Ellerston Australian Market Neutral Fund

Ellerston Australian Market Neutral Fund PERFORMANCE REPORT February 2016 Fund performance^ (Net) Net Jan Feb Mar April May June July Aug Sept Oct Nov Dec YTD 2016-0.97% -1.03% -1.99% 2015-0.15% 1.09% 1.41% 1.04% -0.11% 1.29% 0.71% 1.11% 0.88% 0.59% 1.37% 1.09% 10.81% 2014 2.50% 0.33% 0.93% -0.47% 2.31% 3.60% 1.24% 2.42% 3.16% -0.82% 1.53% -0.95% 16.82% 2013 0.48% 1.12% 1.74% 1.38% 2.87% -0.34% 2.54% 10.18% ^ The net return figure is calculated after fees & expenses. The gross return is calculated before fees & expenses. Past performance is not a reliable indication of future performance. The benchmark is the RBA Cash Rate. The Fund commenced on 3 June 2013. Return Net BM Alpha Gross Portfolio Metrics 1 Month -1.03% 0.17% -1.20% -1.29% Positive months 76% 3 Months -0.92% 0.49% -1.42% -1.10% No. Relative Value positions 85 FYTD 3.78% 1.33% 2.45% 5.14% No. Special Situations 18 1 Year 7.59% 2.06% 5.54% 10.25% Net Equity Exposure 13.0% Since inception 39.78% 6.58% 33.20% 53.99% Gross Portfolio Exposure 116% Since inception p.a 12.95% 2.35% 10.61% 17.00% Beta Adjusted 5.3% Correlation Coefficient (vs ASX 200 Accum) -0.12 Net Sharpe Ratio ( RFR = RBA Cash) 2.6 Performance The Fund had a disappointing February, falling 1.0% on a net basis. As in January, the uncertainty in the market was evident with the ASX200 Accumulation Index down as much as 4.7% in the month before recovering to close 1.8% lower. The semiannual Australian reporting season exacerbated prevailing macro themes, with February witnessing strong divergence at both the sector and intra-sector levels. Heightened intra-sector volatility was particularly apparent within the REIT sector (+2.9%), in which 15 of the 18 names advanced in the month. In terms of breadth, Vicinity Centres (+6.9%), Goodman Group (+6.7%), and Shopping Centres Australasia (+6.6%) were the best performers, while Mirvac Group (-3.7%), Abacus Property Group (-3.7%), and Charter Hall Group (-0.7%) all retreated. Notably, all constituents surpassed the broader equity market return. The Fund was short the chief outperformers and long two of the three laggards, resulting in REITs being the largest detractor to performance. Specifically, paired positions featuring Mirvac hedged against shorts in Vicinity Centres and Shopping Centres Australasia detracted value, while the latter hedged against a long position in Peet (-3.8%) was another prominent detractor. Ellerston Capital Limited ABN 34 110 397 674 AFSL 283 000 Level 11 179 Elizabeth Street Sydney NSW 2000 Tel: 02 9021 7797 Fax: 02 9261 0528 info@ellerstoncapital.com www.ellerstoncapital.com APIR Code: ECL0013AU

Mean reversion effectively stopped working in February, with many stocks continuing to rise, irrespective of their valuation or market direction. That said, it was our short positions that detracted from performance in the Relative Value strategy, with long positions detracting within Special Situations. We continued to reduce our market exposure in February, with net equity exposure declining to +13.0% by month-end with a +5.3% beta adjusted equivalent. The portfolio s gross exposure at the end of the period was 116%. Appen (+2.3%) announced maiden financial results late in the month, significantly exceeding prospectus and analyst forecasts. Increased demand for their services and the benefit of a strong currency tailwind contributed to three successive profit guidance upgrades through FY2015. In spite of foreign currency movements, the underlying growth was still extremely strong with revenue growing 35% on last year, EBITDA up 85%, and NPAT 144% higher than FY2014. Pleasingly, both operating divisions, Language Resources and Content Relevance, delivered robust revenue growth of 42% and 78% respectively compared to the prior year. Strategically, major customers in 2014 evolved to significant new sources of revenue in 2015, thus improving customer diversity with no customer representing more than 28% of revenue in FY2015, down from 48% in the prior year. We believe Appen has outstanding growth opportunities in both operating divisions, strong customer relationships in key industries, global coverage in languages, and their technology platform, afford us the optimism about the company s future. Murray Goulburn (-21.0%) announced early in the month that it entered into a five-year national private label contract to supply Coles brand Australian cheese. This follows on from the ten-year partnership that commenced with Coles in 2014 to supply daily pasteurised milk for their private label brands in Victoria and NSW. The new contract includes the supply of cheddar-style cheese including: tasty, colby, mild and light cheese in blocks, shreds and slices. The contract begins in February 2017 and will generate approximately A$130m in additional sales per annum, however this declaration did little to placate investors as the Global Dairy Trade (GDT) price index fell 7.4% at the last auction. In an effort to insulate the company from the challenges of volatile global dairy commodity prices, management ramped up their manufacturing capability and capacity to produce a diverse range of readyto-consume dairy foods. Late in the month, Murray Goulburn announced disappointing 1H16 results which saw NPAT fall from A$15.2m in the pcp to A$10.0m due to the low dairy commodity prices. Another Consumer staple position within Special Situations, Yowie Group (-16.5%), also detracted value in February. The company announced half-year results late in the month, revealing a 1,094% surge in revenue for the period to US$5.7m. Despite this, the company reported a net loss of US$2.6m, which was an increase in loss of 189% over the previous corresponding period. A Building pair containing a long in GWA Group (+14.9%) hedged against Adelaide Brighton (+4.7%) was the chief contributor to the Relative Value strategy in February. Adelaide Brighton s FY15 NPAT of A$208m was in line with consensus, while GWA's core bathroom and kitchens business (91% of EBIT) continued to improve with 2Q16 growth accelerating over 1Q16. Due to its incumbency and strong brand portfolio, GWA remains a genuine market leader in the supply of bathroom and kitchenware products and its focus is to further improve its share and efficiency as the housing cycle matures. The Rio Tinto (+6.7%) spread contracted during the month, adding value to the portfolio. Under pressure from the falling iron ore price, commodity blue chip Rio Tinto turned in a disappointing 2015. Because commodity prices have declined so markedly, Rio Tinto's consolidated revenue fell 27% to $34.8 billion for the full year, and its underlying earnings retreated 51% to $4.5 billion. Rio Tinto management also scrapped the company's progressive dividend and enacted plans to ensure that the balance sheet remains strong for the long haul.

Activity Relative Value Gross Contribution -0.6% The REIT sector is currently trading at a 26% premium to NTA, compared with the long term average of 14%. The premium / discount to NTA dispersion among constituents is large, with some companies trading well above their NTA, while a few trade modestly below. Vicinity Centres, for instance, recently lifted EPS guidance to the top end of the previous range and announced NTA uplift to $2.54 from $2.45. Despite trading at a 22.4% premium to NTA, Vicinity was an outstanding performer in the sector. We believe this outperformance is unsustainable and have added to the short Vicinity position in pairs containing Aveo Group (+6.7%), Arena REIT (+5.4%), Charter Hall Group (-0.7%), and Rural Funds Group (+4.5%). Astro Japan Property Group (+9.6%) sold the Sun Ace Tokugawa office property for A$16.9m, representing a +4.6% premium to book value as at 31 December 2015. With the property having had a material and persistent vacancy, being 26 years old, and requiring significant capital expenditure, Astro Japan concluded that this was an opportune time to sell. Following this sale, the company will have approximately A$50 million in excess cash, which provides the Board with significant flexibility in implementing capital management initiatives, including further share buybacks. The share price rallied as a consequence, prompting us to close the pair in which Astro Japan was hedged against a short in Shopping Centres Australasia. We initiated a Bank pair early in the month containing a long in Westpac (-6.8%) hedged against a short in Commonwealth Bank (-8.4%). Both share prices deteriorated rapidly due to fears of tightening credit markets, and the pair was unwound within the week for a modest profit. A paired position between Surfstitch Group (-32.2%) and Super Retail Group (-20.1%) was established late last year but stopped out by the end of February. The Surfstitch 1H16 result was very strong with EBITDA much stronger than expected, though revenue and gross profit were in line. The company however did not disclose FY16 guidance, which surprised the market and the shares consequently traded lower. Special Situations Gross Contribution -0.7% Origin Energy (+10.7%) posted a 27% decline in first-half profit after a downturn in energy prices, with the company s underlying profit falling to A$254m in the six months from A$346m a year earlier. The Origin Notes (+2.5%) weren t immune to the intramonth decline either, providing us the opportunity to add to our existing holding prior to the company s earnings announcement. The market s concern regarding Origin s burgeoning debt led Origin to issue a clarifying statement regarding their financing arrangements last month, and further warned it may suspend its dividend this half. The company last year unveiled a debtreduction program, including spending cuts and as much as A$800m in asset sales, to shore up its balance sheet. As anticipated, Origin confirmed its intention to redeem the A$900m Subordinated Notes by the first call date in December 2016. We sold our remaining holding in the underperforming Sino Gas & Energy (+63.6%). A number of small and mid cap energy stocks recently reported December 2015 quarterly production figures, with many delivering flat q/q and pcp metrics. In fact, the total 2015 aggregate development capex of U$403m was 40% lower than in the previous period. This bias is expected to continue in 2016, as companies look to cut discretionary exploration capex and focus on balance sheet preservation. For Sino Gas, lower production is evidenced by an idle Sanjiaobei field despite possessing all regulatory approvals. In this instance, the project will remain offline until a satisfactory revenue sharing mechanism is agreed with PSC Partners. Recall Holdings (+5.2%) released 1H16 results during February. Revenue of A$450.9m (+6.7% at constant FX) with EBITDA of A$107m (+7.3%) underwhelmed the market as guidance was for high single-digit metrics. Recall also provided an update on the Iron Mountain (+6.7%) transaction, citing substantial progress in pursuit of all regulatory approvals. Despite the progress, they do not expect to receive all necessary approvals ahead of the scheme meeting scheduled for 17-March, prompting a deferral to 19- April with implementation expected in early May. Despite the delay in the scheme meeting, we were encouraged by the announced implementation date and took the opportunity to add to the position as the spread expanded during the month. Late in the month, we participated in the Oneview Healthcare IPO. Oneview is a market leading provider of innovative patient engagement and clinical workflow technology solutions to healthcare facilities in America, Australia and the Middle East. The power of the Oneview solution lies in its ability to integrate information across hospital systems and connect systems to automate workflows, thus enhancing the patient experience, empowering the care team, and delivering real cost savings to hospital administrators. In January, Oneview announced that the University of Iowa contracted them to support its patient experience initiatives, with the multi-year agreement implemented by December 2016 when the hospital is due to open. We believe the offering is attractively priced and the company is well placed in the healthcare space. The company will commence trading on the ASX in March.

Sector Long Equity Short Equity Net Equity Banks 0.0% 0.0% 0.0% Div Financials 0.5% 0.0% 0.5% Insurance 0.0% 0.0% 0.0% REITs 45.5% -36.4% 9.1% Financials 45.9% -36.4% 9.6% Builders 0.7% -0.7% 0.0% Consumer Disc 1.0% 0.0% 1.0% Consumer Staples 2.9% 0.0% 2.9% Gaming 0.0% 0.0% 0.0% General Industrials 0.0% 0.0% 0.0% Health Care 0.6% 0.0% 0.6% Information Technology 1.9% 0.0% 1.9% Infrastructure 1.0% -1.0% 0.0% Media 0.7% -0.1% 0.5% Telcos 0.0% 0.0% 0.0% Utilities 0.0% 0.0% 0.0% Industrials 8.6% -1.8% 6.8% Bulk Metals 3.2% -3.0% 0.2% Energy 0.0% 0.0% 0.0% Gold 0.0% 0.0% 0.0% Resources 3.2% -3.0% 0.2% Hedge 0.0% -3.5% -3.5% Index 0.0% -3.5% -3.5% Total 57.8% -44.7% 13.0% Market Commentary A weakening economic backdrop (particularly in China), deflationary concerns stemming from Europe and the Brexit fears over the upcoming British referendum on E.U. membership set the macro scene for the month. Coupled with a shift towards risk aversion strategies which manifested into a global sell-off in bank stocks, world equity markets were driven lower in February, with the MSCI world index (USD) closing the month down 0.9%. Mining and Metals prevailed as the single best performing sector globally (up 19% for the month) on rising iron ore and gold prices. Gold was up 11% to US$1,234/oz, while iron ore prices surprised everyone and rallied nearly 20% to US$49.60/t. Banks were the worst performing sub-sector globally, weighed down by fears that low and falling interest rates might squeeze margins and negatively impact their earnings. Bond yields around the world fell on a weakening economic growth outlook, safehaven buying and speculation of more monetary easing from the ECB. The US equity market outperformed its global peers, albeit the S&P 500 still finished down 0.4%, adding to a 5.47% YTD loss. The Fed took no action this month and released its semi-annual monetary policy outline mid-month where it adjusted previous guidance of 3-4 rate hikes down to 1-2. The more dovish tone was the result of key US economic data remaining weak. European equity markets were down as fears over Brexit materialized with the MSCI European index down -1.7%, while the Euro Stoxx 600 was down -3.1%. The ECB released a bleak outlook for the economy intra month, outlining downside risks present in the EU and the need for further monetary stimulus. In the U.K., Prime Minister David Cameron announced a referendum to be held on 23 rd June 2016, causing the British Pound to depreciate and underperform against most major currencies.

In Asia, the Shanghai Composite witnessed further volatility as seen in January, before finally closing -1.8%. The index reached a monthly high of 2,928 and settled at 2,688 on the news of a potential downgrade to China s GDP to 6.5-7%, prompting another 50bp cut in the reserve requirement ratio by the PBOC for all financial institutions, effective March 1st. The Nikkei endured a shocking month by falling 8.5%, as investors questioned whether central bankers have lost their ability to influence markets. However, the Japanese Yen shrugged off weak economic data and last month s announcement of negative interest rates to rally against most major currencies. Japan s benchmark 10-year bonds fell below zero, an unprecedented low for a G7 economy. In Australia, a side platter to the reporting season, pending tax reform changes were the hot topic. The Opposition Labor party took the initiative by pledging to phase out negative gearing and promising to halve the capital gains tax (CGT) discount to 25%. The Liberal party has yet to present its own tax reform package, but has ruled out a number of options, including: increasing the GST, an overhaul of negative gearing and changes to CGT. This kept investors on edge. In other developments, the RBA held the cash rate steady at 2.0%, despite unemployment rising to 6.0% (from 5.8%). The AUD managed to eke out a small gain against the USD (+0.8%) and the yield curve flattened. Despite a 1.76% fall in the S&P ASX 200 Accumulation index during the month, we actually witnessed one of the strongest risk-on patterns in nearly 30 years. The intra month low for the Australian market was 4,706.7 on the 10th of February, but the index re-bounded to finish 3.7% off its lows, closing at 4,880.9. Resources (+6.9%) beat Banks (-7.9%) by 15%. Cyclical industrials (+3.7%) beat Defensives (-3.5%) by 7.2%. Adding to the uncertainty and dislocations that exist in global markets, investors decided BHP Billiton was worth 20% more in Australia than its equivalent plc shares listed in the UK. Market weakness was attributed to the global banking sector, as credit default swap spreads increased and persistently low commodity prices created question marks over loans provided to resource companies when commodity prices were much higher (Deutsche Bank stock fell 9% in one day). Late in the month, domestic banks sold off again on fresh overseas shorting as concerns around the inflated status of the housing market and its sustainability were debated in the media. There is mixed opinion in the market around whether a housing bubble exists. As a result of both strains in the global banking system and domestic economic outlook, the Australian banks had a poor month despite delivering a reasonable set of results and updates (ANZ being the exception). Australian Reporting Season At the beginning of February and following the worst start to the year since 2010, investors went into the upcoming Australian reporting season with trepidation, especially given current macro headwinds and patchy domestic operating conditions. By month end, the general consensus was that the score-card turned out to be better than feared. Stocks leveraged to the domestic economy, in particular housing and consumer related, performed exceptionally well. Higher PER quality names, like Treasury Wine Estates, Seek, James Hardies, Brambles, Cochlear and Trade Me didn t crack under the pressure, delivering or exceeding the growth estimates, while there was mixed performance from $US and foreign currency earners. In what appeared a relatively benign reporting season, beneath the surface 44% of EPS results overwhelmingly beat consensus estimates, with 32% in-line and 24% below expectations. This positive skew was also apparent on the top line, largely delivered by companies with offshore revenue. DPS results were more balanced, suggesting the rising trend in the payout ratio has possibly reached a ceiling. Guidance was mostly in-line, with slightly more upgrades than downgrades, though outlook statements were conservative. Source: S&P, Bloomberg, Morgan Stanley Research

The Australian market is now tracking for its second successive year of negative earnings growth, an outcome we haven t experienced since 2008-09. However, earnings growth ex resources continues to track at a low to mid-single digit growth rate. Prior to the reporting period, analysts were forecasting a significant contraction in the dividend pay-out ratio (~300bps). However, as a result of the weakness in NPAT growth and a slightly more positive aggregate dividend surprise, the pay-out ratio contraction was much less severe at ~100bps. This was also the first contraction in the dividend pay-out ratio for many years. Key fundamental trends to emerge from the reporting season were top line growth performance being generally stronger than market expectations (eg Brambles), cost control still a big focus (as evidenced by South 32) and a few particularly good cash-flow conversion outcomes (namely Treasury Wine Estates at 126%). Value stocks had a mixed experience, but we note some dramatic share price surges on fairly modest beats eg for Primary Health Care, Healthscope, Amcor, IOOF Holdings and GWA Group. The best performing stocks in the ASX100 during the month included Newcrest Mining (+35.9%), CIMIC Group (+31.1%), Alumina (+29.9%), Primary Health Care (+29.7%) and South32 (+28.2%). The worst performers included Bendigo & Adelaide Bank (- 20.3%), Bank of Queensland (-19.4%), Henderson Group (-16.2%), Sirtex (-14.9%) and Fairfax (-13.0%). Newcrest Mining, Brambles, BHP Billiton and S32 added the most index points, while Commonwealth Bank, ANZ, Westpac and NAB were the biggest detractors. The S&P/ASX Small Ords (Accum) finished up +0.95% outperforming the broader market, with the positive performance attributed almost entirely by the Small Resources. The Small Resources saw a phenomenal double-digit increase of +19.0%, while the Small Industrials posted a loss of -1.82%. The Small cap earning s outcome was relatively similar to large caps, with EPS revisions relatively flat, but share price reactions tilted to the positive, with strong results including TradeMe, Pacific Brands, Reckon and Steadfast. ECM Activity picked up in February with ~A$1.8bn in equity issuance. Issuance came in the form of 1 Hybrid (A$910m), 4 primary placements (A$185m), 1 accelerated entitlement offer (A$17m), 1 traditional rights offer (A$63m), 2 block trades (A$92m) and 1 underwritten DRP (A$490m). The notable deal in February was the Commonwealth Bank of Australia ( CBA ) PERLS VIII issue, with A$910m allocated with the margin set at 5.20% per annum. Woodside Petroleum Limited ( WPL ) announced a fully underwritten DRP expected to raise ~A$490m, with shareholders who participate to be issued shares at a 1.5% discount. Relative Value Gross Contribution -0.6% Special Situations Gross Contribution -0.7% Positive Positive ADELAIDE BRIGHTON - GWA GROUP 0.20% APPEN 0.08% RIO TINTO - RIO TINTO 0.19% ORIGIN ENERGY NOTES 0.07% AVEO GROUP - GPT GROUP 0.12% SINO GAS & ENERGY HOLDINGS 0.03% HEALTHSCOPE - RAMSAY HEALTH CARE 0.10% AVEO GROUP - CHARTER HALL RETAIL REIT 0.06% Negative Negative MIRVAC GROUP - SHOPPING CENTRES AUSTRALASIA -0.20% MG UNIT TRUST -0.38% SURFSTITCH GROUP - SUPER RETAIL GROUP -0.19% YOWIE GROUP -0.26% BWP TRUST - PEET -0.18% NATIONAL AUSTRALIA BANK NOTE -0.10% PEET - SHOPPING CENTRES AUSTRALASIA -0.14% IRON MOUNTAIN - RECALL HOLDINGS -0.05% MIRVAC GROUP - VICINITY CENTRES -0.11% S&P/ASX 200 INDEX -0.03%

-2 to -1-1 to 0 0 to 1 1 to 2 2 to 3 3 to 4 4 to 5 Frequency 20 18 16 14 12 10 8 6 4 2 0 Distribution of Net Returns Key Information Fund Inception Date: 3 June 2013 Liquidity: Daily Management Fee: 1.20% Performance Fee: 20% of outperformance Buy/Sell Spread: 0.25% Application price: $1.1499 Redemption price: $1. 1442 Fund AUM: $319.19M Core Concentrated Team AUM: $2,150M Firm AUM: $4,189M % return for the month TOP RELATIVE VALUE POSITIONS INVESTA OFFICE FUND - SCENTRE GROUP RIO TINTO - RIO TINTO MIRVAC GROUP - VICINITY CENTRES MIRVAC GROUP - SHOPPING CENTRES AUSTRALASIA BWP TRUST - PEET AVEO GROUP - VICINITY CENTRES BWP TRUST - GDI PROPERTY GROUP AVEO GROUP - GPT GROUP CHARTER HALL GROUP - CHARTER HALL RETAIL REIT PEET - SHOPPING CENTRES AUSTRALASIA TOP SPECIAL SITUATION POSITIONS S&P/ASX 200 INDEX IRON MOUNTAIN RECALL HOLDINGS WESTPAC TPS TRUST ORIGIN ENERGY NOTES NUFARM FINANCE NOTE AUST AND NZ BANKING NOTE APPEN NATIONAL AUSTRALIA BANKING NOTE MG UNIT TRUST Key Service Providers Registry: Link Market Services Limited Auditor: Ernst & Young Prime Broker & Derivative Counterparty: Morgan Stanley Intl & Co PLC Administrator: BNP Paribas Securities Services Material Matters During the month there were no material changes to the Fund in terms of its risk profile, investment strategy or changes to investment staff which would impact this strategy. There have been no changes to the key service providers described above. Further Information Contact: Andrew Seddon 0417 249 577 aseddon@ellerstoncapital.com Simon Glazier 0410 452 949 sglazier@ellerstoncapital.com DISCLAIMER This newsletter has been prepared by Ellerston Capital Limited ABN 34 110 397 674 AFSL 283 000, the responsible entity of the Ellerston Australian Market Neutral Fund ARSN 168 025 670 (Fund) without taking account of the objectives, financial situation or needs of investors. Before making an investment decision about the Fund persons should obtain advice from an appropriate financial adviser and consider their own individual circumstances and obtain a copy of the Product Disclosure Statement dated 31 March 2014 for the Fund which can be obtained by contacting info@ellerstoncapital.com. Actual performance for your account will be provided in your monthly account statement which may v ary from that set out in this newsletter and will vary for investments made in different classes, or at different times throughout the year. This material has been prepared based on information believed to be accurate at the time of publication. Assumptions may have been made which may prove not to be accurate. Ellerston Capital undertakes no responsibility to correct any such inaccuracy. Subsequent changes in circumstances may occur at any time and may impact the accuracy of the information. To the full extent permitted by law, none of Ellerston Capital Limited, or any member of the Ellerston Capital Limited Group of companies makes any warranty as to the accuracy or completeness of the information in this newsletter and disclaims all liability that may arise due to any information contained in this newsletter being inaccurate, unreliable or incomplete. Past performance is not indicative of future performance