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Ellerston Low Volatility Income Strategy Fund

Ellerston Low Volatility Income Strategy Fund Information Memorandum 22 March 2019 SYDNEY OFFICE Level 11, 179 Elizabeth Street, Sydney NSW 2000 MELBOURNE OFFICE Level 4, Flinders Lane, Melbourne
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Ellerston Low Volatility Income Strategy Fund Information Memorandum 22 March 2019 SYDNEY OFFICE Level 11, 179 Elizabeth Street, Sydney NSW 2000 MELBOURNE OFFICE Level 4, Flinders Lane, Melbourne VIC, 3000 Ph: E: Ellerston Low Volatility Income Strategy Fund IMPORTANT INFORMATION Ellerston Capital Limited ABN , AFSL (Ellerston Capital, the Manager or we) is the issuer of this Information Memorandum (IM) dated 22 March Investments in the Ellerston Low Volatility Income Strategy Fund (Fund) are made available by Ellerston Capital as the trustee of the Fund. Units in the Fund are available for issue under this IM. An application for Units under this IM may only be made on the Application Form accompanying this IM. The Application Form contains important terms relating to the Fund and should be read in full before deciding to invest. The Application Form does not form a part of this IM. A person may not pass on the Application Form onto another person unless it is accompanied by a printed copy of this IM or a complete and unaltered version of this IM. The information in this IM is general information only and does not take into account your individual objectives, financial situation or needs. It is important that you carefully read this IM in full before deciding to invest in Units. In particular, you should carefully consider the risks associated with an investment in the Fund and whether the information in this IM is appropriate for you in light of your objectives, financial situation and needs. To obtain advice or more information about the product offered in this IM you should speak to your financial adviser or other professional adviser. You should rely only on information in this IM. No person is authorised to provide any information, or to make any representations, in connection with the issue of Units, which is not contained in this IM. Any information or representations not contained in this IM may not be relied upon as having been authorised by the Manager in connection with the issue of Units. This IM supersedes and replaces all previous representations made in respect of the Manager, the Fund and the issue of Units. This IM only constitutes an offer of or invitation to apply for financial products to persons within Australia or in places where it is lawful to make such an offer or invitation. Units in the Fund are not available for purchase within the United States or by US Persons (refer Glossary Section 9). If you access an electronic copy of this IM, then you should ensure that you download and read the entire IM and the Application Form. A paper copy of this IM (including any supplementary document) can be obtained free of charge by calling Ellerston Capital on (02) or by ing You will be asked to provide personal information to us (directly or through the Administrator) if you apply for Units. For information about how the Manager collects, holds and uses this personal information see Section 8.7. An investment in the Fund is subject to investment and other risks, including possible delays in repayment, loss of income and loss of principal invested. Investments in the Fund are not deposits with or other liabilities of Ellerston Capital, any member of the Ellerston Capital Group or related bodies corporate, affiliates, associates or officers of any of the above entities. None of these entities guarantee any particular rate of return or the performance of the Fund nor do they guarantee the repayment of capital from the Fund. There are no forecasts or prospective financial information relating to the Fund in this IM. No person other than Ellerston Capital has caused or authorised the issue of this IM nor do any of them take any responsibility for the preparation of this IM or the establishment or performance of the Fund. All actions referred to in this IM as being taken by the Fund are performed by Ellerston Capital as trustee of the Fund or its delegates, as the case may be, in respect of the Fund. The Manager reserves the right to vary the Offer, including closing the Offer at any time, accepting late applications, changing the timing of the Offer, either generally or in particular cases, without notifying any recipient of this IM or any applicants. Investors are encouraged to submit their applications as soon as possible. Subject to the law and the Constitution, the Manager may change at any time the information, terms and conditions set out in this IM and otherwise applying to Units. Where a person is a Unitholder, they will be provided with at least 30 days written notice of any such change which is materially detrimental to them as a Unitholder including any change to fees. Unitholders who redeem their Units prior to the change will ordinarily not be bound by the change. Where a change is not materially adverse to investors, the information may be made available at: Investors may obtain a paper copy of this information free of charge by contacting the Manager using the details in the Corporate Directory. Certain capitalised expressions used in this IM have defined meanings, which are explained in the Glossary of this document. References to $ or A$ are to Australian dollars. Ellerston Low Volatility Income Strategy Fund Table of Contents 1. KEY FEATURES 2 2. ELLERSTON LOW VOLATILITY INCOME STRATEGY FUND 4 3. RISKS 6 4. FEES AND OTHER COSTS 8 5. APPLICATIONS AND DEALING WITH YOUR INVESTMENT TAX CONSIDERATIONS MATERIAL DOCUMENTS ADDITIONAL INFORMATION 18 GLOSSARY 20 Ellerston Low Volatility Income Strategy Fund 1. Key Features This Information Memorandum (IM) contains an invitation to invest in Units in the Ellerston Low Volatility Income Strategy Fund. This table contains a summary of the key features of the Fund. You should read the IM in full before deciding whether to invest. FEATURE INVESTMENT OBJECTIVE INVESTMENT PHILOSOPHY INVESTMENTS OF THE FUND FUND STRUCTURE PREFERRED INVESTMENT HORIZON RISKS OVERVIEW The investment objective of the Ellerston Low Volatility Income Strategy Fund ( ELVIS or the Fund ) is to provide investors with returns and income growth greater than the S&P/ASX 200 Accumulation Index over rolling 3-5 year periods. The key belief underpinning the Manager s investment philosophy is that the historical approach taken by many income-oriented investors is outdated in today s markets. Long-term structural changes in markets mean that the traditional income sectors (e.g. Banks and Telecoms) typically pursued for income no longer offer sustainability of dividends and earnings, while at the same time the traditional cyclical sectors are experiencing a structural shift towards companies providing more reliable income. Based on this market evolution, the Manager recognises the need to take a different approach to harnessing income: an approach focused on dividend growth and sustainability that sets multiple, sectoragnostic criteria to capture dividend yield flexibly from wherever it arises, as it arises, across the market cycle. The Fund aims to achieve its investment objective by investing in a concentrated portfolio of Australian Listed Securities that display both lower levels of earnings volatility, and stable and growing dividend streams. The Fund will seek to remain fully invested at any given time but will hold Cash and Cash-Like Securities as is required for sufficient liquidity and operational purposes. The permitted asset classes and ranges as a percentage of Net Asset Value of the Fund are: % Australian Listed Securities; 0 20% Cash and Cash-Like Securities; and 0 20% Australian exchange traded Derivatives (futures). Thresholds incorporate the Delta Exposure gained through Derivatives. The Fund is an Australian domiciled unit trust and is not registered with ASIC as a managed investment scheme. The Fund may be registered as a managed investment scheme in the future at the discretion of the Manager. At least five years. There are a number of risks associated with investing in the Fund. The key risks include: Market Risk: The risk that the value of the Fund s investments will fluctuate as a result of factors such as economic variables (including interest rates, unemployment, inflation and economic growth), market conditions and sentiment. Changes in government regulations (e.g. tax), local and international political events and environmental and technological issues may impact on the Fund s ability to implement its strategy. Market risk may have different impacts on each type of asset, investment style and investor. Security Specific Risk: The risk that the price of shares in a particular company may be affected by the operational and financial circumstances of the issuer of those securities such as the state of their underlying businesses (including the level of debt they carry, the availability of debt financing and level of interest rates), their profits, earnings and cash flows, and their dividends, Section 2.2 Section 2.3 Section 2.4 and 2.5 Sections 3 and 6 2 Ellerston Low Volatility Income Strategy Fund FEATURE OVERVIEW Portfolio Risk: The Fund may be relatively concentrated across a narrower list of Australian securities, sectors and industries than the Benchmark and therefore may display higher volatility or be adversely affected by the unfavourable performance of any of those individual Australian securities. Fund Risk: The success of the Fund depends upon our ability to develop and implement the Fund s investment strategy and identify investment opportunities that achieve the Fund s investment objective. MANAGER FEES APPLICATIONS REDEMPTIONS DISTRIBUTIONS This is not a comprehensive summary of all the risks of investing in the Fund. See Sections 3 and 6 for more information. Before investing in the Fund, investors should obtain financial advice on whether an investment in the Fund is suitable for their objectives, financial situation and needs. The fees include a Management Fee of 0.70% p.a. of the Net Asset Value and an Outperformance Fee of 10% of the Fund s investment return over the Benchmark return, after recovering any underperformance in past periods. Refer to Section 4 for further information about fees and other costs payable in respect of the Fund. Monthly with a minimum initial investment amount of $50,000 and a minimum additional investment amount of $10,000. Units will be issued on a monthly basis (subject to our ability to suspend or reject applications) provided the application and the Application Amounts are received by the Administrator prior to 2:00pm (Sydney time) one Business Day before the Application Day, unless otherwise agreed by the Manager in its absolute discretion. An Application Day occurs on the last Business Day of the month. Monthly Unitholders may redeem their Units on a monthly Redemption Day by giving the Administrator notice by 2:00pm (Sydney time) five Business Days before the Redemption Day or such lesser period as the Manager may determine, except where redemptions are suspended, and subject to a minimum redemption amount of $10,000 and a minimum holding of $50,000. A Redemption Day occurs on the last Business Day of the month. Where distributable income is available, distributions will be made half yearly for each period ending 30 June and 31 December in each year. There is no guarantee that any income will be generated. Section 4 Section 5.1 and 5.3 Section 5.4 Section Ellerston Low Volatility Income Strategy Fund 2. Ellerston Low Volatility Income Strategy Fund 2.1. ABOUT THE MANAGER ELLERSTON CAPITAL Ellerston Capital is a specialist investment manager providing a range of innovative equity and alternative strategies. As a firm majority owned by its principals and employees, our clients objectives are our objectives. Ellerston Capital has been managing money since 2004 and as at 31 December 2018 manages over $5 billion in long only Australian, global and Asian equities, Australian market neutral, global macro and global long-short equity strategies, and private investments. The Manager s investment products are designed to take advantage of the strengths and capabilities of our experienced investment team and also the opportunities which we feel exist in the market place. Ellerston Capital is based in Sydney and holds an Australian Financial Services License (AFSL No ) which regulates its prudential requirements and its delivery of financial services in Australia INVESTMENT OBJECTIVE The investment objective of the Fund is to provide investors with returns and income growth greater than the S&P/ASX 200 Accumulation Index over rolling 3-5 year periods INVESTMENT PHILOSOPHY AND STRATEGY The Fund is a fundamental, bottom-up Australian equities strategy with a clear focus on delivering low volatility, sustainable income for investors through actively blending multiple, distinct dividend yield strategies throughout the market cycle. Accordingly, the Fund invests in a high conviction portfolio of Australian Listed Securities that pay, or are expected to pay, dividends in the next 12 months. At the portfolio level, the strategy aims to display both lower levels of earnings volatility, and stable and growing dividend streams. The key belief underlying the Manager s investment philosophy is that the continued focus of income investors on nominal yields instead of dividend growth and sustainability is outdated in today s markets, specifically: Within traditional income sectors (e.g. Banks and Telecoms), disruption to business models from technology, competition, regulation and structural decline in ROE are eroding sustainability of dividends and earnings and making these companies riskier than ever; and Within traditional cyclical sectors (e.g. Diversified Financials, Consumer Discretionary and Materials), improving industry structure, regulation, business models, balance sheets, and focus on profitability means a structural shift towards these companies providing more reliable income. The Manager believes these long-term structural changes mean that managing an income strategy requires a new perspective characterised by recognising opportunities and risk from structural and macroeconomic changes as they occur, and setting multiple, sector-agnostic yield criteria to capture dividend yield flexibly from wherever it arises, as it arises. These are implemented by seeking income-generating companies across all market sectors, focusing on the sustainability of earnings and dividends to compound income, assessing opportunities in the context of the current market cycle and its future trajectory, and rotating flexibly between different sustainable income strategies with the aim of producing consistent income throughout the economic cycle. The final result that the Manager is seeking to deliver is a portfolio with a meaningfully higher dividend growth rate than the broader market INVESTMENT UNIVERSE The investment universe of the Fund includes all Australian Listed Securities and will focus primarily on the mid- to large-cap segment of the market. Australian Listed Securities include dual listed securities, securities expected to list on a recognised Australian exchange within three months, or through American Depositary Receipts or similar instruments or Derivatives. Australian Listed Securities with a market capitalisation at the time of investment of less than $500 million will be excluded from the investment selection process. The Fund may also invest in Cash and Cash-Like Securities. 4 Ellerston Low Volatility Income Strategy Fund 2.5. DERIVATIVES Australian exchange traded Derivatives may be used up to a maximum of 20% of the Net Asset Value of the Fund (Delta Exposed). This limit may be exceeded on a temporary basis with the dominant purpose of managing financial risk arising from deferring a proposed dealing in another financial product that is not a Derivative (for example managing cash flows that result from applications or redemptions) PORTFOLIO PARAMETERS BENCHMARK S&P/ASX 200 Accumulation Index The portfolio will be comprised primarily of Australian Listed Securities that pay a dividend, or are expected to pay dividends in next 12 months (IPOs etc.) and which display both lower levels of earnings volatility, and stable and growing dividend streams. The permitted asset parameters of the portfolio are: % of the Fund s Net Asset Value must be invested in Australian Listed Securities; PORTFOLIO CHARACTERISTICS AND LIMITS Australian Listed Securities with a: Maximum exposure of 10% of the Fund s Net Asset Value in any single Australian Listed Security at the time of investment; Minimum $500 million market cap at the time of investment; and Maximum of 4.9% of issued capital at the time of investment. 0 20% of the Fund's Net Asset Value in Cash and Cash-Like Securities 1 ; and 0 20% of the Fund s Net Asset Value in Australian exchange traded Derivatives. Short selling of physical Australian Listed Securities or borrowing of Australian Listed Securities are not permitted. Thresholds incorporate the Delta Exposure gained through Derivatives. Save where specified to the contrary, the above thresholds apply as at the time of the relevant investment. Where a threshold would be breached merely because of any appreciation in value (e.g. as a result of strong outperformance), depreciation in value, capital restructure, managing cash flows that result from applications or redemptions corporate action or similar event, the Fund will be rebalanced or reduced back to below that threshold within a reasonable timeframe PERFORMANCE Performance information for the Fund can obtained by telephoning (02) or by ing 2.8. REGISTRATION AS A MANAGED INVESTMENT SCHEME The Fund is not registered as a managed investment scheme. Ellerston Capital may, at its discretion, choose to register the Fund as a managed investment scheme at some point in the future. We will notify you before registration takes place. 1 Cash-like securities includes effective cash from the use of Derivatives 5 Ellerston Low Volatility Income Strategy Fund 3. Risks An investment in the Fund involves risk, including the risk that the value of the Fund s investment could fall and that distributions could be lower than expected or not paid at all. No guarantee or representation is made that the Fund will be successful, that the capital value will grow or be maintained, or that there will be any distributions. Please be aware that the investment program is speculative, that is, we undertake a process of selecting investments with higher risk in order to profit from a higher return over the long term. There can be no assurance, however, that the Fund s investment objective will be achieved. Investors should consider any investment in the Fund as a supplement to an overall investment portfolio and should invest only if they are willing to undertake the risks involved. Prospective investors should consider and understand risk in determining whether an investment in the Fund is suitable for them. While it is not possible to identify every risk relevant to investing in the Fund, the summary below lists some of the significant risks associated with investing in the Fund. Investors should read this IM in full and consult their financial adviser or other professional adviser before deciding whether to invest in Units RISKS APPLICABLE TO THE FUND All investments carry risk. The likely investment return and the risk of losing money is different for each managed investment scheme as different strategies carry different levels of risk depending on the underlying mix of assets that make up each fund. Those assets with potentially the highest long term return (such as shares) may also have the highest risk of losing money in the shorter term. The significant risks of the Fund are: Market Risk: The risk that the value of the Fund s investments will fluctuate as a result of factors such as economic variables (including interest rates, unemployment, inflation and economic growth), market conditions and sent
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