Preserving capital in a volatile market“Australian Leaders is offering investors an alternative to a traditional equity fund, most of which have performed poorly since the advent of the financial crisis. Over the last 3 years ALF has grown by 50% net of fees, while the market and most institutional funds have moved sideways

Justin BraitlingChairman

1

Europe’s Problems in a Nutshell Monetary Union proceeded in absence of fiscal & political

union.

Flagrant breaches of the original Maastricht Treaty conditions - specifically in failure to comply with the fiscal disciplines of the Stability and Growth Pact.

Divergence in pace of supply-side and public sector reforms rendered Southern Europe uncompetitive in comparison to Northern peers.

Leading Too:

Fiscal and trade imbalances have pushed sovereign debt to unsustainable levels (Greece, Ireland, Portugal).

2

Southern Europe has become uncompetitive

-2

-1

0

1

2

3

4

5

6

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Greenspan metric of internal imbalances in Euro Area Euro Area current account

% of GDPA surge in

internal imbalances

No major move inexternal imbalances

Internal imbalances surge

• Lack of reforms and loss of markets to Eastern Europe has resulted in divergence in unit labour costs and productivity.

• Access to cheap funding lead to fiscal and property bubbles.

Divergent unit labour costs and productivity

Crisis of Solvency, Liquidity and Growth

Fiscal sustainability is a function of debt levels relative to both the size and growth of an economy along with the cost of funding debt.

Argentina defaulted in 2001 with half the debt levels of Italy (when measured as a percentage of GDP).

Italy’s debt has become unsustainable in spite of a relatively low deficit, as the economy is shrinking and its cost of funding has escalated sharply.

A fifth of Italian public debt falls due over the next year. It will be a race against time as recession risk looms in the Euro-zone (EZ).

4

Fiscal Sustainability- Restore Solvency

Bagehot’s Rule for Central Banks as published in Lombard Street (1873)-“Lend without limit, to solvent firms, against good collateral, at high rates and walk away from insolvent institutions”.

Solvent countries receive liquidity support from official sources: ECB, Rescue Fund, IMF.

Insolvent countries (Greece/Portugal) return to solvency through either significant debt restructuring and/or an orderly exit from the EZ.

5

Restore competitiveness

Fiscal and Trade deficits have to be funded, further adding to the stock of public debt unless consolidated.

These imbalances need to be addressed or else debt levels will keep rising.

Imbalances can be addressed either by: Internal devaluation – Structural reforms that lead to a

depreciation in prices and wages estimated at 30%. External devaluation of Euro or exit currency block and relaunch

domestic currencies. Fiscal consolidation through austerity.

6

Maintain Liquidity

Spreads on 10y EFSF bonds over German Bunds

0

20

40

60

80

100

120

140

160

Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12

EFSF Jul-16 / Germ Jul-16

EFSF Dec-16 / Germ Sep-16

EFSF Jul-21 / Germ Sep 20

• Solvent countries who lose access to capital markets should be funded by official lenders (EU, EFSF, IMF).

• The rescue fund (EFSF) lacks sufficient money and the Central Bank (ECB) has no mandate to act as lender of last resort through monetising state debts.

Growth is panacea for all ills in Euro-Zoneas Europe faces recession.

Policy needs to shift quickly to restoring growth and competitiveness

via both:

Monetary stimulus through lower rates and quantitative easing, and

A weaker Euro coupled with a reversal of austerity measures in core Europe.

Rapid loss of momentum leading towards recession in EZ

A reminder of US structural imbalances

0

10

20

30

40

50

0

10

20

30

40

50

50 55 60 65 70 75 80 85 90 95 00 05 10

Share of Unemployed Workers Who Have Been Unemployed for 27 Weeks Or More

Percent Percent

Source: Department of Labor.

Government spending has to consolidate Unemployment is becoming embedded

Consumption has to contract Housing Sector will take years to recover

Headwinds are significant for fragile recovery

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

State/Local Payroll Tax Cut Extended, EUC expiresTotal Fiscal EffectCurrent LawPresident's Proposal (All Provisions)President's Proposal (Tax Provisions Only)

2010 2011 2012

Effect of Federal, State, and Local Fiscal Policy on GDP Growth*:

Percentage points, annual rate Percentage points, annual rate

* Excludes second round effects.Source: GS Global ECS Research.

2009

Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4-2.0

-1.6

-1.2

-0.8

-0.4

0.0

-2.0

-1.6

-1.2

-0.8

-0.4

0.0Percentage points Percentage points

*From bank equity shock in Q2 and/or short-term funding shock in Q3.** Shaded area represents range of estimates from alternative models.Source: GS Global ECS Research.

2011 2012 2013

Cumulative Impact on Level of US Real GDP from Eurozone Financial Stress*

Average impact**

96.6

96.8

97.0

97.2

97.4

97.6

97.8

98.0

96.6

96.8

97.0

97.2

97.4

97.6

97.8

98.0

Jan Feb Mar Apr May Jun Jul Aug Sep Oct

Index Index

Source: GS Global ECS Research.

US Financial Conditions Index

Tighter

-10

-8

-6

-4

-2

0

2

4

6

8

-10

-8

-6

-4

-2

0

2

4

6

8

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Soft

Hard, 3m average

Percent change, annual rate

Note: Shaded area denotes recessions.Source: GS Global ECS Research.

CAI by Data Type:

Percent change, annual rateLeading indicators are turning down Fiscal drag to take 1% off growth

Euro-zone crisis another 1% off growth Credit tightening a further burden

Soft Landing in China

11

China’s unbalanced growth

Europe is not alone with banking problems

-1

0

1

2

3

4

5

6

Mar-00 Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12

Quarterly economic growth Annual economic growth

Australia: Economic Growth Profile

%

Source: GS&PA Research estimates, ABS

(f)

Non-Mining GDP Growth

-6

-4

-2

0

2

4

6

8

10

12

Sep-88 Sep-93 Sep-98 Sep-03 Sep-08

Mining Sector* Non-Mining Sector

Source: GS&PA Research Estimates, ABS

%YoY (3 year average)

* Resource exports plus mining investment, less GS&PA estimate of the imported component of mining investment

-1.0

-0.5

0.0

0.5

1.0

1.5

91 93 95 97 99 01 03 05 07 09 11

Expansionary

Contractionary

Index

GS&PA’s FCI incorporates movements in short- term interest rates, the exchange rate, the ASX 200, the yield curve and corporate bond spreads. The variables are expressed in real terms weighted according to empirical

Australia: Real Financial Conditions Index

Source: GS&PA Research estimates

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

94/95 97/98 00/01 03/04 06/07 09/10 12/13

Underlying Cash Balance/GDP Fiscal Thrust

% of GDP

Source: Australian Treasury

Cash Balance and the "Fiscal Thrust"

Stimulatory Thrust

Contractionary Thrust

Australia: Growth has disappointed in 2- speed economy

But significant scope to stimulate if environment gets tough...

14

Summary

15

Australia: In relatively good shape given committed level of investment spending and significant scope to ease both monetary and fiscal conditions

BAML Research

Sep00 Peak EPS $57; Trough ~$40 (~30% downside)

Jun07 Peak EPS $91; Trough ~$40 (~56% downside)

If deep recession, corporate profits could fall by 50%.

?

What if we have a recession in advanced countries:

16

Portfolio Construction in difficult times

17

BanksResourcesIndustrialsDefensivesCash

Banks Short term Underweight/Medium term hold• System credit growth has stalled – households & businesses are

deleveraging. • Margins improving

– banking oligopoly has returned with ongoing asset repricing.– AA rated paper highly sought after.

• Wholesale funding task moderated with low balance-sheet growth.• Banks are well capitalised with little asset risk• Fully franked dividend yields @ 7.5-8% will support shares in the

absence of deteriorating asset performance.• Australian banks have significantly outperformed and are

vulnerable to further weakness offshore.• Preference for ANZ, WBC over CBA, NAB.

18

19

Loan Growth slows but margins recover Stronger funding position

Stronger Capital Position- Core Tier 1 ratio

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

-0.40%

-0.30%

-0.20%

-0.10%

0.00%

0.10%

0.20%

0.30%

Loan growth LHS Margins Mvt RHS

Reduced risk of losses on corporate portfolios

Banks in better shape then pre-GFC

FY05 FY06 FY07 FY08 FY09 FY10 1H11

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

Outperformance of Australian Banks

20

Resources - Underweight• If Industrial production in China continues to grow above

10%, commodity markets are undersupplied & prices will find support at current levels.

• The unwinding of speculative positions is putting pressure on commodity prices in the short term.

• Some traders are struggling to get letters of credit, resulting in some cancelled cargoes.

• In absence of a collapse in commodity prices, large diversified miners (BHP, RIO) are trading at significant discounts to fair value and look attractively priced.

• We would expecting to see further corporate activity in the sector particularly in coal (COK, WHC).

• If western economies weaken, China unlikely to provide offsetting support of a scale provided during GFC

21

Defensives- Overweight

Consumer Staples, Gambling, Healthcare, Telecom & Utilities are all defensive sectors.

The safest investments in this environment are in companies that can deliver solid growth irrespective of economy trends.

Preferred investments: Woolworths: With Coles outperforming, WOW shares have been de-rated and

now offer an attractive entry point into an outstanding business. Tattersall’s; a combination of monopoly state lotteries and totalisator

operations – 10% dividend yield. Telstra; Selling their weakest business the PSTN to the NBN for $11bn –

sustainable 10% dividend yield. Woolworths; Food deflation has weighed on margins. Asciano; Strong growth in coal haulage already contracted.

22

Telstra-Modest but reliable growth

FY06 FY07 FY08 FY09 FY10 FY11 FY12E-1,500

-1,000

-500

0

500

1,000

1,500

TELSTRA - Change in Revenue

PSTN Mobiles Internet IP & Data Sensis

Change in sales ($m)

Source: Company data, GS&PA Research estimates.

23

Industrials - Underweight• Economically sensitive sectors have underperformed as economy

has been weaker than expected.• Deep cyclical’s priced for failure; Qantas, OneSteel, Boral.• These companies all have cyclically exposed businesses that are

losing money (Qantas International, Steelmaking, Boral US) along with valuable businesses that are performing well (Jetstar, OneSteel Materials, Boral Construction Materials).

• There is significant value emerging in these companies as the residual value in the weaker businesses has been written off by investors.

• While the currency has been a headwind for many of these trade exposed sectors, as the Australian dollar falls returns improve and value is restored

24

TEN

MYR

QAN

BLD

25

2006Jan Apr Jul Oct Jan

2008Apr Jul Oct Jan

2009Apr Jul Oct Jan

2010Apr Jul Oct Jan

2011Apr Jul Oct

TEN.ASX@AUX: 0.92 MA: 30 1.0313,15 0.8987

0.8

1.2

1.6

2

2.4

2.8

3.2

3.6

O2009

D J2010

F M A M J J A S O N D J2011

F M A M J J A S O N

MYR.ASX@AUX: 2.61 MA: 30 2.5,15 2.2693

2.1

2.4

2.7

3

3.3

3.6

3.9

4.2

2006Jan Apr Jul Oct Jan

2008Apr Jul Oct Jan

2009Apr Jul Oct Jan

2010Apr Jul Oct Jan

2011Apr Jul Oct

QAN.ASX@AUX: 1.65 MA: 30 1.7485,15 1.5443

1.5

2

2.5

3

3.5

4

4.5

5

5.5

6

2006Jan Apr Jul Oct Jan

2008Apr Jul Oct Jan

2009Apr Jul Oct Jan

2010Apr Jul Oct Jan

2011Apr Jul Oct

BLD.ASX@AUX: 3.6 MA: 30 3.9853,15 3.5707

2

3

4

5

6

7

8

9

26

Historic Exposure

In the 2009 financial year ALF’s shareholder funds increased 26% while the All Ordinaries Index fell by 22%.

Fund Snapshot

27

28

Portfolio Returns:

Performance to 30 September2011

29

Source: JBWere Listed Investment Companies, September 2011

LICs Performance