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Australian Share Fund Composite Research Book March 2012

PM CAPITAL Limited ABN 69 083 644 731 AFSL 230222 Level 24, 400 George Street, Sydney NSW 2000 P: 02 8243 0888 F: 8243 0880 E: pmcapital@pmcapital.com.au www.pmcapital.com.au

ABN 69 083 644 731 AFSL No 230222


This information has been provided by PM CAPITAL Limited (ABN 69 083 644 731) (AFSL 230222). This report is intended solely for the information of the person to whom it was provided by PM CAPITAL Limited and is ONLY intended for wholesale and institutional investors and under no circumstance should be supplied to retail clients. Past performance is not necessarily a guide for future performance. Please note that all return figures reported are after all fees and before taxes. While the information contained in this presentation has been prepared with all reasonable care, PM CAPITAL Limited accepts no responsibility or liability for any errors or omissions or misstatements however caused. Except insofar as liability under any statute cannot be excluded, PM CAPITAL Limited and its directors, employees and consultants do not accept any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this presentation or for any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this presentation or any other person.

Table of Contents
Gross performance summary to 31 March 2012 ............................................................... 4 Portfolio Manager update - Australian Share Composite March 2012 .......................... 5 Due diligence...................................................................................................................................... 10 Contact us ........................................................................................................................................... 17

PMCAPITAL Australian Share Fund Growth of $10,000 vs ASX 200 Accumulative

Gross performance summary to 31 March 2012

Annualised Returns 1 Year 2 Year 3 Year 5 Year 10 Year Since Inception Australian Share Fund* -4.4% 1.3% 14.8% -1.1% 8.7% 10.2% ASX 200 -6.1% -1.4% 11.3% -2.0% 6.9% 7.7% Excess Returns 1.7% 2.7% 3.5% 0.9% 1.8% 2.5%

Return Summary 2012 Financial year 2011 Financial year 2010 Financial year **2009 Financial year 2008 Financial year 2007 Financial year 2006 Financial year 2005 Financial year 2004 Financial year 2003 Financial year 2002 Financial year 2001 Financial year 2000 Financial year

Australian Share Fund * -1.7% 17.3% 16.4% -6.1% -27.9% 25.9% 29.2% 17.8% 43.9% -3.0% -3.1% 14.5% 23.5%

ASX 200 -2.1% 11.7% 13.1% -20.1% -13.4% 28.7% 23.9% 26.4% 21.6% -1.7% -4.7% 9.1% 17.3%

Excess Returns 0.4% 5.6% 3.3% 14.0% -14.5% -2.8% 5.3% -8.6% 22.3% -1.3% 1.6% 5.4% 6.2%

Since Inception Total Return 232.9% 151.1% 81.8% (30.11.99) * Returns for the PM Capital Australian Share Composite listed above are gross of all fees and pre tax. ** In March 2009 the PM CAPITAL Australian Share Portfolio Manager was replaced, initially by Paul Moore (CIO) and 3 months after by Paul Frost (current Australian share portfolio manager). Also during 2009 PM CAPITAL added to its investment team with three senior investment personnel, John Whelan, Tim McGowen and Dane Roberts. In 2009 PM CAPITAL had 75 years of experience it now has over 140 years of investment experience in its team.

Portfolio Manager update - Australian Share Composite March 2012

Despite the underperformance of resource stocks, the ASX200 was dragged higher through the quarter posting gains of 8.4% whilst the PM CAPITAL Australian Share Portfolio returned 11.3%. Part of the performance differential is explained by PM CAPITALs cautious outlook on commodities. Interestingly, in March, China's National People's Congress guided to a GDP growth target of 7.5% in 2012 - the first time since 2004 that this annual target has been set below 8%. Strong performance of core holdings such as Echo, Austar and QBE Insurance made strong contributions. Global equity markets experienced a decent rebound over the March quarter, with the MSCI index posting its best first quarter performance since 1998. Growing confidence in a sustained US economic recovery has been a key driver with unemployment and leading business indicators continuing to trend positively. Further aiding sentiment, the European Central Bank (ECB) completed its second colossal injection of liquidity into the European banking sector through the Long Term Refinancing Organisation (LTRO) program which will at least buy some time for governments and central banks to implement a longer term solution.

Fund activity
Activity in the Fund stepped up during the quarter, via corporate activity and value realisation with most of the capital release being recycled into existing holdings. We exited the Funds holding in News Corporation as the stock reached our assessed valuation. We reduced the Funds holding in CSL after a strong share price rally following its interim result. The major sale for the Fund was Austar. During the quarter, we used price weakness to add to the Funds holdings in Tabcorp, Sky City Entertainment, Brambles, Westpac, AMP and Insurance Australia Group (pre-result). We have also executed options strategies around core holdings in Brambles, Suncorp, QBE and CSL. These options strategies have generated incremental premium income equivalent to, or exceeding, interim dividends declared by the respective companies in the recent reporting season. Austar late in the quarter, we exited the Funds holding at a price slightly below Foxtels merger offer of $1.52. We sold the holding following release of the ACCCs announcement of commercial undertakings provided by Foxtel to enable the merger with Austar to proceed. Despite this good final outcome, it is fair to say that this transaction has been a long, drawn out process with an extended period of negotiation between the ACCC and the merger parties. Interestingly, many market analysts viewed the merger as unlikely to proceed based on the ACCCs definition of the TV market and some isolated competition concerns raised by it on the monopoly-like attributes of the merged pay TV entity. Since release of the ACCCs Statement of Issues in July 2011, we have held a firm view that the TV market, as defined by the competition regulator, was too narrow and not truly representative of the commercial environment in which Foxtel and Austar operate. In the ensuing share price weakness following release of this Statement of Issues, we increased the Funds holding in Austar (below $1.10). This was based on our strong conviction that a rational outcome would eventually be forthcoming, and that the merger would be approved. In addition, a recent legal precedent in the Metcash/Franklins case gave us some confidence that the ACCC would more likely go down the negotiation path rather than endure a protracted, expensive court battle with Foxtel. The end result is a pleasing one for Austar shareholders. Despite the increased activity noted above, there was little change to the Funds overall sector positioning. We continue to maintain strong weightings in select Major Banks and more defensive, less economicallysensitive sectors such as Gaming, General Insurance and Healthcare. We remain cautious on the Industrials space, particularly cyclical companies, following sanguine company outlook statements during the December reporting season. In our view, domestic market valuations remain compelling relative to bond yields and cash. Many of the Funds holdings continue to deliver ungeared pre-tax earnings yields in the mid-high teens. At current prices, many holdings are also providing sustainable, above average dividend yields, including major banks, general insurers, Tabcorp and AMP. These dividends are often double-digit when grossed up for franking credits.

The Australian Share Fund composition as at 31 March 2012 was as follows:

Sector Banks Gaming Insurance Resources Healthcare Media Listed Property Trusts Consumer Discretionary Wealth Management Other Net Exposure Cash Total Exposure 29.1% 13.1% 12.8% 8.4% 6.7% 5.6% 3.7% 3.2% 3.2% 7.5% 93.3% 6.7% 100%

Portfolio composition for this Fund is very different to the ASX200 Index. Most Australian fund managers tend to deviate only marginally from the ASX benchmark index when constructing investment portfolios. As a stock picker, PM Capital is benchmark agnostic. We are not compelled to invest in any particular sector, or company, simply because of its representation in an index. We prefer to focus on building concentrated investment portfolios (20-30 holdings) in companies that we view as fundamentally undervalued and where we believe we can deliver above average returns for clients over time in a tax effective manner. For example, we currently have no Fund exposure to several sectors - Telco, REITs, utilities, energy, mining services and consumer staples. The Fund also has holdings in companies that are not represented in the benchmark index, or are dual-listed, such as Sky City Entertainment and Rio Tinto PLC. Lastly, our mandate gives us flexibility to hold higher levels of cash in the absence of compelling value in equities. Financials we have a significant sector position comprising core holdings in select banks, life insurance, general insurance, and other stocks leveraged to capital markets activity. Many of these companies have strong leverage to rising investment yields, a softening AUD and rising US bond yields, including Macquarie Group, QBE Insurance, ANZ, NAB, AMP, Suncorp and IAG. Major banks share prices performed solidly over the quarter as the global rotation out of resources into the financial sector finally found its way to Australia. We expect the major banks to deliver mid-single digit earnings growth in 2012 - a reasonable outcome given a sustained two-speed domestic economy. The capital position of the major banks continues to steadily improve with each reporting period, and the sector is well advanced to meet regulatory capital/liquidity thresholds demanded by APRA under the Basel III regime. The current industry dynamic encompassing higher capital standards, more disciplined risk pricing, more sustainable rates of lending growth, corporate & household deleveraging and the exit of foreign bank competition leaves the Australian major banks and larger financial services providers well positioned. Macquarie Groups share price had a strong rally in the quarter after hitting cyclical lows in the December quarter. Activity in its capital markets divisions remains well below mid-cycle levels, a function of weak retail investor confidence and ongoing caution by corporate boards. Nevertheless, activity across its global operations is showing signs of improvement and revenue growth is expected to rebound as global investor risk appetite reverts to more normal levels. Despite this rally, Macquaries share price remains well below reported book value and our assessed valuation. The company has recently flagged a 10% buyback, subject to regulatory approval. Macquarie remains a compelling investment and a core holding. Insurers QBEs share price experienced a significant rebound over the quarter after the market received greater clarity on its 2011 full year result and the company completed an equity raising (at $11 per share) to

replace a convertible hybrid security. The Fund participated in this raising. Investor sentiment also changed more favourably following a rebound in US bond yields and release of improved US economic data. Despite the recent share price rally, QBE is trading well below our assessed valuation. We expect the companys share price to continue to re-rate as the recent catastrophe event experience reverts to more normal levels and global investment yields continue to normalise over time. Recent AGM commentary suggests that this process is underway. Industrials the Fund has core weightings in more economically-resilient Industrial sectors such as Gaming (Sky City Entertainment, Echo, Tabcorp) Healthcare (CSL, Sonic) and Logistics (Brambles, Qube Logistics). We believe many industrial companies will still struggle to meet market expectations for earnings growth in 2012. In our view, latest (downgraded) market forecasts for earnings growth in 2013 also remain too optimistic, a view based on current activity levels in domestic/offshore markets and feedback garnered from our contact with many companies across industry. Our cautious stance is based around three key issues - an absence of meaningful top line revenue growth, higher costs of debt funding in tight credit markets, and limited scope for management to pursue further major cost cutting programs without risking long term damage to company franchises. Nonetheless, we have identified a small number of holdings and prospects in which we would be happy to invest at our target price. Resources we remain cautious on the resources sector with Chinas rate of growth slowing, albeit still robust. The rate of China growth remains a key risk to current supply/demand dynamics, commodity prices and resource company earnings growth. As such we hold no second tier resources companies. We have maintained the Funds positions in the PLC stock of Rio Tinto and BHP Billiton over the quarter. The valuation discount of PLC stock (relative to ASX-listed stock) remains compelling and increasingly attractive relative to assessed company valuation. More recently, Rio Tinto and BHP Billiton have been facing increasing pressure to return surplus capital to shareholders rather than pursue aggressive expansion via large acquisitions or new greenfield mining projects. In an environment where the rate of growth in China is less certain, we support a balanced capital management program by these companies in the near term that focuses on existing operations (brownfield expansion) supplemented by the return of surplus capital to shareholders. We expect future buyback activity to remain focused on the London-listed PLC stock, and for the spread to narrow. The Fund currently has minimal exposure to the Retail sector given well publicised trading headwinds facing the sector (cautious consumers, high AUD, online competition, non-discretionary cost inflation). Our view, as conveyed in recent quarterly reports, remains unchanged near term. Rising USD/falling AUD in recent quarterly reports, we stated our view that the AUD was overvalued relative to its long term average, with global interest rate differentials and sustainability of growth in China expected to dictate the pace of an AUD unwind. During the quarter, the AUD came under selling pressure following outlook comments forecasting a lower rate of growth in China in 2012. US bond yields also rallied on encouraging US economic data and a more positive outlook for a sustained US recovery. We are seeing some signs of investor rotation into companies with leverage to foreign currency-denominated income & offshore earnings. The Fund is already well positioned for this dynamic to play out with core holdings in CSL, Sonic Healthcare, Brambles, Macquarie Group, QBE and ANZ companies with meaningful offshore operations/earnings that are steadily growing.

PM CAPITAL Australian Share Portfolio Manager Paul Frost

Stock story Echo Entertainment Group

Echo Entertainment Group (Echo) was conceived in July 2011 from the demerger of Tabcorp into two listed entities: 1) wagering & Victorian gaming - Tabcorp, and 2) casino operations - Echo. Echo comprises four casino assets - The Star in Sydney, Treasury Brisbane, Jupiters Gold Coast and Townsville. Each casino is, in effect, a regional monopoly operating under a long term license regulated by casino authorities under respective State Government law. Sydney casino is a regulated monopoly in New South Wales with a license to operate exclusively in NSW until 2019. Until recently, the Sydney casino had languished due to an extended period of underinvestment. As a result, operating performance significantly lagged domestic peers; most notably, Crown Melbourne. Following its demerger from Tabcorp and appointment of an experienced casino management team, Echo has undertaken a major upgrade of its core Sydney asset & since rebadged The Star. This $870 million investment, combined with additional gaming license concessions approved by NSW Government, has transformed the property from a tired, RSL-style gaming hall to a more competitive, integrated gaming and entertainment destination. Since September 2011, Echo management has progressively re-opened new and upgraded facilities at The Star. The PM Capital investment team has made several site tours to The Star during the re-construction phase, as well as attended opening functions to assess the new facilities and patrons response. Overall, we have been impressed with the project execution, improvements to the main gaming floor layout and quality of fit-out in new/upgraded facilities. To date, the level of public interest and patronage across the precinct has been encouraging, albeit still early days. On completion of this major project, The Star will have integrated gaming and entertainment facilities that should enable it to more effectively compete on a level playing field with domestic peers such as Crown Melbourne. The Star should have greater appeal to local gaming patrons (particularly, local VIP market), domestic/international tourists as a destination for gaming/non-gaming facilities, and a more appealing offer to compete with other Asian casino operators for international VIP commission play; a segment of the global market that continues to grow rapidly. Echo is targeting an after-tax IRR (return on capital) in excess of 14% on its project spend. If achieved, The Star should deliver significant earnings growth for Echo over the next few years. A key success factor in generating an acceptable return on this investment will be the ability to drive: 1) increased patronage, 2) improved spends per patron, and 3) increased utilisation of the expanded gaming infrastructure. Successful execution of this strategy should enable Echo management to deliver a positive outcome on its first major investment undertaking and improve returns to shareholders over time. In the year to date, financial outcomes from capital investment at The Star have been difficult to measure given the progressive ramp up of new/upgraded facilities in the September and December quarters. Pleasingly, December quarter operating performance improved significantly - a function of reduced construction disruption, rollout of new gaming product and initial benefits from expanded gaming facilities. Revenue growth of 27% in the quarter was impressive. Echo management has also announced a proposed investment of $625m to expand and upgrade its Queensland casinos. This investment is underpinned by a package of additional gaming license concessions, the bulk of which have already been approved by the Queensland Government. Gold Coast and Treasury Brisbane properties are expected to install additional EGMs by the fourth quarter of 2012 calendar year (front loaded concessions relative to the timing of capital spend). In late February 2012, Crown Limited announced it had taken a 10% interest in Echo and has made an application to NSW and Queensland gaming authorities to increase its stake beyond 10%. A decision by the relevant gaming authorities in each State is expected to take a few months. We view Crowns move on the Echo register as a prelude to corporate activity. The timing of Crowns move is intriguing. Most of Echos major capital spend on The Star is now largely behind it, free cash flow should grow strongly hereafter and Echo management has flagged a much improved second half result in 2012 - the first half year without major disruption and a full period contribution from its expanded operations. The Echo Boards rejection of Crowns request for a board seat (should regulatory approval be given for Crown to increase its stake beyond 10%) has seen battlelines drawn between Crowns chairman, James Packer and Echos chairman, John Story all of which could lead to a protracted takeover battle. However, Crown reasons for acquiring Echo are compelling. The operational synergies (revenue and cost) from a merger of the two entities are numerous and material. The medium term risk to Crowns earnings growth profile from a rejuvenated Echo operation is also very real. Key risks include: 1) Echo recapturing market share lost to Crown in past years in the local VIP /

international VIP space, 2) a more competitive tax regime under Echo will now operate, and 3) increased interest in Echos assets from local/international tourism markets. We view the recent media publicity on Crowns interest in constructing a new high rise boutique hotel (with international VIP facilities) in Barangaroo Central as a smokescreen for Crowns long term objective to own Echo outright. Crowns domestic casino operations have a lot to lose from a rejuvenated Echo operation in NSW and Queensland. Casino gaming expenditure (i.e. player loss) in Australia is ~$3.5bn, with growth trending at mid- to highsingle digits. Of this expenditure, 85% is attributable to six casinos operated by Crown and Echo - Crown Melbourne, The Star, Crown Burswood, Jupiters Gold Coast, Treasury Brisbane and Townsville. Almost 70% of this expenditure is spent in the two largest casinos, Crown Melbourne and The Star. Burswood casino in Perth is the only significant operation outside of NSW, Victoria and Queensland. An acquisition of Echo would give Crown an impressive network of upgraded regional monopoly assets covering all major Australian cities under long duration licenses. Should a full takeover be forthcoming from Crown, we expect a bid well in excess of $5.00 would be required to: 1) provide an acceptable takeover premium to, and ensure adequate sharing of synergy benefits with, Echo shareholders, and 2) receive the support of Echos board of directors. We increased the Funds holding in Echo during the December quarter (below $3.60), based on more positive observations made during our recent site visits. We have maintained the Funds position following Crowns announcement of its increased stake as we await regulatory approval on whether Crown can lift its shareholding, and pending potential corporate activity. Should a takeover bid from Crown not be forthcoming in the short term, we still expect the Echo share price to continue to re-rate in line with earnings growth delivered from The Star project and, over time, from the proposed Queensland casino upgrades. Either way, we see meaningful valuation uplift in Echo over the next few years as the companys major capital investment programs deliver improving returns to shareholders and our investment thesis plays out.

Due Diligence


Investment objectives
The objective of the Australian Share Fund is to provide returns in excess of the benchmark over a two to three year period by investing in a concentrated portfolio of undervalued Australian equities. The benchmark of the Fund is the S&P/ASX 200 Accumulation Index however the goal of the Fund is not to replicate the Index and it is likely that the Fund will have varied outcomes to the benchmark. The Fund is managed from an Australian investors perspective with tax being an important consideration in the daily management of the Fund.

Investment strategy
The investment process is built around the simple principle that the best way to preserve and enhance your wealth over the longer term is to buy a good business at a good price. The portfolio is a focused portfolio with approximately 20-40 stock specific ideas purchased in the Australian equity market. Typically our time horizon for assessing stocks is at least two to three years and all portfolio positions are subject to intensive research and peer group review. The Australian Share Fund's risk and return philosophy differs from the standard relative fund manager. Risk is regarded as the potential loss of invested capital as opposed to deviation from a benchmark.

Investment team

Paul Moore CIO

Paul Frost Head of Australian Equities Financials

Ashley Pittard Commodities

Paul Gyenge Property/ Healthcare

Uday Cheruvu Financials / Credit

Thomas Rice Industrials/ Consumer

Dane Roberts Industrials

Clement Tseung Transport

John Whelan Credit/ Currency/ Property Trusts

Kevin Bertoli

Jarod Dawson Credit/Currency/ Infrastructure


Tim McGowen Options and Protection Strategist

The Australian Share Fund utilises the resources of 11 analysts with a combined experience of 130 years. The team operates on a globally integrated sector basis. PM CAPITAL believes that generally 80% of stocks are fairly valued over the short term and therefore the investment team spends its time looking at a narrow subset of anomalies that are viewed as mispriced over the long term. That being said, PM CAPITAL feels it is very well resourced to research in depth the opportunity subset for its focused portfolios.


Portfolio construction: 20 to 40 Australian equity positions

Focused portfolio Option overlay

Maximum 10% or 1.5 times index


Zero Weight Fair Value / Overvalued

>50% in S&P ASX 100 Index


Bottom up fundamental company analysis

Economic Factor

Individual Company Factors Cash

Industry Factors


Typically the Fund will hold between 20 and 40 Australian equity positions. This may include stocks that are dual listed on other stock exchanges. The Fund may also invest in hybrid / quasi-equity securities. The Fund will not purchase individual positions greater than 15% of the portfolio or 1.5 times the index weighting, whichever is the greatest. To control short-term volatility risk we generally initiate a 2-3% position in a stock with the objective of moving towards a 5% core position. For stocks that we have an extremely strong view on and which exhibit compelling valuation we can hold up to a 10% position or 1.5 times its weighting in the ASX 200. The Fund may employ exchange-traded option strategies to reduce market risk. Derivatives may be used for hedging purposes or to replicate underlying positions. If the fund cannot find attractive equity investments it will not be afraid to let the cash build up to 20% however it would be common for the cash weighting to be significantly less than this. In addition, the net effective exposure of the Fund can be reduced to 50% through the use of derivatives. From a risk control perspective we monitor our stock positions and industry concentrations on a daily basis. We also monitor the Funds overall market exposure and if deemed excessive we either sell stock or employ option strategies to reduce risk. In the long run, the best way to control risk is by owning a number of good businesses purchased at good prices i.e. true diversification.


At PM CAPITAL we believe the best way to preserve and enhance wealth is to buy a good business at a good price. What does this mean?

Good business
A good business is one where: It is simple to understand; Its cash-flows and capital requirements are transparent Managements interests are aligned with shareholders The business model is sustainable and there are barriers to entry

Good price
Our research focuses on how the company generates and uses its cash. The key focus is on the cashflow statement and how it matches with the income statement, with the objective being to understand the cash generation from the core business relative to its price. When looking at the price, we are interested in how much we would have to pay to privatise the business, meaning how much it would cost to buy the business in its entirety (i.e. the equity and the debt). This causes us to look at a business in the same way as a business owner would do, which is also why we tend to have an above average number of takeovers within our funds. If we are looking at price in the way that we say we are, we should see a number of our stocks bid for. This has indeed been the case over time (refer to Investment Philosophy and Style to see the corporate actions we have experienced in our Funds over time).

Industry example Commodities How PM CAPITALs valuation process is unique

We do not buy on macro prediction; in other words, we do not guess where the commodity prices will be in the future. We look for commodity companies that will perform irrespective of the macro environment. We base our long term valuations on trend pricing. We perceive the trend commodity price to be that where 15% of the industry is losing money. We look for the lowest cost producer / with long life assets. We look at the cost curve to get a feel for the sustainability of the business model. We ask - what are the cash costs of operating this business?

Why we bought commodities post 2000

Global growth expectations (and thus stock prices) were low Commodity prices were well below long term trend prices and our expectations of a weaker $US would accelerate their recovery Assuming long term trend commodity prices stock valuations were very cheap No new mines were being built, hence there was no new supply coming through Post the Asia Crisis we expected industry consolidation Australian producers were very cheap with the $A approaching 50 cents and experts expecting 40 cents. We built our commodity positions post 2000 with our exposure peaking at around 30%.

As a result of our commodity positioning the Fund experienced 8 corporate takeovers.

The following stocks have all been part of the Australian Share Fund at the time of the takeover announcement. Eastern Aluminium Comalco


Acacia Gold Woodside (takeover blocked by ACCC) MIM Cominco Western Mining Inco

Recent years
In mid- to late-2008, the Australian Share Fund held zero exposure to resources companies despite the sector having an approximate 30% weighting in the ASX200 index. Our view at the time was that record commodity prices were unsustainable in the face of the global economic downturn coupled with the levels of capital expenditure being undertaken by resource companies, implying a significant shift in both the demand and supply side of the equation. During the last six months of 2008, stock prices of commodities businesses collapsed with Rio Tinto falling from $120 to $25 and BHP Billiton fell from an all time high of $50 to $22. Global growth expectations had collapsed, investment markets were questioning the sustainability of the China story and global industrial production fell to levels never seen before. While the market was pricing in an end to the commodity cycle and discounting these businesses accordingly, we saw an opportunity to look through this short sighted panic selling and focus on the long term fundamentals of the businesses in a normalised operating environment. We spent significant time in late 2008 and early 2009 refreshing our background due diligence on the global commodity companies which led to us building our commodity exposure from 0% at the start of 2009 to 23% by mid year in the Australian Share Fund. This intensified research effort was focused on those companies that we viewed as higher quality, meaning businesses with long life reserves, low cost operations, diversified asset portfolios (by commodity and geography) and a track record of generating earnings through all stages of the economic cycle. The other interesting dynamic which occurred in the resources sector was that the dual-listed companies which trade on both the ASX and London stock exchanges were trading at significantly different valuations. Throughout history, BHP Billiton and Rio Tinto have, on average, traded at a small discount on the London exchange compared to the ASX-listed stock. On face value, this would appear justified based on the small valuation difference implied by the fact that Australian shareholders receive additional franking credits (which UK shareholders do not receive) and also partly reflecting the disproportionate weight of companies like BHP Billiton in the ASX 200 Index. In late 2008 and 2009, the valuation discount between the Londonlisted stocks and AAX-listed stock expanded to a range approaching 25-30%. This can be seen in the chart below, where the red line indicates the valuation gap for Rio Tinto over time.


Many Australian equity portfolios are restricted from investing in the London-listed stock. However, our flexible mandate allows us to take advantage of this pricing anomaly. As a result, in late October 2009 we made a wholesale shift for the Australian Share Fund and sold all of the ASX listed stock in both BHP Billiton and Rio Tinto and purchased the equivalent dollar amount in the London listed stock. We expect this valuation discrepancy to narrow over time, and this discount unwind is expected to add incrementally to the returns achieved by the underlying businesses. The chart below shows the price action of the ASX200 Resources Index since January 2000 and the weights of the Australian Share Fund at major inflexion points. The chart highlights the Australian Share Funds contrarian weighting to resource companies.

Why invest in our Australian Share Fund?

The Fund offers different risk / return characteristics to those offered by more traditional investment managers as a result of us paying little attention to the benchmark The Fund is focused on after-tax returns as opposed to relative pre-tax returns PM CAPITALs investment team is split on a global industry basis. The Australian equity view is supported by global equity knowledge The fund is not compelled to be fully invested or in every industry The Fund is a concentrated portfolio of investments The Fund may use derivatives to protect and enhance stock returns PM CAPITAL are traditional investors as opposed to traders Portfolio construction is an outcome of intensive research and peer group review. We look through short term risk issues and concentrate on the long term value of a company PM CAPITAL has a contrarian approach to investing, with stocks more likely to be purchased when they are out of favour, resulting in a superior number of corporate actions


From a portfolio construction perspective, what are your typical exposures and limits in the Australian Share Fund?
Long positions: Initial position: 2% 3% Core position: 5% Maximum position: 10% or 1.5 times index weight, whichever is the greater. Stocks outside the ASX 100 Leaders must not to exceed 50% of the total portfolio.

Do you have any restrictions regarding exposures to small companies and resource stocks?
We do not have any formal restrictions as to the extent of exposure to small companies or resource stocks. Rather, we have a wide investable universe in the sense that we do not exclude stocks based on size or industry. The exposure to small companies and resource stocks are monitored during the top-down review.

How does PM CAPITAL incorporate ESG issues into its investment process?
PM CAPITAL regards Responsible Investment as a commonsense consideration in terms of assessing existing and prospective investments. ESG factors must be considered as part of an overall assessment of a companys risk management framework to the extent that these may impact the value of the company over time. In our quest for a portfolio of good quality businesses, sustainability issues are inherently analysed. PM CAPITAL defines Responsible Investment as: an investment process that considers the governance, social and environmental consequences of investments, both positive and negative, within the context of rigorous financial analysis. PM CAPITAL has a policy of exclusion when we feel that a company or sector can not, as a result of its primary business activities, be considered to be a Responsible Investment. The exclusion of a stock or sector has a negligible effect on the size of the investable universe. PM CAPITAL is typically looking to hold 25-45 investment positions in its portfolios at any time. Some examples of sectors that are screened from our investable universe include tobacco manufacturers and weapons manufacturers. PM CAPITAL acknowledges that the UNPRI is a voluntary, aspirational initiative that provides a framework for integrating ESG considerations into investment decision-making. As such we have chosen to be a signatory to the UNPRI.

How do you manage cash in the Australian Share Fund?

The Fund can hold up to 20% in cash (which can be increased to 50% through use of derivatives) but generally the cash weighting is less than this. In terms of cash, unlike most other managers we do not have a policy of buying a new position once we exit a stock in order to maintain a fully invested position. On occasions when we have not identified an appropriate investment to replace a former position, cash has been allowed to accumulate until such time as we can identify a stock that meets our strict investment criteria.


Contact Us
PM CAPITAL Head Office Level 24, 400 George Street Sydney NSW 2000 Ph: (02) 8243 0888 Fax: (02) 8243 0880 Website: www.pmcapital.com.au


Institutional Sales

Chris Donohoe Direct: 02 8243 0806 Mobile: 0413 315 631 Email: cdonohoe@pmcapital.com.au

At PM CAPITAL we remind ourselves that the stock market is far more volatile than the underlying businesses that it represents. Thus the key to successful investing is good business judgement in combination with the ability to control your emotion.