Investment Strategy and Asset Allocation News

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1 1 SEPTEMBER 2016 Investment Strategy and Asset Allocation News Central banks continued to support investor sentiment Share markets moved higher as bond yields remained low The US Federal Reserve (Fed) kept rates unchanged in September Markets in a see-saw At the start of the month share markets were weighed down by concerns that central banks may be withdrawing stimulus with bond yields increasing and prices dropping. However, these concerns were put to rest following the decision by the Fed to keep interest rates unchanged, along with communication from the European Central Bank (ECB) and the Bank of Japan (BoJ) reaffirming their asset purchase programs. In the US, economic data remained soft following a decline in lead manufacturing indicators and industrial production. Retail sales were also soft but inflation measures were generally stronger. Despite the Fed leaving rates unchanged in September, members of the Federal Open Market Committee (FOMC) were generally more upbeat on the underlying strength of the economy as better labour market growth supports a rate hike in December. Central banks continued to support markets In Europe, growth indicators continued to pick up as business sentiment improved. Consumer activity remained strong but this was offset by softer industrial production. In the UK, the political front stabilised following the re-election of labor leader, Jeremy Corbyn, but there was limited discussion on implementing Brexit. In Japan, the BoJ reaffirmed its commitment to asset purchases after conducting its comprehensive monetary policy review, but with a focus towards providing steepness across the yield curve. In China, weaker data flow in August saw the State Council (China s central body for fiscal policy implementation) commit to bring forward public works investments which supported industrial activity and steel prices. Measures of private sector investment remained soft, while rampant credit growth caught the attention of Western media. Share markets in overvalued territory (composite indicators) Sources: Bloomberg, ANZ Wealth. In Australia, the Reserve Bank of Australia (RBA) is now armed with greater flexibility to meet its medium-term inflation target following a review of monetary policy by new RBA governor, Dr Philip Lowe. The net effect has been reduced market expectation of further rate cuts, in spite of soft underlying momentum across the economy. In particular, forward-looking industrial indicators have declined along with housing finance. Consumer confidence also edged lower but this was offset by continued labour market strength. Service sectors, including tourism and health care, continued to perform well. Shares Share markets rose moderately after a weak start to the month. Global developed share markets were up 0.3% in hedged Australian dollar (AUD) terms. European shares were up 0.1% in local

2 currency terms as sentiment remained strong given easy monetary conditions. That said, concerns over Deutsche Bank and the broader banking sector highlight some risk factors in the region. Earnings growth remains challenged but is starting to follow improvements in lead indicators. The UK market (FTSE index) rose by 1.7% as political stability and better growth prospects encouraged investors. In the US, the share market rose as investor sentiment improved, although the upcoming election may cause some pockets of volatility down the track. The Australian share market performed well, up 0.5% which was in line with developed markets. Banks performed better as the outlook for interest rates looked more balanced, and the resources sector outperformed following better economic data in China and rising commodity prices. Emerging market shares outperformed developed markets, up 1.1% in US dollar (USD) terms as fund flows increased due to improved sentiment thanks to reduced Fed rate hike expectations and stronger commodity prices. Bonds Bond yields remained low despite moving slightly higher at the start of the month. The US 10-year bond yield finished flat at 1.59%. In Europe and Japan yields were unchanged which produced a return of 0.1% across international fixed income. Australian fixed income underperformed international fixed income down -0.2% as rate cut expectations fell, with the 10-year bond yield rising by eight basis points (bps) in the month. Across credit markets spreads declined as sentiment improved following central bank actions, with both investment grade and high yield spreads below their long-run average. Currencies Across currency markets the USD fell against most majors driven by the benign outlook for the Fed. The Australian dollar (AUD) rose by 2.0% following better data from China impacting unhedged returns for the month. However, narrowing interest rate differentials should see the AUD fall from here. Major asset class performance as at 30 September 2016 Sector 1 month 3 months 12 months 5 Years Australian Shares Global Shares (hedged) Global Shares (unhedged) Global Emerging Markets (unhedged) Global Small Companies (unhedged) Global Listed Property Cash Australian Fixed Income International Fixed Income Source: JP Morgan & ANZ Wealth. Indexes: Australian Shares - S&P / ASX300 Accumulation, Global Shares (hedged/unhedged) - MSCI World ex Australia, Global Emerging Markets - MSCI Emerging Free Net in AUD (unhedged), Global Small Companies (unhedged) - MSCI World Small Cap exaustralia, Global Listed Property - FTSE EPRA/NAREIT Developed Rental Index exaustralia (hedged), Cash - Bloomberg Bank Bill, Australian Fixed Income - Bloomberg Composite Bond All Maturities, International Fixed Income - Barclays Global Aggregate Bond Index (hedged).

3 OptiMix Wholesale Balanced Trust Portfolio Positioning (as at 30 September 2016) Sector Actual weight Active weight Australian Equities (1.8) Global Equities (hedged) (2.4) Global Equities (unhedged) Global Small Companies (unhedged) (0.3) Global Emerging Markets (unhedged) (0.3) Global REITS (hedged) Alternative Growth (1.8) Australian Fixed Interest International Fixed Interest (2.1) Alternative Defensive Cash Currency hedging position on overall Global Equities, which includes Global Equities, Global Emerging Markets, Global Small Companies and Low Volatility Equities, is 26% relative to a 33% benchmark. OptiMix Wholesale Balanced Trust Performance (as at 30 September 2016) Fund name (Gross returns) 1 mth 3 mths 1 year OptiMix Wholesale Balanced Trust Excess returns against benchmark CPI + 5% * n/a Excess returns CPI Objective n/a * CPI numbers are to 30 June 2016 as inflation figures are released quarterly by the RBA. Excess returns stated are gross returns i.e. before any fees have been deducted.

4 Implications and Fund Positioning September returns across share markets were modest as bond yields edged slightly higher. The Australian share market rose by 0.5% while returns on an unhedged basis (in AUD terms) for the MSCI World and Emerging Market indices were down 1.3% and 0.5%. Investor doubts regarding the efficacy of central bank stimulus continued to result in a rotation away from sectors deemed to be sensitive to rising interest rates, such as GREITs which were down 1.5% in hedged AUD terms in the month. Across major share markets, sectors including utilities, telecoms, and industrials where valuations have been on the high side continued to lose ground in September. On the other hand, earnings across the energy, metals and mining sectors of the market continued to improve following stability in commodity prices, led by oil which strengthened off the back of an OPEC announcement flagging a decrease in production for the first time in eight. Stronger commodity prices have continued to benefit the Australian share market, which has outperformed global shares over the past three months. Domestic growth also remained firm following lower interest rates which stimulated housing construction and saw higher terms of trade, in turn boosting exports. Bond yields across global fixed income markets backed up gradually as the prospect of a Fed rate rise weighed on investor sentiment. Due to the Fed keeping rates unchanged in September, and uncertainty surrounding the November US election, there s now heightened anticipation across markets of a December Fed hike. Within credit markets, the fundamental outlook has improved following the sustained rebound in commodity prices. This has helped the high yield market as energy makes up about 20 per cent of high yield credit issuance. Demand from investors has been strong, but in the US and Europe high yield corporate grade debt is highly leveraged on a gross basis. This is concerning because historically this sector has been sensitive to rising interest rates. Recent share market strength is reflecting the improved economic outlook, though this has relied heavily on monetary policy support, especially in Europe and Japan. The improved outlook for China off the back of government stimulus has re-energised the industrial sectors; a key driver of the strengthening economic and earnings momentum which has been unfolding throughout the year. We anticipate global growth will improve slightly into However we prefer a cautious approach given that upward momentum is now likely to ease and share market valuations are in moderately overvalued territory. A moderate back up in yields and steeper yield curve will likely cause some disruption to markets. We have positioned the portfolios for this by running an underweight position to growth assets. However we would expect improved growth to support a moderate lift in earnings, in which case we would look to acquire growth assets if and when yields tracked modestly higher and equity valuations offered better prospective returns than they currently do. We have held a neutral position in Australian bonds as further RBA easing is not out of the question in the wake of softening inflationary pressures, such as wages. We hold an underweight position in international bonds due to low bond yields, risks in shifting central bank policies, and the long duration positions held by bond managers all reflecting rising complacency. We hold an overweight position to cash. The OptiMix Balanced fund achieved a gross return of -0.2% for the month and 6.5% for the year to September The Balanced fund s objective is to deliver a return of 5% p.a. above inflation (before fees and tax) over periods exceeding five or more. The portfolio has outperformed this return target over the five to September 2016, producing a positive return of 10.4% p.a. (before fees and tax), 3.6% above the target. The negative active returns achieved by our selection of managers detracted from performance (-1.4% over the year to September 2016). Our allocations to alternatives were the major detractors of performance, as hedge funds have struggled to generate target returns in an environment where markets continue to be heavily influenced by central bank actions. Global equities and fixed income portfolios outperformed their respective benchmarks. Tactical asset allocation detracted 0.9% over the year, predominantly due to underweight positions to growth assets, the Australian dollar and an overweight position to cash.

5 Components of Total Return The chart below shows the percentage contribution to total return from the broad asset classes over the year to September With the exception of currency, most asset classes contributed positively to performance Total contribution to return

6 Manager spotlight GMO The Systematic Global Macro Fund is managed by GMO and the fund follows a systematic global macro process that aims to add value through five main activities: asset allocation; equity market selection; bond market selection; and currency and commodity market selection. Generally the Fund employs two primary strategies based on value and sentiment: Value-based strategies: comparing the price of an asset class or market to an economic fundamental value. Generally, value-based strategies use yield and mean reversion factors. Sentiment-based strategies: generally assessing factors such as risk aversion, analyst behaviour and momentum. Performance attribution As part of the alternative investments allocation within OptiMix, the purpose of holding the GMO strategy is to generate long term, risk-adjusted returns over an investment cycle, characterised by low correlation to traditional equity markets, with lower volatility. The Fund has had a strong track record of delivering long term, positive returns as shown in the chart below. Returns are presented gross of management fees, net of transaction costs to 31 August GMO Systematic Global Macro Trust returns Source: GMO, September 2016 The following chart shows that the fund s sensitivity to equities, fixed income and currency market variations over time. Considering the fund has the flexibility in taking long and short positions in various financial markets, it is a good complement to a multi-asset fund, where the dominant driver of risk is equity risk. returns of various asset classes Source: GMO, September 2016

7 Performance data of OptiMix Wholesale Diversified Trusts (30 September 2016) Fund name / OptiMix Conservative OptiMix Moderate OptiMix Balanced OptiMix Growth OptiMix High Growth 1 mth 3 mths 1 year Excess returns stated are gross returns i.e. before any fees have been deducted. This brochure is issued by OnePath Funds Management This brochure is issued by OnePath Funds Management Limited (ABN ; AFSL ) (OnePath Funds Management) and is Limited (ABN ; AFSL ) (OnePath Funds intended for the use of financial advisors and institutional clients only. Management) and is intended for the use of financial advisors and institutional clients only. This update is current as at 17 October 2016 and is based in part on information obtained in good faith from third party sources. Whilst it is believed that the information obtained from such third party sources is accurate and complete, neither OnePath Funds Management, nor This update is current as at 10 August 2016 and is based in any of its related group companies, nor any of their directors or employees, guarantees its accuracy and completeness or accepts any part on information obtained in good faith from third party responsibility for any errors or omissions. sources. Whilst it is believed that the information obtained from such third party sources is accurate and complete, The information provided is of a general nature and is not tailored to any particular investor s personal circumstances. Accordingly, reliance neither OnePath Funds Management, nor any of its related should not be placed by anyone on the information in this brochure as the basis for making any investment decision. Before acting on the group companies, nor any of their directors or employees, information in this brochure, investors should consider the appropriateness of the information having regard to their personal objectives, guarantees its accuracy and completeness or accepts any financial situation and needs and should consult their financial adviser. Investors should also consider the relevant Product Disclosure responsibility for any errors or omissions. Statement (PDS) and any product updates available at or by calling The information provided is of a general nature and is not The inclusion of a manager within the OptiMix Wholesale Trust portfolios does not, and must not be taken to, constitute an endorsement of, tailored to any particular investor s personal or recommendation or statement of opinion by the manager about, the relevant OptiMix Wholesale Trust. None of the OptiMix Wholesale circumstances. Accordingly, reliance should not be placed by Trust managers are, or should be taken to be, providing any financial product advice, and the recipient of this brochure should consider anyone on the information in this brochure as the basis for obtaining independent advice before making any financial decisions. making any investment decision. Before acting on the information in this brochure, investors should consider the OnePath Funds Management is a wholly owned subsidiary of Australia and New Zealand Banking Group Limited (ANZ) ABN appropriateness of the information having regard to their ANZ is an authorised deposit taking institution (Bank) under the Banking Act 1959 (Cth). Although OnePath Funds Management is owned by personal objectives, financial situation and needs and should ANZ, it is not a Bank. Except as described in any relevant PDS, an investment in any of the OptiMix Wholesale Trusts is not a deposit or consult their financial adviser. Investors should also consider other liability of ANZ or its related group companies and none of them stands behind or guarantees OnePath Funds Management or the the relevant Product Disclosure Statement (PDS) and any capital or performance of the OptiMix Wholesale Trusts. Investments in the OptiMix Wholesale Trusts are subject to investment risk, product updates available at or by including possible repayment delays and loss of income and principal invested. Past performance is not indicative of future performance. calling The value of investments may rise or fall and the repayment of subscribed capital is not guaranteed.