"It is a socialist idea that making profits is a vice. I consider that the real vice is making losses." Winston Churchill

As an ‘All Opportunities’ fund, the underlying goal of the Manager is to assess the risk adjusted return of every potential opportunity identified by the Manager. The Manager’s intended approach includes selectively and modestly taking higher-risk positions, provided that the potential return exceeds the additional risk – preferably in terms of both value and time.

Whilst the Manager intends to combine the best principles of value investing, fundamental and technical analysis, it does not wish to be constrained by the constructs of any one approach. The key to the long-term success of the Company is seen as the capacity of the Manager to integrate the best principles of each discipline with the extensive and varied experiences of the Manager. This is achieved by encouraging flexibility and adaptability, but within the confines of an overall framework that controls risk.

The Manager classifies potential investment positions as:

• Investments or

• Market Opportunities

Investments

‘The game of professional investing, is intolerably boring and over exacting to anyone who is not entirely exempt from the gambling instinct; whilst he who has it must pay to this propensity the appropriate toll.’ Keynes

The Manager will consider an ‘investment’ to be a purchase in a company where the underlying (intrinsic) value:

(a) can be quantified, and

(b) is materially above the current market price.

The Manager considers that such investments are of a static, medium-long term nature.

Market opportunities

The Manager considers ‘market opportunities’ as purchases that:

(a) potentially may not meet all of the criteria for ‘investments’;

(b) may need to be assessed in a short period of time; and

(c) are only intended to be held by the Manager for a short duration.

’Market opportunities’ arise often, and are constantly evolving. It would not be possible, nor to the Company’s advantage to list all of the ‘market opportunities’ that may prove attractive to the Company, however the Manager will consider the following:

• IPO’s (see below)

• Oversold positions (see below)

• Mergers and acquisitions

• Issues of securities to professional investors or AFSL licence holders

• Dividend/yield enhancement

• Exchange trade options

• Additional investments

Two of these ‘market opportunities’ are worthy of particular attention, as set out below.

Initial Public Offerings (IPOs)

The Manager considers IPOs are statistically likely to list at a premium, often due to an inherent pricing discount and the increased profile that listing affords. By applying a list of the desirable stock characteristics, the Manager can seek to add a layer of filtering with a view to increasing the likelihood of profiting from IPOs. Furthermore, float-specific characteristics such as investor demand, vendor holdings and market sentiment provide additional insight into their likely performance.

For the above reasons, the Manager believes IPOs are often heavily oversubscribed, and it can be difficult to obtain access to quality new issues.

The Manager and the Company have each established a wide network of corporate contacts. This network has to date provided access to a substantial number of IPOs, and this access to deal flow is expected to continue in the foreseeable future.

Oversold positions

The Manager considers one of the most frequent opportunities that the market consistently affords is to capitalise on stocks that have reported an event or pending occurrence that causes investors to oversell a stock. The initial selling can be further exacerbated by ‘momentum selling’. More recently, investors have witnessed the rise of ‘stop loss selling’, which is perpetrated by automatic electronic stop losses that are set when a stock is purchased.

Oversold positions may provide a short term opportunity for the Manager.

Stock selection

The Manager considers that underlying (intrinsic) value drives the long term share price, but sentiment is the primary driver in the short-medium term. At the broadest level, the Manager considers price has two components: value + sentiment. Value and fundamental analysis is at the heart of the first part of this equation. Technical analysis is used to assess sentiment and offers considerable insight into timing decisions. Market experience and observation can assist in both areas.

Value and Fundamental Analysis vs Growth

To initially identify potential investments, various individual and thematic models are constantly developed, incorporating both top-down and bottom-up analysis.

The Manager considers recent themes that continue to have considerable merit include the:

(a) extraordinary growth in manufacturing experienced within China;

(b) needs and demands of our ageing population; and

(c) increasing levels of education, and initiatives towards privatisation.

There has been considerable discussion of the merits of funds that invest in value and others that seek growth. The Manager recognises that value and growth stocks outperform at different times in the business cycle. More specifically, the Manager believes value investments tend to outperform growth stocks in periods of slow growth or recession whilst growth stocks typically outperform value stocks in periods of reasonable or strong growth.

Cyclical vs Defensive

Similarly, a distinction is often made between cyclical companies and defensive stocks.

The Manager believes cyclical stocks’ earnings are tied intimately to the level of economic activity, and hence move strongly in periods of economic growth.

Defensive stocks include securities issued by banks, utilities, infrastructure companies and property trusts. The Manager considers profitability may be reasonably predictable and defensive companies often have reasonably high dividend pay-out ratios. Their security prices are often inversely linked to bond rates, so that if bond rates increase, the share price of defensive stocks will typically decrease because investors may switch into bonds if they find their yields to be more attractive than those of defensive stocks.

Approach

The Manager has a style-neutral approach because it aims to outperform the index and maximise returns to Shareholders throughout the business cycle.

Investment Analysis

Individual stock analysis is a complicated and inexact science.The following list – whilst not exhaustive – is indicative of the current criteria which may be considered by the Manager in the investment process. Investors should note that the Managers investment criteria may change over time.

The Manager considers there is indeed no ‘perfect investment’, and the art of investing necessitates that difficult decisions are made to buy ‘imperfect companies’. It is for precisely this reason that risk/money management of the overall Portfolio is of such importance. Additionally, technical analysis can assist our understanding of market sentiment towards a company.

Technical (timing) analysis

Ultimately, the Manager considers that the price of a stock at a point in time, is determined by the interaction of buyers and sellers. Any analysis that adds insight into the strength of buyers or the strength of sellers, will add insight into where the price may move. The Manager looks to technical analysis and other indicators of market sentiment to assist in determining entry and exit points. The following list – whilst not exhaustive – is indicative of the current criteria which may be considered by the Manager in determining entry and exit points. Investors should note that these criteria may change over time.