Se

p 1

0

Mar

11

Se

p 1

1

Mar

12

Se

p 1

2

Mar

13

Se

p 1

3

Mar

14

Se

p 1

4

Mar

15

Se

p 1

5

Mar

16

Se

p 1

6

Mar

17

Benchmark : Growth $10k Fund : Growth $10k Peer Avg : Growth $10k

+6.35

+5.08

+6.34

+2.96 +2.68

+2.34 +2.07

+0.74

+4.67

+2.12

+5.79

+2.57

+0.0

+1.0

+2.0

+3.0

+4.0

+5.0

+6.0

+7.0

Dec 14 Dec 15 Dec 16 May 17

Fund Benchmark Peer Average

Annual Returns


Fund Performance to 31 May 20171 (98 months)

Returns 1-Month 3-Month 6-Month 1-Year 3 Year 5-Year Inception

Fund 0.52 1.28 3.91 8.25 5.99 7.43 9.14

Benchmark2 0.15 0.45 0.89 1.83 2.25 2.55 3.28

Peer Average 0.46 1.28 3.26 6.11 4.19 5.77 8.25

Excess 0.38 0.83 3.02 6.42 3.74 4.87 5.86

1 Total return assumes dividend reinvestment. Three, five-year, and inception returns are annualised. The period since inception starts with the month of Sep 2014

2 Benchmark is the Bloomberg AusBond Bank Bill Index

the latest figure = 5 months ending May-17

SUMMARY 7

for passing on to investors can only be calculated after the close of the financial year, based on the Funds taxable income for that year.

If the total distributions a Fund pays out exceeds total tax income for that particular financial year, the excess amount may be treated as a return of capital rather than income. This will possibly have tax implications for the investor.

Due to the considerations outlined above, there may be periods in which no distributions are made, or a Fund may make additional distributions.

A Fund’s ability to distribute income is determined by the performance of the Fund and general market conditions. Accordingly, there is no guarantee a Fund will make a distribution in any distribution period.

Strengths of the Fund

• The Fund, although small in size, possesses strong credentials in its portfolio manager with considerable industry experience in fixed income markets.

• The Fund has a stable board who are also long-term shareholders, and investors in the Fund.

• The Fund has outperformed the benchmark across short and long-term time frames, producing only one drawdown period.

• Risk-adjusted returns are stronger than that of peers.

• The Fund has delivered a track record of consistent distributions.

Weaknesses of the Fund

• Investable instruments for the Fund are illiquid in nature, which can be challenging in stressed market environments.

• Key person risk: the fund relies considerably on Mr. Carden as Portfolio Manager, macro strategist, security analyst and trader. To assist in managing this risk, SIAL has recently hired an analyst (Javier Quintanilla) who assists with security research and is mentored by Mr Carden. The recent appointment of Doug Goldsmith to the Investment Committee also assists in managing this risk.

• The fee structure is higher than that of peer average.

Other Considerations

• SIAL has enhanced its management and governance with the recent appointments of Michael Ohlsson as CEO and the Honourable Helen Coonan as Chair of the Board.


• SIAL has recently brought additional fixed income expertise to the process through appointing Mr Doug Goldsmith as a new external Investment Committee member. Mr Goldsmith has more than 30 years’ experience within the financial markets including the role of Global Head of Interest Rates at the National Australia Bank.

• The Fund is working productively to acquire a significantly valued mandate to invest in prime US CLOs.

• It is important to note that the type of credit market cycle experienced during the GFC or similar severe recessions would likely see material mark-to-market write-downs of Fund holdings and poor performance. If the Fund’s securities do not themselves default or experience adverse restructuring, and the Fund is not forced to sell securities at a principal loss through this phase, then as the cycle recovers there is a potential for the Fund to recover (over time) some, and possibly all, of the mark-to-mark losses (as opposed to realised losses) experienced during the downturn. This type of experience is not limited specifically to this Fund, it is likely to be a pattern seen across many other fixed income funds that rely heavily on high yield, lower liquidity, cash-flow structuring or a combination of these to achieve cash-plus type returns.

• SIAL has also appointed Jenni Harding from Harbridge Investment Partnerships as an external compliance consultant.

• The portfolio manager has recently funded an A$22m separate mandate to invest in BB rated US CLOs for an Australian endowment fund.

Key Changes Since the Last Review

• The considerable building of professional resources in the management, governance and investment functions at SIAL through the following appointments:

o Michael Ohlsson as CEO

o The Honourable Helen Coonan as Chair of the Board

o Mr Doug Goldsmith as a new external Investment Committee member

o Mr Javier Quintanilla as an analyst and effectively an “understudy” to Mr Carden.

o Jenni Harding from Harbridge Investment Partnerships as an external compliance consultant.

• Moving from monthly to daily unit pricing, thereby providing more flexibility for investors.

INVESTMENT PROCESS & PORTFOLIO CONSTRUCTION 8

Investment Process Diagram


Process Description

Universe

Investable Universe The authorised universe for investment is: “any negotiable debt security or derivative over such a security issued under the rule of insolvency law and sovereign risk that provides a known, proven right of enforceability within a stable political environment”.

In practice, this rules out many emerging market countries. Traditionally the Fund has focussed its investing in Australia and the US.

It has typically owned RMBS (residential mortgage backed securities) and CLOs (Collateralised Loan Obligations).

Investment Process

Top-down or Bottom Up

The Fund uses big-picture macro-driven themes as a backdrop for security selection. The majority of effort and reward comes from the identification and purchase-at-a-discount of securities with a high yield and a definable downside that can be adequately stress tested.

Research and Portfolio Construction Process

Idea Generation

The key steps for generating potential portfolio investments are:

1. Top down macro analysis is used to identify economies that are performing well and likely to support low default rates and favourable prospects for growth and cash flow.

2. Sectors are sought that have strong cash flow prospects based on broad macro themes such as low rates, demographics, property prices, and so on.


Research and Portfolio Construction Process- continued


3. Seek out high yielding securities with the potential for limited downside that:

a. are stress tested to ensure they can survive a worst case economic environment

b. are sized such that the risk of loss is less than 10% of the portfolio’s net asset value

Finding the specific securities that meet these criteria is the key challenge and relies on the skills, network, and market contacts that Mr. Carden has built over his long career in the markets.

These types of opportunities can arise from a relatively limited number of sources:

• Investment banks who wish to take inventory off their books, either for risk management purposes, or to make room for new deals

• Brokers who specialise in odd-lots, less liquid securities, or particular market niches (such as RMBS). Some may have a client base more oriented to mid-market size where more of these less-known or mispriced securities might reside

• Major banks wishing to get legacy deals off their books for capital management or risk management purposes

• New issues being brought to market by investment or commercial banks where the credit is not well understood in the markets or where junior tranches may difficult to place, especially if they are unrated.

It is unlikely that such mispriced securities are to be found amongst high profile well-followed credits and deals that are relatively liquid and trade in the large volume institutional market.

The right deals need to be unearthed from scouring the deal flow and the firm’s market contacts and by having a reputation in the marketplace for dealing in such securities, as this will attract calls from brokers and banks looking for a buyer or seller of such bonds.

This process has implications for the liquidity of the portfolio and the overall FUM capacity as these sources tend to be somewhat limited in availability.

Portfolio Construction and Risk Management

The key element of the portfolio construction process is establishing the risk profile of each investment and of the Fund as a whole.

An investment recommendation is prepared for every intended holding. It covers in-depth analysis of the credit on a cash flow basis and, for securitised issues, analysis of all tranches, cash flow waterfalls, loss allocation, interest allocation and other relevant factors

The recommendation is presented to the Investment Committee and either approved or rejected. All investments are:

• stress tested to ensure they can survive a worst case economic environment

• sized such that the risk of loss is less than 10% of the portfolio’s net asset value.

The typical parameters for stress-testing are relatively stringent and are shown below:

Stress Test Parameters

RMBS 30% default rate across the pool (for non-conforming RMBS) and 14% default rate for prime RMBS

50% house price fall from original valuation

CLOs 14% default rate Year 1

7% default rate Year 2

50% recovery rate on defaults


The stress tests and sizing limits discussed above also form the basis of risk management for the Fund and are seen by the Manager as the key elements of capital protection for investors.

Typically, credit selection is the key driver of returns as the focus is generating and holding a high yield through to maturity unless the bond becomes overpriced.

Phil Carden has ultimate decision-making authority on security selection and portfolio construction, with pre-trade approval and ongoing oversight of the Investment Committee.

Portfolio Construction and Risk Management- Continued


From the perspective of a sell discipline, there is continual review and assessment of existing positions by Mr. Carden. Most positions are held through the cycle, but in instances where deterioration in the credit is identified, an exit strategy will be explored. A bond sale typically occurs for one (or more) of these reasons:

1. Market price is higher than assessment of fundamental value

2. Credit deterioration to the point where loss of principal may occur

3. Recognition of an alternative superior relative value opportunity.

Sell Discipline

Trading/Implementation

Trade Execution

Hedging and Derivatives

Overseas positions are hedged into $A using three-month forward swaps.

The workflow of trade execution is described below.

The Investment Committee must approve every investment by way of majority vote.

The process flows as follows:

• Investment Committee approval for the trade is transmitted to the Portfolio Manager, the Fund’s Respon-sible Entity and the Fund Administrator, Custom House.

• The Portfolio Manager verbally executes the relevant trade with the market counterparty.

• Following execution, the details are agreed verbally and then confirmed in writing by way of the Portfolio Manager, and the trade counterparty emailing and agreeing on the trade details in a contract note.

• The Portfolio Manager then checks the contract note and forwards to the Responsible Entity, the Fund Administrator, and the CEO.

• The contract note when forwarded is supported by the Relevant Investment Recommendation approval by the Investment Committee.

• The broker forwards the contract note to the Fund Administrator and the Responsible Entity, who conduct an independent reconciliation of the trade.

• The Responsible Entity instructs the custodian and settlement agent JPMorgan using the JPMorgan COS-MIC custody and settlement platform.

• The settlement funds and security are then approved and released on JPMorgan Cosmic by the Fund Administrator Custom House.

CORPORATE GOVERNANCE / BUSINESS STRATEGY 11


Parent Company

Supervised Investments Australia Limited (SIAL) is a privately-owned funds management company with no parent company. SIAL was set up in September 1999 by David Constable, who has remained a majority shareholder. The private shareholders who together own all the equity in SIAL are people associated with, or companies owned and controlled by:

• David N. Constable, Executive Chairman of SIAL.

• Kenneth J. Cooper, a prior CFO of SIAL

• Chair, The Honourable Helen Coonan

• Philip J. A. Carden, the Manager of the Supervised Global Income Fund

Investment Manager / Fund Manager

The Manager, Supervised Investments Australia Limited (SIAL), developed from an original entity called Supervised Investments Limited (SIL). This was an international equity investment fund established in September 1999 by founder David Constable. In December 2007, SIAL launched an Australian based

Key Counterparties

international equities fund, The Supervised Fund, into which Supervised Investments Limited was subsequently merged. Following the GFC, SIAL broadened its investment focus into debt securities. This led to the establishment of the Supervised Global Income Fund (previously the Supervised High Yield Fund) in March 2009.

Responsible Entity

One Managed Investment Funds Limited is the independent Responsible Entity for the Fund. One Investment Group operates a number of Responsible Entities. Each holds an Australian Financial Services Licence and is licensed, pursuant to the Corporations Act, to operate financial services businesses and to act as a Responsible Entity for registered managed investment schemes.

Each registered managed investment scheme is governed by a constitution. The constitution must be lodged with Australian Securities and Investment Commission. A compliance plan must also be prepared for each registered scheme which describes the key processes, systems, and structures that the Responsible Entity will apply to ensure compliance with the Corporations

CORPORATE GOVERNANCE / BUSINESS STRATEGY 12

Act, the scheme’s constitution and financial services laws. The compliance plan is required to be audited annually, and the audit report is lodged with the Australian Securities and Investments Commission. The role of the Responsible Entity includes responsibility for compliance with the managed investment scheme constitution and compliance plan, and ongoing satisfaction of legislative and regulatory requirements.

One Managed Investment Funds Limited has extensive experience in acting as Responsible Entity for registered schemes and trustee for unregistered schemes and is currently the Responsible Entity/Trustee for in excess of 120 managed investment schemes. One Managed Investment Funds Limited has worked with numerous investment managers to establish registered schemes in a variety of asset classes.

Management Risk

Funds management encompasses not only the operational capabilities of key counterparties but also the corporate ability of the Responsible Entity to monitor operational performance and to meet the regulatory and statutory responsibilities required. For all investment funds, there is a risk that a weak financial position and management performance deterioration of key counterparties may temporarily or permanently compromise their performance and competency. This can also adversely affect financial or regulatory outcomes for the Fund or associated entities.

Based on the materials reviewed, SQM Research believes that SIAL / One Managed Investment Funds Limited and associated key counterparties are qualified to carry out their assigned responsibilities.


Funds under Management (FUM)

The Fund is approximately $19.7 million in size at Mar 2017 experienced a rise in FUM since falling from 2014 highs. The portfolio manager also manages an A$22m separate mandate for an Australian endowment fund.

FUM

Jun-11 $10.9

Dec-11 $13.2

Jun-12 $14.4

Dec-12 $17.5

Jun-13 $19.0

Dec-13 $21.1

Jun-14 $22.7

Dec-14 $21.9

Jun-15 $20.1

Dec-15 $19.4

Jun-16 $18.0

Dec-16 $17.9

Mar-17 $19.7

FUM for Fund under Review ($mill)

$0

$5

$10

$15

$20

$25

Dec

-03

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

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Dec

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Dec

-11

Dec

-12

Dec

-13

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-14

Dec

-15

Dec

-16

MANAGEMENT & PEOPLE 13

Investment Team

Phil Carden is Portfolio Manager of the Supervised Global Income Fund (previously Supervised High Yield Fund). His career in the securities industry spans over 35 years. Over that time, he has traded a wide range of bonds in international markets including corporate, asset-backed, sovereign, derivative, and hybrid debt securities.

In the 1980s, Mr. Carden was responsible for the formation and management of Macquarie Bank’s debt securities division in both Australia and London. During a period of strong growth for the bank, he managed a successful operation which focussed on developing new and innovative derivative products across a wide range of fixed-income securities.

Following this, Mr. Carden was a key advisor to the Victorian Government for the restructuring of its seven billion dollars public debt portfolio. Simultaneously, his private investment company managed a $500 million debt security portfolio for AMP Society, now AMP Life Ltd.

Mr. Carden is able to utilise his broad and deep expertise in debt securities across multiple roles for the Fund; as a portfolio manager, analyst, and trader.

The investment process also uses an Investment Committee, comprised of David Constable AM (Chair), Michael Ohlsson CEO, and more recently, Mr Doug Goldsmith (external member).

Mr Carden’s role is supported by the recent hire of an analyst (Javier Quintanilla) who assists with security research, structured cash-flow modelling, and quantitative analysis amongst other tasks. He acts as an “understudy” to Mr Carden and is

being mentored to grow into broader portfolio management functions that will assist in dealing with key-person risk within the strategy.

Mr Quintanilla’s biography, as provided by SIAL, is shown below:

Javier Quintanilla is an Investment Analyst for the Supervised Global Income Fund. Prior to joining Supervised Investments, Javier worked in the Corporate Treasury team at CEMEX global headquarters. He then joined Westpac’s Institutional Banking division, where he worked for the Corporate Guarantees and Structured Finance teams. He also gained experience working as a financial services research analyst at RFi Group.

Javier has a B.A. in Financial Management from Tecnológico de Monterrey (ITESM) and completed exchange programs at Copenhagen Business School and Macquarie University.

On a formal basis, all investment recommendations and trades are put to the Investment Committee for review, debate, and approval. Ideas rejected by the Investment Committee do not move forward. Additionally, the Investment Committee will discuss and review macroeconomic and market insights with Mr. Carden, acting as a sounding board and an additional source of investment perspective.

SQM Research believes the support and peer review provided by the Investment Committee is helpful to the process, as is the recent hiring of an analyst to support Mr Carden and the addition of Mr Doug Goldsmith to the Investment Committee.

Key Investment Staff

Name Responsibility / Position Location Years with Company

Years with Industry

Phil Carden Portfolio Manager of Supervised Global Income Fund Sydney 9 37

Javier Quintanilla Fixed Income Analyst Sydney 1 4

David Constable Chair of Investment Committee Sydney 18 64

Michael Ohlsson CEO 1 30

Portfolio Managers 1

Research Staff 1

Investment Offices 1



Staffing Changes

Since the last review, considerable building of professional resources in the management, governance and investment functions at SIAL has occurred through the following appointments:

o Michael Ohlsson as CEO

o The Honourable Helen Coonan as Chair of the Board

o Mr Doug Goldsmith as a new external Investment Committee member

o Mr Javier Quintanilla as an analyst and effectively an “understudy” to Mr Carden.

Mr. Quintanilla’s experience and qualifications have been described above. The three senior appointments listed are described in detail below, via quoted excerpts from SIAL announcements.

Supervised Investments Australia appoints new Chair

Supervised Investments Australia Ltd has named former Senator the Hon. Helen Coonan as Chair of the board

Ms Coonan is a former Cabinet Minister and Deputy Leader of the Government in the Senate; she was the Minister for Revenue and Assistant Treasurer with portfolio supervision of the Australian Tax Office and APRA. As Minister for Communications she was also a shareholder Minister in Telstra and Australia Post.

Ms Coonan has broad spectrum industry experience in financial and professional services, energy and telecommunications

In welcoming Ms Coonan to the board, the current Chairman, David Constable said the appointment of Helen to the board would bring “new energy and a broad skill set” to the company, adding that Ms Coonan would help drive the company’s vision.

Ms Coonan said the appointment was a great opportunity to oversee a dynamic and growing business. “I look forward to helping the company with its strategic direction and vision for growth”, she said.

Ms Coonan also sits on the boards of Crown Resorts, Snowy Hydro, Sydney Opera House, and JP Morgan Advisory Council. She is the Chair of Sydney Harbour Foreshore Authority and an advisor to Aon Risk Insurance and Samsung.

Supervised Investments appoints new CEO

Supervised Investments Australia Limited (SIAL) has appointed Michael Ohlsson as CEO.

In welcoming Michael, SIAL Chairman, the Hon. Helen Coonan, said; “as our firm enters a new growth phase we are delighted to have someone of Michael’s calibre and track record of successfully building funds management businesses”.

With a career spanning over 25 years in the financial services and superannuation industries, Michael has held senior positions in global firms including nine years with Barclays Global Investors and then CEO of Fidelity Investments, Australia and New Zealand. He has also been the CEO of boutique Australian funds management businesses.

Michael said his appointment is an excellent opportunity to lead a dynamic and growing business; “the firm has enormous potential to expand its investor base as we offer our equities and fixed income investment strategies more broadly”, he said.

The Board of Supervised Investments Australia Limited has approved the appointment of Doug Goldsmith to the Investment Committee of the Supervised Global Income Fund, effective 1 July 2017

With more than 30 years’ experience within the financial markets including being domiciled for Banks in Tokyo, Hong Kong, New York, London, Sydney and Melbourne. Doug has built up an extensive knowledge of Fixed Income, cash and derivative markets not just locally but globally. As a trader and financial engineer, he has risen to the top of his field and worked with financial institutions such as National Australia Bank, Westpac, Schroders, Banque National de Paris (BNP) and CSFB (Credit Suisse).

Before Doug was Global Head of Interest Rates at the National Australia Bank he oversaw the Financial Market’s Dealing rooms for the bank in Asia as Head of Trading based in Hong Kong. Prior going to Asia, he was Head of Fixed Income having spent most his career as a Bond Trader.

As Global Head of Rates for the NAB, Doug was responsible for all the Banks’ activities and exposure to any interest rate Globally. These activities included:

• Debt Markets

• Fixed Income

• Short Term Interest Rate Risk

• Derivatives (swaps, options)

• MTFX

• Proprietary Trading

As a senior executive of large financial organisations Doug has gained the experience of having direct dealings with the relevant Regulatory Authorities in such matters as compliance and ethical standards.



SQM Research observes that Mr Carden’s investment experience and company tenure are strong and is a key asset to the Fund and SIAL. The additional appointments SIAL has made over the last 12 months represent a significant broadening and deepening of the firm’s professional talent.

Remuneration and Incentives

All employees are remunerated by way of an annual salary. They are incentivised via an additional performance bonus that is directly linked to:

• their ability to generate performance for the Fund investors

• the growth and profitability of the Company

Phil Carden has the ability to earn up to 20% of the share capital of SIAL. The shares will be awarded in 4 tranches which are quantitatively linked to the growth in assets managed in the funds and mandates for which Mr Carden is the Portfolio Manager. The share allocations will thus be a reflection of how well the funds and mandates perform in order for SIAL to retain those investments.

Equity Fund Manager David Constable is a significant shareholder in the Manager SIAL and receives a fixed salary plus a share of the performance fee earned by SIAL from the Supervised Fund (an Australian Equity fund offered by SIAL).

Sales and marketing employees are incentivised through a share of the management fee earned on new business introduced to SIAL Funds directly attributable to their efforts.

The CEO/CFO is incentivised by way of a share of the profits of the Company.

Alignment of interests: Ownership has been split three ways with the Constable family having a majority share, followed by the Cooper family and Carden family. The Hon. Helen Coonan, recently appointed the chair of SIAL, is in the process of being allocated an ownership stake.

SQM Research believes access to firm equity, and client-focused performance bonuses act as strong incentives for attracting and retaining staff. The intention (and SQM believes, the effect) is to align staff performance with client and shareholder objectives. It focuses on the clients’ needs and medium to long term results.


Average Experience (years) PM Analyst

Years with Company 10 0

Years of Investment Experience 37 4

Staff Numbers 1 1

Departures

Date Name ResponsibilityReason for Departure

Dec-2016 Damien Cooper Director Work commitments

Jul-2016 John Harvey OA Director Personal Reasons

Dec-2016 Ouafaa Karim CEO/CFO Retirement

Jan-2017 Phill Kennedy Analyst Other opportunities

Additions / Hires

Date Name New Responsibility

Jan-2017 Michael Ohlsson CEO/CFO

Apr-2017 Javier Quintanilla Fixed Income Analyst

Jan-2016 Joseph Constable Equity Analyst

Jan-2016 Cheryn Croker Office Manager

Appointments

Date Name New Responsibility

Jul-2017 Doug Goldsmith External member of Investment Committee

Sep-2016 Hon. Helen Coonan Chair - Board of SIAL

PRODUCT FEATURES - FEES, REDEMPTION POLICY 16

Buy/Sell Spread

As per the Fund’s PDS dated 15th August 2016, the buy/sell spread was set at a total of 0.30% (0.15% buy / 0.15% sell)

The Fund’s most recent PDS dated 15th August 2016 describes the determination of the buy/sell spread as follows:

“The Buy/Sell spreads vary depending on the liquidity of the fixed income market at the time of application or redemption. The Fund will apply the Australian iTraxx Index as a proxy for liquidity of the fixed income market at any time. The Australian iTraxx Index is calculated daily by Markit, an independent data and valuation provider. The index level is published on www.markit.com.

The table below sets out the maximum Buy/Sell spread that will be applied with different levels of the Australian iTraxx Index”.

Australian iTraxx Index Spread

0-100 101-200 201-300 >300

Maximum Buy / Sell Spread 0.05% 0.15% 0.25% 0.50%

“As at the date of this PDS (15th August 2016) the Buy/Sell spread is set at +0.15%/-0.15%. This means that 0.15% will be applied to the value of the Units of the Fund to calculate the application price and 0.15% will be deducted from the value of the Units of the Fund to calculate the withdrawal price.”

This spread represents the difference between the application price and the withdrawal price of the Fund, a reflection of transaction costs relating to the underlying assets.

Entry/Exit Fees

Buy Spread (%) varies - at 15th August 2016 was 0.15% (see details below)

Sell Spread (%) varies - at 15th August 2016 was 0.15% (see details below)

Ongoing Fees

Management fee (% p.a.) 1.00%

Expense recoveries (% p.a.) Nil

Cost of Fund1 (% p.a.) 1.00%

ICR2 (% p.a.) 1.00%

Performance fee (%) None

1 Management fee and expected expense recoveries. 2 Indirect costs ratio

Ongoing Fees

The annual management fee of the Fund is 1.00% (including GST not RITC) p.a. of the Fund’s net assets. No additional charge of is made for expense recoveries.

Performance Fees

There are no performance fees applied.

Overall Fees

If held and redeemed within 12 months, total transaction costs would amount to 1.00% of investment in the Fund. This figure includes the MER and expense recovery.

SQM Research observes that the Fund management fee (including expense reimbursement) is 1.00%, which is higher than the peer average of 0.713%.


PRODUCT FEATURES - FEES, REDEMPTION POLICY 16 QUANTITATIVE ANALYSIS 17

1. Total return assuming dividend reinvestment, three, five-year, and inception returns annualised.2. Benchmark is the Bloomberg Ausbond Bank Bill

Note: Ratios (such as the Sharpe and Information ratios) are not reliable comparison tools in periods where both the Fund and its peers/benchmark record a negative result.

Relative to Benchmark 1-Year 3-Year 5-Year Inception

Tracking Error (% p.a.) - Fund 0.98 1.11 1.23 1.91

Tracking Error (% p.a.) - Peer Average 1.55 2.31 1.97 3.39

Information Ratio - Fund 6.55 3.38 3.97 3.07

Information Ratio - Peer Average 2.95 0.96 1.68 1.51

Sharpe Ratio - Fund 6.54 3.47 3.83 2.95

Sharpe Ratio - Peer Average 2.92 0.95 1.62 1.48

Volatility - Fund (% p.a.) 0.98 1.08 1.27 1.98

Volatility - Peer Average (% p.a.) 1.57 2.31 2.00 3.41

Volatility - Benchmark (% p.a.) 0.04 0.11 0.15 0.31

Beta based on stated Benchmark 1.69 -2.32 3.00 1.96

Risk/Return - periods ending May-171 (Start Apr-2009)

Returns 1-Month 3-Month 6-Month 1-Year 3 Year 5-Year Inception

Fund 0.52 1.28 3.91 8.25 5.99 7.43 9.14

Benchmark2 0.15 0.45 0.89 1.83 2.25 2.55 3.28

Peer Average 0.46 1.28 3.26 6.11 4.19 5.77 8.25

Excess 0.38 0.83 3.02 6.42 3.74 4.87 5.86

Quantitative Insight

The Fund has a history of eight and a half years. Observations and analysis of returns will have reasonable statistical meaning as a result of the sample size of observations.

Note: All return and risk data reported in this section are for periods ending May-2017 unless otherwise stated.

Returns

Since inception in Apr-2009, the Supervised Global Income Fund has returned 9.14% p.a. as compared to a return of 3.28% p.a. from the Bloomberg AusBond Bank Bill Index. This represents alpha of 5.86% p.a. The peer group average over this period was 8.25%. (Note that all Fund returns referenced in this report are net of fees).

The return achieved over the past year was 8.25% compared to the benchmark of 1.83%, generating an excess return of 6.42%. The peer average was 6.11%.

The Fund’s return for the past three years was 5.99% p.a. compared to the benchmark return of 2.25% p.a., generating an excess return of 3.74% p.a. The peer average was 4.19% p.a.

These returns are impressive relative to the PDS objective, and materially exceed SQM’s expectations for the Fund relative to its fee level and volatility.

The Fund has significantly outperformed the Bloomberg AusBond Bank Bill Index across all the time periods shown in the table above, covering a track record of eight and a half years (97 months).

Risk

The Fund’s volatility (standard deviation of monthly returns) since inception was 1.98% p.a. compared to a peer average of 3.41% p.a. and 0.31% p.a. for the benchmark.

The one-year outcomes are 0.98% for the Fund, 1.57% for the peer average, and 0.04% for the benchmark. Three-year volatility was 1.08% for the Fund, 2.31% for the peer average, and 0.11% for the benchmark.

SQM has measured and reported tracking error in the tables above. Since the Fund’s benchmark has almost no volatility, the tracking error readings add no new information to observations gained from studying volatility. The tracking error of the Fund is almost identical to its volatility (standard deviation).


QUANTITATIVE ANALYSIS 18

As another perspective, the Fund’s rolling 3-year volatility (of monthly returns) has varied from a low of 0.86% p.a. to a high of 2.66% and averaged 1.56% over the rolling observations of the Fund’s lifespan.

The risk outcomes as described above regarding volatility and tracking error are consistent with the PDS statements about risk and are in line with SQM’s expectations for this Fund.

Drawdowns

Over its life, the Fund has had one drawdown month in Jan-2016, amounting to -0.51%

In comparison, the peer group has had eight drawdowns averaging -0.61% (with the worst at -1.67%). The benchmark has had zero drawdowns, as expected from a cash-based index. (see table below for details).

Snail Trail

The three-year snail trail is in the top-right hand quadrant - the 2nd most attractive quadrant as it indicates positive excess returns with above benchmark volatility.

It is important to note that in the case of cash-style benchmarks such as here, the top left-hand quadrant is unachievable as it is not possible to deliver lower volatility than what is virtually zero for the benchmark.

Risk-Adjusted Returns

The Fund’s low volatility along with general solid outperformance has delivered very strong long-term Sharpe ratios – at 3.78 for five years and 2.95 since inception - outperforming respective peer averages of 1.50 and 1.48.

Correlation

Correlation of the Fund’s returns with the S&P ASX300 index was +14.7% since inception. This is relatively low for a fixed income fund, for example, the peer group average over the same timeframe is +45%.

Tail Risk

The tail risk chart below shows a significantly negative correlation with the ASX300 in times of equity market extremes.

(The analysis in the paragraph below looks at the performance relationship of the Fund to the ASX300, a practice that SQM has set as common across asset classes in Fund reviews. This approach recognises that for the large bulk of financial planner clients, their key traditional asset class risk regarding size and volatility is to Australian equities. Exploring that

relationship is useful regardless of the asset class of the Fund itself, as it is helpful to understand how a Fund has acted in times of Australian equity market stress in terms softening or exaggerating the negative performance experienced at such times.)

The table shows the ten largest negative monthly returns for the ASX 300 since Apr-2009, the inception of the Fund. This is compared to the Fund’s performance over the same ten months. The Fund’s return correlation to the ASX300 returns over this period is -29.33% while posting nine positive returns against the ten negative returns of the Australian stock market.

The sum of returns over those ten months was -58.93% for the ASX 300 and +5.17% for the Fund, a difference of +64.10% in favour of the Fund. These figures point to material defensive characteristics of the Fund in the face of extreme equity tail risk.

RankLowest Returns - ASX 300 since Fund Inception

DateFund Return Same Month

Difference

1 -7.70% Aug-15 0.36% 8.06%

2 -7.54% May-10 1.01% 8.55%

3 -6.74% May-12 0.48% 7.21%

4 -6.28% Sep-11 1.35% 7.63%

5 -6.17% Jan-10 0.90% 7.07%

6 -5.45% Jan-16 -0.51% 4.94%

7 -5.37% Sep-14 0.31% 5.68%

8 -5.32% Jun-15 0.21% 5.53%

9 -4.54% May-13 0.62% 5.15%

10 -3.83% Jul-11 0.45% 4.28%

TOTALS -58.93% +5.17% +64.10%

Correlation -29.33%

Other points of note from the charts below:

• The Fund has experienced one drawdown period in its lifetime, while the peer average accumulated eight drawdown periods

• Rolling returns of the Fund have been consistently above that of the peer average and the benchmark

• The Fund’s strategy provides for diversification given the low correlation to Australian equities as well as defensive characteristics in times of equity market stress.

• It is important to note that the type of credit market cycle experienced during the GFC or similar severe recessions would likely see material mark-to-market write-downs


QUANTITATIVE ANAYLSIS 19

of Fund holdings and poor performance. If the Fund’s securities do not themselves default or experience adverse restructuring, and the Fund is not forced to sell securities at a principal loss through this phase, then as the cycle recovers there is a potential for the Fund to recover (over time) some, and possibly all, of the mark-to-mark losses (as opposed to realised losses) experienced during the downturn. This type of experience is not limited specifically to this Fund, it is likely to be a pattern seen across many other fixed income funds that rely heavily on high yield, lower liquidity, cash-flow structuring or a combination of these to achieve cash-plus type returns.

Drawdowns: Worst to Best - Since Fund Inception

Drawdown Count

DrawdownTrough Fund

Drawdown TroughBench

Drawdown TroughPeers

1 -0.51% no data -1.67%

2 no data no data -1.08%







Average Drawdown -0.51% no data -0.61%

Sum of Drawdowns -0.51% 0.00% -4.91%

Rolling 3 Year Correlation to ASX300

Cumulative Excess Returns

-0.10

0.00

0.10

0.20

0.30

0.40

0.50

Mar

09

Se

p 0

9

Mar

10

Se

p 1

0

Mar

11

Se

p 1

1

Mar

12

Se

p 1

2

Mar

13

Se

p 1

3

Mar

14

Se

p 1

4

Mar

15

Se

p 1

5

Mar

16

Se

p 1

6

Mar

17

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Mar

09

Se

p 0

9

Mar

10

Se

p 1

0

Mar

11

Se

p 1

1

Mar

12

Se

p 1

2

Mar

13

Se

p 1

3

Mar

14

Se

p 1

4

Mar

15

Se

p 1

5

Mar

16

Se

p 1

6

Mar

17

1 month Excess Fund: Cumulative Excess


Rolling Returns

Returns

0%

2%

4%

6%

8%

10%

12%

14%

16%

Mar

09

Se

p 0

9

Mar

10

Se

p 1

0

Mar

11

Se

p 1

1

Mar

12

Se

p 1

2

Mar

13

Se

p 1

3

Mar

14

Se

p 1

4

Mar

15

Se

p 1

5

Mar

16

Se

p 1

6

Mar

17

Benchmark 3yr Return Fund 3yr Return 3 yr Return Peer Avg

QUANTITATIVE ANALYSIS 20

Risk Return & Efficiency

Rolling Information Ratio

0.000.501.001.502.002.503.003.504.004.505.00

Mar

09

Se

p 0

9

Mar

10

Se

p 1

0

Mar

11

Se

p 1

1

Mar

12

Se

p 1

2

Mar

13

Se

p 1

3

Mar

14

Se

p 1

4

Mar

15

Se

p 1

5

Mar

16

Se

p 1

6

Mar

17

Fund 3yr Info Ratio 3 yr Info Ratio Peer Avg

Snail Trail

-5.0%

-2.5%

0.0%

2.5%

5.0%

7.5%

10.0%

-5.0% -2.5% 0.0% 2.5% 5.0%

Fu

nd

: R

olli

ng

3yr

Exc

ess

Ret

urn

s (N

et)

Fund: Rolling 3yr Excess Volatility (Net)

0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5%5.0%

Mar

09

Se

p 0

9

Mar

10

Se

p 1

0

Mar

11

Se

p 1

1

Mar

12

Se

p 1

2

Mar

13

Se

p 1

3

Mar

14

Se

p 1

4

Mar

15

Se

p 1

5

Mar

16

Se

p 1

6

Mar

17

Benchmk Std Dev 3yr Fund Std Dev 3yr 3 yr Std Dev Peer Avg

Rolling Volatility

98.098.298.498.698.899.099.299.499.699.8

100.0

Mar

09

Se

p 09

Mar

10

Se

p 10

Mar

11

Se

p 11

Mar

12

Se

p 12

Mar

13

Se

p 13

Mar

14

Se

p 14

Mar

15

Se

p 15

Mar

16

Se

p 16

Mar

17

Benchmark Drawdown Fund Drawdown Peer Avg Drawdown

Tail Risk - Returns in Equity Down Markets

Drawdowns


ASSET ALLOCATIONS & RISK PARAMETERS 21

The table below outline limits on the Fund’s asset allocation and other risk parameters: -

Fund Constraints Permitted Range or Limit

Corporate Bonds 100.00%

Cash 100.00%

Bank Bills 100.00%

Commercial Paper 100.00%

Bank Loans 100.00%

Mortgage Backed Securities 100.00%

Asset-Backed Securities 100.00%

Mortgages 100.00%

Secured Corporate Loans 100.00%

Discounted Bills 100.00%

Debt/Equity Hybrids 100.00%

Forwards 100.00%

Interest Rate Futures 100.00%

Option and Interest Rate Swaps 100.00%

Repurchase Agreements 100.00%


The Fund pursues active asset allocation within sectors and countries and will make meaningful changes in those allocations over time:

Fund Allocation over Time

Apr-2009 to Mar-2017

Fixed IncomeAverageWeight

MaxWeight

MinWeight

as at Mar-17

High Yield Corporate 23.3% 31.2% 6.7% 6.7%

Hybrids / Preferreds 0.4% 0.5% 0.3% 0.0%

MBS 76.1% 98.4% 56.8% 63.1%

Cash 12.0% 29.9% 1.0% 29.9%

Other 0.5% 0.7% 0.3% 0.3%

GeographicAverageWeight

MaxWeight

MinWeight

as at Mar-17

Australia 88.6% 100.0% 68.8% 95.2%

USA 22.8% 31.2% 4.8% 4.8%

CurrencyAverageWeight

MaxWeight

MinWeight

as at Mar-17

AUD 100.0% 100.0% 100.0% 100.0%

Recent Positioning

(Comments from the Fund’s fact sheet, relating to the Fund and markets as they stood in May 2017, are reproduced below as a perspective on the Manager’s strategy and style.)

Market Review / Market Commentary

The SGIF has earned 7.77% in the current financial year to the end of May 2017, when annualised this is equivalent to 8.50% per annum.

The SGIF continues to perform in line with the objectives of its investment thesis, producing consistent month on month positive capital returns and abundant cash distributions over the medium 2-3 year time frame. This is a validation of our investment process and the discipline we employ, even when market conditions are unfavourable.

Looking ahead regarding the SGIF’s asset mix, we see a period of stability as demand for the style of assets SGIF is invested in, builds in the market. Financial asset price volatility, as measured by the market’s estimate of future volatility as traded on the Chicago Board of Trade’s Options Exchange SPX Volatility Index is currently trading at all-time lows. The following chart illustrates this.


Clearly the market is now expecting a period of stability. However, looking at a historical chart of the USD Three Month LIBOR rate against US Inflation and Unemployment data, one can construct an argument that expectations of low volatility ahead should not be applied to interest rates in the United States. The following charts illustrate this point if you consider the current level of USD Three Month LIBOR relative to the US CPI and Unemployment rates across time. Clearly, there is a lot of room for the Three-Month USD LIBOR rate to move up.


Looking at this chart, we observe in 2006-2007 the SPX Volatility index was at an all-time low of 10%, the Unemployment rate was 4.0%, whilst the CPI rate was 2.0% with Three-Month USD LIBOR trading at 5.35%. Today in 2017, the SPX Volatility index is again at an all-time low of 10%, the Unemployment rate is at 4.1%, whilst the CPI rate is at 1.9%, having recently peaked at 2.7% and Three-Month USD LIBOR is trading at only 1.21%. We believe something will change; either unemployment will head higher whilst inflation heads lower or LIBOR is about to increase.


With the Volatility Index so low and the interest rates also historically low relative to the main interest rate drivers of CPI and unemployment, we believe an opportunity presents itself for the Fund. In such instance, the Fund could buy interest rate volatility in the United States and wait for the LIBOR, CPI and unemployment rates to converge. This is a good example of the SGIF’s investment thesis identifying a new investment opportunity.

Fund Composition as at Mar-2017

Security Maturity Weight

Aims 2004-1 Trust Frn 10-Jul-2035 10-Jul-2035 11.55

Aims Home Loans 2007-1 0.0% 10-Jul-2038 10-Jul-2038 7.60

ZAIS CLO 5 LTD , 7.88%, Due 15/10/2028 15-Oct-2028 6.81

Aims 2005-1 Trust 0.0% 10-Jun-2036 10-Jul-2035 5.19

Sapphire Trust, 0.00%, Due 14/03/2046 14-Mar-2046 5.17

36.32

Ratings Fund %

AAA 0.00

AA 49.02

A 5.07

BBB 0.00

BB 14.20

B 9.17

CCC 0.00

UNR 22.54


Geographic Fund %

Australia 95.21

North America 4.78

© SQM Research 2017

DISCLAIMER

Although all reasonable care has been taken to ensure that the information contained in this document is accurate, neither SQM Research nor its respective officers, advisers or agents makes any representation or warranty, express or implied as to the accuracy, completeness, currency or reliability of such information or any other information provided whether in writing or orally to any recipient or its officers, advisers or agents.

SQM Research and its respective officers, advisers, or agents do not accept:

- any responsibility arising in any way for any errors in or omissions from any information contained in this document or for any lack of accuracy, completeness, currency or reliability of any information made available to any recipient, its officers, advisers, or agents; or

- any liability for any direct or consequential loss, damage or injury suffered or incurred by the recipient, or any other person as a result of or arising out of that person placing any reliance on the information or its accuracy, completeness, currency or reliability.

This document contains statements which reflect current views and opinions of management and information which is current at the time of its release but which may relate to intended or anticipated future performance or activities. Such statements and financial information provided have been estimated only and are based on certain assumptions and management’s analysis of the information available at the time this document was prepared and are subject to risk and uncertainties given their anticipatory nature. Actual results may differ materially from current indications due to the variety of factors.

Accordingly, nothing in the document is or should be relied upon as a promise or representation as to the future or any event or activity in the future and there is no representation, warranty or other assurance that any projections or estimations will be realised.

By accepting the opportunity to review this document the recipient of this information acknowledges that:

- it will conduct its own investigation and analysis regarding any information, representation or statement contained in this or any other written or oral information made available to it and will rely on its own inquiries and seek appropriate professional advice in deciding whether to further investigate the business, operations and assets of the business; and

- to the extent that this document includes forecasts, qualitative statements and associated commentary, including estimates in relation to future or anticipated performance, no representation is made that any forecast, statement or estimate will be achieved or is accurate, and it is acknowledged that actual future operations may vary significantly from the estimates and forecasts and accordingly, all recipients will make their own investigations and inquiries regarding all assumptions, uncertainties and contingencies which may effect the future operations of the business.

In providing this document, SQM Research reserves the right to amend, replace or withdraw the document at any time. SQM Research has no obligation to provide the recipient with any access to additional information or to release the results of or update any information or opinion contained in this document.

Reproduction

SQM Research assessment reviews cannot be reproduced without prior written permission from SQM Research. Each assessment review completed by SQM Research is held under copyright. Extracts may not be reproduced.

Requests to reproduce or use an SQM Research assessment review should be sent to [email protected].

Disclosure

SQM Research has no involvement in this fund or any of the organisations contained in the product disclosure statement. This assessment does not constitute an investment recommendation. It is designed to provide investment advisers with a third party view of the quality of this fund, as an investment option. SQM Research charges a standard and fixed fee for the third party review. This fee has been paid under the normal commercial terms of SQM Research.

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