Investor Update

Justin BraitlingDirector

November 2010

Investment Philosophy

The Manager employs a bottom up, fundamentally driven security selection process. The Manager believes the best investment opportunities are found in well managed companies with strong fundamentals that can be purchased on attractive terms:

• a history of superior returns

• management with a track record of value creation

• businesses with a capacity to grow.

• attractively priced on an absolute value basis

Consistent with these basic principles. In selecting securities to short sell as a source of portfolio funding, we find the best “shorting” opportunities are found in poorly managed companies with weak fundamentals that can be sold for more than they are worth.

Weaker growth in Western Economies offset by strength in Emerging Markets

IMF is forecasting growth of just 2-3% for US and European economies.

-Insufficient to create employment growth-

-Unemployment stays high for protracted period undermining confidence

-Deleveraging continues as household debt is reduced

-Consumption falls to more sustainable levels as household save more and spend less

-US housing slow to recover given 6 million homes at various stages of foreclosure

IMF Forecasts

Change of LeadershipChange in US$ size of GDP from 2010 to 2019 Change in US$ size of GDP from 2000 to 2009

Strong outlook for Australia

•The economy should strengthen further as we move into 2011

•Businesses and Households are still very cautious

•Uncertainty continues around Government policy resulting in ongoing delays with investment decisions

We need to see:

•Legislation passed to provide clarity on project economics

•Backlog of projects approved and sanctioned

•Stability return to financial markets

Household income growth to support private sector demand-Record Employment-Wages to “catch up” >5%-Record Population growth-Income tax cuts-Households are underspending-Household wealth is up 20% since 2009

Offset by

higher interest rates and costs of living

Business Investment to stage solid recovery

• Investment intentions point to strong recovery in business investment

• Lead by 60% rise in mining investment

• Projects have been delayed due to election and tax changes

Outlook for Equity Markets

• Strengthening Australian economy to support corporate earnings

• Currency and factor costs provide headwinds

• Valuations are quite supportive

• Expect high correlation with offshore markets were the fundamentals are poor limiting overall returns

• Equity markets grind higher in environment of softer growth in developed world

Sector OutlookBanks: Outlook is weak- Weaker credit growth- Regulatory change- Ongoing pressure on funding and margins.

Industrials: Outlook is strong - Recovery in household spending- Manufacturing challenged by strong $A- Services – employment costs- Contractors – solid business investment

Resources: Outlook is strong- Strong demand for commodities to continue- Project delays- Currency trends impacting commodity prices- Investor demand for commodities increasing on debasement of USD

Defensives: Sector looks expensive - Telecommunications – competitive/NBN deal to close- Utilities – supported by regulatory trends/government asset sales- Healthcare – Regulatory changes and currency to depress profits

BanksCredit growth is much softer post GFC as deleveraging trends continue

Business credit will recover but disintermediation trends ensure credit growth will fall short of prior experience.

Mortgage lending will slow as real estate inflation will be much lower given poor affordability.

Margin pressures continue as banks cycle cheap funds with more expensive debt post GFC , banks struggle to pass on increases to customers.

Fee income also under pressure

Government and regulatory oversight will lead to increased competition along with higher capital and liquidity requirements

Banks: High return businesses in a low growth environment.

Funding Costs are High

IndustrialsLONG

• Domestic Cyclicals – Australian economy will continue to outperform . This leads to overweight positions in domestic media & retail – Seek, Myer, Harvey Norman

• Contractors – The large projects slated for the resources, oil & gas sectors are beginning to come through. Key beneficiaries will be Transfield, Worley

• Building Materials – US housing is at the bottom of a deep cycle. This has created an opportunity to buy a high quality business at a cyclical low – James Hardie

• Property- Lend Lease. If we assume property portfolio is worth a small discount to book value, we are buying development company very cheaply (4 times earnings)

SHORT

• Manufacturing – The stronger Australian dollar has diminished the competitive standing of domestic manufacturers. Key positions Bradken, Caltex, Amcor.

• Ag / Chem – DAP market to be over-supplied in the medium term. Domestic competition continues to rise foreigners coming in (Agrium)Key position Incitec Pivot.

Resources

• While commodity fundamentals have been quite weak over the last year as Chinese demand has slowed, prices have risen sharply!

• Investor demand has pushed commodity prices higher

• Debasement of USD through QE has seen switching into hard assets like commodities that are supply constrained.

• With China moving to sustainable growth with its 12th Five Year Plan fixed asset investment growth will slow. China is looking to consolidate producers and reduce energy intensity

• Still retain positive view of resources in the medium term.

Industry Long Short

Banks Major trading banks: Westpac, Comm Bank, NAB

Regional Banks: Bendigo,Suncorp

Resources Diversified miners: BHP, RIOCopper: Pan Aust. Discovery

Base MetalsNickel: Minara, Aluminium: Alumina

Defensives Telecom: Telstra, Tel NZ Healthcare: CSL, Sonic, Sigma, Gaming: CrownFood and Beverage: Fosters

Healthcare: AnsellGaming: Tabcorp

Industrials Domestic Cyclicals: Retail- Myer, Harvey NormanMedia- Seek, News CorpContractors Worley, Transfield

International cyclical: CaltexManufacturing Amcor, Incitec

QR National IPOBUY CASE

• Back-Book Repricing Coal haulage contracts are being renewed at market rates significantly higher than current agreements

• Strong Export Coal Volumes – QR is leveraged to rising coal exports and significant expansion plans by major mining companies

• Cost-Outs – QR has an inefficient cost structure which will be rationalised upon privatisation

• Discount to Book Value – early indications are that QR will be priced either below, or at book value

SELL CASE• Upside Priced In – expected growth is

largely factored into the price, with the valuation range based upon forecast FY12 earnings

• Cheap Comps – Asciano (PN) QR’s largest competitor, is a cheaper play on growth in Coal.

• Any shortfall in Coal Volumes -90% of FY12 earnings being coal related, any external impact on these volumes would significantly impact QRN

• Entrenched Culture and Cost Structure: QRN has a highly unionised workforce.

# It all comes down to price and management. At the bottom end of range with the retail discount, QRN is a reasonable investment. The potential is there to transform QRN but are management motivated enough?

Performance Summary October 2010                  

                 

                 

Financial Year to Date 3 YEARS (ANNUALISED) SINCE INCEPTION (ANNUALISED)

PORTFOLIO BENCHMARK VALUE ADD PORTFOLIO BENCHMARK VALUE ADD PORTFOLIO BENCHMARK VALUE ADD

1.9% 11% -9.1% 8.76% -7.36% 16.12% 17.32% 10.03% 7.29%