Bennelong Avoca Emerging Leaders Fund Monthly performance update As at 31 January 2017

At a glance

Performance in review

The S&P/ASX Small Ordinaries Accumulation Index (XSOAI) posted a -2.4% return in January 2017 compared to the S&P/ASX 100 Accumulation Index (XTOAI) which posted a -0.6% return. Over the past year, XSOAI has underperformed XTOAI by +1.1%.

The top five performers in XSOAI in January were Energy World +50.0%, Paladin Energy +45.4%, Metals X +42.9%, Liquefied Natural Gas +26.7% and Bega Cheese +21.0%.The bottom five performers in XSOAI in January were Aconex -40.4%, Bellamy’s -36.7%, Impedimed -27.2%, Western Areas -20.2% and Monash IVF -19.0%.

The Small Resources Accumulation Index (XSRAI) posted a +2.9% return in January and outperformed the Small Industrials Accumulation Index (XSIAI) which fell by -3.8%. XSRAI outperformed XSIAI by +64.4% in the twelve months but underperformed by -7.2% in the three years to 31 January 2017.

Global equities were mixed in January. The MSCI World ex Aust (loc) rose +1.3%, S&P 500 rose +1.9%, NASDAQ +4.4%, German DAX +0.5%, Shanghai Composite +1.8%. Conversely the FTSE 100 fell -0.6%, French CAC -2.3%, and the Nikkei -0.4%.

Global bond markets were generally weaker in January with US 10-years yields rising +1bp, Japanese 10-years +5bp, UK 10-years yields +32bp, German 10-years +24bp, and Australian 10-years yields falling -5bp.

On the corporate front, January is the traditional time for guidance downgrades and so it was in 2017 with Aconex, Bellamy's, GBST, OFX, Virtus, and Village Roadshow all downgrading during the month. On the positive side, Bluescope put through an upgrade to its H1 17 result. The month also saw generally strong commodity prices across the complex (crude oil the one exception) and a commensurate strong A$.

Performance in review

Timeframe Fund return

Benchmark Value added

1 month -4.00% -2.44% -1.56%

3 months 0.43% -0.13% 0.56%

1 year 13.56% 16.35% -2.80%

3 years p.a. 5.51% 6.35% -0.84%

5 years p.a. 5.93% 2.80% 3.12%

Since inception* p.a.

4.06% 1.45% 2.60%

Performance figures are net of fees and gross of any earnings tax. ‘Value added’ calculation does not use rounded performance figures. *Inception date is 1 July 2011

Feature Fund fact

APIR code BFL0008AU

Benchmark S&P/ASX Small Ordinaries Accumulation Index

Investment objective 3-5% p.a. above benchmark measured over rolling 5-year periods

Portfolio managers Jeremy Bendeich/John Campbell

Stock number 32

Fund size $17.87m

Active stock limit ± 6%

Cash limit 0-10%

Inception date 1 July 2011

Recommended investment period

Long term (five years plus)

Minimum investment $20,000

Buy/sell spread +/-0.30%

Entry/exit fees Nil

Management Fee 1.25% p.a. (including GST net of reduced input tax credits) of Net Asset Value of the Fund

Performance Fee 17.5% (including GST net of reduced input tax credits) of any amount by which the Fund's investment return (before fees and expenses) is more than 1.25% p.a. greater than the return generated by the S&P/ASX Small Ordinaries Accumulation Index

Bennelong Avoca Emerging Leaders Fund Monthly performance update

As at 31 January 2017

The portfolio returned -4.00% in January versus -2.44% for XSOAI, delivering -1.56%. For the year, the fund returned +13.56%, versus the index at +16.35%. Outperformance in the last three months was +0.56%.

The top five contributors for January were Sandfire Resources +30bp, Fortescue Metals +28bp, EQT Holdings +27bp, Sims Metal Management +14bp (Not Held), and Freelancer +12bp. The top five detractors for January were Next DC -72bp, Aconex -60bp, Western Areas -44bp, OZ Minerals -27bp and Independence Group -26bp.

Outlook and strategy

Global capital markets continue to oscillate between the growth reflation scenario (positive Trump effect) and the trade war deflation scenario (negative Trump effect). However, the growth reflation scenario is winning out for now ably assisted by a strong pick-up in Chinese economic activity with commodity prices a clear beneficiary. With respect to President Trump, markets are seemingly taking some confidence from the generally pro-business composition of his cabinet with people such as Secretary of State nominee Rex Tillerson (ex-CEO of ExxonMobil) and Vice-President Mike Pence seen as steady hands and strong counters to the possibility of Trump's more economically extreme tweets ever being enacted.

We remain on the positive side of this ledger. It is self-evident that no-one wins from enacting trade barriers. Whilst some protectionist jaw-boning from the new administration should not surprise, we are comfortable at this point that economic rationalism will prevail and the protectionist rhetoric will remain just that. The positives for capital markets in the new policy agenda should be twofold:

1. President Trump's intention to significantly increase the nation's infrastructure spend via tax incentives for the private sector (leading to a mooted US$1 trillion spend); and

2. his intention to significantly cut US corporate taxes (and flow-on benefits from reactionary corporate tax cuts in other jurisdictions).

To date, the ‘Trump Effect’ has coincided with US 10-year bond yields rising circa 70bp and the S&P 500 rising some 8%. To maintain this bull run in US equities will obviously require complete follow-through on these critical economic policies, a process that will

clearly be fraught with political challenges and hurdles.

Assuming these two catalysts are positive for equity markets, it is likely that US equities will pause to reflect for a moment. Markets are then likely to focus on downside risks around funding the promises, time to implement them and the impact of upcoming European elections. Amidst this backdrop we will be prudently trimming positions that have become overinflated relative to risk, and considering downside protection.

Top 10 holdings

Stock name Portfolio weight

Aveo group limited 6.67%

Trade me group limited 6.32%

G8 education limited 6.01%

Breville group limited 5.79%

Aub group ltd 5.67%

Southern cross media group limited 5.65%

Nextdc limited 5.57%

National storage reit 5.03%

Automotive holdings group limited 4.58%

Nufarm limited 3.99%

Bennelong Avoca Emerging Leaders Fund Monthly performance update

As at 31 January 2017

Portfolio analysis

Five largest overweighted stocks

How to invest

The Fund is open to investors directly via the PDS, available online, or via a range of platforms.

Platforms

BT Wrap

Federation Managed Accounts

Hub24

Netwealth: Super Service, Wrap Service

Oasis Wealthtrac

UBS

Contact details

For more information, call 1800 895 388 or visit avocaim.com.au

5.10%

5.26%

5.51%

5.67%

5.74%

G8 Education Limited

Breville Group Ltd

Trade Me Group

AUB Group Ltd

Aveo Group

Five largest underweighted stocks

-1.41%

-1.49%

-1.56%

-1.59%

-1.65%

Metcash Limited

WorleyParsonsLtd

Macq AtlasRoads Grp

OZ Minerals

Evolution MiningLtd

The Fund is managed by Avoca Investment Management, a Bennelong Funds Management boutique.

Disclaimer: This information is issued by Bennelong Funds Management Limited (ABN 39 111 214 085, AFSL 296806) (BFML) in relation to the Bennelong Avoca Emerging Leaders Fund. The information provided is general information only. It does not constitute financial, tax or legal advice or an offer or solicitation to subscribe for units in any fund of which BFML is the Trustee or Responsible Entity (Bennelong Fund). This information has been prepared without taking account of your objectives, financial situation or needs. Before acting on the information or deciding whether to acquire or hold a product, you should consider the appropriateness of the information based on your own objectives, financial situation or needs or consult a professional adviser. You should also consider the relevant Information Memorandum (IM) and or Product Disclosure Statement (PDS) which is available on the BFML website, bennelongfunds.com, or by phoning 1800 895 388. BFML may receive management and or performance fees from the Bennelong Funds, details of which are also set out in the current IM and or PDS. BFML and the Bennelong Funds, their affiliates and associates accept no liability for any inaccurate, incomplete or omitted information of any kind or any losses caused by using this information. All investments carry risks. There can be no assurance that any Bennelong Fund will achieve its targeted rate of return and no guarantee against loss resulting from an investment in any Bennelong Fund. Past fund performance is not indicative of future performance. Information is current as at 31 January 2017. Avoca Investment Management (ABN 17 149 651 856) is a Corporate Authorised Representatives of Bennelong Funds Management Limited (BFML), ABN 39 111 214 085, Australian Financial Services Licence No. 296806.