Page 3 - Private Wealth Specialist Growth Moderate

These two narratives have quite distinct market backdrops and hence portfolio playbooks, resulting in volatility creeping up through the quarter as
investors readjusted portfolio settings to account for the changing consensus.

The implications of higher rates for longer in light of inflation remaining stickier than expected is an interesting dynamic and hence dilemma for
investors – is this time different in that economic resiliency can be maintained; or do higher rates for longer eventually lead to a more meaningful
economic downturn? We finally started to see the impact of higher rates and higher inflation in the quarter with cost-of-living pressures showing up in
the data including weaker retail sales growth, falling household savings, excess discretionary spending capacity almost all gone, and borrowing costs
catching corporates by surprise in terms of impacts to their bottom line.

In other economic developments, employment conditions remained strong in most jurisdictions, maintaining upward pressure on inflation, particularly
in services. Residential housing market sentiment and hence prices began to reaccelerate higher on continuing tight supply, increasing immigration
(Australia), and full employment with reasonable wages growth still coming through. This was in contrast to leading indicators still pointing to likely
recession in the period ahead, or significantly weaker conditions at the very least (ie. recession-like).

Economists and investors became ever more impatient with China’s economic woes as the country’s economic data continued to worsen with
slumping household and business confidence / sentiment, very high youth unemployment, a still deflating housing market bubble, concerns that
Chinese government overregulation would remain, and both foreign demand and capital flows slowing. The government continues to provide very
measured and specific stimulus, prioritising stimulus volume over size, which provides incremental stability to the economy over a longer period of
time rather than fixing any malaise with a big bazooka approach to stimulus – a play book that China has used regularly and aggressively over the last
20-30 years. However, the more current measured approach from Chinese officials has seen investors favour developed markets and other emerging
markets (e.g., India, Korea, Mexico).

We almost saw another US government shutdown as the current administration’s insatiable (and ridiculous) spending continues, racking up even
larger deficits and adding to the US$33 trillion debt pile! Basic economics teaches you to do the complete opposite when there is strong economic
growth, and you are trying to curb runaway inflation. In the absence of economic rationalism, the current administration’s approach applies significant
additional pressure on monetary policy (ie. central bank activities) and/or forces investors to react accordingly (ie. sell bonds, rising yields). Both
occurred in the quarter, with rhetoric from the Federal Reserve increasingly more hawkish, putting another rate rise on the table for this year and
dousing expectations of significant rate cuts in 2024.

From a market perspective, we saw both ups and downs for most asset classes given the changing dynamics discussed above. The A.I. / technology
sector received considerable positive attention, with surging prices for anything tagged as being “A.I.” broadening into support for technology names.
Corporate reporting season was mixed at best, with results coming in a little better than fairly weak expectations, whilst the limited guidance provided
was generally weak with rising costs and slowing demand expected in the period ahead. Those companies with very low debt levels or no debt are
clearly in enviable positions.

Oil prices surged higher in the quarter as supply was further tightened by OPEC and Russia, first temporarily and then more permanently, whilst
demand remained resilient. Conflicts in oil/gas rich regions also supported the price push higher as investors fretted over additional supply shortages,
whilst investment in new oil/gas fields remains constrained by the global push to renewable energy sources.

There was also weakness in the AUD/USD in the period as concerns regarding the Chinese economic outlook rose (negative AUD) whilst expectations
of narrower interest rate differentials between Australia and the US were dashed (positive USD) as the higher rates for longer mantra took hold.

Portfolio update
Portfolio returns for the September quarter came in above expectations, as investment selection within Australian direct equities significantly
contributed whilst allocation and selection within bonds also significantly contributed to returns given the significant underweight to interest rate
duration.

Drivers of performance on the asset allocation side included an overweight to global equities versus Australian equities as unhedged currency
exposure assisted returns given falls in the Australian dollar. Positioning within Australian and global equities detracted as our allocation to Australian
mid/small sized companies and ex-US equities hurt relative returns. Allocations to infrastructure hurt absolute returns as rising real yields and
concerns regarding longer duration assets hit home in the quarter. Positioning within bonds assisted relative returns given our low interest rate
duration exposure.

Drivers of performance on the investment selection side were wide and varied. Within Australian equities, the direct stocks held performed strongly,
outperforming by nearly 3% as many of the stocks held up well during reporting season, whilst GLP1-affected ResMed and CSL did their best to
detract from returns. Vanguard also contributed to relative performance within small companies. Within global equities, our unhedged currency
exposed investments assisted as the Australian dollar fell, but our underweight to US equities largely gave back those returns. Within property and
infrastructure, both allocation and selection hurt relative returns as infrastructure underperformed property, whilst Magellan performed poorly due to
their overweight to utilities. Within bonds, the portfolio’s exposure to hybrid securities significantly contributed to returns given their floating rate
structures (ie. no interest rate duration), whilst Ardea also benefited from their zero duration positioning and active trading.