Netwealth portfolio construction series: Economic Update with Roger Montgomery

1. 2017 Investment Outlook Presented by Roger Montgomery Founder and Chief Investment Officer Montgomery Investment Management 22 February 2017

2. | netwealth This webinar is being recorded. • Slides will be sent to you after the webinar Enter your questions in the chat. • We will get to them at the end of the webinar Posting to social? • Make sure to use #netwealthinvest or tweet @netwealthInvest 2 Housekeeping Webinar Series

3. | netwealth3 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. Disclaimer Webinar Series

4. | netwealth Webinar Series4 Roger Montgomery Founder and Chief Investment Officer Montgomery Investment Management Meet today’s speaker

5. February 2017 Roger Montgomery Chief Investment Officer Invest in Quality now For quality returns

6. • Maximising Wealth & Income • What has happened? The Great Rotation • What might happen next? • Where to find Value & Income Growth Agenda Value investing, low rates and uncertainty

7. Yield = 10% Growing Income v High Yield How to put yourself in danger

8. Growing income In the real world

9. Is Value being Created? Earnings/Income growth is key

10. Is Value being Created? Not related to Price in the short term

13. BHP versus REA 12 Month Price Performance Comparison

14. BHP versus REA 10 Year Price Performance Comparison

16. 2016 Market Rotation – a global phenomena From Quality to ‘Value’

17. 2016 Rotation Poor Quality is Best Performer MIM Quality Decile Performance 12mo to Jan 31 2017 1% 19% 7% 21% 26% 24% 13% 18% 60% 76% 1 2 3 4 5 6 7 8 9 10 Notes: All companies with MIM Quality score and market capitalization >$250m as at 31 January 2016; Equal-weight basis Poorer QualityHigher Quality

19. Iron Ore oversupply to resume Price well above marginal cost of production of 90th percentile!

20. Rates Lower than the Great Depression Yield on 10-Year Treasury Bond 36 years of declining rates boosting Asset Prices 1773AD, Captain Cook crosses Antarctic Circle } 1929-39, The Great Depression

21. PE Ratio at record highs The most expensive is low growth and high debt Index returns driven by large cap, low growth stocks

22. “Investors snap up Italian 2.85% 50-year bonds. Hunt for returns outweighs bank fears.” “Austria Sells €2 Billion In 70 Year Bonds at 2.03%” These top-of-market offerings pose numerous risks that investors are ignoring. 1) interest rates return to more normal levels, bonds trade down. “Lower for longer” = “inadequate for longer,” “an insufficient return locked in for a lifetime.”* 2) Pick-up in inflation, or expectations render meagre yields inadequate, so sell off further. 3) Over the course of 20-50years, credit risks of ‘priced-to-perfection’ obligations will emerge Distorted Securities Unprecedented risks from Magnitude and Duration NB: 35-year bond bull market, few investors have any experience navigating a sustained increase in interest rates and inflation. * Mark-to-market losses from merely a 50bp rise in rates would be equivalent to >3years of coupon payments for holders of 30-yr Treasury bonds.

23. • Maximising Wealth & Income • What has happened? The Great Rotation • What might happen next? • Where to find Income Growth • Type 1. Slow and steady • Type 2. Taking advantage of overreactions Agenda Value investing, low rates and uncertainty

24. Type 1. Challenger Financial Group Growing with Australia’s Superannuation system

25. 26 • Australia’s 2nd largest operator of 45 Private Hospitals • Interests in NZ Pathology and AU Medical Centres Quality business because? • High barriers to entry (gov’t $3m/bed cost vs. $1.5m for HSO) • High incremental ROE Bright prospects? • Ageing population • Expanding the bed base by 15% in 2 years Type 2. Healthscope Growing with Ageing Baby Boomers

26. What happened in September? • Healthscope announces a weaker than expected September 2016 quarter: • “Various data points across the industry tell us that the average rate of hospital volume growth generally has slowed. We have seen this impact a number of our hospitals resulting in increased variability in volumes and case mix month to month in the first quarter and particularly in September”.

27. 0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000 1,000,000 Monthly SurgicalOperations - Past12 Months Monthly Volumes 12 Month Moving Average MBS data for Surgical Procedures. A “softer” September quarter

28. Twenty year data…….. • And yet this growth is set to accelerate…. 0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000 1,000,000 Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Monthly SurgicalOperations since1994 Monthly Volumes 12 Month Moving Average A “softer” September quarter

29. The market response = opportunity: Announcement

30. Thank You The Montgomery [Private] Fund The Montgomery Fund Montaka Global Access Fund The Montgomery Global Fund Montgomery Alpha Plus Fund

31. Questionsandanswers

32. | netwealth33 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. Disclaimer Thank you Webinar Series