Market and Portfolio Update – June 2013

Market Update 2  During the past month we have seen a major shift in markets: The A$ has started to fall; US$ strength; and Bond yields increase.  Federal Reserve talk of winding back quantitative easing.  The Australian market has been weaker than the global market.

US Economy showing signs of resilience 3 Home builders remain very confident Home Builders Sentiment Survey Initial Jobless Claims Jobless claims trending down Source: Bloomberg

The question is whether good news is bad news… 4  Bernanke: QE purchases could potentially be tapered "in the next few meetings"  What is the impact of a gradual tapering of quantitative easing?  What are the implications for Australian companies? Source: IRESS

Chinese Economy 5  The Chinese economy remains a little soft with key manufacturing indices and industrial production remaining subdued (by their standards) as noted below.  The focus of the new leadership appears to be on corruption and environment at this point rather than re-accelerating the economy.  Lead indicators such as sales of yellow goods (excavators) and power have improved. Industrial Production Source: Bloomberg

Resources Underperforming 6  Over the past year we have seen resource companies substantially underperform defensive yielding companies.  Conditions are shifting to claw back some of this underperformance.  RIO share price assumes a long term Iron Ore Price of $80 and 90 cent currency which seems conservative. CBA versus BHP Source: IRESS

Mining Services 7  Reasonably optimistic on the outlook for the major resource companies however this is at the expense of mining service players.  We have seen a series of downgrades in this space. Engineering Construction Activity

Domestic Confidence 8  With mining investment peaking the Government and RBA need to accelerate alternative areas of the economy to avoid a recession  Domestic confidence (especially business confidence) is very low at present.  We see a number of factors influencing this confidence: The unprecedented long election period is causing considerable damage. The poor competitive position of many Australian companies  Expect lower interest rates – perhaps down to 2%. Currency to assist competitive position and Government to accelerate PPPs.  Housing market showing signs of life and we have a range of companies in the portfolio that can benefit from greater housing activity levels (e.g. Dulux, Lend Lease).

A$ falling 9  Fall in the A$ a short term negative but long term positive. Short term - The pullback has resulted in international investors selling Australian holdings. Long term – Positive impact on earnings.  Competitive position of domestic companies competing with offshore will improve.

Great rotation from bonds to equities 10  With interest rates low and bond markets deteriorating, equities will remain an important asset class for investors.

Portfolio Positioning 11 We are benefiting from current trends given the following weightings: 1.Overweight currency exposed companies – QBE, ANN, BXB, CWN 2.Positioning in companies which benefit from rotation out of bonds – QBE, HGG, MQG 3.Position in housing exposed stocks (low interest rates) – DLX, SGP, LLC 4.Underweight defensive yield In terms of future positioning we see a few key decisions: 1.Look for yield stocks that get oversold.. 2.Look for companies getting caught up in the mining service sell down without much mining exposure. 3.As we look further out the prospect of lower interest rates, a lower US$ and a change in Government will provide a better environment for domestic stocks. 4.Look to add to resource positions given valuation support.

Investment Process – High Conviction portfolio 12 Stock Research  Phase 1 - Quality Web assessment ─Strength of management, balance sheet, earnings, industry structure and ESG review  Phase 2 - Fundamental bottom up valuation and thesis 1.Ideas Generation 2.Stock Research 3. Portfolio Construction 4.Portfolio Management Idea Generation  Quantitative and quality screening  Company and industry contacts  Daily meetings to discuss findings and allocate tasks Portfolio Construction Recommended stocks considered given:  Top down considerations  Portfolio characteristic impacts  Stock and sector correlation analysis  After tax consideration  Monthly ICM review provides strong oversight of process Portfolio Management  Conclusions constantly retested  Sell decisions based on: ─Reach target valuation ─Deterioration of quality characteristics / inv. thesis

13 Australian Equities High Conviction Portfolio Performance as at 31 May 2013 Please note: Past performance is not an indication of future performance. No allowance has been made for taxation and fees are not taken into account.

14 Australian Equities High Conviction Portfolio Stock Holdings as at 31 May 2013 StockGICS SectorIssuer NameActualActive Code Weight CASH2.7% ANZFinancialsAustralia and New Zealand Banking Group Limited9.8%3.9% BHPMaterialsWestpac Banking Corporation9.3%0.6% WBCFinancialsBHP Billiton Limited8.1%1.3% AZJIndustrialAurizon Holdings Limited5.4%4.7% LLCFinancialsLend Lease Group5.1%4.7% RIOMaterialsRio Tinto Limited4.7%2.8% WPLEnergyWoodside Petroleum Limited4.4%2.1% HGGFinancialsBank of Queensland Limited4.3%4.1% MQGFinancialsHenderson Group PLC.4.2%3.1% BOQFinancialsMacquarie Group Limited4.0%3.8% BXBIndustrialTrade Me Group Limited4.0%2.9% TMEConsumer DiscretionarySeek Limited3.4%3.3% QBEFinancialsBrambles Limited3.2%1.8% AGKUtilitiesQBE Insurance Group Limited3.0%2.4% SGPFinancialsCoca-Cola Amatil Limited3.0%2.3% SEKIndustrialStockland3.0%2.7% CWNConsumer DiscretionaryCrown Limited2.9%2.2% ANNHealth CareAGL Energy Limited2.7%2.5% SHLHealth CareSouthern Cross Media Group Limited2.5%2.1% SXLConsumer DiscretionaryAnsell Limited2.4%2.3% AIOIndustrialSonic Healthcare Limited2.1%1.7% DLXMaterialsAsciano Limited2.1%2.0% CCLConsumer StaplesDuluxGroup Limited2.0%1.2% WTFConsumer DiscretionaryWotif.com Holdings Limited1.8%1.7% Total 100.0%

15 Australian Equities High Conviction Portfolio Stock Attribution as at 31 May 2013

Investment Process – Socially Responsible portfolio 1. Ideas Generation 2.Stock Research 3.Portfolio Construction 4. Portfolio Management 16 Idea Generation  Quantitative and quality screening  Company and industry contacts  Daily meetings to discuss findings and allocate tasks Portfolio Construction Recommended stocks considered given:  Top down considerations  Portfolio characteristic impacts  Stock and sector correlation analysis  After tax consideration  Positive and negative SRI screening  Monthly ICM and Socially Responsible IC review Portfolio Management  Conclusions constantly retested  Sell decisions based on: ─Reach target valuation ─Deterioration of quality characteristics / inv. thesis ─Change in SRI screening outcomes. Stock Research  Phase 1 - Quality Web assessment ─Strength of management, balance sheet, earnings, industry structure and ESG review  Phase 2 - Fundamental bottom up valuation and thesis

17 Australian Equities Socially Responsible portfolio Performance as at 31 May 2013 Please note: Past performance is not an indication of future performance. No allowance has been made for taxation and fees are not taken into account.

18 Australian Equities Socially Responsible portfolio Holdings as at 31 May 2013

19 Australian Equities Socially Responsible portfolio Stock Attribution as at 31 May 2013

1. Idea Generation 2. Stock Research 3. Portfolio Construction Portfolio Management Investment Process – Income portfolio 20 Idea Generation and Quantitative Screen  Quantitative and quality screening  Company and industry contacts  Daily meetings to discuss findings and allocate tasks Portfolio Construction  Top down considerations  Portfolio characteristic impacts  Stock and sector correlation analysis  After tax consideration  Monthly ICM review  Positive and negative income screening Control Risk & Retest Conclusions  Conclusions constantly retested  Sell decisions based on: ─Reach target valuation ─Deterioration of quality characteristics / inv. thesis ─Change in income screening outcomes Stock Research  Phase 1 - Quality Web assessment ─Strength of management, balance sheet, earnings, industry structure and ESG review  Phase 2 - Fundamental bottom up valuation and thesis

21 Australian Equities Income Portfolio Performance as at 31 May 2013 Please note: Past performance is not an indication of future performance. No allowance has been made for taxation and fees are not taken into account.

22 Australian Equities Income portfolio Holdings as at 31 May 2013

23 Australian Equities Income portfolio Stock Attribution as at 31 May 2013

24 Disclaimer IMPORTANT NOTE: This presentation has been prepared by DNR AFSL Pty Ltd ABN , an Australian Financial Services Licensee, Licence Number Dalton Nicol Reid has used its best endeavours to ensure the information within this presentation is accurate it cannot be relied upon in any way and recipients must make their own enquiries concerning the accuracy of the information within. This presentation is not intended to provide you with personal advice and in providing this information, Dalton Nicol Reid has not taken into account your particular investment objectives, financial situation or needs. You should assess whether this information is appropriate for your particular needs, either by yourself or with your adviser. Dalton Nicol Reid expressly disclaims any responsibility or liability to anyone who acts or relies upon anything contained in, or omitted from, this presentation. Past performance is not indicative of future performance. Total returns shown are based on Dalton Nicol Reid’s composite portfolio performance and have been calculated before taking Dalton Nicol Reid’s fees into account as actual performance on managed accounts is dependant on a number of factors including, but not limited to, timing of investment, blacklisted stocks and portfolio execution. No allowance has been made for taxation. Investment into managed accounts can only be made via the appropriate MDA Contract.