September 2014

Investment review

Market Review

2

Volatile markets

End of QE

Deflation concerns

Rebound

Ebola overdone

Geopolitical risks

US economic data strong

Lower oil price, lower bond yieldsNov2013

Dec Jan2014

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:XJO.ASX@AUX

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End of QE

3

QE coming to an end in the US as economic outlook improves

US ISM

End of QE

4

Increasingly QE no longer seem to be working to drive animal spirits

Low interest rates are encouraging companies to hand back cash

Low interest rates are compressing returns which undermines the need for companies to invest

Productivity improvements are being saved by conservative boards.

Alternatives are needed – does higher rates drive animal spirits?

QE has worked for stocks

End of QE

5

Two strongest trades during low interest rate period

Defensive high yielders – now 72% of the market

Structural growth stories

Deflation

6

Poor economic data from Europe and low oil price raised the possibility of deflation

Outlook for Europe remains poor however

Market expectations are also low

Pressure on Russia is increasing

A steadily recovering global economy. Markets managed to navigate a 20 year deflation of the Japanese economy.

German Bunds Oil Price

Domestic Outlook

7

Outlook improving driven by

Lower currency

Lower oil price

Finalisation of budget

Wealth effect of housing and equities

Small sign of improvement in sentiment

Newsflow

8

Given volatile top down focus on newsflow across the portfolio which was very strong across the month.

Aurizon: 1Q above rail volumes increased 1% and volume guidance reiterated.

Bank of Queensland: 21% increase in cash profits for 2014 above market expectations.

Henderson’s: GBP1.4b in net FUM inflows for the 1Q

JB Hi Fi: Reported year-to-date (as at 26 October) sales growth of 0.5%

Macquarie Atlas: 2.6% increase in toll revenue including an impressive 6.6% increase in Dulles Greenway

Macquarie Bank: 1H15 result up 35% (5% better than the market was expecting).

Resmed: Announced 1Q results with sales up 6% better than expected.

Sonic Healthcare: Chosen as preferred proponent to operate a laboratory in Alberta Canada. This is expected to enhance earnings by 2-3%.

The resource sector continues to be the weak sector across the portfolio (and the market) with BHP, RIO and Origin reflecting the softness in commodity prices at present.

Medibank

9

Strengths: Strong market share, ageing population, premiums increase at 6% pa, no debt

Opportunities: Reduce costs and reduce claims to drive a 2% improvement in margins from 4.5% to 6.5%, improve marketing to stop loss of share, consolidate fragmented market

Weaknesses: Losing share consistently and paying iselect to hold onto customers, cannot select the risks they want to take, Board lacks experience.

Threats: Affordability means customers are dropping extras, possible changes in Govt policies, lack of accountability in healthcare.

Return: From $2 we estimate 22% two year return based on margin improvement of 1%, 17x PE target.

Portfolio positioning

10

Our portfolio performed very well during September when concerns regarding the end of QE were paramount. It is underperforming when deflationary concerns take hold. Given interest rates are at 200 year lows, that the weight of money remains with defensive high yielding stocks and given the strong news flow in a range of our holdings this is a situation we are comfortable with.

Key area where we see opportunities:

Market underestimating growth strategy – IRE, VED, JBH & REC.

Clear cyclical recovery – DLX, MQG, HGG & LLC.

Restructuring to deliver growth – AZJ & MQA.

Offshore companies benefitting from lower A$ - QBE, RMD, SHL & TWE.

Major resource companies undertaking cost reduction opportunities – BHP & RIO.

Underweight higher yielding segment that can suffer as bond yields unravel.

11

Disclaimer

SOURCESGoldmanSachsMacquarieMorgan StanleyIRESSBloombergBCA Research

DISCLAIMERThis document has been prepared by Dalton Nicol Reid Pty Ltd, AFS Representative - 294844 of DNR AFSL Pty Ltd ABN 39 118 946 400, AFSL 301658. It is general information only and is not intended to be a recommendation to invest in any product or financial service mentioned above. Whilst Dalton Nicol Reid has used its best endeavours to ensure the information within this document is accurate it cannot be relied upon in any way and recipients must make their own enquiries concerning the accuracy of the information within. The general information in this document has been prepared without reference to any recipients objectives, financial situation or needs. Before making any financial investment decisions we recommend recipients obtain legal and taxation advice appropriate to their particular needs. Investment in a Dalton Nicol Reid individually managed account can only be made on completion of all the required documentation.