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Wavestone Absolute ReturnFund Quarterly Investment Report 30 September 2013

Portfolio returns
The Fund delivered a positive return of +8.25% (after fees) for the September 2013 quarter. The S&P/ASX300 Accumulation Index gained +10.28% over the same period. Fund size: $86.1m Unit price cash only $1.4006 Unit price including franking $1.4043
Period WaveStone Absolute Return Fund1 7.92% 8.88% 2.30% 8.25% 30.12% 21.24% 12.94% 10.01% 12.69% 12.12% 124.66% RBA cash rate benchmark 0.82% 0.74% 0.71% 0.66% 2.90% 4.07% 4.27% 3.93% 3.89% 4.69% 33.17% Net long exposure 91.7% 91.3% 77.9% 81.2% 85.5% 84.7% 84.4% 85.1% 84.0% 78.9% 78.9% S&P/ASX 300 Acc Index 6.77% 8.04% 2.83% 10.28% 23.61% 18.94% 8.90% 6.78% 7.12% 4.55% 37.00% Fund implied alpha2 1.7% 1.0% 4.7% 0.1% 9.1% 5.0% 4.5% 3.6% 2.8% 6.5% 77.7% MSCI (A$)

Dec 2012 Qtr Mar 2013 Qtr Jun 2013 Qtr Sep 2013 Qtr 1 year

1.95% 6.93% 13.93% 5.51% 31.04% 20.25% 10.73% 6.73% 2.09% 0.99% 6.80%

2 years p.a.3 3 years p.a.3 4 years p.a.3 5 years p.a.3 Since inception p.a.3,4 Total since inception3,4
1 2 3 4

After all fees and includes franking Alpha equals Fund return after all fees less beta (ASX/S&P 300 Index return net long exposure) Includes reinvestment of distributions From close of business on 5 September 2006

WaveStone Absolute Return Fund Monthly % returns

Fin Jul Aug Sep Oct Nov Year 2007 1.98% 4.64% 3.94% 2008 1.92% 2.04% 7.03% 3.94% 1.00% 2009 2.70% 3.98% 6.29% 4.31% 2.85% 2010 7.12% 7.30% 6.57% 0.50% 2.11% 2011 2.36% 1.24% 3.73% 2.03% 0.67% 2012 1.69% 0.56% 4.91% 2.28% 2.87% 2013 2.45% 3.36% 2.84% 2.66% 2.35% 2014 2.87% 2.29% 2.87% Dec Jan Feb Mar Apr 2.71% 3.27% 2.65% 0.06% 1.16% 0.63% 3.72% May Jun Fund ASX 300 Year Year 31.12% 25.98% 0.58% 13.67% 3.95% 20.34% 18.75% 13.04% 10.58% 11.90% 3.57% 7.01% 30.90% 21.90% 8.25% 10.28%

3.45% 0.23% 1.19% 2.74% 0.12% 6.34% 0.30% 5.98% 1.62% 4.02% 0.14% 6.12% 2.79% 5.67% 1.80% 6.58% 2.52% 0.72% 0.71% 1.24% 0.83% 3.53% 2.12% 2.45% 2.71% 3.95% 4.88% 0.14%

4.24% 2.43% 0.83% 3.16% 0.54% 1.88% 6.64% 2.91% 1.38% 0.94% 5.54% 0.59% 0.14% 1.23%

Best month: Sharpe ratio:

7.30% 0.72

Worst month: 6.64% Positive months: 69%

Fund volatility: 11.2% S&P300 volatility: 15.1%

Portfolio analysis as at 30 September 2013

Exposure analysis Position Long stocks (44) Short stocks (5) Gross exposure Net physical long Index futures/puts Net effective equity exposure % of net invested capital 116.6 3.1 119.7 113.5 40.2 73.3 Largest stock holdings Stock net exposure analysis BHP Billiton Twenty-First Century Fox % of net invested capital 6.7 5.5

Crown 4.9 Seek 4.8 Macquarie Group Top 10 4.6 45.3

Cash/(Borrowings) 13.5

Small cap exposure (30% maximum) 12.1

Absolute Return Fund Quarterly Investment Report September 2013 WaveStone Capital Pty Ltd 1

Quarter in review
Investment markets recovered their poise after the quantitative easing taper losses of May and June a response that saw some vindication late in the quarter when the US Federal Reserve opted not to cut back on asset purchases. The MSCI World (USD) Index gained +7.7% over the quarter despite a lagging performance by the US S&P500 Index at +4.7%. The stand-out equities region over the quarter was the eurozone at +11.2%, which emerged from recession after six consecutive quarters offallingGDP. The August 2013 Australian reporting season was characterised by low top-line growth, a continuation of cost reduction initiatives and high payout ratios. Share price reactions had a positive skew as investors were encouraged by commentary that conditions were not weakening with green shoots emerging in both housing and consumer spending. The Reserve Bank of Australia cut its cash rate target to a record low 2.50% in August. At its September meeting, the US Federal Reserve surprisingly opted to continue its asset purchases at the current rate, rather than slow them as many had expected. Chinese data improved over the quarter and there was no repeat of the money market tensions seen there in June.

Furthermore strong investment outperformance against both cash and the overall Australian equities market has been consistently delivered over all longer time periods as detailed in the performance table on page 1. Cyclical sectors enjoyed a quarter in the sun as investors warmed to the idea of a pickup in local growth and some improving signs from China. Consumer Discretionary (+14.7%) and Materials (+16.3%) were strong performers as was Energy (+14.0%). At an individual stock level it is worth highlighting some key contributors. Crown rose 30% over the quarter, driven by strong performance from its Macau assets. With unmet demand from mainland Chinese and massive ongoing investment in Macaus infrastructure as well as the new Studio City casino complex under construction, ongoing earnings growth looks highly prospective. Closer to home, management displayed highly disciplined cost control atitsMelbourne and Perth casino resorts. REA Group was up 38% for the quarter, after delivering another stellar profit result. The company is quickly evolving from a simple subscription model offering additional data driven services and mobile connectivity to agents and vendors, and is now starting to flex its inherent pricing power, which underpins a strong multi yearearnings trajectory. Other notable contributors included our re-established position in Seek and a sizeable re-rating of Bank of Queensland. In a particularly strong rising market, declining stocks were rare in the quarter. The high profile detractor to performance was McMillan Shakespeare which was effectively side-swiped by the now removed Rudd governments announced policy to effectively scupper the tax benefits on novated car leases. At its depths the stock halved, however the new Abbott coalition government,

Performance and activity

The Fund rose strongly in absolute terms over the quarter, up +8.28%.but trailed the ASX/S&P300 Accumulation Index increase of +10.28%. The difference can be attributed to the Funds average net equity exposure of c81% over the period. Over the last 12 months the Fund has delivered a return of 30.1% well ahead of the equity market return of 23.6%, and this has been driven by stock selection as well as identifying and riding the market trends.

Stock contribution by basis point return (gross) for September Quarter 2013
Funds best performing investments Longs Shorts Crown 130 REA Group 96 BHP Billiton 95 Funds least performing investments Longs Shorts McMillan Shakespeare 69 SPI Futures Treasury Wines 25 Bradken Iress

215 29 15

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Unit price accumulation

2.50 2.25 2.00 1.75 1.50 1.25 1.00 0.75 0.50 AUG DEC APR AUG DEC APR AUG DEC APR AUG DEC APR AUG DEC APR AUG DEC APR AUG DEC APR AUG 06 06 07 07 07 08 08 08 09 09 09 10 10 10 11 11 11 12 12 12 13 13 WaveStone

Portfolio positioning as at 30 September 2013 Sector exposure analysis as % of invested capital

Long Short Consumer D&S Metals & Mining Banks
Morningstar HF Index

Net Index 26.2 9.3 8.9 8.1 5.5 5.2 4.5 3.6 2.8 0.4 0.5 0.7 73.3 47.6 13.6 12.1 13.1 14.5 4.6 3.2 8.2 4.3 2.9 6.4 5.1 6.0 1.7 34.9 20.9

Diff 13.1 5.2 3.5 2.3 3.0 0.2 0.7 3.6 4.7 6.5 2.4 12.7 8.8

32.0 15.2 9.9 6.8 8.5 8.5 4.8 5.4 2.4 1.9 0.0

5.8 5.9 1.8 1.3 3.3 4.0 1.2 2.6 2.0 2.4 0.7

21.2 12.3

30.0 21.1

Healthcare Transport Other Financials Misc Industrials Materials Energy Telecoms Property Trusts Utilities Industrials Financials Resouces

RBA Cash Index

S&P 300 Accum Index

WCARF quarterly alpha 8

6% 4% 2% 0% -2% -4% -6% 6 4 2 0 -2 -4 -6 SEP MAR SEP MAR SEP MAR SEP MAR SEP MAR SEP MAR SEP MAR SEP 06 07 07 08 08 09 09 10 10 11 11 12 12 13 13

Total Exposure 116.6 43.3 64.4 16.8 31.6 18.0 20.6 8.5

100.0 26.7 44.2 30.6

Portfolio composition
100 90 80

% of portfolio

70 60 50 40 30 20 10 0 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 200

Fund exposure history

200 150 100 50 0



150Financials 100 50 0

-50 -100
Long Short Average NEE

-50 -100 -150


SEP MAR SEP MAR SEP MAR SEP MAR SEP MAR SEP MAR SEP MAR 06 07 07 08 08 09 09 10 10 11 11 12 12 13

Absolute Return Fund Quarterly Investment Report September 2013 WaveStone Capital Pty Ltd 3

has formally rejected the policy change, and post-election both the business and the share price are gradually recovering. Against the backdrop of a strongly rising market, there were very few opportunities in the short space. The default short SPI position detracted from overall performance. We remain doubtful over the mining services space as we believe the full effect of passing the mining capital expenditure peak and margin pressure from mine owners has yet to run its course. The Fund performed reasonably well through the reporting season despite the hiccup with McMillan Shakespeare. The Fund rose a solid +2.87% in the month of September (Index +2.16%). One feature of the past three years has been currency volatility. We constantly monitor the potential impact of currency fluctuation on our investments, and seek to invest in high quality, sustainable franchises, who business case is not based upon currency forecasts. The Portfolio continued a tilt towards an improving domestic economy built around accommodative Reserve Bank policy settings. On top of elevating the exposure to Seek, we re-established a position cyclically sensitive Harvey Norman shares after a 5 year absence. Seek has a burgeoning portfolio of international investments in profitable online employment sites (China, Brazil, ASEAN), a well-placed Education business (to both online and international students) as well the market dominant online employment site in Australia. Harvey Norman represents the market leading exposure to an uptick in housing related expenditure (furniture white goods, air conditioning, flooring, kitchens), with valuation support from a property portfolio and a massive bank of untapped franking credits. Resource exposure was increased on a more benign outlook rather than the uncertainty that has prevailed over recent years.

China Investment Trip September 2013

Ian Harding attended an extensive week long CLSA Investor Conference in Hong Kong. While the primary focus was on Asian economies and companies, the implications for a relatively few Australian stocks remain profound. Essentially we believe that with such a massive population base, the following identified trends in the Chinese economy and its society represents substantial structural opportunities. Rising middle class As incomes grow, so do the dreams of everyday Chinese. Central to their goals is the upgrading of their quality of life. The 300 million middle class are clearly moving up the bourgeois hierarchy of needs.

Among their strongest preferences is the desire for their childrens education, a clean environment (after frequent hazardous smog occurrences), safe food (scandalous practices, bird/swine flu), health (industrialisation causing high cancer rates), overseas travel and gambling:  30% want to upgrade to a bigger apartment;  most want to spend significantly more on their nextcar;  travel, dining, shopping and cinema are preferred pursuits. Macau gaming has been the best performing Chinese consumer goods or services sector for the past few years. This is despite just 1% of the Chinese population having visited Macau - there is ongoing penetration into greater China with extensive infrastructure expansions (hi-speed rail, ferry terminal, connecting Hong Kong bridge) well underway.

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business district, residential complex and additional hotel rooms. Macau is set to become the luxury capital of Asia a true Shangri-La. E-commerce The rapid adoption of mobile enabler technology within an underdeveloped greater China has seen an explosion of e-commerce. Online growth there is leading the world booming at 100%p.a. growth rates, despite still poor logistic efficiency. Chinas youth meanwhile are obsessed with their online social image and constantly update their profile. People under 30 appear to have an additional sense:  53% of 16-22 year olds would rather lose their sense ofsmell than their mobile smartphone!  65% of Asian mothers would rather choose a mobile phone over an engagement ring or passport if they could only carry one thing  55% of Asian people judge others based on their mobile device or network. Matching mobile technology empowerment with an undeveloped retail bricks and mortar network has seen the rapid take up of online services. Weak efficiencies have not been a hindrance to e-commerce growth to date. However, there is:  a lack of pallet standardisation with no pooling practices  limited A grade warehouses or distribution centre exist  a multitude of toll roads presenting high transport costs  goods are often handled up to 16 times before they reach the end consumer.

The greatest surprise at the Macau casinos has been the insatiable demand driving up the minimum table bet size to $120 being 5x the global average. Due to restricted supply and popularity, Cotai Island casinos earn 4x-5x theEBITDA of comparable Las Vegas properties.

Major casino expansion projects kick-in from 2015 together with 3rd party investment on the neighbouring Hengqin Island including a university, theme parks,

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The upcoming potential $100bn IPO of will be transformational to expectations. This company is the Amazon of China where funds raised will be reinvested toaccelerate growth options.

Chinas economic miracle has to an extent been forged on cheap manufacturing labour sourced from peasant rural inland villages. Already, 70% of parents have left their villages to earn higher incomes by performing lowskilled manufacturing or construction work in urban areas. Parentless children are being reared by grandparents with migrant workers sending their wages back home. In addition, falling birth rates (from 5 to 1.6 births per female) since the advent of the stringent 1 child policy in the 1970s will see the labour force peak then rapidly decline by 2030. Therefore, the time to change policy is now so as to address a rapidly increasing dependency ratio (workforce to elderly) in 17 years time.

Structural reform Migrant worker registrations look set for liberalisation in order to maintain the generally cheap labour dividend accruing to Chinese businesses. Under the archaic 1950s hukou classification system, people only have rights (eg social security, healthcare, education) in their original birthplace, not where they work. You have either a rural or urban hukou with no transfers generally available.

There are currently 16mpa births in China. A relaxation in family policy would see a near term baby boom as fertile couples across a 20 year age cohort seek to take advantage. Emigration Internal migration throughout Asia projects 40m people will move into cities each year. Infrastructure needs will be ongoing and massive estimated at $300bn/year thereby maintaining demand for raw materials. Cheap coal energy sources will still dominate though renewables are in the spotlight (during Bejings January 2013 airpocalyse, 95% of air filtering scrubbers at coal fired power stations were turned off). Last year, 95m Chinese tourists travelled to other countries, up 15% on the prior year. This new travel freedom also shows up in their generous spending habits through duty free stores where they can often represent 25% of total store sales on just 1% of passenger volumes. To further boost tourism, the State is moving to enforce the taking of paid leave (35% do not take all of their vacation days). A recent survey indicates that 15% of the Chinese population want to emigrate. More relevant is that among the upper income cohort that has the financial means to easily do so, an astounding 45% wish to leave. This cohort equates to around 70 million people clearly, the Chinese are coming! Australia meanwhile ranks very highly among foreign destinations for Chinese both from an emigration or travel perspective.

In Beijng, 37% of the 20m population are migrant workers toiling in factories with poor living conditions experiencing first hand an ever widening wealth gap. As China wants to switch to a more consumption-based economy, further reforms will become necessary. In order to preserve social harmony, extending Government benefits to migrant workers would cost an estimated minimum of $16,000 per person (a massive $100bn expenditure/stimulus for a single city like Beijing). Theclass system that exists within cities would be testedwere the inequalities abruptly removed and competition for scarce opportunities increased.

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To Emigrate: 1. Canada 2. Australia 3. USA 4. Singapore 5. EU ex UK 6. Hong Kong 7. United Kingdom 8. Japan 9. Taiwan 10. New Zealand

Cities to Visit: Hong Kong Taiwan Seoul Sydney Tokyo Paris New York Los Angeles Macau Melbourne

Brambles Group has the opportunity to be at the forefront of development of a pallet pooling system inChina.

USA Investment Trip September 2013

Catherine Allfrey spent a week in the USA this September, visiting companies which we have shareholdings in like FOX, Ainsworth and Telstra as well competitors of Crown in Las Vegas. She had an amazing day in Silicon Valley absorbing the where to from here trends with companies like Apple, Facebook, EBay and Netflix. Finally she attended the Merrill Lynch Media and Telco conference in Hollywood hearing all about exploding revenue growth and ever expanding buybacks. Here are a few of her pertinent observations: 1.  Content remains king producers of quality scripted films and dramas are benefiting as international audiences explode and home entertainment is driven by broadband and new competition for cable companies from Netflix and Amazon. 2.  Sport costs will keep escalating unless Washington does something 96% of sport is viewed live! This is appealing to advertisers so expect ridiculous rights costs as new players like Apple contemplate how to break into the content model. 3.  Its all about mobile moving social media from talk to video is being led by mobile, and for the vast majority of the worlds population mobile is the main access to the internet. 4.  Movies are all about the evergreen franchise Star Wars 7 is coming in 2015! The sales of franchise toys, books, games, resort themes all add to the value. 5.  Most of the earnings upside in 21st Century FOX will come from cable. The engine room of FOX are the content creators, FOX TV and Film. FOX TV presented showcasing its enormous upside from shows like Modern Family moving into syndication at $5m per episode as well as its library such as the Simpsons which the CEO called the greatest TV asset of this generation he meant returns not the quality of the show!

The number 1 domestic Chinese destination is the beach town of Sanya on Hainan Island which further supports the Australian emigration preference. Chinese demand for foreign apartments should remain strong or even accelerate. Purchases by families for their Chinese students here already represent around 15% of market activity. As Australian universities also rank well internationally, the combined lifestyle and educational opportunity meets many of middle class Chinese desires. Australasian companies set to benefit Crown Resorts is uniquely positioned as a prime beneficiary of Asian growth. 33% owned Crown Melco operates one of the highest margin casinos on Macau Cotai with their new Studio City facility due to open within 18 months. Seek today earns nearly half its profits from overseas versus its traditional domestic search business. Ranked a close No. 2 in Chinese job search plus its education business makes Seek a diversified online/Asian/cyclical play. Sydney Airport operates the gateway access to Australia (similarly for Auckland Airport in New Zealand). China is progressively spending a jaw dropping $780bn on building and buying a 5,600 aircraft fleet. Navitas is seeing the return to overseas student growth into Australia now that visa issues and red tape are resolved. The emergence of online courses could further accelerate international demand for their services. Fonterra is the worlds largest exporter of milk protein. AChinese baby boom would immediately boost the already double digit demand for infant formula. Goodman Group has established a major $1bn industrial property joint venture in China. Prime industrial rents in China have been growing at a strong 13%pa over the past 3 years.

Absolute Return Fund Quarterly Investment Report September 2013 WaveStone Capital Pty Ltd 7

Whilst on the gaming side, social media games like Candy Crush and Farmville, and the increasing access to poker online is taking the edge off revenue growth. Casinos are providing more entertainment and hence for gaming machines to keep growing, entertaining games like Sex in the City, Batman are the way forward. The Casinos in the US with Asian operations (like Crown) are benefiting from the rise of the Asian middle class and their desire to gamble in resort casinos. The US sourced revenue remains low growth like the recovering economy. The word from Silicon Valley is that the cloud or iCloud as Apple like to call it, is the new big thing. There is talk of moving education, especially school curriculum, online using of course iPads so expect more apps on the measurement of a childs progress than ever before. Facebooks campus was fascinating with signs like is connectivity a human right? and No company can be all things to all people yes unfortunately Facebook is blocked in many totalitarian societies you knew we were in for a different meeting! As a parent all my concerns were realised as everything you write and like onFacebook will now be marketed to advertisers to target you going forward. Today 5% of newsfeed is advertising and this will only grow. For those interested we recommend The New Digital Age co-authored by Googles Executive Chairman, Dr Eric Schmdit covering the outlook for all of these topics!

Outlook and strategy

Early anecdotal and partial sales data supports a domestic economic uplift since the Federal election on 7September. Consumer and business confidence have rallied which should eventually flow through to further improved activity. Already, house prices have been on the move so far this calendar year. We note that Australia has one of the highest economic multipliers to house price growth in the developed world. Meanwhile, most economists are still uncertain pushing the rising unemployment/cut interest rates strategy. Have stockmarkets then already anticipated the rising tide and pushed cyclical share prices beyond current fundamentals? We dont think so. Instead, further normalisation developments may occur as earnings momentum takes hold over secure dividend yields. Our strong China consumption theme continues to play out in ASX listed stocks exposed to tourism, education and food. Our recent business trip to the USA confirmed a trending up economy where content is still king! Persistent US political wrangling over budget cuts and the debt ceiling limit elevates the risk profile in global markets. Just as central banks have altered perceptions with artificially suppressed interest rate settings, so can politicians impact with extreme policies or even just stalemate scenarios. Overall market valuations are at average historical levels with the only missing ingredient being earnings growth.

WaveStone Strategy Summary

LONG: US Media, Gaming, Energy, Healthcare HIGH:  Foreign-based earnings, Market sensitive exposures RISING: Domestic cyclicals HOLD: Modest diversified mining exposure YIELD:  Focus on yield + growth, via Infrastructure (Airports and Toll Roads)

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Absolute Return Fund Quarterly Investment Report September 2013 WaveStone Capital Pty Ltd 9

WaveStone Capital Pty Ltd Level 15, 255 Pitt Street, Sydney NSW 2000 Phone +61 2 9993 9162 ABN 80 120 179 419 AFSL 331644 Thank you for your continued support. From the WaveStone Capital investment team: Ian Harding, Graeme Burke, Catherine Allfrey and Vik Pitrans

This report has been prepared by WaveStone Capital Pty Ltd (WaveStone) for the exclusive use of WaveStone Capital Absolute Return Fund investors. WaveStone does not warrant or represent that the information in this report is free from errors or omissions or is suitable for your intended use. WaveStone accepts no responsibility for any direct or indirect loss, damage, cost and expense as a result of any person acting on this report.