February 2014

TAE

Market Review

2

February2013

April May June July August September November December January2014

February

:XJO.ASX@AUX

5310.1

4700

4800

4900

5000

5100

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5300

5400

Positive Factors

3

Low Interest Rates:

Strong money growth and a positive yield curve are supportive of equities.

A bear market would typically be associated with a negative spread between long and short rates signalling a potential slowdown in the economy.

Positive Factors

4

Valuations:

Market is not cheap at current levels, however not significantly overvalued.

Importantly valuations do not always provide a great signal for a turn in equity markets.

The direction of earnings provides the more important signal.

Positive Factors

5

Earnings Outlook:

We see the outlook for earnings as being much improved compared to recent years.

While there are has been some high profile downgrades, number and quantum is not as great as recent years.

Positive Factors

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Earnings Outlook:

A falling currency supports offshore earnings for many companies.

Lower interest rates to reduce finance costs.

Cost cutting from a range of companies will improve margins.

Pockets of top line growth from increases in housing, consumer and market related activity.

Positive Factors

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Sentiment Remains Negative:

We are inclined to be more cautious when the market is bullish.

Markets became more comfortable last year, however a significant level of caution prevails.

Furthermore the past decade has seen an enormous weighting towards cash and bonds away from equities.

Risk Factors

8

Emerging Markets:

Concerns have arisen regarding potential problems in emerging markets and a fall in their currencies have triggered concerns of the Asian crisis in 1997.

In 1997 there were fixed currencies, large foreign currency borrowings and large external imbalances.

This time around currencies have been adjusting.

Risk Factors

9

Emerging Markets:

EM as a whole has a much better current account balance than two decades ago and less borrowing.

We think the risks of contagion are actually quite low.

Risk Factors

10

Chinese Growth Rates:

Pro growth policies showing progress

One Child Policy

Improved land ownership for farmers

Financial reforms to improve IPO market

Privatise State Owned Enterprises

So we were disappointed with soft January data.

Collapse of Trust products remains the key market concern and this risk rises if growth slows.

Two years into downturn in China – we expect to see some improvement later in the year.

Risk Factors

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QE Unravelling:

The unravelling is likely to lead to a steady decline of the excess valuations in bonds and currencies.

This in turn could cause some relative weakness in select equities.

Market Review

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Conclusion:

Despite rocky start to year we remain positive on markets overall:

Liquidity remains strong;

Earnings are improving;

Valuations are not stretched; and

Sentiment while improved, has further to run.

Market move will be more of a jagged edge as earnings growth is weighed against economic growth outlook

Current Portfolio Positioning

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Companies which can control their profit and value accreting outcomes (NAB,

ORG, AZJ, TWE).

Pockets of top line growth in housing, market exposure (LLC, SGP, DLX, HGG,

MQG).

Offshore plays (BXB, QBE).

Resource stocks (BHP, RIO)

Cautious on high PE growth stocks following a strong re-rating last year.

Underweight the high yielding segment which can suffer as QE unravels.

Macquarie Bank

Stock is recovering but still not expensive on 14x subdued earnings.

Significant growth opportunity from:

$3.6tr Infrastructure needed in the US

Private equity recycling capital $3.5tr

Recovery in Asian capital markets

Large pipeline of performance fees

Recovery for Securities Business

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Treasury Wine

Disappointing 1H14 result

Sales are subdued – Australia, China

But we have added to the stock in weakness because

Current market value is $2.3b despite Fosters spending around $8b on the wine assets including $2.5b on the US wine assets which currently do not earn any money.

Significant asset value with $1.2b of inventories carried at cost, $1.3b of hard assets including wineries and bottling plants.

Net tangible assets including no goodwill for Grange, Penfolds, Wolf Blass etc and the inventory is in at cost of $2b

Net assets including $1b for goodwill is $3b – 30% above the current share price

Private equity bid for the company at $2.7b in 2010 when there was no inventory on the balance sheet and the A$ was higher.

Good balance sheet – net debt is only $293m

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Performance

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PERFORMANCE FOR PERI OD ENDED:

AUSTRALI AN EQUI TI ES - High Conviction 1 MONTH 3 MONTHS 6 MONTHS 1 YEAR 2 YEARS 3 YEARS 5 YEARS SI NCE I NCDIRECT AUSTRALIAN EQUITY PORTFOLIO -3.32% -3.21% 9.44% 18.03% 20.91% 11.71% 16.7% 13.4%ASX S&P 200 ACCUMULATION INDEX -3.03% -3.54% 5.06% 11.06% 15.49% 7.77% 12.90% 9.7%

-0.29% 0.3% 4.4% 7.0% 5.4% 3.9% 3.8% 3.7%AUSTRALI AN EQUI TI ES - Socially Responsible 1 MONTH 3 MONTHS 6 MONTHS 1 YEAR 2 YEARS 3 YEARS 5 YEARS SI NCE I NCDIRECT AUSTRALIAN EQUITY PORTFOLIO -3.16% -3.01% 9.36% 18.15% 21.15% 11.75% 16.37% 9.65%ASX S&P 200 ACCUMULATION INDEX -3.03% -3.54% 5.06% 11.06% 15.49% 7.77% 12.9% 5.0%

-0.13% 0.53% 4.30% 7.10% 5.66% 3.99% 3.46% 4.65%AUSTRALI AN EQUI TI ES - I ncome 1 MONTH 3 MONTHS 6 MONTHS 1 YEAR 2 YEARS 3 YEARS 5 YEARS SI NCE I NCDIRECT AUSTRALIAN EQUITY PORTFOLIO -2.27% -2.32% 10.69% 22.23% 28.50% 17.1% 17.4% 5.7%ASX S&P 200 INDUSTRIAL ACCUMULATION INDEX -3.02% -3.53% 4.99% 16.12% 23.75% 14.3% 16.1% 2.6%

0.75% 1.21% 5.70% 6.11% 4.76% 2.81% 1.35% 3.05%PROPERTY 1 MONTH 3 MONTHS 6 MONTHS 1 YEAR 2 YEARS 3 YEARS 5 YEARS SI NCE I NCDIRECT LISTED PROPERTY TRUST PORTFOLIO 1.36% -3.08% 2.49% 4.60% 16.78% 10.95% 14.04% 7.91%ASX S&P PROPERTY ACCUMULATION INDEX 0.47% -3.61% -0.23% 3.06% 16.52% 11.25% 10.9% 3.4%

0.89% 0.54% 2.72% 1.54% 0.27% -0.29% 3.12% 4.5%

FI XED I NTEREST 1 MONTH 3 MONTHS 6 MONTHS 1 YEAR 2 YEARS 3 YEARS 5 YEARS SI NCE I NC

DIRECT AUSTRALIAN FIXED INTEREST PORTFOLIO 0.50% 1.08% 3.28% 5.72% 6.99% 7.40% 10.59% 6.56%FIXED INTEREST inc FRANKING 0.50% 1.08% 3.36% 5.95% 7.41% 8.03% 11.26% 6.92%UBS CORPORATE BOND INDEX 0.86% 1.54% 2.33% 5.02% 7.14% 7.66% 7.10% 6.5%

-0.36% -0.5% 1.0% 0.7% -0.2% -0.3% 3.5% 0.0%I NTERNATI ONAL EQUI TI ES 1 MONTH 3 MONTHS 6 MONTHS 1 YEAR 2 YEARS 3 YEARS 5 YEARS SI NCE I NCINTERNATIONAL MANAGED FUNDS PORTFOLIO -1.93% 7.26% 9.98% 35.11% 27.58% 14.60% 10.1% 7.0%MSCI EX AUST IN AUD -1.20% 8.84% 10.47% 38.58% 27.92% 14.22% 9.1% 4.7%

-0.73% -1.59% -0.50% -3.48% -0.35% 0.39% 0.96% 2.27%

31/ 01/ 2014