Morphic Global Opportunities Fund Performance Report for September 2014 1,2 Unit price: $1.3619 Fund Objective: To provide long term capital growth by investing globally across asset classes. The Manager combines bottom up equity research with top down macroeconomic analysis. The Manager aims to preserve capital in falling markets through proactive risk management. The Fund generally consists of 20 to 60 stocks with selected other positions to optimise risk/reward - including cash, short sales and derivatives. Key Facts 3 Performance of AUD $10,000 Launch Date August 2nd, 2012 Minimum Initial Investment AUD 10,000 16,000 Pricing and Liquidity Distributions Management Fee4 Daily January and July 1.35% 15,500 Performance Fee 5 16,500 15,000 14,500 14,000 15.375% 13,500 Entry and Exit Fees Zero Buy/Sell Spread 0.3% each side Performance Morphic Global Opportunities Fund 13,000 12,500 12,000 6 11,500 Month 3.20% Index7 3.42% Quarter Half year 3.76% 5.38% 9.80% 8.69% 1.10% Year Inception (annualised) 17.94% 18.95% -1.01% 25.81% 26.48% -0.67% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec YTD 4.17% 4.12% 0.05% Jan 0.90% 1.87% -0.97% Feb 0.99% -0.01% 1.00% Mar 2.80% 3.30% -0.50% Apr 6.77% 7.97% -1.20% May 1.84% 1.68% 0.16% Jun 7.71% 6.88% 0.83% Jul -1.57% -1.34% -0.23% Aug 0.26% 0.17% 0.09% Sep 3.14% 2.71% 0.43% Oct 5.48% 5.09% 0.39% Nov 3.85% 3.91% -0.06% Dec 42.49% 42.51% -0.01% YTD -1.66% -1.56% -0.10% -0.71% 2.21% -2.92% -2.63% -3.02% 0.39% 0.75% 0.98% -0.23% 3.91% 1.67% 2.24% 1.07% 0.46% 0.61% -0.73% 0.29% -1.02% 1.28% 1.60% -0.32% 3.20% 3.42% -0.22% - - - 4.39% 6.06% -1.66% Fund Relative -1.62% 11,000 10,500 -0.22% *Past performance is no guarantee of future performance. 10,000 9,500 Historical Monthly Performance 2013 MGOF Index Relative 2014 MGOF Index Relative Risk Measures Fund Equity Exposure Summary 8 101% Net Exposure Gross Exposure9 141% Telecommunication Services VAR10 % Positive Months 1.01% Materials % Negative Months 23% Utilities % Outperforming Months 46% Health Care % Underperforming Months 54% Industrials 77% Benchmark Energy 7.71% Consumer Staples Worst Month -2.63% Consumer Discretionary Average Gain in Up Months 2.94% Information Technology Average Loss in Down Months -1.30% Financials Asia Pacific Western Europe North America 0% 9.05% 10% 20% 30% Top 10 Active Positions Name Name Short Euro vs USD & GBP Long Aust. Dollar vs US Dollar Long US Dollar vs Yen Region Financials Consumer Staples Utilities Financials Consumer Staples Industrials Consumer Discretionary Information Technology Information Technology Health Care Active FX Positions Name 6.8% 1.0% 2.0% None Weight 20% Gross 18.3% 8.4% 5.5% 4.6% 4.5% 4.0% 3.1% 2.9% 2.8% 2.4% North America Asia Pacific Europe North America Asia Pacific North America North America North America Asia Pacific North America Active Commodity Positions Weight 0% 40% 60% 11 Industry US Banks Japanese Drug Stores UK Water Utilities US Fund Managers Spread Japanese Supermarket Spread US Capex International Game Tech Takeover Mentor Graphics Corp Printer Manufacturers Aetna Inc Morphic Global Opportunities Fund Eastern Europe Central Asia Best Month Annual Volatility Africa / Middle East South & Central America Active Bond Positions Name Short US Bonds Long 12.4% 6.6% 5.5% 4.1% 2.2% 4.0% 2.5% 2.9% 2.8% 2.4% Short 5.9% 1.9% 0.0% 0.5% 2.2% 0.0% 0.6% 0.0% 0.0% 0.0% Active Credit Positions Name Weight 7.5% Net 6.5% 4.7% 5.5% 3.7% 0.0% 4.0% 1.9% 2.9% 2.8% 2.4% None Weight MORPHIC GLOBAL OPPORTUNITIES FUND Commentary and performance The Fund rose 3.20% in September while its benchmark (MSCI AC World Total Return Net Index in Australian Dollars) rose 3.42%, resulting in underperformance of 0.22%. Since inception (August 2012), the Fund has returned 25.81% (annualised and net of fees), against benchmark returns of 26.48%. The absolute gains were due to Australian dollar weakness and the Fund’s decision to be completely unhedged. Although US economic indicators are still strong, global markets finished the month down over 3% in US dollar terms. The market weakness can be ascribed variously to rising political tensions in Hong Kong; China and Europe growth fears; and worries that Ebola might spread out of Africa. The most resilient market was the US which managed gains over the quarter. The Fund’s main win again came from its oldest thematic holding - the Japanese drugstore chain basket. The long positions in national store chain Welcia and regional player Kusuri no Aoki were increased, but Sundrug and a short position in Sugi were closed. A short position in a highly priced regional player and the long position in national chain Tsuruha were maintained. The other main stock contributor was Japanese automotive manufacturer Mitsubishi Motors. The Fund’s largest losses came from Austrian industrial rubber goods producer Semperit, and Canadian automotive component maker Magna. Semperit has sold off along with most small to midcap stocks in Europe, but in particular has suffered from anxieties about its exposure to Russia and litigation in Thailand. The position was reduced over the month to reflect these concerns. Magna was part of the formerly large automotive basket that had been progressively reduced over the year. The sector has come under further pressure with EU auto sales stalling and Ford announcing that its earnings will not meet expectations. Since month end Magna and the other members of the basket, Mitsubishi Motors and Korean part maker Sungwoo Hitech have been sold. The second major disappointment was the Fund’s UK Water Utilities position which underperformed for a second month as investors began to reconsider yield plays. A risk-off environment in Europe also reduced the willingness of investors to hold these stocks for merger optionality. With yields above 4% and regulatory news continuing to improve we used this weakness to add to the position. September saw the diverging economic trends in the US and most of the rest of the world intensify. The US is coming to the end of QE and the probable start of an interest rate hikes cycle. By contrast the European Central Bank is trying to expand its balance sheet through the purchase of credit instruments, and Japan’s QE programme continues unabated. The result has been a significant rally in the US dollar against most currencies, which benefited hedges the fund had in place, but is raising a range of new anxieties in equity markets. The Fund remains positioned for a continuing bull market, though somewhat more tentatively than in recent months. Nevertheless the Fund remains close to fully invested. For the equity bull market that began in 2009 to end now, before the first rate increase in the cycle, with a backdrop of good economic data and earnings, would be to believe that “this time is different” – and whilst the Manager is always open these possibilities, it is not our base case for now. All assets remain unhedged to the Australian Dollar. The Fund has hedged some of its euro exposure into Sterling and US Dollars, and some of its Yen back to US dollars, as US Dollar strength is most likely at the early stage of a bull market as discussed at length in our December 2014 half yearly report. This report is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security by the sender or Morphic Asset Management Pty Ltd (“Morphic”) (ACN 155 937 901) (AFSL 419916). This report does not take into account the investment objectives, financial situation or particular needs of any particular person. Investors should obtain individual financial advice based on their own particular circumstances before making an investment decision. Any person considering investment in the Morphic Global Opportunities Fund (“MGOF”) should first review the Product Disclosure Statement (PDS) for the Fund issued by Perpetual Trust Services Ltd dated 23/01/2014. Initial Applications for units in the MGOF can only be made pursuant to the application form in the PDS. Morphic does not guarantee repayment of capital or any particular rate of return from the MGOF. Past performance is no guarantee of future performance. Investment returns have been calculated in accordance with normal industry practice utilising movements in unit price and assuming reinvestment of all distribution of income and realised profits. Statements of fact in this report have been obtained from and are based upon sources that Morphic believes to be reliable, but Morphic does not guarantee their accuracy, and any such information may be incomplete or condensed. All opinions and estimates included in this report constitute Morphic's judgement as at the date of this communication and are subject to change without notice. 1 Please see disclaimer 6 2 ISIN AU60PER06735, APIR PER0673AU 7 The Index is the MSCI All Countries World Daily Total Return Net Index (Bloomberg code NDUEACWF) in Australian Dollars 3 Not Annualised and net of fees All fees shown are inclusive of GST 8 Includes Equities and Commodities - longs and shorts are netted 4 The Manager may also recoup a maximum of 0.27% in expenses related to operating the Fund 9 Includes Equities, Commodities and 10 year equivalent Credit and Bonds - longs and shorts are not netted 5 The Performance Fee is payable semi-annually in respect of the Fund’s out-performance of the Index. Performance Fees are only payable in the 10 VAR is Value at Risk based upon the 95th percentile with a 1 day holding period using a 1 year look back 11 Baskets include a variety of stocks or indices chosen to optimise exposure event the Fund achieves positive absolute performance and is subject to a high water mark.
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