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Investment Update March 2011

Investment Update March 2011. Elstree Investment Management Limited (ABN 20 079 036 810) AFS License number 225721 Level 15, 333 Collins Street Melbourne VIC 3000 Telephone: 61 3 8689 1348 www.eiml.com.au. Disclaimer.

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Investment Update March 2011

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  1. Investment Update March 2011 Elstree Investment Management Limited (ABN 20 079 036 810) AFS License number 225721 Level 15, 333 Collins Street Melbourne VIC 3000 Telephone: 61 3 8689 1348 www.eiml.com.au

  2. Disclaimer The information and opinions contained in this presentation have been obtained from sources of Elstree Investment Management Limited (ABN 20 079 036 810) believed to be reliable, but no representation or warranty, express or implied, is made that such information is accurate or complete and it should not be relied upon as such. Information and opinions contained in this presentation are published for the assistance of recipients, but are not relied upon as authoritative and may be subject to change without notice. Except to the extent that liability cannot be excluded, Elstree Investment Management Limited does not accept liability for any direct or consequential loss arising from any use of material contained in this presentation. Elstree Investment Management Limited Elstree Investment Management Limited

  3. Executive summary Fund performance, Benefits of investing in the Australian Enhanced Income Fund, Global credit outlook, Australian listed credit outlook, Outlook for the Australian Enhanced Income Fund, Fund metrics and investment strategy, Appendix Elstree Investment Management Limited Elstree Investment Management Limited

  4. Australian Enhanced Income Fund performance summary Fund has performed well post GFC. *Net return for the 12 month period to end February 2011 was 12.60% This compares to the bank bill rate of return over the same period of 4.77%. Fund well positioned to capture both capital growth and higher income opportunities over the next 12 – 18 months. Current net asset value (NAV) of a unit $6.937 (as at February 28, 2011); Total Fund return for CY 2011 expected to be c13.0% p.a. Income return c7.50% p.a. * Return is net of fees and excludes the benefit of franking Elstree Investment Management Limited Elstree Investment Management Limited

  5. Portfolio performance * Returns are net of fees and exclude the benefit of franking Elstree Investment Management Limited Elstree Investment Management Limited

  6. Benefits of investing in the Fund • Pooled exposure to at least 30 ASX listed corporate borrowers • Risks reduced because of diversification. • Gain access to the portfolio construction expertise of managers with a combined experience of over 75 years. • Stable income return of c7.5% per annum @ NAV of $6.94 with capital volatility of around 5% per annum. • ASX listed. • Transparency; • Monthly NAV reporting. • Enhanced liquidity provisioning; • ASX (daily) and • Quarterly off market at the Fund’s NAV. Elstree Investment Management Limited

  7. Global credit outlook The outlook for credit globally is positive. Factors contributing to the positive outlook include; The zero interest rate and enhanced liquidity provisioning policies of the global central banks in particular the US Federal Reserve, Significantly improved corporate metrics (i.e stronger corporate balance sheets initiated by a combination of equity capital raisings and debt repayment). As a consequence of improved corporate metrics and enhanced liquidity provisioning global default rates have declined sharply. The decline in default rates has not been mirrored by credit spreads which are lagging, When investors accept that default rates are likely to remain low credit spreads will contract generating capital growth in credit assets. Elstree Investment Management Limited

  8. Actual high yield defaults and lagging credit spreads Moodys and Merrill Lynch Elstree Investment Management Limited

  9. Australian listed credit outlook Underpinned by the same global influences as well as factors peculiar to Australia the outlook for listed credit is positive. Positive influences peculiar to Australia include; Credit spreads are significantly wider in Australia listed credit than they are elsewhere in the world (refer chart). This means that investors in Australian listed credit are getting paid more to invest in listed credit than elsewhere in the world. Declining return volatility is expected to encourage retail investors, who left the market when volatility spiked during the GFC, to return to the sector (refer chart). This will enhance liquidity which the sector has been devoid of throughout much of the post GFC period. Generally favourable economic conditions and Possibility of higher short term interest rates initiated by the RBA (refer chart). Elstree Investment Management Limited Elstree Investment Management Limited

  10. Margins are wider in Australian listed credit Source: Merrill Lynch and Elstree Elstree Investment Management Limited

  11. Volatility: Normalising Data: Elstree February 2011 Elstree Investment Management Limited

  12. The outlook for the Australian Enhanced Income Fund We estimate that the Australian Enhanced Income Fund’s total return will be approximately 13.0% per annum over the next 12 months and beyond. Our estimates are based on an average credit term of the Fund, assumes no defaults on coupon and principal payments and that discounts (i.e the difference between a security’s current market price and the PAR value) are amortised evenly over the expected term of each security. The Fund’s total return of 13.0% is comprised of; Quarterly cash distributions estimated to be 7.50% per annum Franking benefit of approximately 1% per annum to the cash return and Capital growth (amortisation of discount over the security’s life) estimated to be 4.7%. Elstree Investment Management Limited Elstree Investment Management Limited

  13. Fund metrics and investment strategy The Fund’s portfolio is well positioned to maximise capital gain and income opportunities over the next 12 – 18 months. Pro active portfolio management strategies to take advantage of capital gain opportunities including; Continued overweight exposure to discounted non bank sector, Reduced exposure to bank sector which is fully priced as Basel 3 treatment of hybrid debt will necessitate a number of securities being repurchased at PAR and Take advantage of improved liquidity conditions to more actively manage the portfolio. Income yield of underpinned by; Maturing coupons reinvested at higher absolute levels as a consequence of, Higher official interest rates initiated by the RBA. Exercise of step ups. Elstree Investment Management Limited Elstree Investment Management Limited

  14. Portfolio metric summary Elstree Investment Management Limited

  15. Appendix 1: Portfolio top 12 holdings (alphabetically) # Unlisted Elstree Investment Management Limited Elstree Investment Management Limited

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