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Source: Atrium, Iress. Allocations shown in the ‘Asset Class Exposure’ and ‘Risk Exposure’ charts as at the date of this report.Source: Atrium, Iress. Performance shown as at the date of this report. Inception date is 24 June 2011. Past performance is not a reliable indicator of future performance. Future performance and return of capital is not guaranteed. Performance is after fees and costs and assumes re-investment of all distributions.

KEY HIGHLIGHTS

The Atrium Evolution Series 5 Fund continues to outperform its objective, delivering a return of 4.2% p.a. over three years while maintaining volatility within its 5% upper risk limit over this period. We remain focused in managing the Fund to limit market drawdowns, and to deliver a more consistent return for investors over the longer term.

Performance in 2019 was strong across a majority of asset classes. The Fund returned 7.6% for the calendar year, despite a -0.1% return in the final quarter.   

The Atrium Enhanced Fixed Income Fund (AEFI) continued to deliver positive and stable returns for investors, returning 4.3% in 2019, substantially ahead of its cash + 2% objective.

The Atrium Equity Opportunities Fund has now returned 29.1% p.a. over the year outperforming its benchmark by 5.8%, and placing it in the top quartile of domestic equity managers.

The liquid alternatives allocation continues to deliver on its objective of providing absolute returns uncorrelated to major asset classes.

PERFORMANCE SinceInception

5 Yrsp.a.

3 Yrsp.a.

1 Yr 6 Mths 3 Mths 1 Mth Vol SinceInception p.a.

SharpeRatio

Atrium Evolution Series -Diversified Fund AEF 5RBA Cash Plus 2.5%

5.4 %

4.8 %

4.1 %

4.1 %

4.2 %

3.9 %

7.6 % 2.6 % -0.1 % -0.1 % 2.9 % 1.1

31 December 2019

INVESTMENT OBJECTIVETo maximise returns within the constraint of ensuring that portfolio risk, or volatility, does not exceed 5% over theinvestment time horizon.

ASSET CLASS EXPOSURE

31%

32%

15%

8%

4%5% 5% Liquid Alternatives

Rates & Credit

Private Markets

International Equity

Cash

Property & Infrastructure

Australian Equity

RISK EXPOSURE

46%

36%

18%

Diversifiers

Preservers

Growth

PERFORMANCE (SINCE INCEPTION)

100,000

120,000

140,000

160,000

Gro

wth

of $

100,

000

2012 2014 2016 2018

Atrium Evolution Series - Diversified Fund AEF 5 RBA Cash Plus 2.5%

ATRIUM EVOLUTION SERIES -DIVERSIFIED FUND AEF 5

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MARKET COMMENTARY

The December quarter was dominated by ongoing monetary policy accommodation and broadly better macroeconomic data in the face of lingering uncertainty around a series of political / geopolitical risks (notably impeachment, China trade discussions and Iran). As the US and China staggered towards a Phase 1 trade agreement, policy easing by the US Federal Reserve (Fed) and the Reserve Bank of Australia (RBA), and better data was a good combination for equity markets. World equities rose 4.4% in Australian dollar terms, as strength in the Australian dollar (up 4.0% for the quarter) offset the equity market strength. Bond markets were mixed, although credit continued to perform well.

The US S&P 500 index returned 9.1% for the quarter in a strong end to 2019. US data improved into year end, which is typically supportive of corporate earnings and market valuations, although renewed liquidity provision from the central bank also drove the market higher. The Fed cut rates as broadly expected in late October, however perhaps more important was the decision to again grow its balance sheet by buying treasury bills. The Fed stressed that this was not a return to quantitative easing – although many disagreed – however the liquidity seems to have leaked back into markets, supporting equities (and preventing bond yields rising too sharply). Within the US equity market, it was again the information technology sector which led the way, returning 14.4% for the quarter. Apple rose 31.5% for the quarter, and Microsoft also rose sharply (+13.8%), both ending with market capitalisations well above $US1 trillion. Financials were also strong, returning 10.5%. Outside the US market, emerging markets were also very strong(+10.0%), led particularly by those countries heavily exposed to oil (Russia rose 12.5% for the quarter). European markets lagged other markets, although still returned a healthy 5.7% for the quarter. The UK market rose only 2.7% despite the strong December election results achieved by Boris Johnson. The key drag on the market (and expected earnings) seems to be the significant recovery in the currency over the quarter given the high portion of US dollar profits earned by the multinationals within the index.

Australian equities lagged global peers, returning 0.7% for the quarter, although still returned in excess of 23% for 2019. Banks were a drag on the local market, falling 9.4% for the quarter, in large part due to Westpac’s (-15.8%) money laundering woes. The insurance sector also fell 3.2%, weighed in part by the horrific bushfires across Australia, and a fear that this may become a more regular event for the sector. The standout to the upside was healthcare (+14.0%), mostly driven by CSL which returned 18.0% over the period as it continued to hit new highs.

Over 2019, the US Fed cut interest rates 3 times, and ceased the run-off of its balance sheet, which is again increasing at a significant pace. Following the aggressive move lower in bond yields, 10-year US Treasury yields rose slightly over the December quarter from 1.7% to 1.8%. The RBA also cut rates 3 times in 2019, in each instance by 25 basis points, driving yields to record lows. As markets see the RBA cutting further from here, shorter yields fell over the December quarter (3-year bond yields fell from 0.7% to 0.6%) while 10-year yields remained at 1.0%. German bonds remained at negative yields out to at least 10-years, although moved up during the quarter leading to negative returns on the Euro bond indices. Credit markets remained very firm, being supported by the ongoing central bank easing programs, and the resulting low levels of market volatility.

The Australian dollar rose 4.0% to 0.70 against the US dollar over the quarter, driven by rises in commodity prices, and the general risk-on stance in markets. Behind the gains in the Australian dollar was also a turn lower in the US dollar against major currencies over the quarter, partly driven the US liquidity measures.

PORTFOLIO COMMENTARY

The Atrium Evolution Series 5 Fund continues to outperform its objective, delivering a return of 4.2% p.a. over three years while maintaining volatility within its 5% upper risk limit over this period. We remain focused in managing the Fund to limit market drawdowns, and to deliver a more consistent return for investors over the longer term.

Performance in 2019 was strong across a majority of asset classes, notwithstanding a volatile December that detracted from performance. The Fund returned 7.6% for the calendar year, despite a -0.1% return in the final quarter.

The main return drivers for the quarter were global equities as trade war and Brexit risks faded against a backdrop of improving PMIs (an index of Purchasing Manager views that market conditions are expanding, unchanged or contracting) while central banks around the world retained accommodative monetary policy. The US dollar declined against most major currencies including the Australian dollar, and bond investments saw rising interest rates generally offset tighter credit spreads, leading to lower overall returns for most of the major bond indices.

As part of our dynamic asset allocation approach, we gradually added risk to the Fund towards the end of the quarter via option trades, due to the improving macro environment and receding trade war risks. These positions have contributed positively to Fund performance as equity markets continued higher.

Within the equity allocation, our decision to overweight global rather than domestic Australian equities was rewarded, as global markets finished the year stronger and the domestic equity market lagged noticeably in the December quarter. While global markets have been able to generate solid earnings growth over 2019, domestic equities have struggled, and we believe will continue to face headwinds into 2020.

Preservers

The preserver allocations accessed via the Atrium Enhanced Fixed Income Fund (AEFI) continued to deliver positive and stable returns for investors. For the 2019 calendar year, the fund returned 4.3%, substantially ahead of its cash + 2% objective.

The largest underlying externally managed exposure in AEFI, the Kapstream Absolute Return Income Fund, performed well returning 0.9% for the quarter while ending the year positioned slightly longer than its typical duration (sensitivity to interest rates).

The Daintree Core Income Trust also performed well, returning 0.5% for the quarter with the trust benefiting from tightening credit (corporate bond) spreads partly offset by a longer interest rate duration (1 year at year end). Our target weight for this manager has increased to 15% as the trust has continued to grow and achieve its investment objectives.

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PORTFOLIO COMMENTARY

The JP Morgan Global Strategic Bond Fund (GSBF) returned 0.5% for the quarter as US credit markets remained firm over the year. The majority of the fund’s credit exposure remains in US dollar assets, reflecting the manager’s view of relative value. The GSBF held a 5% target weight over the quarter and returned a very strong 6.1% for the full year.

The loan exposures in the Metrics Credit Partners Wholesale Income Trust continued to provide a higher yield allocation, with the added benefit that the manager sees very little month to month volatility. This is included in our illiquid exposure given the trust’s liquidity terms.

Additionally, we continue to take a dynamic approach to managing the fund, reducing Australian bond futures in early October in favour of call options on US Treasuries which looked cheaper after a period of underperformance relative to Australian bonds.

Diversifiers

During the calendar year the liquid alternatives allocation delivered on its objective of providing absolute returns uncorrelated to major asset classes. Our conviction in this allocation remains strong considering the current dangers of relying solely on low yielding government bonds for protection in multi-asset portfolios.

The final quarter of 2019 saw renewed optimism in global markets. This reflationary mood caught some of our alternatives strategies offside as they had entered the fourth quarter positioned in safe haven assets such as the USD, bonds and precious metals. Despite a difficult final quarter that saw a reversal of price trends evident at the start of the year, our trend following strategies delivered returns of between 8% and 22% over the year.

The momentum shift was also evident between sectors and investment styles in global equity markets. Bennelong Long Short Equity Management (Bennelong) was rewarded for patience in many of its pairs trades in particular its long Qantas/short Flight Centre and long Bluescope Steel/short Sims Metal pairs. Bennelong’s 13.5% final quarter drove much of its calendar year return. In contrast, for Regal Tasman Market Neutral Fund the fourth quarter was difficult as it featured changing fortunes for many of its previous winning positions such as Smart Group and Opthea; however, the fund has performed well over the 12 month period, delivering a return of 14.1%.

Special mention is also made of the 5.5% return Zebedee Capital Partners LLP (Zebedee) delivered in the final quarter. The manager successfully navigated several sector momentum shifts over the course of 2019 and returned 15.4% for the year. The ability of Zebedee to deliver these returns with little to no correlation to traditional equity risk or to equity styles provides a unique return stream that provides a valuable source of diversification to the portfolio.

Our recent investment in Two Sigma Risk Premia Cayman Fund (Two Sigma) finished the quarter positively and value-based strategies in both equities and macro assets helped Two Sigma outperform its peer group in the final quarter of 2019.

Private markets allocations continued to deliver strong risk adjusted returns. During the quarter the Evolution Fund exited the Realside 38 Westgate Fund, which held an industrial asset in Brisbane delivering a solid 11.7% IRR over the holding period. The Fund also exited an investment in property backed loan notes in Sydney at an impressive 15.3% IRR over an 18 month holding period.

Growth Drivers

Our equity managers all finished the year higher as markets were buoyed by improving macroeconomic data and more optimistic sentiment.

The Atrium Equity Opportunities Fund continued its solid outperformance over the previous quarter returning 1.8% in the December quarter compared to a 0.7% return in the benchmark S&P/ASX 200 Accumulation Index, with stock selection the key driver of outperformance. The fund has now returned 29.1% p.a. over the year outperforming its benchmark by 5.8%, and placing it in the top quartile of domestic equity managers.

Key contributors to the Atrium Equity Opportunities Fund performance included the Magellan Group which continued its strong run from the prior quarter on the back of increasing funds under management, while James Hardie was another strong contributor as the company benefitted from an improving US housing market. ResMed and Dominos also added to relative performance over the quarter. Detractors to performance over the quarter included retirement home operator Japara, which was impacted by recent negative sentiment in the sector, while Treasury Wines also detracted after some recently soft sales numbers, although the long term view of both of these positions remain positive.

Over the quarter, the fund exited its investment in Coles Group as Woolworths (another current holding) was assessed to be better placed to weather weaker consumer conditions. Holdings in ANZ and Westpac were also reduced as the fallout from the royal commission and a weak lending environment continue to impact Australian banks. During the quarter the fund added to positions in Ramsay Healthcare, EML and Treasury Wines, and further increased its allocation to BHP as economic conditions continue to improve in China alongside positive news on US/China trade negotiations.

A focus on quality franchises with proven earnings was helpful for SG Hiscock ICE Fund which returned 5.6% for the quarter. Key positive contributors included Lifestyle Communities, Webjet and Bravura.

Our global equity managers similarly all posted positive returns for the quarter. The Magellan global equities mandate (implemented via the Atrium Global Equities Mandate No. 1) returned 3.2% with key contributors from technology stocks, Apple and Microsoft alongside HCA Healthcare, while detractors included a number of the consumer staples stocks such as Nestle and Anheuser-Busch which lagged in a strongly rising market.

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Important Information: The information in this document (Information) has been prepared by Atrium Investment Management Pty Limited (ABN 17 137 088 745, AFSL 338 634). The Trust Company (RE Services) Limited (ABN 45 003 278 831, AFSL 235 150) is the Responsible Entity of the Atrium Evolution Series – Diversified Fund (ARSN 151 191 776) (Fund). The Information is of a general nature only and does not take into account the objectives, financial situation or needs of any person. Before acting on the Information, investors should consider its appropriateness having regard to their own objectives, financial situation and needs and obtain professional advice. No liability is accepted for any loss or damage as a result of any reliance on the Information. Investors should consider the Fund’s Product Disclosure Statement (PDS) (available from www.atriuminvest.com. au) before making any investment decision. Past performance is not a reliable indicator of future performance. Future performance and return of capital is not guaranteed. The Magellan Global Equities Mandate is a separately managed portfolio managed by Magellan Asset Management Limited in a manner consistent with the Magellan Global Fund.

PORTFOLIO COMMENTARY

The Antipodes Global Fund finished the quarter strongly, returning 4.2%. Positive contributors to performance were broad based, including technology stocks Samsung and Alibaba, alongside banks (Unicredit) and industrials such as GE and Siemens. During the quarter the fund also benefited from the announced takeover of Tiffany & Co by luxury brands company LVMH.

Outlook

2019 was a strong year for markets, as the return of monetary stimulus and a fall in risks to global growth propelled asset prices higher. Looking ahead, 2020 is a presidential election year in the US and markets tend to be more buoyant earlier in the presidential term than at the end. However, the Fed is likely to be on hold with market pricing implying largely unchanged cash rates in 2020, a positive sign for global economic growth and investment markets, while easing global trade tensions should provide an added boost for risk assets. While these factors have the potential to lead to higher market performance over the short term, we remain mindful of other valuation measures as well as market sentiment, which often become extended in a late market cycle.

As a result, we are positioned to manage the portfolio dynamically (utilising a range of instruments) in order to achieve our clients’ investment objectives with lower volatility. We remain positioned around the middle of our equity ranges in order to participate in equity market strength, while maintaining a healthy exposure to diversifiers and preservers in order to manage the volatility and preserve capital.

ATRIUM EVOLUTION SERIES -DIVERSIFIED FUND AEF 5

31 December 2019