Performance Review

Por�olio Performance vs Target Return (% AUD)

1 Month 3 Months 6 Months 1 Year Since 1 March 2019­8.00%

­6.00%

­4.00%

­2.00%

0.00%

2.00%

4.00%

6.00%

1.52

­4.52

­6.09

2.10

4.62

0.23 0.691.50

3.25 3.41

Sestante Balanced Index RBA Cash Rate + 2.5% p.a.

Re

turn

Sestante Balanced Index Por�olioMonthly Investment ReportAs at 31 May 2020

Index

Page 1 of 5

Asset Class

Diversified

Growth/Defensive Split

70%/30%

Investment Objec�ve

Target RBA Cash Rate +2.5%

pa. over rolling 6 year periods

a�er fees

Por�olio Incep�on Date

7 February 2019

Management Costs¹

0.31%

Number of Holdings

10­40

Por�olio availability

Hub 24

Contents

1: Performance Review

2. Market Review

3. Market Outlook

4: Por�olio Overview

5: About Us

1 Es�mated current total fee

before transac�on costs and

pla�orm fees but a�er AZ Sestante

manager discounts. As at 31 May

2020

�

�

�

The Sestante Balanced Index por�olio significantly outperformed during May, returning +1.52% for the month.

All growth assets drove returns during the month, in par�cular Australian equi�es.

The severity of the downturn in February/March accounts for challenging 3 and 6 month returns.

Market Review

Oil soared +88.38% in May, recording its best month in modern history. A�er breaching vola�lity levels of over 500% in April,

crude vola�lity declined to 70%. Despite the huge rally in May, crude vola�lity con�nued to hover around extreme levels only

seen during the peaks of previous crashes in 2008 and 2014. The deep cuts in oil produc�on agreed in April by OPEC members

and Russia con�nued to support prices, though risks remained elevated. Notwithstanding the rebound, crude oil was s�ll a

massive ­42% below its price at the end of December 2019. Conversely, iron ore moved back into posi�ve territory over the

same period of �me a�er pos�ng double­digit gains in May on the back of growing concerns over supplies from Brazil and

resilient steel produc�on in China. As the economy of the la�er country reopened, exports of gold, coal and iron ore from

Australia received a boost, both in volumes and in prices, pushing Australia’s trade surplus to new record highs. The AUD

con�nued to benefit from that trend, adding another +1.79% and ending the month above 66 cents vis­à­vis the greenback; it

exhibited strength across the board, sharply apprecia�ng vis­à­vis all other major developed currencies and edging higher

against emerging market currencies. (con�nued..)...

Winners/Losers May ­ Holdings

Weights Return Contribu�on

iShares Australian Equity Index

iShares S&P 500 ETF

Vanguard All­World ex­US Shares ETF

Vanguard Global Infrastructure Index

Vanguard Interna�onal Property Secs Idx

22.35 4.56 1.71

16.80 3.37 0.84

15.78 3.25 0.77

9.21 3.08 0.39

2.42 ­4.11 ­0.25

Winners/Losers May ­ Asset Class

Weights Return Contribu�on

Australia Equity

US Equity Large Cap Blend

Equity Miscellaneous

Infrastructure

Australia Fixed Income

Global Fixed Income

Australia Money Market

Real Estate

22.35 4.56 1.07

16.80 3.37 0.56

15.78 3.25 0.51

9.21 3.08 0.25

21.79 0.27 0.06

7.08 0.21 0.01

4.59 0.01 0.00

2.42 ­4.11 ­0.17

Powered by best­in­class investment managers.Designed by

Past performance is not an indica�on of future performance. Net performance figures are calculated using exit prices, net of fees and reflect the annual reinvestment of

distribu�on. Retail investors should refer to net returns. If inves�ng through an IDPS Provider, the total a�er fees performance return of your investment in the Fund may be

different from the informa�on in this report.

Source: Morningstar Direct

Market Review con�nued

The S&P/ASX 300 TR was up +4.58%, its fi�h consecu�ve month of absolute performance +/­ 400 Bps. This is a remarkable sta�s�c considering that swings of a

similar magnitude occurred only once in 2019 (February) and in 2018 (October). Not surprisingly, returns for resources were almost double than those of the

general index. However, they were eclipsed by the gains generated by technology, as the so­called WAAAX stocks (Wisetech, Al�um, A�erpay, Appen and Xero)

con�nued to march higher; at the end of May the sector was back in posi�ve territory since the beginning of the year owing to two excep�onal consecu�ve

months. Financials were propelled higher by the strong recovery in A­REITs, while banks performed in line with the market; consumer discre�onary outperformed

as well, pain�ng a posi�ve picture for cyclicals. Telecom enjoyed a good month but defensives lagged overall, giving back part of the rela�ve performance

accumulated during the first quarter; healthcare and consumer staples closed in the red and went flat from the beginning of the year, losing the top spot but

remaining the second and the third best performing sectors in the first 5 months of 2020. Finally, mid and smaller companies strongly outperformed the Top 20 for

the second month in a row, while growth and value were evenly matched.

The MSCI AC World Daily TR was up +4.35% in USD terms and +2.47% in AUD terms. Japan topped the list as the state of emergency over the coronavirus crisis was

li�ed in stages star�ng from May 14 and culmina�ng on May 25. Europe came second on the back of a strong rally in the second half of the month; capital started

to flow back into the old con�nent a�er the EU Commission proposed a 750 Bil EUR recovery fund, of which 500 Bil EUR will be given to EU countries as grants,

staving off the spectre of a break­up of the union. As the rota�on into cyclicals picked up, the US started to fade, though it managed to post solid gains for the

month. Conversely, emerging markets closed in the red on the back of the re­emergence of US­China tensions.

Returns for property and infrastructure diverged in May. The former was down ­1.14% in AUD terms as the reduc�on or outright suspension of dividends, the

weakness of the retail segment and the correc�on of the Hong Kong listed real estate market con�nued to weigh on the sector; the la�er rallied +3.82% in AUD

terms as the li�ing of economic restric�ons benefited the transporta�on sector.

Bond yields were largely range­bound for the month and, as a result, both domes�c (+0.29%) and global (+0.27%) fixed income hedged back to AUD exhibited low

vola�lity.

Finally, Alterna�ves (+1.41%) capitalized on the posi�ve momentum in risk assets. Returns for event driven, long/short equi�es and fixed income matched those

for global equi�es on the back of the strong performance of the high yield bond market.

...

Market Returns

Sestante Balanced Index Por�olioMonthly Investment ReportAs at 31 May 2020

Page 2 of 5

Major Index Returns

1 Month 3 Months 6 Months 1 Year 3 Years

S&P/ASX 200 TR AUD

MSCI World Ex Australia GR AUD

Bloomberg AusBond Composite 0+Y TR AUD

BBgBarc Global Aggregate TR Hdg AUD

S&P Global Infrastructure NR AUD

FTSE EPRA Nareit Global REITs TR AUD

RBA Cash Rate Target

4.36 ­9.92 ­14.59 ­6.70 4.35

3.46 ­1.58 ­3.05 12.59 10.81

0.29 0.00 1.51 4.94 5.15

0.27 0.02 2.78 6.03 4.49

3.82 ­13.88 ­13.53 ­5.78 2.43

­1.09 ­20.72 ­23.42 ­14.10 1.88

0.02 0.06 0.25 0.73 1.24

Source: Morningstar Direct

Market Outlook

On June 5 the Nasdaq 100 hit a new all­�me high, while on June 8, one trading session later, the S&P 500 erased its losses since the beginning of the year,

comple�ng the fastest recovery on record following the fastest stock market collapse.

In the mean�me, the US unemployment rate �cked down from 14.9% at the end of April to 13.3% at the end of May. Whilst it sequen�ally improved, it is s�ll at a

level 30% higher than its peak during the Global Financial Crisis of 2008­2009. As a reference, unemployment peaked at 10.0% in October 2009, and when it �cked

lower for the first �me in November 2009, the S&P 500 was s�ll ­30% below its all­�me high. The difference in the performance of financial assets between today

and 10 years ago is staggering and have investors talking about a disconnect between the real economy and the financial economy. We go one step further, and we

posit that we have reached a point where financials have started to dictate fundamentals, and not vice versa.

The Australian Dollar offers a striking example of that dynamic in our opinion. Foreign investors own over 50% of Australian sovereign debt, hence when they

started to exit their posi�ons en masse during Q1 2020, the RBA had to step in, taking the historic decision to launch its Quan�ta�ve Easing (QE) and Yield Curve

Control (YCC) program. That ac�on helped stabilize a cratering domes�c currency during the panicked liquida�on of mid­March ­ the RBA absorbed 27 Bil AUD of

the 30 Bil AUD sold by overseas investors. In short, QE brought the Australian Dollar back from the abyss, going from 55 cents to 62 cents vis­à­vis the greenback…

but that is only one half of the story.

The other half is the YCC, which we think it is responsible for propelling the domes�c currency from 62 cents to the current level of 70 cents (at the �me of the

wri�ng on June 12). In adop�ng the interest rate cap policy, the RBA has in fact decided to maintain the 3­year yield near 0.25% by buying or selling the required

amount of government bonds. By deliberately concentra�ng only on the short end of the curve, the central bank has effec�vely engineered a steep yield curve.

Today the 10 year and the 30 year yields trade at the same level or above where they were before the coronavirus crisis struck (0.90% Vs 0.80% at the end of

February and 1.80% Vs 1.40%), while the 2 year yield has halved over the same period of �me (0.27% Vs 0.55%) In addi�on, long term US treasury yields have

dropped below their Australian equivalents for the first �me since Q1 2018, further increasing the a�rac�veness of the la�er for foreign investors, who as a result

have come back in droves between April and May. This is of course fantas�c news for the government, as the renewed demand for its bonds will help finance its

swelling budget deficit, forecast to blow out to 7.2% of GDP for the 2020 fiscal year.

On the flip side we think that it may have raised the value of the domes�c currency above the equilibrium level required by the real economy, thus poten�ally

reducing the speed of the recovery. If we are correct, Australian dura�on may be a great place to park money as long­term yields will remain anchored, allowing

investors to collect a higher return compared to other sovereign bond markets. However, the enthusiasm of foreign investors may push the domes�c currency

even higher, further complica�ng the balancing act for the RBA, as in the short term it may find itself forced to talk down the value of the Australian Dollar. In the

end, a sluggish economic recovery may require an even more extreme monetary policy, and a lower exchange rate down the road. However, despite financial flows

appearing to put a floor under the value of the Australian Dollar, prima facie economic fundamentals do not support a rally. Accordingly, and barring any renewed

bouts of vola�lity, the deprecia�on / apprecia�on of the AUD should be more muted going forward.

...

Sestante Balanced Index Por�olioMonthly Investment ReportAs at 31 May 2020

Page 3 of 5

Our Investment Process

Source: Morningstar Direct

Sestante Balanced Index Por�olioMonthly Investment ReportAs at 31 May 2020 Page 4 of 5

Por�olio Overview

Por�olio Holdings %

Portfolio Date: 31/05/2020

iShares Australian Equity Index

iShares Australian Bond Index

iShares S&P 500 ETF

Vanguard All­World ex­US Shares ETF

Vanguard Global Infrastructure Index

iShares Core Cash ETF

iShares Global Bond Index

Vanguard Interna�onal Property Secs Idx

23.65

21.04

16.62

15.72

8.16

7.91

6.89

0.00

Sestante Balanced Index ­ Por�olio Holdings

Por�olio Date: 31/05/2020

%

Interna�onal Equi�es 32.3

Australian Equi�es 23.7

Australian Fixed Income 21.0

Global Infrastructure 8.2

Cash 7.9

Global Fixed Income 6.9

Total 100.0

Fixed Income Credit Quality

Por�olio Date: 31/05/2020

%

AAA 72.8

AA 18.0

A 5.6

BBB 3.6

BB 0.0

B 0.0

Below B 0.0

Not Rated 0.0

Total 100.0

Equity Market Capitalisa�on

Por�olio Date: 31/05/2020

%

Giant 42.7

Large 37.9

Mid 16.1

Small 2.9

Micro 0.5

Total 100.0

Ac�ve Asset Alloca�on: Asser�ve Model Por�olio* Tac�cal Asset Alloca�on vs Investment Policy Target

Whilst overall investment policy anchors the Investment Commi�ee’s decision making, the investment process allows addi�onal flexibility to implement wide ranging tac�cal asset class �lts. The

Investment Commi�ee applies generally conserva�ve and prudent asset class �lts when it considers them appropriate. *AZ Sestante Model Por�olio.

Equity and Fixed Income Asset Alloca�on

Source: Morningstar Direct

Sestante Balanced Index Por�olioMonthly Investment ReportAs at 31 May 2020 Page 5 of 5

Flagship Por�olio Ac�ve Asset Alloca�on Overview

Important informa�on

This document has been prepared by AZ Sestante Limited ABN 94 106 888 662 AFSL 284 442 (‘AZ Sestante’). This presenta�on has been prepared for use by dealer group researchers

and research houses only and is not for wider distribu�on. This document is not an offer of securi�es or financial products, nor is it financial product advice. As this document has been

prepared without taking account of any investors’ par�cular objec�ves, financial situa�on or needs, you should consider its appropriateness having regard to your objec�ves, financial

situa�on and needs before taking any ac�on. Past performance is not a reliable indicator of future results. Although specific informa�on has been prepared from sources believed to be

reliable, we offer no guarantees as to its accuracy or completeness. The informa�on stated, opinions expressed and es�mates given cons�tute best judgement at the �me of publica�on

and are subject to change without no�ce. Consequently, although this document is provided in good faith, it is not intended to create any legal liability on the part of any other en�ty

and does not vary the terms of a relevant disclosure statement. All dollars are Australian dollars unless otherwise specified.

Established in 2016, we specialise in designing and administering a focused range of mul�­manager investment solu�ons and managed accounts for our clients. Our parent company

Azimut, Italy’s largest independent asset manager, was established in 1989 and listed on the Italian stock exchange in 2004. Azimut manages in excess of AUD55bn in assets globally

including over AUD$6bn in mul�­manager solu�ons.

Andrew Davies

M + 61 418 617 418

andrew.davies@azsestante.com

Michael Negline

M + 61 410 586 078

michael.negline@azsestante.com

About AZ Sestante

Source: Morningstar Direct