Finding balance in a low-interest environment

This webinar and information has been prepared and issued by Netwealth Investments Limited (Netwealth), ABN 85 090 569 109, AFSL 230975. It contains factual information and general financial product advice only and has been prepared without taking into account the objectives, financial situation or needs of any individual. The information provided is not intended to be a substitute for professional financial product advice and you should determine its appropriateness having regard to you or your client’s particular circumstances. The relevant disclosure document should be obtained from Netwealth and considered before deciding whether to acquire, dispose of, or to continue to hold, an investment in any Netwealth product.

While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), no person, including Netwealth, or any other member of the Netwealth group of companies, accepts responsibility for any loss suffered by any person arising from reliance on this information.

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Yearning for mediocracy

Matt Sherwood Head of Investment Strategy, Multi Asset, Perpetual Investments July 2020

7

WHAT’S MORE IMPRESSIVE – THE PLUNGE OR THE RECOVERY…?

REGIONAL SHAREMARKET PEAK TO TROUGH AND NOW (%); US CREDIT SPREADS TO SWAP RATES (BPTS) … BUT CENTRAL BANK QE PROGRAMS SAW A RECORD RECOVERY IN BOTH

A RECORD PLUNGE IN EQUITY AND CREDIT MARKETS… 0%

360

1160

-5%

330

1060

-10%

300

960

-15%

270

-20%

240 210

-30%

180

-40%

8.

860 760

-25%

-35%

High yield (RHS)

Peak to trough Peak to now Canada Japan

MSCI UK EM World US Europe Australia Small Caps Source: Bloomberg as at 1st July 2020.

US

Perpetual's DRRF

150 120

660 Investment Grade (LHS)

560 460

90 360 02- 18- 03- 19- 06- 22- 07- 23- 09- 25Jan Jan Feb Feb Mar Mar Apr Apr May May

WHAT’S GONE RIGHT 1: THE FISCAL RESPONSE WAS QUICKER AND LARGER THAN THE GFC GLOBAL FISCAL IMPULSE BY SOURCE (% GDP); GLOBAL FISCAL IMPULSE BY YEAR (% GDP) IN 2021 FISCAL POLICY WILL RECORD ITS LARGEST GROWTH DRAG IN 50 YEARS

THE FISCAL RESPONSE WAS LARGER THAN WHAT WAS PROVIDED IN 2008/09

Change in cyclically adjusted primary fiscal balance as % global GDP

4.5%

5.00

4.0% Healthcare

3.5%

Loan guarantees (on-budget)

2.00 Job retention schemes

2.5%

forecast -->

0.00 Other

Other

1.5%

Public Invest.

1.0% housing

0.0%

ROW EM ex China and India Eurozone China US World

1.00

2.0%

0.5%

4.00

3.00

Direct cash payments

3.0%

Loosening

Unemployment insurance

-1.00 Public Invest.

Business loans/grants Unemployment insurance strategic sectors Business loans/grants

other expenditure

personal inc. tax indirect taxes corporate tax

2009

other revenue

-2.00 strategic sectors

other revenue

2020

9. Source: UBS Australia Limited and Bloomberg as at 2nd June 2020.

-3.00

Tightening

-4.00 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21

WHAT’S GONE RIGHT 2: CENTRAL BANKS WENT ‘ALL IN’

INCREASE IN CENTRAL BANK ASSET PURCHASES (USD TRILLION); CITIGROUP’S MONETARY CONDITIONS INDEX A COLLECTIVE USD 6 TRILLION COMMITMENT TO PROP-UP MARKETS, WON’T PREVENT THE COLLAPSE IN EARNINGS, BUT IT SHOULD STOP THE COLLAPSE IN SHARE PRICES

10. Source: Citigroup as at 29th May 2020.

WHAT’S GONE RIGHT 3: ECONOMIES ARE OPENING UP QUARTERLY AND ANNUAL GROWTH FOR US, EUROPE, CHINA, AUSTRALIA FOR 2020 AND 2021 (%)

GROWTH IS EXPECTED TO BOUNCE IN Q3 2020 AND THEN FLATTEN OUT

GROWTH WILL SUFFER STRUCTURAL DAMAGE, AND THE RECOVERY WILL BE WEAKER THAN NORMAL

12%

10%

9%

8%

6%

6%

4%

3%

2% 0% 0% -3%

-2%

-6% -9% -12%

China

Europe

US

Mar'20 Jun'20 Sep'20 Dec'20 Australia World

.

11.

Source: Perpetual Investments as at 13th July 2020.

-4%

2019 2020 2021

-6% -8%

China

Europe

US

Australia

World

WHAT’S GONE RIGHT 4: EPS DOWNGRADES AND EQUITY OUTFLOWS HAVE CEASED MSCI WORLD EARNINGS REVISION INDEX (%); US EQUITY INFLOW BY SOURCE (USD BILLION)

… AND ‘TINA’ MEANT INVESTORS PUT THEIR MONEY TO WORK

EQUITY ANALYSTS HAVE STOPPED DOWNGRADING 2020 EPS ESIMATES…

current

12.

Source: Citigroup as at 13th July 2020.

THE RESULT: GROWTH SECTORS AND GROWTH MARKETS HAVE OUTPERFORMED US TECH, EX-TECH RELATIVE TO MSCI WORLD EX-US (INDEX); GROWTH VS VALUE: WORLD AND US (RATIO) THE US (ex-TECH) MARKET RECOVERY IS THE SAME AS THE MSCI WORLD (ex-US)

OF THE THREE STANDARD EQUITY ROTATIONS, GROWTH INTO VALUE HAS NOT WORKED IN 2020

S&P Magnificent 5 Tech Stocks*

200

220 200

180 160

Global 180

S&P 500 (ex-Magnificent 5)

160

140

140

120

120

100

100

80

United States

MSCI World Index (ex-US)

80 60

Jan-19 Apr-19 Jul-19

Oct-19 Jan-20 Apr-20 Jul-20

1997

13. Source: Bloomberg as at 13th July 2020. * The Magnificent 5 are Microsoft, Apple, Facebook, Amazon and Google

2001

2005

2009

2013

2017

REASONS TO REMAIN CAUTIOUS 1: COV-19 RESURFACED AFTER ONLY 9 WEEKS DAILY INCREASE IN COV-19 CONFIRMED CASES; COV-19 INFECTION RATE STATISTIC (LOG SCALE, X)

COV-19 HAS GONE THROUGH FOUR PHASES AND ENGULFED THE ENTIRE GLOBAL ECONOMY

240,000

China Asia ex-China

Rest of World

Europe 160,000 120,000

US UK

Australia

3.0

Rest of World 200,000

COV-19 CASES ARE RISING SHARPLY, BUT THEY ARE NOT OUT OF CONTROL

Phase 4: Rest of World (particularly EM) Phase 3: US

Asia

1.0 Europe

Phase 2: 80,000 Europe Phase 1: China 40,000 -

01-Feb

14-Mar

25-Apr

06-Jun

0.3 01-Apr

29-Apr .

14.Source: Bloomberg as at 15th July 2020.

United States

27-May

24-Jun

REASONS TO REMAIN CAUTIOUS 2: A V-SHAPED EARNINGS RECOVERY IS TOO OPTIMISTIC US EPS DECLINES IN RECESSIONS 1874-2020 (%); ANNUAL US EPS GROWTH: ACTUAL VERSUS MODEL

AS AT MAY, OUR US EARNINGS MODEL SUGGESTS A CIRCA -27% EPS DECLINE

BETTER MACRO POLICY AND COST CONTROLS HAS SEEN POST-WW2 EPS DECLINES LESSEN, BUT … 45% -10%

-12% -13% -17% -12% -18% -15% -20% -20% -22% -29%

-23% -28%

-30%

-36%

-38% -40% -50% -56%

-57%

Historical average (-33%) -61%

36% 27% 18% 9% 0% -9% -18%

-70%

-27% -90%

S&P 500 EPS growth

-85% 74- 80- 92- 02- 12- 16- 29- 37- 41- 50- 55- 60- 69- 74- 81- 89- 00- 07- 2076 85 94 04 14 21 32 38 44 52 58 61 70 75 83 91 02 09

15. Source: UBS Australia Limited and Perpetual Investments at 2nd July 2020.

-36%

Model (with a 10-month lead)

1995 1999 2003 2007 2011 2015 2019 1993 1997 2001 2005 2009 2013 2017 2021

REASONS TO REMAIN CAUTIOUS 3: MARKETS ARE RICHLY PRICED MSCI WORLD 12-MF PE RATIO AND EPS ESTIMATES; US SHAREMARKET PE RATIO AND 5-YEAR RETURN (X, %)

HIGH VALUATIONS ONLY MEAN ONE THINGS – LOWER FUTURE RETURNS AND HIGHER RISK

A COMPLETE EPS RECOVERY BY END-2020 HAS MARKETS TRADING AT 18 YEAR HIGHS… BUT

17.5% Price Citigroup (-50%, +40%) Perpetual (-30%, +20%)

Dividend Total Return

14.0% 10.5%

Consensus (-20%, +25%)

Average return +9.6%

7.0% 3.5% 0.0%

Current valuation: 22.0x

-3.5% <8x 8x 11x 16. Source: Citigroup and Perpetual Investments as at 8th July 2020.

11x - 14x - 17x - 20x 14x 17x 20x 23x

>23x

REASONS TO REMAIN CAUTIOUS 4: DIVIDENDS WILL DECLINE MORE THAN USUAL US EPS AND DPS DECLINES IN RECESSIONS (%); US PAYOUT RATIO START AND END OF RECESSION (%)

IN THE PAST 40 YEARS, DIVIDENDS HAVE OUTPERFORMED EARNINGS IN RECESSIONS 1200

Earnings

CORPORATE LEVERAGE AND A BROADER DISTRIBUTION DEBATE WILL MAKE THAT HARDER IN 2020

75% Starting Payout Ratio

1000 65%

Ending Payout Ratio

800 -36%

55%

600 Dividends

-17%

400 +9% 200 +2%

-24% -1%

-22% -20%

US recessions

0 1980 1985 1990 1995 2000 2005 2010 2015 2020 17. Source: UBS Australia limited at 30th June 2020.

45%

35%

25%

1941- 1950- 1955- 1974- 1981- 1989- 2000- 2007- 20201944 1952 1958 1975 1983 1991 2002 2009

REASONS TO REMAIN CAUTIOUS 5: FIRMS HAVE NOT FIXED THEIR BALANCE SHEETS CORPORATE NET DEBT TO OPERATING CASHFLOW (X); SECTOR NET DEBT TO OPERATING CASHFLOW (X)

US, EUROPEAN AND UK FIRMS HAVE RECORD DEBT TO OPERATING CASHFLOW

18. Source: UBS Australia limited at 1st June 2020.

THE DIFFERENCE BETWEEN CYCLICAL AND DEFENSIVE DEBT TO INCOME IS AT A 15-YEAR LOW

19

20

STABLE CHARACTERISTICS; DYNAMIC ALLOCATIONS A PORTFOLIO DESIGNED FOR DIFFERENT MARKET CONDITIONS MID CYCLE – FAIR VALUE

MATURE BULL MARKET

▪ Maintain return seeking exposures

▪ Add diversifying opportunities

▪ Build diversifying opportunities

▪ Reduce return seeking exposure

▪ Manage the risk of inflation

▪ Add downside protection

Inflation Protection

Diversifying Opportunities

Downside Protection

RECOVERY

BEAR MARKET

▪ Increase return seeking (value and small cap)

▪ Selectively increase return seeking

▪ Introduce inflation protection ▪ Diversifying opportunities less ▪ Very little downside protection 21

Return Seeking

WE ARE HERE

▪ Diversifying opportunities is at maximum ▪ Allow downside protection to reduce

BALANCING RETURNS WITH RISK MANAGEMENT

Source: Bloomberg, Perpetual Investments Disclaimer: This presentation has been prepared by Perpetual Investment Management Limited (PIML) ABN 18 000 866 535, AFSL 234426 for financial advisers only. It is general information only and is not intended to provide you with financial advice. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. The relevant product disclosure statement (PDS), should be considered before deciding whether to acquire or hold units in the Fund(s). The PDS for the Perpetual Diversified Real Return Fund can be obtained by calling 1800 062 725 or visiting www.perpetual.com.au. No company in the Perpetual Group (Perpetual Limited ABN 86 000 431 827 and its subsidiaries) guarantees the performance of any fund or the return of an investorâ&#x20AC;&#x2122;s capital. Except where gross returns are specifically highlighted as gross returns, returns shown in this presentation have been calculated using exit prices after taking into account all of Perpetualâ&#x20AC;&#x2122;s ongoing fees and assuming reinvestment of distributions. No allowance has been made for taxation. Past performance is not indicative of future performance.

PERPETUAL DIVERSIFIED REAL RETURN FUND PERFORMANCE AND VOLATILITY AS AT 30 JUNE 2020 PERFORMANCE 1 YEAR %

3 YEARS %

5 YEARS %

Since Inception^%

Real Return Fund (Gross)

1.7%

4.7%

4.5%

6.8%

Real Return Fund (Net)

0.8%

3.5%

3.6%

5.9%

2.2%

1.8%

1.8%

2.0%

-0.2%

3.8%

4.0%

N/A

-7.6%

5.2%

6.0%

6.8%

Australian CPI (as at 31 March 2020 – latest available)* Mercer Median Balanced Growth Fund (as at 31 May 2020 – latest available) ASX 300 Accumulation Index

VOLATILITY

Real Return Fund

3.3%

ASX 300 Accumulation Index

13.4%

Source: Perpetual, FactSet Gross performance is before fees and assumes reinvestment of distributions. Net performance is after fees and assumes reinvestment of distributions. Past performance is not indicative of future performance. ^Inception date of Fund: 15 October 2010 *Inception date used for Australia CPI is 31 December 2010, and for Mercer Median is 30 November 2010 #Mercer MPA Investment Performance Survey of Wholesale - Balanced Growth as at 31 May 2020 23

Since Inception^

RISK MANAGEMENT NEED NOT BE AT THE EXPENSE OF RETURNS PERPETUAL’S DIVERSIFIED REAL RETURN FUND VS ASSET RETURNS 240

Performance from 31/10/2010 to 30/6/2020

220

Perpetual Diversified Real Return Fund

ASX300 200 CPI+5% AusBond Comp

180

CPI+4% Cash

160

CPI+3% DRRF Gross CPI+2%

140

120

100

Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 Oct-18 Dec-18 Feb-19 Apr-19 Jun-19 Aug-19 Oct-19 Dec-19 Feb-20 Apr-20 Jun-20

80

Source: Bloomberg and Perpetual Investments Disclaimer: This presentation has been prepared by Perpetual Investment Management Limited (PIML) ABN 18 000 866 535, AFSL 234426 for financial advisers only. It is general information only and is not intended to provide you with financial advice. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. The relevant product disclosure statement (PDS), should be considered before deciding whether to acquire or hold units in the Fund(s). The PDS for the Perpetual Diversified Real Return Fund can be obtained by calling 1800 062 725 or visiting www.perpetual.com.au. No company in the Perpetual Group (Perpetual Limited ABN 86 000 431 827 and its subsidiaries) guarantees the performance of any fund or the return of an investor’s capital. Except where gross returns are specifically highlighted as gross returns, returns shown in this presentation have been calculated using exit prices after taking into account all of Perpetual’s ongoing fees and assuming reinvestment of distributions. No allowance has been made for taxation. Past performance is not indicative of future performance.

STRUCTURAL AND TACTICAL POSITIONS WORKED WELL

Structural Positions No exposure to US or European credit ➢ Removed in 2018

Reduced Pure Credit Alpha (a mix of senior and subordinate debt) by half in late 2019

Tactical Positions • USD call options (against AUD and EUR) ➢ Rolled the strike on the AUD put to lock in profits

• 9% face value put options on ASX and SPX ➢ Multiple strike rolls to lock in profits

No listed property ▪ 5% allocation to unlisted property – focus on industrial property

No listed or unlisted infrastructure No listed or unlisted private equity

25

• Rotated defence to 10% JPY call option (JPY appreciated from 110 to 102) ➢ Rolled the strike on the JPY call to lock in profits

FEBRUARY 28 PUT OPTION

Bought SPX put option

Rolled the strike price

26

Source: Perpetual Investments, Bloomberg

SPX put option expired

ADDED TO GOLD AS THE RUSH FOR LIQUIDITY SAW DECLINES

27

Source: Perpetual Investments, Bloomberg

OUR DASHBOARD INDICATED BETTER CREDIT VALUE IN THE US THAN AUSTRALIA AT MID-MARCH.

28

Source: Perpetual Investments, Bloomberg

PURCHASED US INVESTMENT GRADE

29

Source: Perpetual Investments, Bloomberg

BOUGHT US HIGH YIELD MID MARCH, HAVE SINCE EXITED

30

Source: Perpetual Investments, Bloomberg

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This webinar and information has been prepared and issued by Netwealth Investments Limited (Netwealth), ABN 85 090 569 109, AFSL 230975. It contains factual information and general financial product advice only and has been prepared without taking into account the objectives, financial situation or needs of any individual. The information provided is not intended to be a substitute for professional financial product advice and you should determine its appropriateness having regard to you or your clientâ&#x20AC;&#x2122;s particular circumstances. The relevant disclosure document should be obtained from Netwealth and considered before deciding whether to acquire, dispose of, or to continue to hold, an investment in any Netwealth product.

While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), no person, including Netwealth, or any other member of the Netwealth group of companies, accepts responsibility for any loss suffered by any person arising from reliance on this information.