Q22018All data and information as at Portfolio Date: 30/06/2018

Australian Shares Small CapManaged Account PortfolioQuarterly Performance Update

Investment Growth of $10,000

Time Period: 1/02/2011 to 30/06/2018

2011 2012 2013 2014 2015 2016 20175,000.0

10,000.0

15,000.0

20,000.0

25,000.0

Portfolio S&P/ASX Small Ordinaries TR AUD

Returns Relative to Benchmark

As of Date: 30/06/2018

1 month 3 month 1 year 3 years p.a

5 years p.a

Since Incp % p.a

0.0

5.0

10.0

15.0

20.0

25.0

30.0

1.42.8

8.7

12.8 13.4 13.0

1.1

7.7

24.2

15.0

11.6

3.4

Portfolio S&P/ASX Small Ordinaries TR AUD

Retu

rn

Top Holdings

Weighting %

Cash Account

OFX Group Ltd

Xero Ltd

Nine Entertainment Co. Holdings Ltd

Virtus Health Ltd

Sigma Healthcare Ltd

SkyCity Entertainment Group Ltd

Auckland International Airport Ltd

ALE Property Group

Hotel Property Investments

16.3

8.6

8.4

7.3

5.9

5.3

4.9

4.9

4.2

4.0

Market Commentary

The S&P/ASX Small Ords rose 7.7% in the second quarter, just behind the 8.5% of the S&P/ASX 200. The energy sector (+27%) was a key driver, as were consumer discretionary (+9%) and technology (+14%). Financials (-1%) was the lone negative sector due to poor performance in diversified financials (particularly Blue Sky Alternative -84%) and insurance (NIB Holdings -10%). Looking over the last three years, the materials sector continues to be the largest contributor to performance at nearly 5% of the 15% annualised return.

How the Portfolio Performed

The Small Cap Portfolio generated a 2.8% return in the second quarter driven mostly by Xero (+35%) and Nine Entertainment (+9.3%). Xero is a fantastic business, and its prospects as a cloud-based small business accounting platform are still massive. Subscriber growth remains strong and it’s progressing toward cash flow breakeven, further reducing downside risks. Fast-growing companies with huge addressable markets are notoriously difficult to value, but Xero appears to be doing all the right things to drive growth and its intrinsic value higher. Nine doesn’t have the same growth potential or competitive advantages as Xero, so market optimism is probably starting to run too far, making it a source of capital as alternative opportunities arise.

Weighing on the portfolio’s return was Ainsworth (-44%) and Greencross (-15%). Ainsworth issued disappointing guidance, as a turnaround in its Australian business remains a mirage. Gaming equipment can be a choppy business cycle depending on demand as well as product innovation by Ainsworth and competitors. While the share price decline is discouraging, the outlook implied seems overly harsh. An earnings downgrade was also to blame for the lower share price for Greencross where demand has been weaker than expected and management has shifted their focus from store refurbishment (short-term revenue driver) to backend technology investments (long-term cost efficiencies and eventually revenue enhancement). The potential for Greencross to capitalise on increased spending on pets still looks attractive, as does the current share price.

Outlook

Key attributes for future performance of portfolio holdings are having no exposure to the materials sector, an elevated cash position, and of course the individual companies we’re invested in given the concentrated portfolio construction. We feel the portfolio has an attractive mix of stable earnings companies in defensive sectors complemented by stock-specific capital appreciation opportunities. This approach, at least thus far, has led to attractive returns with substantially less volatility than the benchmark in the long-run.

As of 30/06/2018

Average Relative Weights over the Quarter

Health Care Equipment and Services

Diversified Financials

Transportation

Software and Services

Telecommunication Services

Utilities

Retailing

Consumer Services

Media

Commercial Services and Supplies

Consumer Durables and Apparel

Banks

Real Estate

Automobiles and Components

Household and Personal Products

Food and Staples Retailing

Pharmaceuticals and Biotechnology

Insurance

Food, Beverage and Tobacco

Capital Goods

Energy

Materials

-40.0 -20.0 0.0 20.0

8.7

4.8

4.6

4.2

4.1

3.4

2.7

2.4

2.0

1.5

-0.6

-0.6

-0.8

-1.4

-1.5

-1.7

-2.2

-2.6

-5.5

-5.8

-7.7

-19.8

Transactions in the Quarter

There were no transactions in the quarter.

Equity Region Exposure

Portfolio Date: 30/06/2018

%Australia 61.4New Zealand 38.6Total 100.0

Equity Sectors (GICS)

Portfolio Date: 30/06/2018%

Consumer Discretionary 26.3Consumer Staples 0.0Energy 0.0Financials 10.3Healthcare 16.6Industrials 5.9Information Technology 16.0Materials 0.0Real Estate 12.0Telecom Services 8.2Utilities 4.7Total 100.0

Asset Allocation

Portfolio Date: 30/06/2018

%

Stock 83.7

Cash 16.3

Total 100.0

As of 30/06/2018

Risk-Reward

Time Period: 1/02/2011 to 31/03/2018

Std Dev

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0

0.0

3.0

6.0

9.0

12.0

15.0

Portfolio Australia Fund Equity Australia Mid/Small Blend

Retu

rn

Multiple Investment Sector Exposure Chart

Portfolio Date: 30/06/2018

0.0 2.5 5.0 7.5 10.0 12.5 15.0 17.5 20.0 22.5 25.0 27.5

Consumer Discretionary

Consumer Staples

Energy

Financials

Healthcare

Industrials

Information Technology

Materials

Real Estate

Telecom Services

Utilities

Portfolio S&P/ASX Small Ordinaries TR AUD

Risk

Time Period: Since Inception to 30/06/2018

Inv Bmk1

Return % pa

Std Dev

Max Drawdown

12.98

11.02

-11.63

3.38

14.08

-26.88

Market Performance

Time Period: Since Inception to 30/06/2018

Inv Bmk1

Up Period Percent

Down Period Percent

Best Month

Worst Month

Best Quarter

Worst Quarter

64.04

35.96

7.58

-8.47

14.56

-8.30

56.18

43.82

9.81

-10.61

14.98

-15.30

Complete List of Holdings

Portfolio Date: 30/06/2018

CodeStyle

Box

TotalRet 3Mo

(Qtr-End)

PortfolioWeight

%

Cash AccountOFX Group LtdXero LtdNine Entertainment Co. Holdings LtdVirtus Health LtdSigma Healthcare LtdSkyCity Entertainment Group LtdAuckland International Airport LtdALE Property GroupHotel Property InvestmentsMercury NZ LtdMYOB Group LtdSpark New Zealand LtdChorus LtdTrade Me Group LtdGreencross LtdAustralian Pharmaceutical Industries LtdAinsworth Game Technology LtdFolkestone Education TrustiSentia Group LtdAutomotive Holdings Group LtdMyer Holdings Ltd

16.332OFX Î 8.602XRO Ì 8.431NEC Ê 7.279VRT Í 5.904SIG Î 5.318SKC Ê 4.906AIA Ì 4.902LEP Î 4.187HPI Í 4.016

MCY Ê 3.958MYO Î 3.558SPK Ê 3.461CNU Ê 3.411TME Î 3.220GXL Î 2.838API Î 2.694AGI Í 2.153FET Ï 1.803ISD Í 1.378AHG Í 1.044MYR Í 0.603

6.285

5.030

7.051

34.5999.251

1.0937.941

1.326

13.436

0.656

-15.312

8.571-5.246

0.489

-43.78415.667

-0.809

-18.803-1.333

5.097

-15.569

As of 30/06/2018

This document is issued by Morningstar Investment Management Australia Limited (ABN 54 071 808 501, AFS Licence No. 228986) (‘Morningstar’). © Copyright of this document is owned by Morningstar and any related bodies corporate that are involved in the document’s creation. As such the document, or any part of it, should not be copied, reproduced, scanned or embodied in any other document or distributed to another party without the prior written consent of Morningstar. The information provided is for general use only. In compiling this document, Morningstar has relied on information and data supplied by third parties including information providers (such as Standard and Poor’s, MSCI, Barclays, FTSE). Whilst all reasonable care has been taken to ensure the accuracy of information provided, neither Morningstar nor its third parties accept responsibility for any inaccuracy or for investment decisions or any other actions taken by any person on the basis or context of the information included. Past performance is not a reliable indicator of future performance. Morningstar does not guarantee the performance of any investment or the return of capital. Morningstar warns that (a) Morningstar has not considered any individual person’s objectives, financial situation or particular needs, and (b) individuals should seek advice and consider whether the advice is appropriate in light of their goals, objectives and current situation. Before making any decision about whether to invest in a financial product, individuals should obtain and consider the disclosure document. For a copy of the relevant disclosure document, please contact our Adviser Distribution Team on 02 9276 4550.