product assessment - betashares...to adjust the fund s asset allocation on both a frequent and...

Product Assessment

Highly Recommended

Recommended

ApprovedNot Rated

Redeem

AMP Capital Dynamic Markets Fund (Hedge Fund)Report data as at 30 Sep 2019

Rating issued on 17 Oct 2019

APIR CodeASX:DMKT

Asset / Sub-Asset ClassMulti-AssetExchange Traded Products - ETP

Investment StyleActive

Investment ObjectiveThe Fund aims to provide a total return(income and capital growth) before costsand before tax, of 4.5% p.a. aboveinflation, the Reserve Bank of Australiainflation rate (Consumer Price Index) -trimmed mean, on a rolling 5 year basis.

Zenith Assigned BenchmarkBloomberg AusBond Bank Bill Index

Net Returns (% p.a.)3 yrs 2 yrs 1 yr

Fund 1.77 -1.24 -3.08

Benchmark 1.79 1.81 1.74

Income (% p.a.)Income Total

FY to 30 Jun 2019 1.14 -4.21

FY to 30 Jun 2018 5.10 5.27

Fees (% p.a., Incl. GST)Management Cost: 0.50%Performance Fee: 15.375% (incl. GST lessinput tax credits) of the Fund's net excessreturn over CPI + 4.5% p.a.

ABSOLUTE RISK (SECTOR)

VERY HIGH

HIGH

MODERATE

LOW

VERY LOW

RELATIVE RISK (FUND WITHIN SECTOR)

Active - AA Unconstrained

Active - Tactical AA focussed

Active - Strategic AA focussed

Index - Enhanced/Fundamental

Index

INCOME DISTRIBUTIONS PER

MONTH QUARTER 6 MONTH ANNUM

INVESTMENT TIMEFRAME

1-2 YRS 3-4 YRS 5-6 YRS 7+ YRS

VIEWPOINTThe Fund is an Exchange Traded Product (ETP), taking a Multi-Asset strategy implemented byAMP Capital (AMPC). The Fund is managed by AMP's Sydney-based Multi-Asset Group (MAG)and provides cost-efficient exposure across a broad range of asset classes. Subject to fewconstraints, the Fund employs a dynamic approach to asset allocation and is managed to deliverreturns in excess of the Consumer Price Index (CPI). Zenith believes the Fund presents as astronger investment proposition following process refinement and enhanced risk managementinfrastructure. That said, in the absence of an improved set of portfolio outcomes, our convictionremains constrained.

Responsibility for management of the Fund rests with AMPC's Sydney-based Multi-Asset Group(MAG) which is comprised of 27 investment professionals. Debbie Alliston, Chief Investment Officer(CIO) is responsible for AMPC's multi-asset business, a position she assumed in March 2019following the announcement that Sean Henaghan (previous CIO) was taking an extendedsabbatical and unlikely to rejoin the firm in the same role. Zenith considers the loss of Henaghan tobe meaningful in terms of experience and contribution to the strategic direction of the firm.

Responsibility for the day-to-day management of the Fund rests with Nader Naeimi (Head ofDynamic Markets), one of six senior investment professionals that report directly to Alliston. In thisposition, Naeimi is supported by a team of three that have a range of qualitative and quantitativeexperiences. A further resource is Shane Oliver (Chief Economist) who is integral to the formationof macroeconomic insights that underpin asset class forecasts. In Zenith's opinion, the DynamicMarkets team is adequately resourced and balanced, albeit portfolio management experienceoutside of Naeimi is varied. By consequence, we believe it integral for Alliston to act as a soundingboard and impart her experience with respect to the identification of trade ideas, their expressionand capital allocation.

The investment team believes that superior investment outcomes can be achieved throughadherence to an active team-based approach, with flexibility to adjust the asset allocation mix totake advantage of changing market conditions and investment opportunities. Consistent with thisbelief, the investment team leverages the outputs of its proprietary and quantitatively drivenDynamic Asset Allocation (DAA) model. This combines medium-term drivers of asset class returnswith cyclical indicators to compare the attractiveness of asset classes relative to each other and ona one to three-year forward basis.

Zenith notes that over time, the number of underlying markets modelled by the team has expandedto include niche exposures such as equity sectors (e.g. shipping containers, transport, banks etc)and individual commodity markets such as corn, wheat and soy beans. This has permitted the teamto tailor positions across a range of instruments which include ETF sector baskets and target riskpremias. While Zenith recognises the potential value-add from sector customisation, we believe theattendant volatility and basis risk from niche exposures reduces the robustness of the DAA model.

The team implement tail risk hedging positions through derivatives, at either the portfolio or asset-class levels. This has been an area where AMPC has sought to implement a more formalisedframework to assess hedging options and cost effective implementation across a range of assetclasses. Zenith believes enhancements have been positive, adding more structure and rigour to thetail hedging process.

To assist with managing the drawdown profile of the portfolio, AMPC has a proprietary riskmanagement platform which decomposes ex-ante portfolio risk based on Value at Risk (VaR) andConditional Value-at-Risk (CVaR). The platform also allows the team to stress test the portfoliobased on a number of pre-defined scenarios. Zenith notes that AMPC has continued to progress itsproprietary risk management tools and we see this as a strong and positive development.

FUND FACTSDynamic Multi-Asset strategy available via the ASX AQUA platform●

An unconstrained multi-asset strategy that aims to achieve a return of CPI +4.5% p.a.●

Asset class exposures gained through low cost strategies●

Zenith charges a fee to the Product Issuer to produce this report.For further information please refer to the Disclaimer & Disclosure at the end of this report.

www.zenithpartners.com.auZENITH PARTNERS PTY LTD

AMP Capital Dynamic Markets Fund (Hedge Fund)

APPLICATIONS OF INVESTMENT

SECTOR CHARACTERISTICSThe Zenith Multi-Asset - Exchange Traded Funds sectorincorporates a range of ETF styles including:

Market Beta ETFs;●

Alternative Beta ETFs; and●

Active ETPs.●

These products may encompass a range of strategies acrossthe market capitalisation spectrum or adopt sector specificthemes. Zenith will generally benchmark ETFs against theirspecific benchmarks as well as against a relevant Index as anadditional yardstick where relevant. Active ETFs are measuredagainst a relevant peer index according to their strategy.

The multi-asset sector includes those funds that are permittedto invest across asset classes and investment strategies.Traditionally asset class exposures have included equities,fixed interest, property, infrastructure, and cash. However, inmore recent times there has been an increased willingness bysector participants to incorporate alternative strategies in aneffort to enhance portfolio outcomes. With further innovationalso sighted in the area of active asset allocation, this has ledto a more continuous flow of products that seek to cater to theneeds of a growing and more diverse range of investors.

Zenith believes that multi-asset funds can no longer simply bedeemed the domain of those seeking a low cost and diversifiedinvestment solution. Rather, these strategies are also likely toappeal amongst more sophisticated investors who are onceagain being drawn to the concept of active asset allocation asa core driver of portfolio outcomes. Furthermore, it is feasiblethat the sector will continue to gain in popularity amidst anenvironment of increased regulation and statutory oversight.

Zenith categorises the strategy within the “Multi-Asset – RealReturn” peer group. Members of this category target anabsolute return outcome and unlike their traditional diversifiedcounterparts, are not subject to a conventional Strategic AssetAllocation (SAA) framework. Instead, portfolio positions aredetermined through a continuous assessment of investmentmarkets, with portfolio managers provided with ample flexibilityin setting asset-class exposures.

Given the wide range of fund’s offered in the Multi-Assetspectrum generally and the variable nature in which they aremanaged, Zenith does not measure their performance againstbenchmarks that have an implicit SAA setting. Instead, wemeasure their success against a range of absolute returnbenchmarks including cash (as measured by the BloombergAusBond Bank Bill Index) and one of Zenith’s tailoredConsumer Price Index (CPI) benchmarks. Further detail on thisFund’s assigned CPI+ benchmark is provided at “PerformanceAnalysis”.

PORTFOLIO APPLICATIONSThe Fund’s investment mandate is broad, permitting exposureacross a broad range of asset classes, with investmentexposure gained through low cost passive vehicles includingETFs, futures and index Funds. For investors subject to theconstraints imposed by a traditional SAA framework, the Fundmay be suitable as a satellite portfolio exposure. Such anapproach takes into consideration the potential for the manager

to adjust the Fund’s asset allocation on both a frequent andmaterial basis.

For those less sensitive to the composition of the Fund'sportfolio, it may be appropriate for blending with other similarlystructured strategies to achieve an outcome consistent with aninvestors total return requirements. In isolation, the Fund wouldbe considered a higher risk investment proposition and warrantan investment term of not less than five years.

LiquidityUnits quoted on the ASX AQUA platform may be purchasedand sold via a standard broking service in a similar fashion toequities. Like traditional ASX transactions, settlement is viaCHESS.

Units are traded on the AQUA platform subject to liquidity.AMPC has invested $10 million of its own capital in the Fund tokickstart liquidity as well as aid in alignment of interests. TheFund also facilitates an intraday market making function inconjunction with an independent market participant to executethe Fund's market making activities. At the end of each day,units are created or cancelled to clear the Fund's net marketmaking position. The aim is to provide an efficient pricingenvironment in which investors can purchase Fund units.Creations/redemptions are in cash only, not in-specie. It shouldbe noted that the Fund bears the risk of its market makingactivities and such activities result in either a net benefit or lossto the Fund.

AMP have not indicated any specific repatriation schedule fortheir seed funding to the Fund. Management have informallyindicated their preparedness to maintain this funding to ensurethe Fund market making activities are efficient. Given theimplementation of the strategy in the marketplace, Zenith hasraised some reservations around the ability of management toefficiently replicate the strategy's portfolio with such a lowstarting level of FUM. AMPC have indicated that their ownanalysis indicates that they are comfortable, hence the settingof the seed capital. Ultimately the effectiveness of this will onlybe known once operations commence and any earlydiscrepancies between the strategy's listed and unlistedportfolios are likely to be transient assuming positive FUMgrowth.

AMPC provides an intraday indicative Net Asset Value (iNAV)which is published on a continuous basis on the the Fundwebsite. iNAV reflects adjustments for exchange rates,portfolio changes and equity price movements. Given the factthat parts of the portfolio trade on international exchangesoutside ASX trading hours, the iNAV is exposed to elements of'stale' pricing at certain times (i.e. whenever portfolio stocks donot have live trading prices during the ASX trading day theFund's iNAV will only update for live market prices). Given thecurrent composition of the strategy, the majority of movementsin the iNAV only reflect movements in foreign exchange.

Given that AMPC is in the best position to price its ownportfolio (as opposed to a third party market maker), Zenithbelieves that this process should be fairly efficient. Howeverthere is no guarantee that the spread between unit prices andthe Fund's NAV will be efficient at all times. Given the limitedtrack record to date, Zenith is unable to quantify the level ofpricing efficiency this structure will maintain. We note howeverthat the Fund is aiming to deliver a total spread of <1% around

of 12Please refer to terms relating to theprovision of research at the end of the document



the NAV and that to date results have generally been withinthese guidelines.

RISKS OF THE INVESTMENT

SECTOR RISKSThere exist a number of risks that are generally commonamongst all multi-asset funds. These include:

MARKET RISK: In periods of heightened risk aversion, it isfeasible that asset-class correlations merge. Should this occur,the diversification benefits brought through the construction ofa portfolio comprising multiple lowly correlated asset classesmay be lost, potentially exposing investors to a broaderdeterioration in market conditions.

CURRENCY RISK: Sector participants may be permitted togain international exposures on an unhedged basis. Thedecision whether or not to hedge is often deemed active innature and can expose investors to fluctuations in crosscurrency rates. This may be either to the benefit or cost ofFund volatility and performance.

EMERGING MARKET RISK: Many sector participants gainexposure to emerging and frontier markets which bring withthem additional risks. These may include reduced liquidity, amore opaque pricing mechanism, increased sovereign risk andpolitical tensions.

ALTERNATIVES RISK: A growing number of Funds haveinvestment mandates that permit a meaningful exposure toalternative assets and strategies. Investors should be awarethat the use of alternatives can bring with them additional risks.

ILLIQUIDITY RISK: While most sector participants will seek toretain high levels of liquidity, it is feasible that a Fund mayretain exposures in assets that are deemed illiquid or subject toirregular pricing policies. It may be difficult for an investmentmanager to subsequently liquidate such portfolio positionswithout incurring meaningful transaction or other performancerelated costs.

REGULATORY RISK: The ASIC Regulatory Guide 97‘Disclosing Fees and Costs in PDSs and Periodic Statements'came into effect on 1 October 2017, and seeks to establish acommon framework for disclosing fees with respect toregistered managed investment schemes issued to retailinvestors.

In January 2019, ASIC released a Consultative Paper (CP),seeking feedback with respect to proposed changes to theexisting fee and cost disclosure regime. The consultationperiod ends in April 2019, following which, ASIC will collatefeedback and structure final recommendations, notifying of anintended implementation period.

In its current form, RG97 is not expected to impact the actualcosts (or net returns) on existing investments. Rather, theguide is focused on providing increased transparency withrespect to the costs of management. Given this, it is feasiblethat under RG97, investors become more sensitive to the costscharged and seek lower cost alternatives, potentially leading tofund outflows.

FUND RISKSZenith has identified the following key risks of the Fund.

Although Zenith believes the risks noted are all significant, wehave listed them in order of importance. In addition, we havenot intended to highlight all possible risks.

KEY PERSON RISK: Naeimi is considered integral to theforward performance of the Fund and his departure wouldwarrant an immediate reassessment of our rating.

RESTRUCTURE RISK: Following the promotion of SimonWarner to the position Head of Public Markets and departure ofHenaghan, the leadership, reporting lines and structure of theMAG team has been subject to change. Zenith believes theextent of change may be unsettling to the team and potentiallyimpact Fund performance.

PERFORMANCE RISK: The Fund gains its exposure to assetclasses through low-cost passive vehicles (including ETFs,futures and index funds), that can include idiosyncratic, sectorexposures. As a consequence, there is a risk that sector risksdominate performance, potentially diluting the output of theDAA process.

VOLATILITY RISK: The Fund is not constrained to a statedvolatility range, in part owing to the absence of avenuesthrough which the investment team may seek to diversifyportfolio outcomes. It is therefore feasible that investmentreturns be highly volatile, especially when assessed overshorter investment terms.

DERIVATIVES RISK: The Fund engages in derivativeinstruments to obtain its exposures to select asset classes.While Zenith believes these instruments can aid with portfolioflexibility and risk management, the inherent risks of holdingderivatives are commonly greater than for traditional assets.Risks that arise from derivatives include counterparty, liquidityand basis.

ASX AQUA RISK: Although the Fund will be quoted on theASX AQUA platform, liquidity may be limited if the Fund doesnot provide liquidity via market making. The ASX may suspendtrading under certain circumstances.

iNAV RISK: Intraday unit pricing published by the Fund (iNAV),is indicative only and may not accurately reflect issues such ascurrency movements or stocks in the portfolio which are tradingoutside the hours of operations of the ASX.

MARKET MAKING RISK: The Fund will rely on market makingactivities to minimise any dislocation between the unit priceand underlying value of the portfolio. There is the risk that suchactivities may not be effective, result in unexpected costsand/or errors in execution.

LONGEVITY RISK: ETFs which fail to grow FUM to a scalablelevel run the risk of being unviable for the issuer to maintainover the longer term and could face delisting. The risksassociated around delisting are principally that of timing,forcing a crystalisation of tax consequences to investors whichmay not be suitable. As at 31 August 2019, FUM in the Fundwas low at approximately $A 23.4 million

QUALITATIVE DUE DILIGENCE

ORGANISATIONAMP Capital (AMPC) is a majority owned subsidiary ofAustralian Stock Exchange (ASX) listed parent AMP Ltd. A




diversified financial services company, AMPC has investmentoperations that span multiple geographies including Australia,Dubai, China, Hong Kong, India, Ireland, Japan, Luxembourg,New Zealand, the United Kingdom, and the United States.

The AMP Group is among the five largest asset managers inAustralia, employing over 250 investment personnel worldwide,with FUM of approximately $A 200 billion as at 30 June 2019.The firm has investment capabilities across each of the majorasset classes.

Zenith highlights that AMP has experienced significantnegative publicity following the release of the RoyalCommission into Misconduct in the Banking, Superannuationand Financial Services Industry. While most of the adversecoverage has pertained to its wealth management/advicedivision, in our opinion, the challenges facing the corporateentity have the potential to impact the asset managementbusiness. In particular, cost cutting, role consolidation andFUM outflows are risks that could influence team stability andultimately investment performance.

While the asset management business has largely been ring-fenced from the group level changes, Zenith will continue tomonitor the impact on the respective investment capabilities.

As at 30 June 2019, AMPC's Multi-Asset Group (MAG)managed approximately $A 119.7 billion in Australiandiversified strategies across a range of strategies spanningtraditional diversified, peer-relative, responsible investment,Statutory, Lifecycle, dynamic, alternative-based and otherbespoke multi-asset solutions. At the same date, approximately$A 839.5 billion was managed in the strategy, which included$A 23.6 million in the Fund.

INVESTMENT PERSONNEL

Name Title Tenure

Nader Naeimi Head of Dynamic AssetAllocation 19 Yr(s)

Brad Creighton Portfolio Strategist 1 Yr(s)

Pierre-Hedzer Marchi Senior QuantitativeAnalyst 3 Yr(s)

Shane Oliver Chief Economist 35 Yr(s)

Responsibility for management of the Fund rests with AMPC'sSydney-based Multi-Asset Group (MAG) which is comprised of27 investment professionals. Debbie Alliston, Chief InvestmentOfficer (CIO) is responsible for AMPC's multi-asset business, aposit ion she assumed in March 2019 fol lowing theannouncement that Sean Henaghan (previous CIO) was takingan 18-month sabbatical and not expected to rejoin the firm inthe same role. Henaghan had led the MAG since 2013 andZenith considered him to be instrumental in streamlining theproduct suite and setting the firm's strategy.

Zenith notes that Henaghan's sabbatical coincides with thepromotion of Simon Warner to the position Head of PublicMarkets for AMPC. Previously CIO Global Fixed Interest,Warner has made a number of changes to the reporting linesand team structure across each of AMPC's listed equities, fixedincome and MAG divisions. In Zenith's opinion the changesresult in a simplified and flatter corporate hierarchy. That said,the degree of change is meaningful and has the potential to be

unsettling, particularly for Alliston who assumes furtherleadership and strategic responsibilities yet at a time where aidfrom senior representatives is diminished (most notablythrough the loss of Henaghan and the retirement of Jeff Rogers- previously CIO iPac Securities and key contributor to theMAG).

Responsibility for the day-to-day management of the Fundrests with Nader Naeimi (Head of Dynamic Markets), one of sixsenior investment professionals that report directly to Alliston.In this position, Naeimi is tasked with structuring andexpressing trade ideas. Naeimi has been (and continues to be)a key architect in developing AMPC's DAA process and Zenithconsiders his market positioning and timing skills to be closelytied to the performance outcomes of the Fund.

Supporting Naeimi is a team of two investment professionalsthat have a range of qualitative and quantitative experiences.Included amongst these are Senior Quantitative Analyst Pierre-Hedzer Marchi and Portfolio Strategist Brad Creighton who isthe most recent addition to the team. In Zenith's opinion theDynanic Markets team is streamlined and comprised ofmembers that have a complementary set of experiences andfollowing a period of consolidation, this has lead to enricheddiscussion amongst its members. This has been most evidentthrough Marchi's quantitative skil ls which have beeninstrumental to the team's build out of its tail hedgingcapabilities, and Creighton's fixed interest/cross marketexperience that has led to a deeper pipeline of fixed interesttrade ideas.

A further resource is Shane Oliver (Chief Economist) who isresponsible for generating the macroeconomic insights thatunderpin asset class forecasts which form part of the DAAprocess. Oliver has been AMP's Chief Economist since 1994and Zenith considers him to be a highly experienced macrothinker.

Remuneration

AMPC offers to staff a comprehensive remuneration structure.It comprises an industry competitive base salary anddiscretionary component. The discretionary element offersshort, medium and long-term components and is determinedtaking into consideration both quantitative and qualitativefactors. Quantitat ive factors are largely focused onperformance and mandate compliance as assessed overrolling three-year periods. Qualitative factors are moresubjective in nature and include team contribution, quality ofresearch, leadership and business development.

With the assistance of an independent remuneration expert,AMPC have recently aimed to further align remuneration tofund performance. That is, the team's bonus pool is nowseparate from that of the other AMP business groups. Fouritems contribute to the bonus pool:

Rolling three-year relative fund performance●

Performance fees●

Profit share●

Growth revenue share●

Bonuses above a certain threshold will be deferred for up tothree years, with the deferred amounts invested into fundsmanaged by the team. Zenith believes the revised incentivestructure is an improvement on the previous structure.




However, we will monitor AMPC's ability to hire talentedinvestors and the team's stability over a prolonged period inorder to make an assessment of the success of the revisedstructure.

In Zenith's opinion, the Dynamic Markets team is adequatelyresourced and balanced, albeit portfolio managementexperience outside of Naeimi is varied. By consequence, webelieve it integral for Alliston to act as a sounding board andimpart her experience with respect to the identification of tradeideas, their expression and capital allocation.

INVESTMENT OBJECTIVE, PHILOSOPHY ANDPROCESSThe Fund seeks to outperform the Consumer Price Index (CPI)(trimmed mean version) by 4.5% p.a. (pre fees and taxes) overrolling five-year periods. The Fund seeks to achieve thisobjective via a DAA process, that aims to generate returnsthrough all market conditions.

The investment team believes that superior investmentoutcomes can be achieved through adherence to an activeteam-based approach, with flexibility to adjust the assetallocation mix to take advantage of changing market conditionsand investment opportunities. Consistent with this belief, theinvestment team leverages the outputs of its proprietary andquantitatively driven DAA model which was developed by theInvestment Strategy and Dynamic Markets Team, with Naeimideemed to be a significant contributor.

The model blends medium-term drivers of asset class returnswith cyclical indicators (valuation, business cycle/earnings,liquidity, sentiment and technicals), therein comparing therelative attractiveness of asset classes relative to each otherand on a one and three year forward basis. A preferred assetmix will subsequently be proposed, with the investment teamseeking to build a portfolio that is efficient and deemed to offerthe greatest prospects of delivering upon targeted outcomes.

A more in-depth summary of the Fund's investment process isoutlined below:

Step 1: Medium term return expectations

The process begins with the Dynamic Markets teamdeveloping medium-term return expectations across a broadrange of asset classes. Forecasts are based on an assessmentof each asset-classes dividend yield, earnings growth (nominalGDP) and are subject to a currency adjustment (ie. globalexposures are altered to take into consideration cross-currencyviews). The outworking of this process is the formulation of fiveto ten year 'sustainable' return estimates, reflecting medium-term expectations.

Step 2: DAA scores

Medium-term return expectations are considered in light of thebroader business cycle and through the MAG's DAA process.

The DAA process captures both medium-term secular driversand shorter-term cyclical drivers of markets, which includefactors such as valuation, business cycle/earnings, liquidity,sentiment and technicals. Each of these factors is consideredat the asset class level, with an overall score subsequentlyassigned, signalling how bullish or bearish the team is basedon a one to three year forward view. Asset class scores rangefrom +2.5 to -2.5, with a positive DAA score implying better

return prospects (less risk potential), and a negative scoreimplying lower return potential (an unattractive risk profile).

Step 3: Merged Returns

Zenith notes that the weighting assigned to each of theunderlying factors is dynamic, with weightings altereddepending upon the strength of signals and at marketextremes. This process utilises an algorithm that is based onthe market cycle leading the economic cycle and is purelyquantitative.

Zenith notes that the liquidity factor used is an assessment ofthe easiness of monetary policy rather than an assessment ofoperational liquidity, which is not considered across GlobalInvestment Grade Credit. AMPC do however assess liquidityfor Global Investment Grade Credit within the cycle componentwhich considers central bank policy, issuance, demand, anddefault rates.

Medium-term return forecasts are then blended with the DAAassigned asset-class scores using a Black-Litterman process,to produce a set of 'merged returns'.

Step 4. Portfolio Construction and risk management

Merged returns are then considered in conjunction with riskassumptions, to produce a final asset mix representing anoutworking of a Monte-Carlo simulation. The investment teamwill then propose a targeted asset allocation, taking intoconsideration a range of factors including model outputs, whichare overlayed with qualitative judgement. Ultimately, the teamseeks to produce an asset mix that is efficient, whilst alsomaximising its prospects of delivering upon the Fund's statedobjectives.

Step 5. Asset Allocation Meeting

The final step in the process is an asset allocation meeting,chaired by Oliver. This meeting is also attended by portfoliomanagers from across the MAG, investment analysts andasset class specialists. During this meeting, an asset allocationpaper is presented which includes various proposals, indicatorsand model output from the DAA process. This meeting isstructured so as to promote discussion and inform decisionmaking.

In Zenith’s opinion, AMPC’s DAA process is grounded onquantitative rigour combined with an appropriate qualitativeoverlay. We also note, that the DAA process is shared betweenAMPC’s other multi-asset funds, which we believe formsefficiencies across the broader MAG.

SECURITY SELECTIONIn terms of security selection, the Fund's positions areexpressed through passive instruments, namely exchangetraded funds (ETF's) and futures contracts. Typically, Naeimiwill identify the preferred instrument(s), considering the outputof the DAA model, transaction costs and liquidity.

Zenith notes that over time, the number of underlying marketsmodelled by the team has expanded to include nicheexposures such as equity sectors (e.g. shipping containers,transport, banks etc). This has permitted the team to tailorpositions across a range of instruments which include ETFsector baskets and target risk premias. While Zenithrecognises the potential value-add from sector customisation,




we believe that the attendant volatility and basis risk from nichesector exposures reduces the robustness of the DAA model.

The team is also active in identifying and exploitingopportunities in the commodities sector, including corn, nickel,platinum, wheat and precious metals etc. Given theidiosyncratic nature of these markets, it is problematic forZenith to link these trades to the output of the DAA process.Notwithstanding this, AMPC has consistently generated profitsfrom these positions, exhibiting an attractive skew profile (i.e.maximising winning trades and cutting losing trades early).Zenith would prefer to see a discrete risk allocation to thesepositions/trades and managed with a specific risk/return profilethat is complementary to the output of the DAA model.

PORTFOLIO CONSTRUCTIONThe final portfolio represents an outworking the DAA process,with the Fund gaining its asset classes exposures through low-cost passive vehicles (including futures, ETFs and indexfunds). Naeimi is primarily responsible for the Fund'spositioning, albeit the broader team are actively engaged in allportfolio decisions.

The Fund has a flexible investment mandate with the ability toinvest across the full spectrum of equities, property, fixedinterest, currencies and commodities. While the asset mix willchange through the cycle, Zenith notes that since launch,equity risk has tended to dominate the Fund's risk/returnprofile. Accordingly, in a more challenging equity environment,we believe the Dynamic Markets team will need to demonstratea greater breadth of return sources, to consistently meet theFund's investment objectives. Pleasingly, Zenith has observedthe addition of curve and relative value trades more recently,corresponding with Creighton's adition to the team and greaterfocus on fixed interest.

As detailed earlier, the team is active in reflecting asset classviews via discrete sector positions, based on a relative valueassessment. These can include country specific views whichare expressed via country level futures or ETFs, style basedpositions (i.e. US value), or sector specific expressions such asJapanese banks (expressed through ETFs) or Nickel in thecommodities sector. This process is largely qualitative basedand driven by Naeimi.

Downside protection is an explicit feature of the portfolioconstruction process with tail hedging implemented at eitherthe portfolio or asset-class levels and through the use ofderivatives. Tail risk hedging will be implemented when thesentiment and technical indicators signal a higher than averagelikelihood of a short-term correction or ahead of a key riskevent. Some of the strategies that may be considered includevolatility futures (VIX), equity and currency futures. The risk inenacting these positions is twofold: (i) basis risk brought by therequirement to enact imprecise hedges (these are commonlymore cost efficient than tailored exposures), and (ii) negativecarry, particularly in a low yielding environment.

The range of tail hedging instruments is limited to exchangetraded securities such as futures, exchange traded options,exchange traded funds (ETFs) etc. Presently there is noflexibility to invest via over-the-counter instruments, whichlimits the team's ability to tailor positions and access specificsegments of the market. This could include sovereign andcredit default swaps, exotic derivatives and other fixed income

instruments (i.e. receiver swaptions. inflation swaps). While theteam has the ability to identify proxy instruments, Zenith firmlybelieves that given AMPC's size and scale, operationalconstraints should not govern the range of tail hedginginstruments.

To assist with managing the drawdown profile of the portfolio,AMPC has a proprietary risk management platform whichdecomposes ex-ante portfolio risk based on Value at Risk(VaR) and Conditional Value-at-Risk (CVaR). The platform alsoallows the team to stress test the portfolio based on a numberof pre-defined scenarios (i.e. Global Financial Crisis, EuropeanDebt Crisis). Zenith notes that AMPC has continued toprogress its proprietary risk management tools and we see thisas a strong and positive development.

In terms of position sizing, the Fund will hold a nucleus oflarger positions that tend to dominate active risk. Thesepositions typically range between between 5% and 15%,depending on the level of conviction and the DAA score (i.e. ascore of 2.5 would equate to a higher conviction position).These positions are supplemented by a tail of smaller positionswhich typically range from 0% to 2%.

In sum, Zenith considers AMPC's portfolio construction to besound and we view favourably recent efforts to implement amore formalised framework to assess hedging options and costeffective implementation across a range of asset classes.Zenith believes enhancements add more structure and rigourto the tail hedging process. That said, we also note that in anenvironment in which volatility is high, it may become difficult toimplement cost effective hedges with minimal basis risk.

RISK MANAGEMENT

Portfolio Constraints Description

Growth Assets

Australian Equities (%) 0% to 50%

Global REITs (%) 0% to 25%

Global Equities (%) 0% to 50%

Commodities (%) 0% to 25%

Total Growth Assets (%) 0% to 90%

Defensive Assets (%)

Australian Sovereign Bonds (%) 0% to 25%

Global Credit - Investment Grade (%) 0% to 25%

Global Credit - High Yield (%) 0% to 25%

Global Inflation Linked Bonds (%) 0% to 25%

Cash (%) 0% to 50%

Total Defensive Assets (%) 10% to 100%

ESG Constraints Nil

The MAG maintains a strong risk aversion bias, recognisingthat risk in the context of a multi-asset portfolio spans multipledimensions. Therefore, considerable resources are allocated tomonitoring and protecting against unintended outcomes. Thestrongest layer of defence pertains to the experience of the




portfolio managers, most notably Naeimi in his capacity asLead Portfolio Manager.

The Fund is not subject to a stated risk constraint; that said theinvestment team expect volatility (as measured by StandardDeviation) to average between 5% p.a. and 15% p.a. in normalmarket conditions. Risk is however considered in terms ofvolatility and correlations both across and within asset classes(through normal and extended market conditions). Riskforecasts are also explicitly considered as part of the DAAprocess, which guides the asset mix.

As the designated Lead Portfolio Manager, Naeimi closelymonitors the Fund's overall performance. To aid with this, heutilises a number of proprietary and "off the shelf" riskmanagement systems including BARRA and style research;collectively they produce a range of risk measures that areintegral to the monitoring of performance. Also available is anInvestment Reporting and Analytics team run by Jpseph Tam,which aids with scenario analysis, stress testing, andidentifying unintended portfolio risks.

AMPC has continued to develop its risk managementinfrastructure, most notably its ability to aggregate portfoliorisk/holdings in BARRA, and synthesize this data into a rangeof Fund level risk metrics and factor exposures. For example,Naeimi has the capacity to isolate those securities/positionsmaking the largest contribution to active risk and identify anyunintended factor exposures (i.e. value, growth andmomentum). The system also includes a number of hard wiredstress scenarios, which allows the Dynamic Markets team tounderstand the portfolio's drawdown sensitivity in a stressedscenario.

Zenith is supportive of the above-mentioned enhancements,noting the significant progress that has been over the past 12to 18 months. In our opinion, providing portfolio managers withreal time, 'on the desk' information (currently a T+3 lag) andalso the ability to customise stress tests is the next stage ofevolution. Finally, the ability to risk manage OTC instruments(detailed earlier) will align the process with the broader peergroup.

Environmental, Social and Governance (ESG)

AMPC is a signatory of the United Nations Principles forResponsible Investment (UNPRI) and as such, has a well-developed ESG framework. At the firm level, AMP has an in-house ESG team that is responsible for developing and refiningits policy, and at the same time, supporting the respectiveasset class teams.

INVESTMENT FEES

ETPs and ETF's contain a variety of explicit and implicit coststo the investor. Investors should be aware that poor ETPselection and/or trade execution can rapidly erode anyadvantage gained by the lower management fees espoused byETPs in comparison to managed funds more broadly.

It should be noted that the peer group averages below aremeasured on the basis of asset class, sub-asset class andstrategy implementation (index, smart beta or activemanagement).

Management Fees

The Fund charges a base management cost of 0.50% p.a., anda performance fee of 15.375% is also payable quarterly inarrears on net amounts in excess of the Fund's CPI plus 4.5%return objective.

The Active ETP sector is still in an emerging phase with fewavailable products to date which distorts the sector (averagefee of 1.03% p.a.). The fund's total cost structure is moreappropriately compared to active managed fund peers in theMulti-Asset real return sector. As such, the Fund's costcompares well (sector average of managed fund peers, 0.84%p.a.).

Zenith notes that the Fund commonly uses ETPs as a vehiclethrough which the Fund gains asset class exposure. The costassociated with transacting via other vehicles is an additionalcost that will be borne by unitholders and is reflected in theFund's net returns. Zenith looks negatively on these addedcosts, and believes there is an opportunity for these to beeither rebated or subject to a cap.

Bid/ask spreadAs listed products, investors are exposed to bid/ask spreads asan intangible cost of investment and divestment. The bid/askspread is primarily a function of market liquidity in fund units aswell as the presence of the maximum bid/ask spreads whichare maintained by authorised participants and market makers.

It should be noted that as a safeguard in the absence of anatural market in which two investors are transacting in theFund, market makers ensure the maximum spread is limited toa pre-agreed spread limit. It is important to note however thatbid/ask spreads tend to be at their highest and most volatile atthe start and end of the trading day and decreases during thecourse of the day’s trade as efficiency improves. It should benoted that the Fund bears the risk of its market makingactivities and such activities will result in either a net benefit orloss to the Fund.

Given that AMPC is in the best position to price its ownportfolio, Zenith believes that this process should be fairlyefficient and we have gained conviction in the process overtime. However Zenith notes the spread between unit prices andthe Fund's NAV has the potential to materially widen undercertain market conditions.

AMPC provides an intraday indicative Net Asset Value (iNAV)which is published on a continuous basis. iNAV reflectsadjustments for exchange rates, portfolio changes and equityprice movements. Given that parts of the portfolio trade oninternational exchanges outside ASX trading hours, iNAV is




exposed to elements of stale pricing at times, meaning portfoliostocks do not have live trading prices during the ASX tradingday iNAV will only update for live market prices. Given thecurrent composition of the strategy, the majority of movementsin the iNAV will only reflect movements in foreign exchange.

As at 31 July 2019, the Fund has demonstrated tradingspreads higher than peers in the Active Strategies ETP sector.




PERFORMANCE ANALYSIS Report data: 30 Sep 2019, product inception: Aug 2016

Monthly Performance History (%, net of fees)

JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC FUND YTD BENCHMARKYTD

2019 2.52 0.79 -0.45 0.81 0.05 1.56 -0.22 -0.24 -0.78 4.06 1.26

2018 1.07 -0.61 -2.98 3.46 0.82 -1.59 0.46 -2.24 -0.61 -4.22 -0.81 -1.97 -9.04 1.92

2017 0.45 -0.26 0.21 0.94 -0.31 -0.67 -0.03 -0.38 2.52 2.25 0.30 0.48 5.58 1.75

2016 0.60 0.00 0.20 3.83 1.39 6.11 0.75Benchmark: Bloomberg AusBond Bank Bill Index

Growth of $10,000

Monthly Histogram

Minimum and Maximum Returns (% p.a.)

ABSOLUTE PERFORMANCE ANALYSIS

Return Incpt. 3 yr 2 yr 1 yr

Fund (% p.a.) 1.87 1.77 -1.24 -3.08

Benchmark (% p.a.) 1.80 1.79 1.81 1.74

Ranking within Sector Incpt. 3 yr 2 yr 1 yr

Fund Ranking 1 / 1 1 / 1 1 / 1 5 / 5

Quartile 1st 1st 1st 4th

Standard Deviation Incpt. 3 yr 2 yr 1 yr

Fund (% p.a.) 5.45 5.59 5.90 5.70

Benchmark (% p.a.) 0.07 0.07 0.09 0.11

Downside Deviation Incpt. 3 yr 2 yr 1 yr

Fund (% p.a.) 3.19 3.26 3.79 4.12

Benchmark (% p.a.) 0.00 0.00 0.00 0.00

Risk/Return Incpt. 3 yr 2 yr 1 yr

Sharpe Ratio - Fund 0.01 0.00 -0.52 -0.85

Sortino Ratio - Fund 0.02 -0.01 -0.80 -1.17

NOTE ON PERFORMANCE - Performance data contained inthis report is based on an ETFs end of day Net Asset Value(NAV) as opposed to the last market price. Zenith has electedto use NAV over last price as this eliminates extraneoustrading noise which typically occurs at the end of the tradingday. While we see this as a cleaner approach to assessingETF performance, readers should be aware that actualperformance of an ETF may differ depending on the timing ofinvestment and divestment of holdings.

The Fund seeks to outperform the Consumer Price Index (CPI)(trimmed mean version) by 4.5% p.a. (pre fees and taxes) overrolling five-year periods.

All commentary below is at 30 September 2019.

The Fund has failed to meet its performance objective whenassessed over a range of investment terms. In terms of peerrelative performance, the Fund has consistently ranked in thelower quartiles of the peer group, particularly over the short tomedium-term.

In terms of volatility (as measured by Standard Deviation), theFund has consistently displayed higher volatility relative to peergroup, largely due to the Fund's equity bias. As aconsequence, the risk-adjusted returns have trailed the peergroup.




RELATIVE PERFORMANCE ANALYSIS

Alpha Statistics Incpt. 3 yr 2 yr 1 yr

Excess Return (% p.a.) 0.08 -0.02 -3.05 -4.82

% Monthly Excess (AllMkts) 50.00 50.00 45.83 33.33

% Monthly Excess (UpMkts) 50.00 50.00 45.83 33.33

Beta Statistics Incpt. 3 yr 2 yr 1 yr

Beta 7.62 7.21 8.74 3.58

R-Squared 0.01 0.01 0.02 0.00

Tracking Error (% p.a.) 5.44 5.58 5.89 5.70

Correlation 0.10 0.09 0.13 0.07

Risk/Return Incpt. 3 yr 2 yr 1 yr

Information Ratio 0.01 0.00 -0.52 -0.85

All commentary is as at 31 August 2019.

When assessing active strategies, Zenith seeks to identifymanagers who can achieve a consistency ratio above 50%, aswe believe it is representative of persistent manager skill.

Over a range of investment terms, the strategy has achievedoutperformance in 'all market' conditions of greater than 50%.Zenith deems a consistency ratio above 50% to berepresentative of persistent manager skill.

DRAWDOWN ANALYSISDrawdown analysis assesses the relative riskiness of a Fundversus the benchmark, in reference to capital preservation. Themaximum Drawdown is recorded as the percentage decline inthe value of a portfolio from peak to trough (before a new peakis achieved). All Drawdown analysis is calculated commencingfrom the inception date of the Fund in question, and Drawdownanalysis for the Fund and benchmark(s) are calculatedindependently. That is, the largest drawdown for the Fund andbenchmark(s) will not always refer to the same time period.

Drawdown Analysis Fund Benchmark

Max Drawdown (%) -10.53

Months in Max Drawdown 7

Months to Recover -

Worst Drawdowns Fund Benchmark

1 -10.53

2 -3.57

3 -1.38

4 -0.26

5

All commentary below as at 31 August 2019.

The parallel strategy utilised by AMPC has been in operationsince September 2011. The strategy's largest drawdown wasapproximately -10.53% in early 2019 which exceeded Zenith'sexpectations, particularly relative to the flexible nature of theinvestment process.

INCOME/GROWTH ANALYSIS

Income / Growth Returns Income Growth Total

FY to 30 Jun 2019 1.14% -5.34% -4.21%

FY to 30 Jun 2018 5.10% 0.18% 5.27%

The Fund does not target a specific level of income. However,where available, the Fund will seek to make distributions on asemi-annual basis, following June and December of each year.

REPORT CERTIFICATION

Date of issue: 17 Oct 2019

Role Analyst Title

Author Andrew Yap Head of Multi Asset &Australian Fixed Income

Sector Lead Andrew Yap Head of Multi Asset &Australian Fixed Income

Authoriser Bronwen Moncrieff Head of Research

ASSOCIATIONS & RELATIONSHIPSASIC Regulatory Guide RG79.164 requires Research Housesto disclose certain associations or relationships that they mayhave with a product issuer. As at the date this report wasissued, an associated entity of either the Issuer or InvestmentManager relevant to this report is; or has been, a subscriber toZenith's investment research services within the past 12months. Conflict management arrangements are in placewhere Zenith provides research services to financial advisorybusinesses who provide financial planning services to investorsand are also associated entities of product issuers. This is inaccordance with Zenith's Conflict of Interests Policy.

RATING HISTORY




As At Rating

17 Oct 2019 Approved


4 Oct 2017 Approved



3 Aug 2016 Recommended

Last 5 years only displayed. Longer histories available on request.




DISCLAIMER AND DISCLOSURE

Zenith Investment Partners (ABN 27 103 132 672) is the holder of Australian Financial Services Licence 226872 and is authorisedto provide general financial product advice. This Product Assessment Report (report) has been prepared by Zenith exclusively forZenith clients and should not be relied on by any other person. Any advice or rating contained in this report is limited to GeneralAdvice for Wholesale clients only, based solely on the assessment of the investment merits of the financial product. This report iscurrent as at the date of issue until it is updated, replaced or withdrawn and is subject to change at any time without notice in linewith Zenith’s regulatory guidelines. Zenith clients are advised to check the currency of reports and ratings via Zenith’s website forupdates. Any advice contained in this report has been prepared without taking into account the objectives, financial situation orneeds of any specific person who may read it. It is not a specific recommendation to purchase, sell or hold the relevant product(s).Investors should seek their own independent financial advice, obtain a copy of, and consider any relevant PDS or offer documentand consider the appropriateness of this advice in light of their own objectives prior to making any investment decision. Zenithcharges an upfront flat fee to the Product Issuer, Fund Manager or other related party to produce research on funds that conform toZeniths Research Methodology. Zenith’s fee and Analyst remuneration are not linked to the rating outcome in any way. Viewsexpressed in Zenith reports accurately reflect the personal, professional, reasonable opinion of the Analyst who has prepared thereport. Zenith may also receive a fee for other non-research related services such as subscription fees for Zenith’s researchservices and/or for the provision of investment consultancy services. Conflicts management arrangements are in place whereZenith provides research services to financial advisory businesses who provide financial planning services to investors and are alsoassociated entities of the product issuers, with any such conflicts of interest disclosed within reports as appropriate. Full detailsregarding such arrangements are outlined in Zenith’s Conflicts of Interest Policywww.zenithpartners.com.au/ConflictsOfInterestPolicy

Zenith’s research process seeks to identify investment managers considered to be the ‘best of breed’ through a comprehensive,multi-dimensional selection process. Zenith utilises both quantitative and qualitative factors in its ratings models. Models maximisecommonality across different asset classes while retaining flexibility for specialist asset classes and strategies. The selectionprocess is rigorous in both its qualitative and quantitative analysis and each component is equally weighted. Zenith does notmanage any proprietary assets and as such Zenith is able to choose investment managers with absolute independence andobjectivity. More detailed information regarding Zenith’s research process, coverage and ratings is available on Zenith’s websitewww.zenithpartners.com.au/ResearchMethodology

This report is subject to copyright and may not be reproduced, modified or distributed without the consent of the copyright owner.The information contained in this report has been prepared in good faith and is believed to be reliable at the time it was prepared,however, no representation, warranty or undertaking is given or made in relation to the accuracy or completeness of the informationpresented in this report. Except for any liability which cannot be excluded, Zenith does not accept any liability, whether direct orindirect arising from the use of information contained in this report. Past performance is not an indication of future performance.

Full details regarding the methodology, ratings definitions and regulatory compliance are available atwww.zenithpartners.com.au/RegulatoryGuidelines

© 2019 Zenith Investment Partners. All rights reserved.

Zenith has charged AMP Capital a fee to produce this report.



product assessment - betashares...to adjust the fund s asset allocation on both a frequent and...

Documents