Investment Approach

The Fund was established to provide investors with high levels of tax-advantaged distributions through exposure, on a low-cost basis, to Capital Securities issued by the Big Four Australian Banks (Australia and New Zealand Banking Group, Commonwealth Bank of Australia, National Australia Bank, and Westpac Banking Corporation) and Australian subsidiaries of global banks. The Fund may also invest in other income securities, such as Subordinated Debt and preferred shares, issued by Australian banks and Australian subsidiaries of international banks. The Manager believes that Australian banks are strongly positioned and that the Capital Securities issued by the Big Four Australian Banks offer an attractive investment opportunity for the following reasons (as at the time of issue):

Australia’s banking system is similar to Canada’s banking system – Australia’s banking system is dominated by the Big Four Australian Banks, which together control approximately 75% of the Australian domestic banking market. S&P considers the closest international peers of the Big Four Australian Banks to be the five major Canadian banks, which share important characteristics in terms of their balance sheet size, dominant positions in their respective domestic banking markets and low credit loss levels. Similar to Canadian banks, Australian banks are highly regulated, strongly capitalized, and recognized for their conservative banking practices. In the World Economic Forum’s Global Competitiveness Report 2010-2011, Canada, New Zealand and Australia were ranked as the top three countries in the “Soundness of Banks” category.
Strong credit quality, with higher ratings than Canadian banks – The Big Four Australian Banks are each rated “AA” by S&P, with a stable outlook based on expectations of sound macroeconomic conditions, strong earnings and conservative lending standards. In comparison, the five major Canadian banks are rated “AA-” or “A+”. On the strength of these credit ratings, the Big Four Australian Banks all rank in the top 20 safest banks in the world, above the majority of Canadian banks, as determined by Global Finance magazine in October 2010.
Strength of the Australian economy – The Australian economy continues to enjoy strong growth and only experienced a relatively mild downturn during the recent global financial crisis, benefitting from its significant exposure to higher growth Asian regions and Australia’s abundance of natural resources. Australia’s unemployment rate of approximately 5.1% is among the lowest in the developed world. Australia has also led the G20 nations in increasing interest rates to ensure that inflation remains within its target range. As a result, the Australian dollar has appreciated versus other major currencies where economic and employment growth lag behind Australia and inflationary pressures are more subdued.
Consistently profitable – The Big Four Australian Banks remained profitable during the recent global financial crisis and profits have shown strong growth in 2010. Net interest income has continued to underpin the profitability of the Big Four Australian Banks, whereas many of the largest global banks rely more heavily on trading and investment income.
Strong capital position, with increased dividends – The Australian banking system is well capitalized and Australian banks are well positioned to meet new Basel III capital standards. The Big Four Australian Banks have each increased dividends to shareholders during the second and third quarters of 2010.
Compelling yields – Capital Securities of Australian banks offer compelling yields, particularly in comparison to Capital Securities issued by Canadian banks with similar credit ratings and features.
High credit ratings of the Capital Securities – The Capital Securities of the Big Four Australian Banks are rated “A+” by S&P compared to “A” or “A-” for the majority of comparable Capital Securities of Canadian banks. The credit ratings of the Capital Securities of the Big Four Australian Banks are dependant on the credit ratings assigned to the Big Four Australian Banks.
Potential for rising distributions – The majority of Australian dollar-denominated Capital Securities of Australian banks pay floating rate distributions that vary with short-term benchmark interest rates in Australia. To the extent that short-term interest rates continue to rise, issuers of these securities are obligated to pay higher distributions.
Strong Australian Dollar – Exposure to the Australian dollar offers diversification benefits and is attractive because of the comparatively high interest rates in Australia, the general stability of the economy and political system, and Australia’s greater exposure to both high-growth Asian economies and commodities. Given the strength of the economy and the potential for higher inflation, the Manager believes that interest rates are likely to continue to rise at a faster pace in Australia, resulting in continued strong performance of the Australian dollar versus other major currencies.