Clime CBG Australian Equities Fund (Wholesale)Monthly Investment Report October 2019

Clime CBG Australian Equities Fund(Wholesale)

Market Commentary - October 2019

The month of October delivered several market and macroeconomic themes worth highlighting. The IMF provided a more circumspect update specific to global growth forecasts; optimism sur-rounding a ‘phase one’ trade deal emerged; both the RBA and the US Federal Reserve cut inter-est rates; and the domestic ‘AGM season’ kicked off.

Australian equities lagged the 1.9% return of global markets during the month, with negative returns from gold, information technology and financial sectors more than offsetting the strong returns generated by the health care sector (+7.3% for the month). The rise in global equities for the month was significantly driven by Asian markets, with the Japanese market up +5.4% and the MSCI Asia ex Japan index delivering a return of +4.6%.

We suspect the rally in Asian equities particularly reflects the emerging optimism related to the announced ‘phase one’ trade deal between the US and China. US President Donald Trump suggested that the two countries have come to a ‘substantial phase one deal’, one that would seek to address issues encompassing agricultural trade, intellectual property and financial ser-vices.

Officials from both China and the US have since indicated that a roll back of tariffs on each other’s goods would likely occur on completion of the phase one deal. In a sign of the geopolitical times, we remain measured when assessing the probability of a significant reduction of trade related hostilities in the near term.

The significant slowdown in manufacturing activity particularly highlighted the meaningful ripple effects being felt globally. A more cautious business sector, whereby significant investment de-cisions continue to be postponed, is now directly impacting economic growth rates. As we have highlighted in recent updates, weak manufacturing data continues to emanate from major econ-omies including China, Germany and the US, though easier monetary policy has somewhat soft-ened broader ramifications (to date).

The International Monetary Fund (IMF) presented its outlook for global growth during the month, with its message best described in its blog headline, ‘Synchronised Slowdown’. The IMF has fore-cast global growth to be 3.0% for 2019, its lowest level since 2008–09, and a 0.3 percentage point downgrade from the April 2019 World Economic Outlook.

Despite projecting a rebound to 3.4% growth in 2020, the IMF did acknowledge that ‘with uncer-tainty about prospects for several countries, a projected slowdown in China and the United States, and prominent downside risks, a much more subdued pace of global activity could well material-ize.’

Domestically, we have observed a further round of weak (versus expectations) retail sales data coupled with another month of negative new vehicle sales data. Post month end, the Federal Chamber of Automotive Industries (FCAI) noted that new vehicles have now seen

Clime CBG Australian Equities Fund (Wholesale)

the 19th consecutive month of decreasing sales in the Australian market, with October 2019 sales down 9.1% compared to October 2018. In aggregate, we continue to see sluggish domestic con-sumption trends.

While extremely low interest rate settings have largely driven equities higher in CY2019, we note that concurrently forecast earnings trends have continued to moderate. This is particularly appar-ent within ASX large caps, with the ASX100 forecast to generate earnings growth of just +4.1% for FY2020 and -2.0% for FY2021. This contrasts with small cap earnings forecasts, which remain positive for both FY2020 and FY2021. We therefore continue to see significant merit in Clime’s do-mestic ‘all cap’ strategy, which seeks to generate returns by investing in quality companies across the market cap spectrum.

We look ahead to November with significant interest, with the month bringing substantial opportu-nity to continue implementing our research program. Several investor conferences, coupled with a large number of AGM updates and company management meetings, will see your investment management team well positioned to execute in the coming months.

Head of Investments - Adrian Ezquerro With expertise in equity analysis and investment management, Adrian is focused on the delivery of strong risk-adjusted returns for clients. Adrian joined Clime Investment Management in 2007 and is now responsible for the management and overall performance of Clime’s investment strate-gies, representing gross funds under management in excess of $900 mil-lion.

Adrian’s role includes the identification and evaluation of investment op-portunities across a broad range of asset classes, sectors and market cap segments. His prior investment management roles at Clime have included Analyst, Senior Analyst and Portfolio Manager – Smaller Companies. Adri-an was the Founding Portfolio Manager of the Clime Smaller Companies Fund, having seeded the fund and overseen its growth and significant suc-cess since inception. He also researched, developed and implemented Clime’s proprietary Quality Score, a quantitative filter used to score and rank equities.

The portfolio returned -1.4% in October (net of fees), compared to a -0.3% return for the S&P/ASX200 Accumulation Index and a -0.4% return for the S&P/ASX All Ordinaries Accumulation Index.

Key contributors and detractors to the portfolio return for the month were:• Australian Equity Large Cap Sub-Portfolio: Positive contributor CSL (CSL), detractors Westpac Banking Corpora-

tion (WBC), Australia and New Zealand Banking Group (ANZ) & National Australia Bank (NAB).• Australian Equity Mid Cap Sub-Portfolio: Positive contributors GUD Holdings (GUD), Seek (SEK), Credit Corp

(CCP) & Webjet (WEB), detractor Afterpay Touch (APT).• Australian Equity Small Cap Sub-Portfolio: Positive contributors Integral Diagnostics (IDX) & Lovisa Holdings

(LOV), detractors Navigator Global Investments (NGI), Electro Optic Systems (EOS), Hansen Technologies (HSN) & IMF Bentham (IMF).

CSL’s AGM update was well received, with the company reaffirming guidance for solid growth in FY20, largely reflect-ing strong ongoing demand for CSL’s plasma and recombinant therapies. ANZ’s full year results underwhelmed and highlighted the headwinds facing the Australian banking sector at present.

The Mid-Cap sub-portfolio performed well during the month. GUD reaffirmed its FY20 guidance at its AGM while WEB rebounded off arguably oversold recent lows.

Much of LOV’s AGM update highlighted the global rollout opportunity for the group, with store rollouts gaining mo-mentum in France and the US particularly. NGI’s quarterly Assets Under Management (AUM) update disappointed against expectations, though we retain the view that the business is modestly priced relative to earnings and its longer term prospects.

Inception: 9 April 2002.*Performance figures for more than 1 year are annualised, calculated after all applicable fees and taxes. Performance figures compare unit price to unit price for the given period.The returns exclude the impact of imputation.^Benchmark refers to S&P / ASX200 Accumulation Index

Clime CBG Australian Equities Fund (Wholesale)

Fund Performance - October 2019

Portfolio Return (Month)

Portfolio Return (1 Year) Fund Size Recent Distribution Unit Price

(As at 31 Oct 2019)

-1.4% 18.6% $61.7m 25.9273 (cents per unit)

$1.8702

1 month 3 months 1 year 3 years* 5 years* 10 years* Inception*

Fund Return -1.4% 2.0% 18.6% 11.0% 7.1% 8.0% 9.4%

Benchmark ^ -1.4% -0.9% 19.3% 12.6% 8.5% 8.3% 8.6%

Period Ended Wholesale Units(cents per unit)

30 June 2019 25.9273

30 June 2018 3.0026

Distributions

Fund Performance (31/10/2019)

Clime CBG Australian Equities Fund (Wholesale)

The information contained in this document is published by the Clime Asset Management Pty Limited. The information contained herein is not intended to be advice and does not take into account your personal circumstances, financial situation and objectives. The information provided herein may not be appropriate to your particular financial circumstances and we encourage you to obtain your own independent advice from your financial advisor before making any investment decision. Please be aware that investing involves the risk of capital loss and past results are not a reliable indicator of future performance and returns. Clime Asset Management Pty Limited (Clime), its Group companies, its directors, employees and agents make no representation and give no accuracy, reliability, completeness or suitability of the information contained in this document and do not accept responsibility for any errors, or inaccuracies in, or omissions from this document; and shall not be liable for any loss or damage howsoever arising (including by reason of neg-ligence or otherwise) as a result of any person acting or refraining from acting in reliance on any information contained herein. No reader should rely on this document, as it does not purport to be comprehensive or to render personal advice. Please consider the Information Memorandum and our Financial Services Guide before investing in the product.

Mid Cap Equities 29.1%

Prominent Holdings

Stock Code Security Weighting

BHP BHP Group Limited 5.5%

AMC Amcor PLC 5.0%

WBC Westpac Banking Coporation 4.2%

NAB National Australia Bank Limited 4.0%

BVS Bravura Solutions Limited 3.9%

Asset Allocations Cash

14.0%

Small Cap Equities 22.9%

Large Cap Equities 34.4%

Investment Objective

The objective of the Clime CBG Australian Equities Fund is to provide investment returns over the medium to long-term (3+ years) by investing in securities listed on the Australian Securities Exchange.

We believe that in the short-term markets are inefficient and investors can be irrational; and therefore that disciplined management can add value through the economic and market cycle. Over a rolling three to five-year investment horizon we expect to achieve investment returns in excess of the S&P/ASX200 Accumulation Index while assuming a similar level of total risk.

The Fund is suitable for those seeking primarily capital growth, with some supplementary income derived largely from dividends. This is a whole-sale fund and you must qualify as a sophisticated investor to invest.

The Clime CBG Australian Equities Fund has an investment horizon of a minimum of 3 years. Short-term returns are therefore not necessarily reflective of our long-term goals.

Investment Methodlogy The Clime CBG Australian Equities Fund applies Clime’s investment style of a quality bias with a strong valuation discipline to deliver investors returns above its S&P/ASX200 Accumulation Index benchmark while taking a similar level of risk.

The fund invests across the market (an “all-cap” strategy) but typically holds a minimum weight in the S&P/ASX200 of 75%. The strategy enables strong ideas and positions to grow with a company’s success rather than selling due to investment restrictions centred on market capitalisation.

Portfolio construction is the responsibility of the Portfolio Manager who is supported by a team of experienced investment analysts who have re-search responsibilities for their relevant segment of the ASX by market capitalisation.

Investment decisions are driven by bottom-up stock analysis, overlaid with macroeconomic and industry level considerations.

Idea generation is a result of the continuous monitoring of stocks within each industry sector and screening the investment universe based on quan-titative and qualitative attributes. The investment team draws on a range of sources of information to assist this process, including historical and forecast financial metrics for stocks in the investment universe; regular meetings with company management and attendance at company presenta-tions; analysis of company announcements, news media, industry publications, contact with a network of sell-side analysts; and statistical data.

When a stock is considered for investment, a detailed report is prepared including Clime CBG financial forecasts, a price target and an investment recommendation. Integral to this process are meetings with senior management of the subject company. Investment recommendations are present-ed to and discussed by the investment team, with the Portfolio Manager making final portfolio decisions.

Stocks included in the portfolio are then subject to ongoing monitoring, with the Portfolio Manager producing internal research reports and maintain-ing regular contact with company management. If a stock reaches its price target or records a material share price decline this triggers a review of the position.

Risk management includes the rigorous selection and monitoring process and avoiding or minimising exposure to companies and sectors that do not meet Clime CBG’s criteria around valuation and quality including corporate governance and social and environmental impact risks. Portfolio weights are managed based on the investment team’s analysis of the risk/return characteristics of the stock and how it affects overall portfolio risk.

Clime CBG reviews attribution analysis of past performance and monitors historical and forecast portfolio risk/return metrics to enable an evolution-ary process of quality improvement in investment decisions.

Clime CBG Australian Equities Fund

Investment Director - Ronni Chalmers Ronni founded the business which became CBG and was CIO and owner of the business when it was purchased by Clime in July 2017. Ronni has 38 years’ experience in Portfolio Management, Stock Analysis and asset manage-ment businesses including;

2003 – 2013 Chief Investment Officer, FSP Equities Management Limited, subsidiary of ANZ2001 – 2003 Investment Director, PSG (Aust) Funds Management Limited, partnership with PSG Investment Group, South Africa’s fifth largest bank.

Ronni’s previous funds management experience includes firms such as Bankers Trust and Oceanic Funds Manage-ment before forming PSG. Ronni holds a Bachelor of Commerce and Securities Institute of Australia International Portfolio Management F Fin