RARE Infrastructure Value Fund – Hedged · RARE Infrastructure Value Fund – Hedged INDEPENDENT...

RARE Infrastructure Value Fund – HedgedINDEPENDENT ASSESSMENT

This report has been prepared for financial advisers only

4¼

ScopeThe independent assessments are conducted by SQM Research Pty Ltd (SQM Research).

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Report Date25 June 2013

INTRODUCTION

* Following are descriptions for each of the star ratings, which have been developed as a guide for dealer group research teams and investment committees:

4.5 + stars – Outstanding. Highly suitable for inclusion on APLs.4 stars to 4.25 stars – Superior. Suitable for inclusion on most APLs.3.75 stars – Good. Consider for APL inclusion.3.5 stars – Average. Consider for APL inclusion, subject to advice restrictions.3.25 stars – Caution required. Not suitable for most APLs.3 stars – Strong caution required. Not suitable for most APLs.Below 3 stars – Avoid or redeem. Not suitable for APL inclusion. © SQM Research 2013

CONTENTS

Summary 2 Market Overview 6 Corporate Governance 9 Management & People 12 Fees & Redemption Policy 15 Investment Analysis 17 Asset Allocations 20 Process Analysis 23

RARE Infrastructure Value Fund – Hedged

SUMMARY 2

Global Infrastructure Trust Details

Fund Name RARE Infrastructure Value Fund – Hedged

ARSN Code 121 027 709

APIR Code TGP0008AU

Manager RARE Infrastructure

Address Level 13, 35 Clarence Street, Sydney NSW 2000

Responsible Entity (RE) Treasury Group Investment Services Limited

Custodian RBC Investor Services

Investment Details

Fund Inception 13 November 2006

Fund Size at 31 March 2013

$802.1 million (Fund) $194.3 million (unhedged version)

Fund Type Unlisted, infrastructure securities

Return Objective To provide investors with regular and stable income comprised of dividends plus capital growth from a portfolio of global infrastructure securities.

Benchmark An accumulation index comprised of the OECD G7 Inflation Index plus 5.5%

Number of stocks in portfolio at 31 March 2013

47

Gearing (Fund) The Fund is not geared.

Investment Specifications Summary

Minimum Application $20,000

Minimum Withdrawal $5,000

Redemption Policy Daily

Distributions Frequency Quarterly

Contribution Fee Nil

Management Expense Ratio 1.025%

Buy/Sell Spread 0.25%/0.20%

Currency Hedging RARE intends to substantially hedge all of the Fund’s currency exposure back to Australian dollars. RARE also offers an unhedged version of the Fund.

Tax Deferral Rate n/a

Loan Facility n/a

SQM Rating Superior. Suitable for inclusion on most APLs.


Investment Summary

The RARE Infrastructure Value Fund (the Fund) is an open-ended unlisted infrastructure securities fund that invests in listed infrastructure entities across the globe. The Fund will predominantly invest in securities listed on the stock exchanges in the Americas, Europe and the Asia Pacific. These include developed and developing nations.

As well as investing in listed securities and cash, the Fund can also invest in derivatives and depository receipts or other securities where the underlying assets are inaccessible or illiquid. In addition to this, up to 20% of the Fund can be invested in unlisted securities, should attractive opportunities arise. RARE may use options, futures and other derivatives to reduce risk or acquire exposure to underlying physical investments. However, no derivatives are currently utilised for these purposes by the Fund. Importantly, derivatives will not be used speculatively.

The Fund is managed with the objective of providing investors with regular and stable income comprised of dividends, distributions and interest received as well as capital growth. With a portfolio constructed on a benchmark unaware basis, the Fund invests in securities which offer positive absolute returns, rather than selecting securities in relation to a particular industry standard index.

The Fund aims to outperform an accumulation index comprised of the OECD G7 Inflation Index, plus 5.5%. The investment horizon for the Fund is three to five years. The Fund is not geared, although may borrow for the purposes of ensuring that it maintains adequate liquidity.

The Fund has received a 4¼-star rating.

This represents no change to the rating issued in June 2012. Over the last year, the Fund outperformed its peer average and benchmark index, through the Fund’s experienced investment team, combined with its robust investment process.

SQM Research’s Review

The depth of experience displayed by the Fund’s two senior Portfolio Managers has positively influenced the Fund’s rating. The investment team is well led by Senior Portfolio Managers Richard Elmslie and Nick Langley. Mr Elmslie and Mr Langley are highly skilled, demonstrating 45 years of combined global infrastructure experience. Mr Elmslie and Mr Langley are the principals of RARE and have held their positions since the inception of the Fund. As such, key persons’ risk is mitigated by Mr Elmslie and Mr Langley’s equity stake in RARE.

Mr Elmslie and Mr Langley are well supported by the Head of Research, six senior Analyst/Portfolio Managers, four Analysts

and two Dealers. The research team exhibit a range of experience and qualifications. The size and experience of the Fund’s management team positions it strongly amongst its peers. The overall team is comprised of 15 investment personnel, operating the largest team within the infrastructure securities peer group. On this basis, SQM Research views the team as being well structured and effectively resourced.

Since the last review, there have been no staff departures to the investment team. This is in contrast to 2011 and 2010, where a number of staff departures were observed. Over the last year, the Fund has also increased its personnel resources, with the addition of analyst Bradley Fraser in July 2012. Senior researcher Rod Chisholm also returned from his leave of absence, resuming as Head of Bespoke Strategies. The stability of the team over the last year, as well as the increase in analyst resources has been viewed upon favourably by SQM Research. The Fund’s ability to compensate and provide long term incentives will be the key to stability at the Fund, going forward. SQM Research has witnessed high staff turnover in the listed infrastructure space and anticipates this to continue in the future, given the developing nature of the sector. However, SQM Research has noted that senior members of the team own circa 9% of the business, providing incentives for senior members to remain at RARE.

RARE employs a centralised one-location approach with the whole investment team based in Sydney. Consequently, RARE does not have investment personnel located in foreign infrastructure markets and prefers to travel to cover those markets. SQM Research believes that this setup has advantages in relation to team interaction and the dissemination of information. However, it also presents limitations, especially in comparison to those managers that benefit from having access to a global network of resources and those managers who are able to cover the smaller capitalisation stocks across the globe.

The research team is organised into three regions: Asia and the Middle East, the Americas and Europe and Australia and is led by Head of Research Jonathan Mirrlees-Black. Mr Mirrlees-Black is responsible for ensuring consistency of research across the regions and sectors. Senior analysts have stock coverage responsibilities set regionally, and within those regions typically focus on a sector. Junior analysts support senior analysts and cross-regional research. Responsibilities are allocated in a manner that ensures continuity of process throughout the year.

The Fund employs a quantitative and qualitative bottom-up research process which is detailed and well presented. Since the Fund is not constructed to a benchmark, it has an absolute return focus underpinned by a rigorous bottom-up stock analysis process. A top-down overlay supplements the bottom up process, with the overall global research capability comprised of sector, country and regional findings that may affect the

SUMMARY 3


underlying bottom-up research process. The macroeconomic overlay is driven by the Investment Advisory Board (IAB), which was formed in 2009, to drive the macro-economic research agenda and is comprised of five members. Two members of the IAB are external and bring a wealth of experience in economics and strategy.

There are a number of formal and informal meetings held by the investment team to execute both its bottom-up and top-down processes. RARE advises that 80% of the research investment process is driven by the bottom-up analysis and the remainder 20% by the top-down macroeconomic overlay. While stock selection is based around a team process with extensive team debates, final decisions for portfolio construction lie with the Senior Portfolio Managers, Mr Elmslie and Mr Langley. Over the last year, the Fund has clearly demonstrated to SQM Research the balanced use of its bottom-up research combined with its macro-overlay. Prior to August 2012, the Fund had no exposure to Japan. Following rigorous bottom-up and top-down research, the Fund invested in Tokyo Gas and East Japan Railway. The decision was driven by compelling stock valuations as well as the IAB’s top-down view on medium term GDP figures in Japan. The Fund’s decision to invest into these stocks in the latter half of 2012 strongly contributed to the Fund’s performance in the first quarter of 2013, on the back of renewed policy action by the Bank of Japan.

Overall, the Fund has delivered strong risk-adjusted returns relative to its peers. On a rolling three-year returns basis, the Fund has consistently outperformed its peers. Moreover, on a risk-adjusted basis, as measured by the Sharpe Ratio, the Fund has outperformed its peers since September 2011 (when both the Fund and peer average recorded positive Sharpe Ratios).

Relative to the Fund’s benchmark, the OECD G7 Inflation Index plus 5.5%, performance has been more variable, with the Fund unable to provide consistent positive excess returns. While the Fund’s cumulative excess return was recorded at 2.0% at March 2013, the cumulative return reached a low of -36.2% in February 2009, at the height of the Global Financial Crisis. Investors should be aware that the benchmark is inflation linked, which naturally does not experience strong volatility compared to the daily pricing of listed infrastructure securities in the

portfolio. Therefore any comparison of the Fund’s performance relative to the benchmark should be considered over a longer time horizon.

SQM Research was also provided with performance data for the Fund’s RARE 200 Universe. Since inception the Fund has outperformed the RARE 200 by over 2.5% per annum. In addition to this, on an excess return basis, the Fund has maintained a positive bias since its inception resulting in an overall positive cumulative excess return over the Fund’s history. As at 31 March 2013, the Fund recorded a cumulative excess return to the RARE 200 of 21.9%.

Over the year to March 2013, the Fund has significantly reduced its exposure to Australia and Utilities. During 2012, the Fund increased its exposure to User Demand infrastructure assets, in particular RailRoads and Communications – a result of the Fund positioning itself to benefit from the team’s continued optimism in the United States. Moreover, relative to peers, the Fund has a small exposure to Europe (including the United Kingdom). While the Fund has increased its exposure to Infrastructure assets to capitalise on forecast GDP growth, the Fund’s underlying gearing and interest coverage ratio (ICR) indicate that the Fund has slightly de-risked its portfolio.

SQM Research has reviewed the Fund’s fee structure and has found it to be competitive relative to peers. Both the Fund’s buy/sell spread and indirect cost ratio (ICR) are below the peer average. Investors should note that the Fund levies a performance fee of 10.25% if the Fund outperforms the benchmark, with the performance fee subject to a high water mark and a cap of 0.3% per annum. While the overall fees (excluding performance related fees) are recorded below the peer average, this overall fee structure changes should the Fund significantly outperform the benchmark.

Overall, the Fund’s portfolio construction process appears to be structured and balanced. The investment ranking tools are detailed and robust, incorporating various stock specific and macroeconomic factors while adhering to the risk constraints around portfolio construction. All these factors, combined with the leadership of Senior Portfolio Managers, are expected to provide benefits to the Fund over the longer term.

Fund Performance to 31 March 20131 (%)

1-Month 3-Month 6-Month 1-Year 3-Year 5-Year Inception

Total Return 1.2 7.9 12.4 20.5 13.1 7.8 7.5

Benchmark2 0.4 1.2 3.2 7.3 7.5 7.1 7.3

Peer Average 2.3 9.1 13.8 20.0 12.4 6.6 5.7

1 Total return assuming dividend re-investment, three and five-year returns annualised. 2 An accumulation index comprised of the OECD G7 Inflation Index plus 5.5%

SUMMARY 4 SUMMARY 5


Growth of $10,000

$0$2,000$4,000$6,000$8,000

$10,000$12,000$14,000$16,000$18,000

Oct

06

May

07

Dec

07

Jul 0

8

Feb

09

Sep

09

Apr 1

0

Nov

10

Jun

11

Jan

12

Aug

12

Mar

13

Fund Benchmark

Comparative one-year returns

21%

5%14%

33%

-25%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

Mar 13Mar 12Mar 11Mar 10Mar 09

Fund Benchmark Peer Average

Comparative distribution yields

5%

10%

6%5%

7%

0%

2%

4%

6%

8%

10%

12%

Mar 13Mar 12Mar 11Mar 10Mar 09

Fund Peer Average

Strengths of the Fund• The Fund is well led by two Senior Portfolio Managers and is

supported by a highly skilled and resourced investment team.

• The Fund follows a structured investment process, underpinned by a detailed bottom-up research approach and complemented by a top-down overlay.

• Since inception, the Fund has delivered strong risk-adjusted returns relative to its peers.

• The Fund’s on-going fee structure is competitive when compared to peers.

Weaknesses of the Fund• The Fund is unable to provide consistent positive excess

returns versus its benchmark.

Other considerations• The Fund employs a centralised one-location approach, with

the whole investment team based in Sydney.

• While stock selection is based around a team approach, final decisions lie with the Senior Portfolio Managers.

• The Fund’s benchmark generally exhibits little volatility compared to listed infrastructure indices.

• The Fund charges a performance fee.

• While the Fund’s on-going fee structure is competitive relative to peers, the performance fee may erode some of this benefit if the Fund significantly outperforms the benchmark.

• The Fund is benchmark-unaware.

Changes since the last review• There have been no departures to the investment team since

the last review. Moreover, the Fund recruited an additional analyst who joined the team in July 2012.

• Rod Chisholm returned from his leave of absence.

• The Fund has significantly reduced its exposure to Australia and Utilities, offset by increasing allocations to the Americas and Europe.

• The Fund’s underlying gearing has fallen. In addition to this, the Fund’s weighted average Interest Coverage Ratio for its underlying portfolio has increased over the last year.

SUMMARY 5


The following market overview represents the views of SQM Research at the time of writing the report.

The Global Economy

Real GDP Growth (Year on Year %)

2010 2011 2012 2013(f) 2014(f) Average1

Australia 2.6 2.4 3.6 3.0 3.3 3.2

China 10.5 9.3 7.8 8.0 8.2 9.5

Japan 4.7 -0.6 2.0 1.6 1.4 1.3

United States 2.4 1.8 2.2 1.9 3.0 2.6

United Kingdom 1.8 0.9 0.2 0.7 1.5 2.1

European Union 2.1 1.6 -0.2 0.0 1.3 1.8

Emerging markets 7.6 6.4 5.1 5.3 5.7 4.9

Advanced economies 3.0 1.6 1.2 1.2 2.2 2.4

World 5.2 4.0 3.2 3.3 4.0 3.6

Source: IMF World Economic Outlook April 2013, SQM Research, (f) forecast years.

1 Long-run 30 year average.

The global economy has seen a modest recovery which has been propelled by the emerging markets, whereas the advanced world economies continue to remain in a fragile state. According to the IMF, the world economy grew in 2012, however was recorded slightly below the long-run 30 year average. The IMF projects continued growth in 2013 and 2014.

The fiscal policies that have been implemented in the United States have aided real GDP growth, recorded at 2.2% in 2012. While this lies below the long-run 30-year average, the economy is now showing some signs of recovery. Recent announcements by the Federal Reserve also suggest that the quantitative easing measures which have propelled the economy thus far might be curtailed in the near future. The Federal Reserve has stated that the low interest rate environment will continue till at least 2015. The low interest rates and easing credit conditions have helped kick-start the housing market recovery in the country.

Japan has witnessed impressive growth over 2012 with the election of its new Prime Minister – Shinzo Abe. The economy has moved from a recessionary phase and has recorded GDP growth of 2.0% for 2012. Since Mr Abe’s election into power in December 2012, the Japanese Yen (¥) has devalued by roughly 18% against the US Dollar (US$), resulting from the monetary easing measures that have been implemented. This has helped strengthen Japan’s exports with economies globally beginning to move out of the deceleration phase. According to IMF report, the Japanese economy is forecast to record stable growth of approximately 1.6% in 2013 – above the long-run average of 1.3%.

The European region is still seen to be stabilising, albeit moderately, after the near collapse of Greece. The renewed concerns surrounding Cyprus however has once again given rise

to uncertainty in the region. While the more resilient economies in northern Europe continue to remain strong, the weaker economies are seen to be driving down the growth momentum witnessed in the region. According to the IMF, growth in the region is forecast to remain flat in 2013, while moderate growth is expected to be recorded starting 2014.

The slowing of the Chinese economy in 2012 set panic waves across the global economies. However, this has now stabilised. While the growth for the country has somewhat slowed, it continues to remain strong. Slowing demand in the troubled advanced economies around the world has led to exports from the Asian region to slowdown. The Middle Eastern region continues to witness social and political unrest resulting in slowing activity and intermittent disruptions in the supply of oil to the rest of the world.

Domestically, the Australian economy is being buoyed by the continued rate cuts by the RBA. The mining and resources sectors that previously contributed robustly to GDP growth, are now witnessing a slowdown. This is likely to have an effect on other key contributing sectors of the GDP. Therefore, while the RBA has been cutting key rates since November 2011, gradual improvements in consumer and business confidence and the housing market is being seen. At this juncture, it appears that the future of the Australian economy is closely tied to the growth of the mining sector. However, the now falling Australian Dollar should aid the exports for the country.

While the ever-present risk of a Euro region crisis still looms, investors globally are seen to be more confident, as depicted by the share market rally of 2012. The United States economy is now finally beginning to gain momentum which is seen a positive for the global economy. The IMF forecasts also highlight that almost all economies should record positive GDP growth over the coming years.

Funding rates

012345678

Dec

07

Mar

08

Jun

08Se

p 08

Dec

08

Mar

09

Jun

09Se

p 09

Dec

09

Mar

10

Jun

10Se

p 10

Dec

10

Mar

11

Jun

11Se

p 11

Dec

11

Mar

12

Jun

12Se

p 12

Dec

12

Mar

13

Federal Funds Bank of Japan RBA TargetHong Kong Base China Lending European Central

Source: Bloomberg.

MARKET OVERVIEW 6


Consistent with the trend observed over the year, many of the advanced economies continue to maintain accommodative monetary policies to provide support to the frail economic rebound.

However, it is noted that with the exception of China and Australia, interest rates recorded for the major advanced countries are at 10-year historical low. This has been the trend since after the financial crisis. The Federal Reserve Bank has also reiterated that interest rates will remain low until at least 2015. While the emerging and developing economies are continuing to record stable growth, it is understood that fiscal tightening will continue to occur in the advanced economies.

SQM Research expects the monetary policy measures to remain accommodative through 2013 to propel the global economy, with the exception being China. Moreover, austerity measures in advanced economies especially the European region will likely continue until a stable recovery is witnessed.

Global Infrastructure

The need for infrastructure investments has increased over time. Infrastructure assets provide essential goods and services which assist in serving a country’s development and needs and tend to be highly regulated. World governments are trying to roll out high-quality and sustainable infrastructural framework as the pressing need for better infrastructure arises globally. While on the one hand, emerging economies are looking to provide adequate infrastructure systems, the advanced economies are looking at refurbishing their ageing and flailing infrastructure. However, constrained by the lack of funds and the austerity measures, governments globally are now turning towards Public Private Partnerships (PPPs) to fund such projects. This has resulted in increased funding by the private sector. Infrastructure investments provide for predictable cash-flows, which is why they have gained momentum as an alternate to equities over recent years given the tumultuous global markets.

According to the McKinsey Global Institute’ Infrastructure Productivity report, by 2030 roughly US$57 trillion would be required to support the growing infrastructure needs globally. The American Society of Civil Engineers in the United States ranked its infrastructure sub-sectors, and it was noted that predominantly all infrastructure sub-sectors scored a grade of C or D – representing either poor or failing infrastructure. In the European region, the weak economies along with the tight austerity measures and the slow banking sector have thus far inhibited the refurbishment of key infrastructure. However, as the region shows signs of stability, especially in the north, increased investments in the region is foreseen. This has resulted in a rise in PPPs in the region.

The Asian region has witnessed a spate of new infrastructure projects being initiated to support its urbanisation and match the capabilities offered by developed economies. China and India especially, have been leading the initiative for infrastructural development in their regions. In developed countries within Asia, a higher instance of privatisation of such projects is noted, while in countries that are less developed, the governments are spearheading the push for improved facilities.

It has been observed that around the world, financing for large infrastructure-related projects continues to remain a concern, as governments continue to constrict their spending, banks deleverage and debt markets globally remain tight.

SQM Research anticipates more entrants in the infrastructure space in the longer-term as more public assets are privatised and the emerging economies demand larger, more efficient infrastructure assets to accommodate increased consumption. Moreover, due to the constricted cash flows, PPPs will continue to gain momentum and increase in popularity over the near future for governments to fund the infrastructural developments.

Infrastructure benchmark performance

-23.1%

1.2%

-3.5%

3.3%10.3%

-42.1%

27.0%

9.6%

-7.6%

13.2%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

2008 2009 2010 2011 2012

Infrastructure benchmarks (average) MSCI World Index

Source: Bloomberg. Please note: the chart above graphs the total return in USD not taking

into account the effects of hedging the index to AUD

Given that infrastructure assets typically provide essential services to the economy, infrastructure securities are typically termed as defensive assets. Moreover, such assets are typically highly regulated and competition is limited which enables them to generate stable returns.

Recently over 2012, the infrastructure benchmark indices on average recorded returns of 10.3% compared to the 13.2%recorded by the MSCI World Index. The returns recorded by the UBS Developed Infrastructure & Utilities Index (AUD Net TR) primarily drove down the average returns where all the other benchmarks recorded returns in line with the MSCI World Index.

MARKET OVERVIEW 7


Global Listed Infrastructure Sub-Sector Weights

UBS Global 50/50 UBS Developed Dow Jones Brookfield S&P Global

Sub-Sector Infrastructure & Utilities Infrastructure and Utilities Index Global Infrastructure Index Infrastructure Index

Utilities 58.7% 89.0% 58.1% 52.8%

Communications 17.6% 5.7% 12.4% 0.0%

Toll Roads 11.7% 3.8% 4.5% 12.5%

Airports 3.7% 1.1% 3.4% 10.6%

Other 8.3% 0.4% 21.6% 24.1%

Total 100% 100% 100% 100%

Source: SQM Research, Funds under review. As at 31 March 2013.

A total of four benchmarks were utilised by funds within the Global Infrastructure Securities Sector Review 2013 and SQM Research notes that the performance variances between these benchmarks over the years have been substantial, as seen in the tables above. Notably, the performance of the UBS Developed Infrastructure and Utilities Index has been less volatile as compared to the peer indices given that 89.0% of the index comprises of utilities stocks. Utilities, being highly regulated, form one of the most stable income generating sub-sectors within the infrastructure industry.

SQM Research has observed the varied weighting to infrastructure sub-sectors amongst the various benchmark indices adopted by the funds. The difference in the sub-sector composition could potentially lead to varied returns for each index. Consequently, it is also noted that a fund’s performance relative to peers will also be driven by the performance of the benchmark index it tracks.

MARKET OVERVIEW 8


Key Counterparties

Treasury Group LimitedParent Company

RARE Infrastructure LimitedFund Manager

Treasury Group Investment Services Limited

Responsible Entity

RARE Infrastructure Value FundFund Under Review

Investor

36% 100%

Funds Management Compliance

Distributions Capital

Parent Company

Treasury Group Limited (ASX: TRG) is an ASX listed company which sources the majority of its income from a range of boutique funds management businesses in which it invest in across Australia. TRG currently has investments in 10 boutique fund management businesses including Global Value Investors, AR Capital Management Pty Limited, Investors Mutual Limited, Treasury Asia Asset Management Limited, Orion Asset Management (Aust) Pty Limited, RARE Infrastructure Limited, Celeste Funds Management Limited and Aubrey Capital Management Limited. More recently, TRG acquired an interest in two new boutiques, Melbourne-based Evergreen Capital and Singapore-based Octis Asset Management. Through its wholly owned entity, Treasury Group Investment Services, TRG also provides responsible entity services to the boutique asset management businesses within the Group and to selected third parties. In addition to this, IML Investment Partners Limited, a jointly controlled entity of Treasury Group Limited, undertakes a sub-advisory role to exclusively manage funds for Investors Mutual Limited and its institutional clients.

As at 31 March 2013, total Funds Under Management (FUM) was recorded at $17.8 billion, an increase of 4.4% from the previous year. Of this FUM, RARE Infrastructure Limited was the largest contributor at 34.1% of total FUM.

Board of DirectorsThe Board of Directors of TRG is comprised of four non-executive directors, of which three are classified as independent. Non-Executive Chairman Mike Fitzpatrick is credited to being not fully impartial given his large shareholding in TRG. TRG notes his overall contribution and extensive experience allow him to remain as Chairman of the Board.

While SQM Research prefers to see a board with an independent Chairman, it is acknowledged that the skill and experience of the board members are appropriate to the nature and extent of the company’s operations. Although Mr Fitzpatrick is not independent, his experience and contribution to TRG is highly regarded.

Corporate governanceTRG is a listed entity on the Australian Stock Exchange. Therefore, it must disclose its compliance with the ASX Corporate Governance Council’s published Corporate Governance Principles and Recommendations (ASX Principles) on an ‘if not, why not’ basis in its annual report. The ASX Principles are based on a best practice framework developed by the ASX for business of a listed company. TRG complies with a majority of the ASX Principles, with the only non-compliance relating to the independence of the Chairman.

CORPORATE GOVERNANCE 9


TRG has a number of corporate governance charters and policies in place, with the main elements including:

• A Governance Statement, which is issued annually

• A Board of Directors, Nominations Committee, Audit Committee and Remuneration Charter

• A Continuous Disclosure Policy

• A Directors Code of Conduct

• A Company Code of Conduct

As mentioned previously, the Chairman is not fully independent. However, SQM Research believes that the corporate governance policies and practices are broadly in line with peers of similar size and stature.

Parent Financial performance

Key Financial Data* Year Ended 30 June

Financial Profitability 2012 2011

Revenue ($m) 3.9 4.5

Equity Share of Associates ($m) 11.5 14.0

Expenses ($m) 9.0 8.6

Net profit after tax ($m) 6.8 10.0

Profit margin (%) 43.8 54.1

ROE (%) 11.7 16.9

Market measures 2012 2011

Basic EPS (cents) 18.2 22.7

P/E ratio 14.7 8.3

DPS (cents) 34.0 28.0

Dividend yield (%) 7.9 7.8

Dividend Payout ratio (%) 1.2 0.6

Financial Liquidity/Solvency 2012 2011

Cash and cash equivalents 8.2 10.1

Current Ratio 4.6 4.8

Debt to equity ratio* 0.0 0.0

Gearing (%)** 6.8 6.7

Source: Treasury Group Limited Annual Report 2012. Past performance should not be used

as a guide for future performance.

* Total interest bearing debt to total equity. ** Total Liabilities to assets.

1 Closing price as at 22 August 2012 for FY2012 figures, Closing price as at 24 August 2013

for FY2011 figures.

SQM Research has reviewed the financial statements of TRG and notes the Company has delivered a consolidated profit after tax of $6.8 million for Financial Year 2012. This represents a 32.5% decline from the previous financial year. The fall in profit was driven by a fall in fees revenue reflecting the performance of the global equities market, as well as a changing mix of contributions from partner boutiques.

Global equities and investment markets experienced continued volatility and generally ended the financial year at lower levels. The All Ordinaries Index lost 7% during the financial year to June 2012. Net outflows continued as investors preferred to keep their funds in lower risk assets favouring asset classes other than equities.

The 2013 interim report reveals a strong improvement to the TRG’s performance. Net profit after tax rose 7.2% from the previous interim period. Driving performance was a recovery in the equity markets as well as strong performances from RARE Infrastructure (RARE), Investors Mutual Limited (IML) and Celeste Funds Management (Celeste) which more than offset a reduced contribution from Orion Asset Management.

In terms of the TRG’s financial position, TRG remains to be highly solvent, with a relatively stable current ratio of 4.6 and a gearing ratio of 6.8%.

Overall, TRG appears to be in a solid financial position, with interim results revealing a strong rise in profits and key liquidity ratios indicating that TRG is in a healthy financial position. In addition to this, the Company’s balance sheet remains ungeared.

While TRG has experienced some headwinds, investors should be aware that the other boutiques like RARE, IML and Celeste have continued to perform under these challenging market conditions with some attracting strong FUM flow.

Responsible Entity

Treasury Group Investment Services Limited, a wholly owned entity of the Treasury Group, is the Responsible Entity (RE) for the Fund. Treasury Group Investment Services Limited provides a full suite of business support services to TRG’s partner boutiques as well as selected external clients. There are five members on the board of the RE, three of whom are classified as independent. There is also a Compliance Committee in place. The Compliance Committee has three members and is majority independent.

The RE is fulfilling its duties by providing a majority independent board and Compliance Committee which promotes absolute best practice from a corporate governance perspective.

Fund Manager

RARE Infrastructure Limited (RARE) was founded in 2005 by Richard Elmslie and Nick Langley and operates as a boutique asset management firm specialising in global infrastructure investments. RARE is 64% owned by staff, with the remaining 36% owned by TRG.

CORPORATE GOVERNANCE 10 CORPORATE GOVERNANCE 11


The RARE investment team comprises of 15 professionals and is supported by institutional and retail distribution operatives as well as back office staff. In total, RARE employs 34 people. RARE currently offers four infrastructure products for investors domiciled in Australia, including the RARE Infrastructure Value Fund – Hedged, RARE Infrastructure Value Fund – Unhedged, RARE Emerging Markets Fund and RARE Yield Fund.

RARE continues to expand its operations, opening a London sales office in 2012 as well as bringing finance and legal in house. At 31 March 2013, RARE had circa $6 billion in funds under management.

Management Risk

Funds management encompasses not only the operational capabilities of project counterparties, but also the corporate ability of the Responsible Entity to monitor operational performance and to meet the regulatory and statutory responsibilities required. For all infrastructure funds there is a risk that financial position and management performance deterioration may temporarily or permanently compromise asset condition and financial or regulatory outcomes.

SQM Research considers that TRG, RARE and their associated key counterparties are appropriately qualified to carry out their assigned responsibilities. Management risk is rated as being broadly in line with peers.

CORPORATE GOVERNANCE 11


Key Investment Staff

Responsibility Qualifications Years with Firm

Investment Experience

Previous Employment

Richard Elmslie Senior Portfolio Manager BCom, CA 7 29 UBS, ABN AMRO, KPMG

Nick Langley Senior Portfolio Manager BCom, LLB 7 16 AMP Capital, UBS, BZW/ABN AMRO, Arthur Andersen

Rod Chisholm Portfolio Manager MBA, BArts 7 12 HSBC Securities, HSBC Investment Banking, KPMG

David Maywald Research, Joint Portfolio Manager – Yield

BEcon, BCom (Hons), CFA, GradDipAppFin & Invest

7 13 Constellation Capital Management, Credit Suisse, JP Morgan, BT Funds Management

Ben May Research, Portfolio Manager

BCom, LLB, CA 3 14 CP2, Credit Suisse, Sydney Airport Corporation, Transurban Limited, Deloitte, Arthur Andersen, ANZ

Charles Hamieh Research, Portfolio Manager – Emerging Markets

BEcon 3 14 AMP Capital, Hastings Funds Management, Challenger Financial Services, HSBC

Shane Hurst Research, Joint Portfolio Manager – Yield

BBus MCom(AdvFin), 3 14 Hastings Funds Management, Tribeca Investment Partners, AMP Capital, Ernst and Young

Jonathan Mirrlees-Black Head of Research BA (Maths), MPhil (Econ), DPhil

2 23 Exane BNP Paribas, Dresdner Kleinwort, Coopers Lybrand

Dan Simmonds Senior Analyst BEcon(Hons.), BA, PGradCertAppFin

2 6 CP2

George Kurian Analyst MBA, CFA 3 7 Traditional Capital Management

Daniel Chu Analyst BCom 1 4 ANZ, KPMG

Sue Xu Analyst BEcon, MFIn 1 10 Investec, Global Value Investors, Arete Research, PWC

Brad Fraser Analyst BEcon&Fin, GradDip AppFin

3 12 RBS

Tim Snelgrove Dealer/Analyst BCom (Liberal Studies) 4 4 Merrill Lynch

Jared Grylls Junior Dealer 1 1

Location of Team Sydney Portfolio Managers 2

Investment Offices 1 Analysts 11+2 Dealers

* Jonathan Mirrlees-Black, Charles Hamieh, Shane Hurst, Ben May and David Maywald perform analyst duties as well.

The size and experience of the Fund’s management team is a positive factor associated with the Fund. The overall team is comprised of 15 investment personnel and as such, the Fund operates the largest team within the infrastructure securities peer group. On this basis, SQM Research views the team as being well structured and effectively resourced. The team is also credited as having the necessary experience and skills to oversee the Fund’s development and on-going performance.

Team Process1

The Fund’s investment management team is led by Senior Portfolio Managers Richard Elmslie and Nick Langley. Mr Elmslie and Mr Langley are the principals of RARE and have held their positions since the inception of the Fund and the formation of

1 Please note that Senior Analysts refer to the Portfolio Managers responsible for managing

RARE funds other than the Fund under review

MANAGEMENT & PEOPLE 12


RARE as a Fund Manager. Mr Elmslie and Mr Langley have a wide range of experience, which includes a combined 45 years of global infrastructure experience. Importantly, Mr Elmslie and Mr Langley have previously worked together at ABN AMRO. The Senior Portfolio Managers’ combination of skill and their extensive track record of following infrastructure entities are strengths of the Fund.

Mr Elmslie and Mr Langley are well supported by the Head of Research, six Senior Analyst/Portfolio Managers, four Analysts and two Dealers. The Head of Research Jonathan Mirrlees-Black joined the Fund in November 2011 and was previously working with the Fund in an external advisor capacity. Mr Mirrlees-Black has over 23 years of investment experience and has extensive experience working with national regulators. The research team is led by Mr Mirrlees-Black who is responsible for ensuring consistency of research across the regions and sectors.

The research team is organised into three regions: Asia and the Middle East, the Americas and Europe and Australia. Senior analysts have stock coverage responsibilities set regionally, and within those regions typically have a sector focus. Junior analysts support senior analysts and undertake cross-regional research. There are two senior analysts covering each region of the Americas and Europe/Australia and one for the Asia Pacific/Middle East. This is crucial to ensure that each region (with the exception of the Asia Pacific/Middle East) has at least one senior analyst with primary responsibility at any given time. Analysts within each region support coverage of stocks of other team members to ensure continuity of process.

The Manager has advised that although there is only one Senior Analyst responsible for the Asia Pacific/Middle East region, Sue Xu who joined the team in 2012 is responsible for coverage of Chinese companies. While she doesn’t have the title of Senior Analyst, she has a strong background in investment research on the buy and sell side in London and Sydney. In addition to this, another junior analyst, George Kurian, an Indian national is developing coverage of Indian companies among other responsibilities.

The Investment Advisory Board (IAB) was created in 2009 to drive the macro-economic research agenda and is comprised of five members. David Bowers and David Hale are external members attached to the IAB. Both Mr Bowers and Mr Hale have a broad range of experience and specialise in economics and strategy. The other members of IAB include the Senior Portfolio Managers Richard Elmslie and Nick Langley and the Head of Research Jonathan Mirrlees-Black. The executive members of IAB act as information conduits between the IAB and the investment team at the Fund pertaining to macroeconomic views and data.

Investors should be aware that the role of the IAB is to evaluate macro scenarios and risks, to enable the Fund to position the portfolio in the current and future macro cycle. The IAB is not responsible for stock selection decisions or portfolio construction.

Formal and informal meetings are held by the investment team in order to execute the overall research process. The investment team meet quarterly to review and assess the RARE 200 list of stocks. This represents RARE’s investment universe of stocks. It is from the RARE 200 that a focus list of stocks is taken through to the detailed bottom-up research process.

The IAB meets quarterly to review macro-economic data and risk assessments. The advice of the IAB is used to determine RARE’s macro-economic forecasts used in its bottom-up stock valuations. A central database of macro-economic forecasts by country is maintained by the IAB. Consensus data is reviewed and macro-economic forecasts are updated on a monthly basis.

The research team meets formally three times a week. The entire investment team meets on a Monday morning to review the Portfolio and RARE 200. Dedicated research meetings are also scheduled each Tuesday and Thursday. These meetings are a forum for analysts to present their stock findings and research.

Stock selection is determined by the Fund’s Investment Committee, comprising of Mr Elmslie and Mr Langley. Stock selection decisions are based on IRR, a risk assessment combined with the Investment Committee’s significant industry and sector knowledge and practical intuition.

Throughout the review, it was clear to SQM Research that the team process was efficient and well documented. The team is led by experienced Senior Portfolio Managers and is well resourced. The investment team’s bottom-up research is supplemented with macroeconomic overlays from the IAB. This structured and robust process is acknowledged as a crucial factor to the on-going performance of the Fund.

Staffing Changes

Since the last review, there have been no departures to the Fund.

The Fund however, has increased its personnel resources, with the addition of Bradley Fraser in July 2012. In addition to this, Rod Chisholm returned from his absence of leave, returning to his role as Head of Bespoke Strategies.

The stability of the team over the last year, as well as the increase in analyst resources has been viewed upon favourably by SQM Research.



Remuneration and Incentives

The investment team are compensated using a combination of base salary and incentive remuneration. The fixed remuneration takes into consideration the role of individuals and market conditions. The investment team’s performance evaluations and incentives are primarily based on investment results with performance tracking of analysts’ recommendations. There is also a qualitative component relating to aspects such as maintenance of regular company contact, sector benchmarking and regional economic information and the maintenance of company financial models. Up to 10% of EBIT will be set aside for the profit share scheme.

In addition to the short term profit scheme, RARE has a longer term share scheme. Select senior investment personnel may participate in an employee equity participation scheme at the Manager. The equity scheme is designed to promote long term employee engagement and retention at the Manager. This equity tends to increase in value between years three and seven.

SQM Research has reviewed staff incentives and remuneration policies and believes that they are in line with industry peers. This should provide an effective way to align staff performance with the on-going performance of the Fund under review.



Fee Structure (Wholesale)

Entry/Exit Fees Fund Peer Average1

Contribution fee (%) 0.00 0.00

Buy spread (%) 0.25 0.30

Sell spread (%) 0.20 0.27

Ongoing Fees Fund Peer Average1

Management fee (% p.a.) 1.025 1.05

Expense recoveries (% p.a.) 0.00 0.03

MER/ICR2 (% p.a.) 1.025 1.08

Other Fees Fund Peer Average1

Performance fee (%) 10.25 10.17

1 Average fee level within peer group of wholesale global infrastructure funds as defined by

SQM Research. 2 Management fees including recoverable expenses. The Fund and its peers

do not utilise leverage; the MER and ICR are therefore equivalent.

Entry and Exit Fees

No contribution fees are required for investments in the Fund. This is in line with the peer standard.

A buy/sell spread 0.45% is applicable and payable at +0.25% when investors seek to purchase their units and -0.20% when sold. This spread represents the difference between the application price and the withdrawal price of the Fund, a reflection of transaction costs relating to the underlying assets. The Fund’s buy/sell spread is below the peer average of 0.57%.

On-going Fees

The Fund’s annual management fee of the Fund is 1.025% p.a. of the Fund’s net assets. This cost includes the normal recovery expenses relating to the operation of the Fund, accrued daily and paid monthly, although it does not take into account abnormal expenses, which may also be payable from assets of the Fund. As the Fund’s management fee is based on net assets, its indirect cost ratio and management expense ratio are equal. As performance fees are capped at 0.30% of net asset value, the maximum indirect cost ratio is capped at 1.325% in any one year.

The indirect cost ratio is slightly below the peer average of 1.08% excluding performance fees. Assuming maximum performance fees are payable in one given year, the Fund’s ICR (1.325%) rises above the peer average.

Performance Fee

A performance fee of 10.25% is payable if the Fund outperforms the benchmark index. The performance fee is subject to a high water mark. The total performance fee in any given year will not exceed 0.30% of the net asset value of the Fund.

SQM Research notes that the Fund’s performance fee is line with peers, from those funds that do charge a performance fee.

Overall Fees (Wholesale)*

Fund Peer Average

12-month (%) 1.47 1.63

36-month (% p.a.) 1.17 1.26

* Excluding performance fees

Overall Fees

If held and sold within 12 months, total transaction costs amount to 1.47% for an investment in the Fund and 1.67% for peers. These figures include the contribution fee, the indirect cost ratio and the buy/sell spread. They do not include any acquisition or performance fees that may be charged, nor do they take into account rebates or negotiations. An investment timeframe of at least five years is suggested by the Fund.

SQM Research believes that the on-going fee structure of the Fund is competitive relative to peers. Investors should note that while the overall fees (excluding performance related fees) are recorded below the peer average, this overall fee structure changes should the Fund significantly outperform the benchmark. Assuming maximum performance fees incurred during the year as a result of outperformance, this elevates the Fund’s overall fee structure above the peer group.

Liquidity Management

The Fund monitors its liquidity on a daily basis with respect to its applications and redemption requests. Application and withdrawal requests received before 4pm on any business day are usually processed using the unit price applicable to the close of business that day. Redemption requests will generally be available within seven business days from the time of the withdrawal receipt.

FEES & REDEMPTION POLICY 15


Inflows and outflows trend (monthly)

-60

-40

-20

0

20

40

60

0100200300400500600700800900

Mar

07

Sep

07

Mar

08

Sep

08

Mar

09

Sep

09

Mar

10

Sep

10

Mar

11

Sep

11

Mar

12

Sep

12

Mar

13

Inflo

w/O

utflo

ws

($m

illio

ns)

Fund

s U

nder

Man

agem

ent (

$mill

ion)

Inflows Outflows FUM

Consistent growth in funds under management has been observed by the Fund, with the Fund only recording one monthly period of strong net outflows. Moreover, since the Fund’s inception, the Fund has only recorded three periods of net outflows.

Funds under management has grown significantly over the year to March 2013, increasing 59.8%. The global infrastructure strategy also similarly experienced significant growth, increasing 40.9% over the year to March 2013. At March 2013, the Fund and global infrastructure strategy had $802.1 million and $3.8 billion in funds under management respectively.

Overall, the Fund has maintained consistent positive growth in relation to FUM since inception. In particular, the Fund and Manager have been able to significantly grow its funds under management over the last year.

FEES & REDEMPTION POLICY 16


Statistical Overview (77-month history)

Fund Benchmark Peer Avg.

Total Return¹ (%) 7.5 7.3 5.7

Standard Deviation (%) 11.5 1.1 13.1

Sharpe Ratio 0.0 0.3 -0.1

1 Annual compounded return since inception of Fund.

Highest/Lowest 12-Month Returns

Fund Benchmark Peer Avg.

High (%) 33.2 10.3 37.4

Low (%) -28.5 3.8 -26.0

12-Month Detailed Statistics

Fund Rank/9 Peer Avg.

Total Return (%) 20.5 4 20.0

Dividend Yield (%) 4.5 3 3.7

Current Yield (%) 3.9 3 3.2

Risk Measures

Sharpe Ratio 2.78 3 2.29

Standard Deviation (%) 5.6 7 6.9

Ratios (Sharpe) contained within this summary section and in the charts proceeding provide

no reliable comparison in periods where both the Fund and its peers record a negative result.

Quantitative Insight

Since its inception in November 2006, the Fund has recorded an annualised net return of 7.5%. This figure is above the 7.3% achieved by its benchmark, the OECD G7 Inflation Index plus 5.5%. Importantly, the Fund’s performance is well above the peer average of 5.7%. The portfolio has been relatively stable throughout its operating history, achieving a standard deviation of 11.5%. This is above the benchmark’s 1.1% but below the peer group’s 13.1%.

While the Fund was unable to outperform its benchmark index in the early periods of its operating history, it has generally outperformed peers since inception. Driven by strong absolute returns in early to mid-2011, the performance of both the Fund and its peer group surpassed the benchmark in October 2011. Moreover, given that most regions and sectors have produced strong returns in 2012, the level of outperformance has widened over the last year. As at March 2013, the Fund recorded a three-year rolling return of 13.1%. This is above the returns of 7.5% and 12.4% delivered by the benchmark and the peer average, respectively.

The Fund’s 12 month Dividend Yield was recorded at 4.5% at March 2013. While the Fund recorded one of the highest dividend yields in the peer group, it was observed that the weighted average dividend yield for underlying securities in the portfolio has declined over the last year, in line with trends observed across the sector.

On an excess return basis, the Fund has built upon a performance excess relative to the benchmark index. The overall excess achieved has been moderate at 2.0%.

On a risk-return basis, the Fund has recorded a Sharpe ratio below zero, for most of its early operating history. This indicates poor risk adjusted returns. However, since September 2011, the Fund has consistently delivered a positive Sharpe ratio. As at 31 March 2013, the Fund recorded a Sharpe ratio of 1.0, above the peer average of 0.85 but below the benchmark’s 3.5.

SQM Research was provided with performance data for the Fund’s RARE 200 Universe. While the performance of the RARE 200 was not included in the analysis below, it was noted that since inception the Fund has outperformed the RARE 200, producing a total return of 7.5% compared to the RARE 200’s 5.0%. In addition to this, on an excess return basis, the Fund has maintained a positive bias since its inception resulting in an overall positive cumulative excess return over the Fund’s history. As at 31 March 2013, the Fund recorded a cumulative excess return to the RARE 200 of 21.9%.

Overall, the Fund has delivered consistent outperformance with lower volatility relative to the peer group since inception. While the Fund has only outperformed the benchmark index since October 2011 on a rolling three-year basis, SQM Research notes that the benchmark exhibits minimal volatility and is more correlated to inflation rather than underlying infrastructure fundamentals. Furthermore, the underlying assets owned by the Fund are exposed to daily pricing volatilities. Therefore any comparison of the Fund’s performance relative to the benchmark should be considered over a longer time horizon.

INVESTMENT ANALYSIS 17


Returns

Growth of $10,000

$0$2,000$4,000$6,000$8,000

$10,000$12,000$14,000$16,000$18,000

Oct

06

May

07

Dec

07

Jul 0

8

Feb

09

Sep

09

Apr 1

0

Nov

10

Jun

11

Jan

12

Aug

12

Mar

13

Fund Benchmark

An investment of $10,000 in the Fund would have initially increased to $12,221, 12 months following the Fund’s inception in November 2006. However, following falling optimism and the Global Financial Crisis (GFC), an investment of $10,000 would have fallen to a low of $8,190 in February 2009 – below the benchmark’s $11,811 during the same period. Since this time, improved economic fundamentals have since resulted in a rebound in such an investment, although a notable fall was observed from June 2011 through to September 2011, amid concerns in Europe and the US credit rating. Nevertheless the Fund has been able to recover the losses experienced during the GFC, with the value of an investment in the Fund rising to its highest in March 2013 of $15,866 – above the benchmark’s $15,671. Since February 2013, an investment in the Fund would have been recorded above that of its benchmark index. The last time this had occurred was in May 2008.

Three-year rolling returns

-10%

-5%

0%

5%

10%

15%

20%

Nov

09

Apr 1

0

Sep

10

Feb

11

Jul 1

1

Dec

11

May

12

Oct

12

Mar

13


While the Fund was unable to outperform the benchmark in the early periods of its operating history, it has generally outperformed peers since inception. Moreover, the performance of both the Fund and its peer group has surpassed the benchmark since October 2011.

As at March 2013, the Fund recorded a three-year rolling return of 13.1%. This is above the returns of 7.5% and 12.4% delivered by the benchmark and the peer average, respectively.

SQM Research highlights that the benchmark, the OECD G7 Inflation index plus 5.5%, exhibits minimal volatility as evidenced in the chart above. This is in contrast with the Fund’s underlying assets which are exposed to daily pricing volatility. Therefore, any benchmark comparison should be considered over a long investment time horizon.

Excess returns

-40%

-30%

-20%

-10%

0%

10%

20%

Oct

06

May

07

Dec

07

Jul 0

8

Feb

09

Sep

09

Apr 1

0

Nov

10

Jun

11

Jan

12

Aug

12

Mar

13

1 Month Excess Positive Market Cummulative Excess

While the Fund initially generated positive accumulative excess returns, this was followed by periods of strong negative excess returns over the period from January 2008 through until early 2009. This negative performance against the benchmark can be attributed to freefalling global equity markets over this time, driven by the global financial crisis, to which the Fund was exposed to. The benchmark however, is primarily linked to inflation and was generally less affected. Hence this led to a large recorded performance gap.

Since the market turnaround in March 2009, the Fund’s cumulative excess returns have trended positive, although there has been some detracting performance over the last six months in 2011. In absolute terms, strong performance was witnessed across all infrastructure funds in 2012 and at March 2013 the Fund recorded a cumulative excess return of 2.0%. This is above the previous year’s position of -14.4%.

In the case of the Fund, the monthly excess returns have generally shown some variability throughout its operating history. This is attributed to the nature of the benchmark which correlates closer to inflation rather than underlying infrastructure fundamentals.



Risk-Return & Efficiency

Three-year rolling Sharpe ratio

-1.00-0.500.000.501.001.502.002.503.003.504.00

Nov

09

Apr 1

0

Sep

10

Feb

11

Jul 1

1

Dec

11

May

12

Oct

12

Mar

13


For most of the Fund’s early history, it has recorded a Sharpe ratio below zero, indicating poor risk-adjusted returns. The Fund has consistently delivered a positive Sharpe ratio from September 2011 onwards with the peer group also recorded a positive Sharpe Ratio in the same period.

As at 31 March 2013, the Fund recorded a Sharpe ratio of 1.0, above the peer average of 0.85 but below the benchmark’s 3.5.

The Fund’s Sharpe Ratio has underperformed its benchmark index, but outperformed peers since inception. As mentioned previously, the Fund’s benchmark exhibits minimal volatility thus has generally recorded a higher Sharpe Ratio than the Fund.



Underlying Asset Allocations as at 31 March 2013

Value ($ million) Current Maximum Minimum

Stock Holdings (47) 770.5 96.1% 100% 80%

Cash 31.6 3.9% 20% 0%

Total Fund Value 802.1 100.0%

Top 10 Holdings as at March 2013

Exchange Code Name Portfolio (%) Benchmark (%) Sector Main Geographic Exposure

NYSE NSC Norfolk Southern Corp 4.4% n/a Transport United States

NYSE CSX CSX Corp 3.8% n/a Transport United States

TSX TRP TransCanada Corp 3.7% n/a Pipelines Canada

LSE SVT Severn Trent PLC 3.6% n/a Utility United Kingdom

AEX VPK Koninklijke Vopak NV 3.5% n/a Transport Netherlands

ASX TCL Transurban Group 3.4% n/a Transport Australia

FSX FRA Fraport AG 3.1% n/a Transport Germany

NYSE NEE NextEra Energy Inc 3.1% n/a Utility United States

LSE PNN Pennon 2.8% n/a Utility United Kingdom

BMV OHLMEX OHL Mexico 2.7% n/a Commercial Services

Mexico

Asset allocation at 31 March 2013

Stock Holdings,

96.1%

Cash, 3.9%

The Fund held a stock portfolio of 47 individual securities at the end of March 2013, representing a more diversified portfolio than peers. The number of stocks holdings has increased over the last year, with additions such as Norfolk Southern, CSX, NextEra, Pennon and Crown Castle over the last year. As at 31 March 2013, the Fund’s portfolio comprised of 96.1% of stock holdings and 3.9% of cash. As the Fund is constructed on a benchmark-unaware basis, the Fund does not stipulate its holdings between index and ex-index holdings.

Summary2

SQM Research reiterates that the Fund is not constructed against a specific infrastructure based global index. The Manager believes that major infrastructure indices are too heavily skewed towards Utilities. Hence, the Manager constructs a benchmark-unaware portfolio to provide some sector diversification.

Over the year to March 2013, the Fund has significantly reduced its exposure to Australia and Utilities. At March 2013, the Fund had a 37.0% exposure to Utilities, below its historical average of 43.6% and a reduction of 18.2% since March 2012. During 2012, the Fund increased its exposure to User Demand infrastructure assets, in particular RailRoads and Communications, a result of the Fund positioning itself to benefit from the team’s continued optimism in the United States.

Relative to peers, the Fund held a small exposure to Europe. Going forward, should Europe outperform the other regions, the Fund’s small exposure to the region will likely result in the Fund underperforming against peers. It is important to note, the Fund has increased its exposure to Europe during 2012 with select holdings bought on by valuations in mid-2012.

2 Note that in this report the Americas exclude North America and Europe excludes the

United Kingdom.

ASSET ALLOCATIONS 20


While the Fund previously held the largest exposure to Australia, it has reduced its exposure to the region driven by valuation triggers, with the Fund selling out of SP Ausnet and reducing its exposure to Sydney Airport.

Interesting, the Fund had no exposure to Japan prior to August 2012. Following rigorous bottom-up and top-down research, the Fund invested in Tokyo Gas and East Japan Railway in August 2012. The decision was driven by compelling stock valuations as well as the IAB’s top-down view on medium term GDP figures in Japan, which were forecasted at higher rates than consensus. While the returns on the Fund’s investment in Tokyo Gas and East Japan Railway were relatively stagnant in 2012, since late 2012 to early 2013, the huge rally in Japanese stocks on the back of renewed policy action by the Bank of Japan resulted in the region being a significant contributor to the Fund’s performance.

While the Fund has increased its exposure to Infrastructure assets to capitalise on forecast GDP growth, the Fund’s underlying gearing and interest coverage ratio (ICR) indicate that the Fund has slightly de-risked its portfolio, with underlying gearing falling to a four-year low of 36.7% and the underlying ICR increasing from 3.4 times in March 2012 to 4.2 times at March 2013.

Geographical Asset Allocation

Geographic allocation as at 31 March 2013

Cash, 6.9%

North America,

37.2%

Americas ex-North

America, 11.0%

United Kingdom,

8.4%

Europe ex-United

Kingdom, 15.0%

Australia, 13.1%

Asia, 5.8%

Other, 2.6%

As at 31 March 2013, the Fund’s geographical exposures were skewed towards North America, with an allocation of 37.2%. This was followed by its exposure to Europe at 15.0%. Other geographical exposures include Australia at 13.1%, the Americas at 11.0%, the United Kingdom at 8.4% and Asia at 5.8%. The Fund has a small geographic exposure to Other at 2.6%. Cash exposure is at 6.9% at the end of this period.

Geographic allocation trend

0%

20%

40%

60%

80%

100%

Mar 10 Mar 11 Mar 12 Mar 13

Cash North AmericaAmericas ex-North America United KingdomEurope ex-United Kingdom AustraliaAsia Other

The Fund has repositioned its geographical exposures over the last 12 months, with a strong shift away from Australia into Europe, North America and Asia.

While in November 2011 the Fund significantly reduced its exposure to Europe, the Fund selectively brought back into the region in mid-2012 based on favourable valuations. The significant reduction in exposure to Australia was a result of valuation triggers with the Fund reducing its exposure to Sydney Airport and selling out of SP Ausnet. The Fund’s increased exposure to North America has been driven by the belief that certain infrastructure assets in the region should benefit from some GDP growth over the next three years.

The rebalancing of the portfolio, in terms of geography, has been driven by optimism in the US economy, as well as an increase in select holdings in Europe. In addition to this, valuation triggers in Australia has resulted in a shift away from the region.

Sector Allocation

Sector allocation as at 31 March 2013

Cash, 6.9%

Airports, 7.9%

Communications Infrastructure,

7.9%

Diversified Utilities, 6.5%

Electricity & Gas Utilities,

19.0%Other, 7.4%

Ports, 7.1%

Railroads, 13.3%

Toll Roads, 12.5%

Water Utilities, 11.4%

As at 31 March 2013, the Fund’s sector allocations were dominated by Electric and Gas Utilities which represented



19.0% of the Fund. This is closely followed by user demand sectors such as Railroads and Toll Roads which accounted for 13.3% and 12.5% of the portfolio respectively. The Fund also had a moderate exposure to Water Utilities, accounting for 11.4% of the Fund. The remainder of the portfolio was relatively evenly spread across Airports at 7.9%, Communications Infrastructure at 7.9%, Ports at 7.1%, Diversified Utilities at 6.5%, Cash at 6.9% and Other allocations at 7.4%.

Sector allocation trend

0%

20%

40%

60%

80%

100%

Mar 13Mar 12Mar 11Mar 10

Cash AirportsCommunications Infrastructure Diversified UtilitiesElectricity & Gas Utilities OtherPorts RailroadsToll Roads Water Utilities

As with the Fund’s geographic allocations, there have been some major shifts in the underlying sector allocations over the year to March 2013. Over the last 12 months, the Fund has decreased its exposure to Airports and Diversified, Electric, Gas and Water Utilities, offset by a significant shift towards Railroads and smaller shifts towards Communications, Ports and Toll Roads.

While during the last review the Fund had repositioned itself into defensive stocks, during 2012, a move to User Demand assets was observed and offset by a decrease in regulated Utilities. In particular, the Fund has repositioned itself to benefit from its projected GDP growth for the United States, with increased exposure to Railroads and Communications.



Investment Process Diagram

1. Derivation of Universe

• Infrastructure characteristics• RARE 200• Focus list

• Specialist knowledge• Primary valuation tool equity IRR• Scenario and sensitivity analysis• Peer review• Calculation of IRR

• Rank of IRR• Market risk assessment• 80% bottom up• Strategy guidelines

2. Research Effort

Macro economic inputs

3. Portfolio Construction

Process Descriptions

Portfolio Manager/Analyst Interaction

Communication and meetings

There are a number of informal and formal meetings held throughout the course of the investment process, with frequent informal communication.

On a formal basis, certain members of the investment team meet quarterly to review and assess the RARE 200 list of stocks. The IAB meets quarterly, to review macro-economic data and drive macroeconomic risk assessments across the Fund.

The research team meets formally three times a week. The entire investment team meets on a Monday morning to review the Portfolio and RARE 200. Dedicated research meetings are also scheduled each Tuesday and Thursday. These meetings are a forum for analysts to present their stock findings and research.

Number of staff 2 Portfolio Managers, 11 Analysts and 2 Dealers

Initial Screens

Investable universe The Fund’s investment universe comprises 200 stocks. These are selected from a larger “Infrastructure Universe” comprising stock from relevant sectors where infrastructure stocks can be found including energy, utilities, transport and communications and members of the main infrastructure indices, including the S&P Global Infrastructure Index and the UBS 50/50 Infrastructure and Utilities Index.

Stocks that do not meet the above criteria may also be considered, if they meet the team’s definition of infrastructure assets. These may include companies that are treated as financials but comprise a portfolio of infrastructure assets.

PROCESS ANALYSIS 23


Screening process There are a number of steps within the RARE investment screening process. From an initial global stock universe of 40,000+ stocks, an automated sector screen will be run, to make sure that only stocks meeting the definition of Transport, Energy, Communications & Utilities in the GICS and Bloomberg classifications are included. A manual screen is then applied, whereby stocks that fall outside these sectors, but which display infrastructure characteristics are included. This universe of approximately 430 stocks is then defined as the ‘Infrastructure Universe’.

Each stock in the Infrastructure Universe is scored to the extent in which it meets RARE’s definition of infrastructure. RARE assesses stocks to ensure they have the following infrastructure characteristics:

• Long dated assets

• Resilient and predictable cash flows

• Low volatility

• Inflation protection

• Monopoly or limited competition

The Universe is also screened for liquidity. Companies are restricted to those with sufficient liquidity, i.e. trading of above $2.5m/day or sufficient liquidity off exchanges. From this restricted RARE Universe, those with the highest RARE Infrastructure Score make it to the RARE200. The RARE200 is made of 200 stocks.

A peer group assessment is then made to define a focus list of 80 to 120 stocks. This is done through a combination of screening using stock market valuation metrics, a proprietary tool for assessing infrastructure valuations, and qualitative assessment based on the team’s detailed knowledge of infrastructure. The entire focus list will be considered for detailed bottom-up analysis.

Stock Research

Top-down or bottom-up? As the Fund is not constructed to a benchmark, it has an absolute returns focus, with the risk/returns profile a result of rigorous bottom-up stock analysis. The bottom-up process is driven by the quality of in-house research delivered, with a combination of quantitative and qualitative factors underpinning each investment decision.

A top-down overlay supplements the bottom-up research process, with the overall global research capability also comprised of sector, country and regional analysis of the key themes that may affect the outlook for the underlying bottom-up stock analysis.

It is estimated that the research and stock selection process is 80% driven by bottom-up analysis, with a 20% top-down macro-economic overlay.

Data collection Data collection is obtained from a range of sources including information released by each company under consideration, sector regulators and other industry organisations. This information is gathered from publicly available sites or through company-specific visits. Discussions with management of the target company and key industry figures are given high priority in the overall data collection process. Economic and industry statistics and market data are sourced from external providers, with the major provider being Global Insights. Regulatory and statutory reports are also utilised in the data collection stage.

External databases such as Bloomberg are used as secondary sources of information. Credit rating analysis and reports are utilised. Broker reports are used as a reference, with RARE tracking various brokers’ forecasts to obtain an assessment of the market view of a stock at any time. While broker reports do not form the basis for bottom-up research, they are primarily utilised for in-depth industry information and understanding unusual market value drivers in particular regions/sectors. Brokers are also utilised to gain access to management when arranging overseas trips and telephone conferences.

PROCESS ANALYSIS 24


Research methods The research process involves detailed analysis of both qualitative and quantitative factors and is detailed in the five steps below:

Understanding a Company’s Business Environment - As most infrastructure companies are regulated, a detailed review is taken on the regulatory frameworks so the team can form an assessment of revenues and cash flows and their sustainability. Where infrastructure companies are not regulated, the analysis focuses on understanding the contractual framework, the length of contracts, the extent of indexation and the economic factors that determine prices on renewal.

Financial Model – The investment team examine historical financial statements, in particular focusing on sources of cash flow; examining debt and other securities and understanding their tenor and covenants; assessing provisions and other liabilities, both on and off-balance sheet and understanding trends in key aggregate financial variables.

Research Report – A financial model is prepared with financial projections. The Head of Research ensures consistency in inputs. The inputs to the aggregate financial models for each company arise from a detailed model of the operations of each division that is reported. Where possible, a standardised template for modelling is used by the investment team.

Valuation and Risk Assessment – Rare’s main valuation tool is the Internal Rate of Return (IRR). This is based forecast of dividends and capital growth over a notional five year holding period. Key to this is the assumed exit value at the five year date. The equity value is calculated using a forecast enterprise value and deducting debt and other liabilities. The Enterprise Value is determined using discounted cash flow techniques, based on the long term cash flow forecasts in our model.

Cross Check Findings – The investment team will test important assumptions to ensure that the team has taken into account all the relevant available evidence.

Number of one-on-one meetings annually

As the team in its entirety is based in Sydney, it is expected that the Senior Research Analysts will spend two to three weeks every six months visiting companies and various market participants.

RARE seeks to maintain in regular contact with management of the companies it holds in the portfolio and those held on watch lists. A range of interactions between RARE and the companies include company site visits or conference calls, broker-arranged meetings and company road shows.

In terms of global coverage, the investment team normally undertake a minimum of 15 international trips per year to visit companies. Where possible, two people will attend each visit.

Modelling and Valuation

Proprietary modelling The Fund utilises a detailed proprietary valuation model, which includes a standardised risk-adjusted weighted average cost of capital (WACC) calculation. The output of the valuation model is essentially the equity IRR for each stock, the primary valuation tool utilised by the investment team.

For each stock within the focus list, there is a detailed five-year forecast dividend payment calculated, as well as a target price in year five. The target price in year five is determined by the discount of future expected cash-flows back to year five, discounted using the calculated WACC. In assessing future cash flows, the Fund will generally model cash flows based on the entirety of contracts in place, or to ensure that cash flows are in a steady state, generally around the 20 to 30-year mark. On this basis, a terminal value is then assumed, applying a terminal rate in accordance with the Gordon Growth Model.

In terms of the discount rate used, a risk-adjusted WACC is applied, which takes into account various stock-specific and relative to peer-group risk factors. A standard methodology is used to derive the inputs to the calculation of this for each company and in particular, the risk free rate, market risk premium, sovereign risk, long bond and debt premium and the asset beta, which takes into account each individual asset and the underlying quality of the cash flow. The overall equity IRR is then calculated using the current stock price – the five-year forecast dividends and the exit price.

PROCESS ANALYSIS 25


Valuation Methodology For each stock an IRR is calculated using the current stock price, five-year forecast dividends and an exit valuation is determined by the DCF of the expected future cash flows.

The cash-flows are discounted using a risk adjusted weighted average cost of capital, as discussed above. In assessing the discount rate, stock specific risks, including quality of management, structural complexity, acquisition strategy and refinancing upside are considered. Risks relative to peers are also considered, including the resilience of cash flows, low fixed operational cost base, monopoly characteristics, regulatory environment, inflation hedge and the volatility of earnings.

The valuation methodology will compute an expected equity IRR, which is used as the basis, for portfolio construction.

Portfolio Construction

Process The Portfolio construction meetings are held twice weekly following the research meetings and are attended by the Investment Directors, Portfolio Managers and the Dealer for the Fund. Analysts will attend these meetings as and when required. The stock ideas and research, which are discussed during the week, form the basis for the portfolio construction meetings.

The main focus of the portfolio construction meetings will be to review proposed portfolio changes. It is estimated that the portfolio construction process is based 80% on the bottom-up analysis of the focus list stocks and 20% top-down, based on the experience of the Investment Committee and its expectations of a number of relative value measures between particular regions and sectors. The bottom-up analysis includes utilising the quantitative internal rate of return criteria. The portfolio construction process and guidelines incorporate risk controls within the overall portfolio, including:

• Sector and regional limits

• Asset maturity limits

• Stock limits

After taking into account the risk control noted above, stock weightings are based on a combination of the extent of a stock’s undervaluation compared to RARE’s view of fair value (as measured by the equity IRR), with the RARE Investment Committee’s understanding of the sector and companies used as an overlay.

Accordingly, stock weightings are based on a ranking model.

Expected Equity IRR Maximum Weighting (% Total Portfolio)

Rank 1 13% + 6%

Rank 2 11% 5%

Rank 3 10% 4%

Rank 4 9% 3%

The stock weights in the portfolio are allowed to drift by market movement to a maximum of an additional 33% of the maximum stock buy limits as noted above. To protect the weighting and ranking during the entry process, absolute ‘buy’ limits are placed on each stock and RARE ceases buying stocks as soon as the buy limit is reached.

PROCESS ANALYSIS 26 PROCESS ANALYSIS 27


Rules The Investment Committee is responsible for monitoring portfolio risk, with the main parameters below:

Sector Parameters Target

Essential Services 45%–70%

Transport 25%–45%

Communications 0%–15%

Community & Social 0%–10%

Cash 0%–20%

Regional Parameters Target

UK/Europe (Developed) 20%–45%

Asia Pacific (Developed) 0%–25%

North America (Developed) 20%–45%

Developing 0%–25%

Cash 0%–20%

Asset Lifecycle Maturity Target

Greenfield 0%–20%

Developing 0%–20%

Mature 70%–100%

Trading/Implementation

Agents and processes The Fund uses ten global brokers, nine local brokers and two agency execution only broker for Direct Market Access (DMA). Brokers are selected based on a voting and ranking process, with broker rankings reviewed every six months.

The market globally is divided into five regions, Australia, Asia Pacific, Europe, North America and Latin America. Broker allocation is driven by Best Execution, with research targets reconciled after trading. Broker votes are allocated according to Research (Analysis/Research, contacts, conferences, company contacts, Industry Reports), Dealing, (Execution including flow and liquidity sourcing, settlements/back office, market information, market momentum analysis) and Other Factors (IPOs, Conferences, Macroeconomics/strategy, company/industry road trips and contacts with regulators).

As the Fund has a long-term focus, a relatively low turnover approach acts to minimise overall transaction costs. Historic turnover is in the range of 30% to 50%.

Hedging The Fund hedges 100% of its currency exposure back to Australian Dollars. An audited derivatives risk statement is in place to ensure the appropriate processes and procedures are followed.

Since the Fund’s inception, the Fund has maintained a hedge of between 95% and 101%.

Sell Discipline

Decision process Each stock has a target valuation and an entry/exit price point recommendation. A number of events will prompt a review of the stock valuation, including:

• Market price movements which alter a stock ranking

• Fundamental changes to a business model or regulatory environment

• A stock is excluded from the investment universe during the screening process.

If the price of a stock falls, the Fund will thoroughly reassess the fundamentals and then speak with the company’s management and/or other relevant parties before deciding whether the stock should be sold or whether there is an opportunity to increase the holding.

PROCESS ANALYSIS 27

INTRODUCTION DISCLAIMER

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RARE Infrastructure Value Fund – Hedged · RARE Infrastructure Value Fund – Hedged INDEPENDENT...

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