SG Hiscock & Company Limited | AFS Licence No: 240679 | ABN: 51 097 263 628 L28, 367 Collins Street, Melbourne | 03 9612 4600 | www.sghiscock.com.au

SGH ICE 31 December 2016

1 Month

%

3 Month

%

1 Year

%

2 Years % p.a.

3 Years % p.a.

5 Years % p.a.

7 Years % p.a.

10 Years % p.a.

Inception (21.02.06)

% p.a.

SGH ICE (after MER & after performance fee)

2.53 -5.61 -5.60 9.55 10.94 17.56 11.63 8.91 11.34

Small (ex 100) Industrials* 3.91 -2.63 6.18 10.52 7.89 12.85 7.24 1.87 3.59

ASX 300 Industrials* 4.46 4.34 7.41 7.87 8.92 15.93 10.12 5.49 6.90

ASX 300 (incl. resources)* 4.34 4.93 11.79 7.20 6.57 11.64 6.69 4.39 5.77

Performance & Commentary SGH ICE returned +2.5% for the month, –5.6% for the quarter and –5.6% for the year. We are approaching 11 years since the fund’s incep�on and no doubt 2016 was one of the more challenging years. Medium and long term returns remain strong in absolute and rela�ve terms with the 3 years at 10.9% pa, 5 years at 17.6% pa and 10 years at 8.9% pa. Over the quarter key contributors were: A2 Milk – re-affirming strong growth and, by implica�on, that the issues experienced by compe�tor Bellamy’s were

company specific,

Covermore – a takeover from Zurich was received valida�ng our view of the value of this franchise which had been impacted by short term profitability headwinds, and

BT Investment Management – delivered earnings growth of 15% for FY 16, demonstra�ng the quality of the company and in par�cular the successful acquisi�on and ongoing opera�on of the J O Hambro business.

Key detractors over the Quarter were Sco�sh Pacific, iSen�a and Sirtex. We have wri�en about the first two in previous newsle�ers and Sirtex is also worthy of comment. We first invested in Sirtex in 2009, and have only ever held a maximum posi�on of 2% in 2012 — the posi�on size being driven by the higher risk/return nature of this business. The posi�on size was smaller in recent years (circa 1-1.5%), despite the share price rising by many mul�ples of the $5 cost price (peaking at $40), through our process of careful exposure management and ‘profit taking’. This shielded ICE to an extent in December when management markedly wound back growth expecta�ons for FY17, having a very adverse affect on the share price—down 40%. The stark change in outlook and emergence of compe��on led to concerns about the sustainability of revenue growth and reduced our confidence in customer s�ckiness, which drove the decision to exit completely. While this event nega�vely affected the fund over the Quarter, Sirtex has been a solid posi�ve contributor over 3 and 5 years for the ICE por�olio. As a small cap investor, there are always a number of companies that do not perform as an�cipated and ICE had its share of these in 2016; within historical norms, albeit at the higher end. Normally this is overcome by having significantly more posi�ve contributors but in 2016 the number of material posi�ve contributors was at a historically low level. The chart below shows that in 2016 there was a significant short term shi� away from quality Industrials to cyclical (lower quality) companies such as resources, mining services, basic industrials etc. This was a headwind for our style — inves�ng in a�rac�ve industrial business franchises with sustainable compe��ve advantage. To illustrate, only 3 of the Top 20 returning stocks in the Small Ords in 2016 met our investment criteria and were eligible for ICE investment—this is unusual. Similarly, of the Top 20 returning stocks in the Small Industrials, in 2016, 8 did not meet our criteria and 2 were lossmaking. Of the remaining 10 companies; we owned 3, another 3 were rejected on profit sustainability grounds and 4 were rejected on valua�on grounds. In short, we applied the same investment discipline that we have used over the previous 10+ years. If this environment con�nued on for ever then lower quality companies would be long term outperformers of high quality

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SG Hiscock & Company Limited | AFS Licence No: 240679 | ABN: 51 097 263 628 L28, 367 Collins Street, Melbourne | 03 9612 4600 | www.sghiscock.com.au

SGH Funds Monthly

companies – a highly unlikely outcome which is evidenced by the long term downtrend of cyclicals vs defensives in the chart below. This view is also supported by the 10+ years of SGH ICE experience—we have seen periods like this come and go before, giving confidence that what has gone against us in 2016 will at some point reverse. While the �ming is difficult to predict, what we do know is that the current episode is already quite large in the context of the past decade.

Source: UBS

In conclusion, while short term performance is not at the standard we have a�ained over longer �me periods, we remain diligent and focused on applying our investment approach which has served us well over the long haul i.e. inves�ng in a�rac�ve industrial business franchises that can deliver superior returns over the medium to long term. Finally, the por�olio appears well placed from a valua�on standpoint; SGH ICE’s IRR is around a 4% premium to the Industrials ex Financials IRR; and it’s median PE ra�o is currently at a low 4% premium to Industrials ex Financials (typically 5-15%). We look forward to a more rewarding 2017... a number of opportuni�es are star�ng to be presented, one of which is discussed below.

Portfolio Activity Ac�vity during the quarter included ini�a�ng posi�ons in Trade Me, Charter Hall, Seek & CSL, and exi�ng ASG, Greencross, Healthscope, CSG and Virtus. Trade Me is a good example of the opportuni�es that are now star�ng to be presented (as a by product of investors focussing on cyclicals) . We were able to buy this quality franchise at 20% below the recent peak at a �me when the investment in the business phase is close to ending and earnings are set to re-accelerate.

65

70

75

80

85

90

95

100

105

110

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Performance of Global Cyclicals rela�ve to Defensives

TOP 5 HOLDINGS

(alphabetical order)

MANTRA

OOH!MEDIA

RESMED

SPEEDCAST

TRADEME

Co. Weight No. Stocks

3.0% 18

2.0% 9

1.5% 3

1.0% 12

Market Cap Analysis

$10b+ 12%

$5b - $10b 4%

$2b - $5b 17%

$1b - $2b 13%

$500m - $1b 15%

$100m - $500m 15%

<$100m 4%

Cash 20%

Total 100%

Peak Cashflow 25%

Growth 47%

Establish 8%

Cash 20%

Total 100%

Lifecycle

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SG Hiscock & Company Limited | AFS Licence No: 240679 | ABN: 51 097 263 628 L28, 367 Collins Street, Melbourne | 03 9612 4600 | www.sghiscock.com.au

SGH Funds Monthly

Appendix—Summary of SGH ICE Decision Making Process

Our overall goal is to invest (at sensible prices) in companies with a sustainable competitive edge. This is the focus because these companies deliver more certain earnings growth.

We go through the following steps for each company that is considered for investment. 1. 1. Find assets that are difficult to replicate eg licences, patents, brands, captive client base2. 2. Ensure the company has an entrenched market position for its products/services = hard for competitors to take revenues. If

steps 1 & 2 are achieved then we have a company that should deliver higher & more certain earnings growth over the cycle.3. 3. Ensure we are buying the shares at a price will deliver a high internal rate of return to us as the investor. This ensures higher

and more certain earnings growth translates into superior share market performance over time.

Evidence of the more certain earnings growth was provided when companies reported their profit results for the 2015 fiscal year. The earnings of the median company in the SGH ICE portfolio rose 10% over the FY 2016 year, compared to an average earnings decline of –11% for the overall market.

The end result is a focus on companies with: Organic growth opportunities that are not overly impacted by fluctuations in the economy Appropriate debt levels

Strong cash generation

Awards

* Morningstar Awards 2016©. Morningstar, Inc. All Rights Reserved. Finalist: Domestic Equities – Small Caps

** Morningstar Awards 2015©. Morningstar, Inc. All Rights Reserved. Winner: Fund Manager of the Year 2015 - Small Caps Category, Australia.

* **

Disclosure Statement: This document is for wholesale investors only. SG Hiscock & Company may hold positions in companies mentioned in this newsletter. This is general information and is not intended to constitute a securities recommendation. SG Hiscock & Company is not licensed to give advice and does not warrant that past performance is an indication of future performance. A reference to a Fund or a company as to an outlook, or possible factors affecting future performance should not be relied upon or considered as being a statement of likelihood of future performance. While the information contained in this newsletter has been prepared with all reasonable care, SG Hiscock & Company accepts no responsibility or liability for any errors or omissions however caused. Performance results are presented after all wholesale management and custodial fees and after all performance fees and trading costs. All fees are disclosed in the respective Product Disclosure Statements and are available upon request. Before you make a decision to invest in the Fund you should obtain a Product Disclosure Statement as it contains crucial information including risks.

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