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Emerging Leaders PortfolioQuarterly Report June 2017

Investment Portfolio June 2017

The Watershed Emerging Leaders Portfolio is a separately managed account, or SMA, actively managed by Watershed Funds Management. SMAs are professionally managed portfolios of direct shares whereby the investor receives beneficial ownership of the underlying securities.

Investment Objective The objective of the Watershed Emerging Leaders Portfolio is to provide investors with long-term capital growth and some tax effective income from a concentrated portfolio of stocks listed outside of the ASX 100. The Portfolio aims to outperform the ASX Small Ordinaries Accumulation Index over the medium to longer term (three to five years) by 2-3% per annum, by undertaking rigorous bottom up stock analysis and active portfolio management.

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Health Care Services 2.5%Consumer Discretionary 9.4%Commercial Services/Industrials 9.3%Consumer Staples 5.5%Diversified Financial 10.5%Retail 7.4%Materials/Mining 10.4%Software & Services 13.6%Telecommunications/IT 3.6%Cash 27.8%

Inception 6 August 2013Benchmark S&P/ASX Small Ordinaries Accumulation IndexAuthorised Investments ASX listed companies not in the ASX 100

No Company name ASX Code

1 Appen Limited APX2 Reliance Worldwide RWC3 Orora Limited ORA4 Link Market Services LNK5 Independence Group IGO

Portfolio structure

Sector Allocation

No. of Stocks 15—30Cash Allocation 2—40%Tracking Error 5—9% per annumInvestment Horizon At least 3—5 years

Key Portfolio Features

*Inception since August 2013

• Note The Portfolio is designed for investors who seek long term capital growth & some tax-effective income and have a longer -term investment horizon of at least three years and accept the risk of significant price fluctuations.

BoughtHFAParticipated in BIN IPO

SoldFSFFBU

TrimmedAFYBTT

Topped UpIGOBTTNVL PlacementCKFLNK

• The S&P/ASX Small Ordinaries Accumulation Index fell 0.35% during the past quarter, underperforming the Watershed Emerging Leaders SMA which rose by 1.81%.

• The Watershed Emerging Leaders SMA has underperformed the ASX Small Ordinaries Accumulation Index by 4.01% in recent history due in part to a large rally in the small resources index and also the comparative underperformance of growth stocks compared to value stocks in the smaller company space.

• The portfolio has still produced an impressive 12.11% since inception.

Top Contributors Key DetractorsAPX A3DAFY BBGPWH CLQ

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Portfolio Changes

Performance Summary

Performance Attribution for Month

Quarter in Review June 2017

Gross performance (%) 1m 3m 6m 1yr 2yr 3yr Inception*

WFM Emerging Leaders SMA 2.93% 1.81% (3.87%) 3.00% 10.28% 11.42% 12.11%

S&P/ASX Small Ords Accum Index 1.99% (0.35%) 1.11% 7.01% 10.65% 7.13%

Relative Performance 0.94% 2.16% (4.98%) (4.01%) (0.37%) 4.29%

Performance

• As referenced, it has been a challenging twelve months in the small cap space, and the SMA has underperformed the S&P/ASX Small Ordinaries Accumulation Index. The period of underperformance now looks to be turning around as out of favour stocks are beginning to rebound as investors revisit the investment thesis of what constitutes quality investment in the mid-cap space. This should only help the performance of the SMA as we have neither chased the small resources trade nor the switch from perceived expensive “growth” stocks to poorer quality but cheaper “value” stocks.

• We are actively looking for ideas to deploy our relatively high level of cash to reaffirm our view that the risk/reward skew is moving back in favour of the small cap sector. We subsequently made several changes to the portfolio.

Performance Commentary

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Quarter in Review June 2017

• During the quarter we opened a position in HFA Holdings Limited (HFA) who are an alternative asset manager that runs funds for high net worth investors around the world. They have a strong track record of performance with a growing client base that tends to have low turnover given the conservative nature of their investments.

• We added National Veterinary Care Limited (NVL) to the portfolio via an institutional placement. NVL is a leading provider of veterinary services in Australia and New Zealand and have an attractive business model that we believe will see them be successful as a consolidator in this highly fragmented market.

• We also participated in an IPO for Bingo Limited (BIN) at $1.80 to which we received a 3.4% allocation. Bingo is a waste management and recycling company located in NSW. The company is a vertically integrated operator across the waste collection, processing, separation and recycling components of the waste value chain.

• There was also some corporate activity during the quarter offering favourable prices through right issues for both Collins Foods and Link Administration, both of which we participated in.

• Collins Foods (CKF) announced a 1 for 11 rights issue to acquire a network of 28 KFC stores in Australia from Yum Brands for $110M. And Link Administration (LNK) announced a 4 for 11 rights issue to acquired UK-based Capita Asset Services for £888 million. We believe both deals further underpin the investment attractiveness of both companies.

• We divested our positions in Fonterra and Fletcher Building given our view that the outlook for these businesses was becoming increasingly challenged.

• We trimmed our position in Afterpay into price strength and topped up our position in Independence Group into price weakness.

• Despite the underperformance by the SMA, most of our holdings are performing strongly from an operational perspective and we remain confident on the outlook for our portfolio.