Page 3 - Specialist Income Moderate_March 2023

Holding Asset class Allocation (%)
Westpac Banking Corporation Cap Note 3-Bbsw+3.20% Perp Non-Cum Red T-0 Australian Equities 4.8
Westpac Banking Corporation Cap Note 3-Bbsw+3.40% Perp Non-Cum Red T-03-27 Australian Equities 4.8
Westpac Banking Corporation Ordinary Fully Paid Australian Equities 1.4
Woodside Energy Group Ltd Ordinary Fully Paid Australian Equities 1.4

Quarterly manager commentary

Market Update
The March quarter was largely a positive one for investment markets, but it felt like we went through ten rounds in the ring to get there.

It was a tale of three completely different months with wild swings in investor sentiment and expectations the driving force of investment markets.

January started off with a bang, in stark contrast to December returns, with investors feeding on any positive news they could get their hands on. This
included but wasn’t limited to: European energy crisis averted (a milder winter and the US provider support via their strategic petroleum reserves); US
company quarterly reporting season came through better than expected (though weaker than the same time last year); China reopening, which began
in November, continued supporting outlook for global supply chains and Chinese demand; and the changing interest rate dynamic (flipped to dovish)
as the US central bank shifted to smaller rate hike increments (ie. 0.75% to 0.50% in December 2022 and 0.5% to 0.25% in February). That resulted in
equities and property powering ahead (ie. monthly gains more akin to annual returns) and bonds producing one of their best months in over a year. It
all seemed too much too soon, but no one was complaining after a year like 2022.

That positive sentiment spilled into the early part of February but was short-lived as concerns arose regarding the pace and evenness of China
reopening in the absence of reasonable to significant government / central bank stimulus and western central bank rhetoric turned more hawkish as
they moved to put a lid on animal spirits by reminding investors that they still have a long way to go bring inflation under control. That hawkish tone
sent investor sentiment packing as expectations of a “soft landing” or a central bank pause very quickly disappeared and not helped by opportunistic
profit taking following an unusually strong January.

That negative sentiment carried into March until we saw US banks come under pressure as a crisis of confidence hit Silicon Valley Bank and a few
others, either linked to the technology / crypto sector or smaller regional banks. Interestingly, this wasn’t GFC mark II given bad debts remain incredibly
low and banks generally well capitalised. It was a function of a sector under pressure (ie. technology sector) as the irrational exuberance of the Covid
period washed out, a concentrated relatively affluent, customer based, and terrible treasury management by the banks themselves. US regulators
moved swiftly to protect deposit holders and provide a liquidity backstop to the banking system. However, the negative investor and concerned
deposit holder sentiment shifted to Europe with Credit Suisse identified as the weakest link, which culminated in a swift and quite unusual bailout by
Swiss authorities, sending reverberations through some parts of the bond market.

Interestingly, investor sentiment and expectations shifted drastically in a positive direction on the view that either central banks won’t raise rates any
further to protect the banking / financial system (a misguided view in our opinion) or won’t have to raise rates any further as the banking system
tightens financial conditions themselves thus doing the remaining heavy lifting for central banks (definitely possible). Markets were always going to rally
on a whiff of an impending pause in central bank rate hikes, but investors took it one step further by bringing forward their expectations of rate cuts.
That change in expectations, and oddly positive sentiment, saw markets rally exceptionally strongly the back end of the month with global equities and
bonds attracting all the attention, Australian equities didn’t get the memo, and property fell sharply on concerns regarding the economic outlook and
tighter financial conditions in the period ahead.

The Australian dollar fell from US71c to US66c in the quarter assisting unhedged global equity, property, and infrastructure allocations, as currency
investors moved to a risk-off stance.

Portfolio Update
Portfolio returns for the March quarter were positive in the absolute sense, but underperformed the benchmark, in a fairly odd quarter which saw
markets rally strongly on perceived improvement in the economic outlook, then give back some of those gains on economic data being too strong (ie.
more central bank tightening required), before rallying again following foreign bank collapses (ie. central banks will save the day). What has been
apparent over the last three to five months, and pleasingly so, is markets have begun to focus back on company fundamentals.

Drivers of underperformance for the portfolio included investment selection in Australian equities (both large and small companies) and bonds, given
our significant underweight to duration (government bonds) as yields fell sharply (bond prices higher) in March following foreign banking issues with
markets bringing forward their expectations of rate cuts. The healthy yields on hybrid securities weren’t enough to cover the lower duration
positioning.

On the asset allocation side, our higher weighting to Australian versus global equities held performance back as global equities powered ahead in the
quarter benefiting from compositionally less exposure to those sectors that dominate the Australian market (ie. financials and resources).

On the investment selection side, a tough quarter for the portfolio as the income biased stock holdings underperformed the broader market as
growth stocks (little to no income) rallied strongly. Notable highlights included resource names, petrol stations / convenience, and infrastructure
services. Bond selection hurt relative returns as hybrid securities suffered falls on concerns regarding offshore hybrid securities. Clear to note that