July 2014 The Advice Exchange – Technical Day

Market Review 2 This month we review the performance over the past 12 months:  What we got right: −Market sensitive stocks; −Housing and infrastructure recovery; −Bottom up opportunities; and −Reduced exposure to high PE stocks.  What we got wrong: −Carry trade; −Bottom up stock issues; and −QBE underperformance.

Outlook 3 Continuation of the search for yield:  Low interest rates remain a strong source of support for equity markets & high yielding assets.  Bond yields at 2.5% means 6% earnings yield looks attractive.  This has created a resurgence in support for higher yielding defensive stocks.  These companies most sensitive to a decline in rates look well owned and expensive.  Prefer growth stocks and those that will product strong free cashflow.

Outlook 4 Rebound in the Australian Economy:  Domestic economy and confidence has been soft since the budget.  However we would expect consumer confidence to recover over the year.

Outlook 5 Rebound in the Australian Economy:  Resource capex cycle continues to slow.  Companies which have delayed maintenance and cut costs seeking to grow again.  Strength in housing and infrastructure.

Outlook 6 China bottoming out?  The manufacturing sector has barely been growing.  Recently there have been preliminary signs of a pickup response to government efforts.

Outlook 7 Iron Ore Price:  We have seen the first bounce in prices for some time.  Lower price forcing high cost producers to start shutting down.  Investors are likely to be cautious as there have been false rallies. Signs of further closures or greater confidence that China has bottomed will drive interest in the sector.

Outlook 8 US growth rates:  US growth has been softer than expected impacted by the snowstorms.  Manufacturing growth survey appears robust, and improvements in housing seen.

Outlook 9 US growth rates:  Employment growth is also looking solid.  There has been nothing to suggest the improvement in the US economy is in trouble.

Outlook 10 Current earnings expectations:  The market is currently forecasting 8% earnings growth.  A lower currency at 88c would add 3-4% to market forecasts.  Resource companies should see benefit from cost cutting and new projects.  Steady growth by defensives should deliver 4-7% growth.  Cost cutting from a range of businesses.  Top line growth more limited. Higher prospects for US, market, property and infrastructure exposed companies.  Mining services might continue to go backwards but at a slower rate.  Overall 8% seems achievable although more difficult if currency was to remain at 94c for too long.

Outlook 11 Valuations:  The valuation of the market is as follows: 14.5x FY15 PE, 6.2% Dividend yield.  Dividend yield looks attractive relative to low interest rates.

Outlook 12 Valuations:  Potential return for the year dependent on potential bond yield of the market and risk premium investors will want relative to this rate.

Current portfolio positioning 13 Key areas where we see opportunities:  Names where the market is underestimating a renewed growth strategy-IRESS, JB Hi-Fi, Recall  Clear cyclical recovery being underestimated-Dulux, Macquarie Bank, Hendersons, Lend Lease  Restructuring to deliver growth-Aurizon, Macquarie Atlas  Companies operating offshore that receive a benefit from the lower A$, however the risk/return on this segment looks more marginal following a strong run in the share prices of a range of these companies-Brambles, QBE  Major resource companies, given the cost-reduction opportunities-BHP, RIO  Remaining underweight the higher yielding segment that can suffer as quantitative easing unravels bond yields.

Moves - High Conviction Portfolio Sale of Asciano Limited (ASX:AIO)  Softer sentiment likely have a short term impact on haulage volumes.  Reduce portfolio exposure to coal following continued price weakness.  Disappointed with managements efforts to reinvigorate their business and potential resulting share losses. Purchase of Veda Group Limited (ASX:VED)  VED largely operates a monopoly with approximately 85% market share.  Additionally due to recent Comprehensive Credit Reporting legislative changes the size of the market is potentially set to increase substantially.  Unique combination of very high quality characteristics and growth potential. 14

Moves - Socially Responsible Portfolio Sale of Asciano Limited (ASX:AIO)  Refer previous slide. Purchase of Veda Group Limited (ASX:VED)  Refer previous slide. Purchase of Greencross Limited (ASX:GXL)  Favourable industry structure with the “humanisation” of pets gaining momentum.  The scale it has generated in franchising vets enables it to create revenue synergies from vet referrals to other parts of its business such as animal pathologies and hospitals, however in particular its retail offering at Pet Barn/ City Farmers.  Growth profile more than justifies its premium to the market, with GXL planning to acquire 1-2 veterinary clinics a month and is on track to open 24 Pet Barn stores this financial year.  Currently they hold approximately 5% market share with management targeting 20% of total. 15

Moves - Income Portfolio  Purchase of Smartgroup Corporation Limited (ASX:SIQ)  Capital light duopolistic business with high recurring revenues.  Strong free cash generation.  The IPO is priced at an attractive CY2014 PE of ~10x and a dividend yield of 6.6%. 16

Performance 17

18 Australian Equities High Conviction Portfolio Annualised performance as at 30 June 2014

19 Australian Equities Socially Responsible Portfolio Annualised performance as at 30 June 2014

20 Australian Equities Income Portfolio Annualised performance as at 30 June 2014

21 Blended portfolios performance As at 31 May 2014

22 Disclaimer DISCLAIMER This document has been prepared by Dalton Nicol Reid Pty Ltd, AFS Representative of DNR AFSL Pty Ltd ABN , AFSL It is general information only and is not intended to be a recommendation to invest in any product or financial service mentioned above. Whilst Dalton Nicol Reid has used its best endeavours to ensure the information within this document is accurate it cannot be relied upon in any way and recipients must make their own enquiries concerning the accuracy of the information within. The general information in this document has been prepared without reference to any recipients objectives, financial situation or needs. Before making any financial investment decisions we recommend recipients obtain legal and taxation advice appropriate to their particular needs. Investment in a Dalton Nicol Reid individually managed account can only be made on completion of all the required documentation.