Perennial Value Smaller Companies Trust

Australian Shares Manager Review

PRODUCT

The Perennial Value Smaller Companies Trust is an actively managed portfolio of Australian small companies. The investable universe comprises listed securities on recognised Australian exchanges; excluding S&P/ASX Top 50 index stocks.

ORGANISATION

Perennial Investment Partners (Perennial) is a specialist, active investment management firm, comprising a suite of specialist investment management boutiques specialising across value and growth Australian shares, international shares, real estate and fixed interest. Perennial is a wholly-owned subsidiary of IOOF, the ASX listed wealth management group.

Formed in 1999 through a joint venture between senior investment professionals and IOOF, Perennial has responsibility for the management of all IOOF-branded managed funds. Perennial invests on behalf of its wholesale and retail clients with approximately $22.6 billion funds under management at 30 June 2011.

Perennial Value Management Ltd (PVM) is a specialist active Australian shares manager, whose investment process is based on a ‘value’ stock picking investment style. PVM is 50% owned by its investment staff, with the remainder owned by IOOF.

INVESTMENT PROCESS

Investment Objective

Provide a total return (after fees) that exceeds the S&P/ASX Small Ordinaries Accumulation Index by 3% p.a. measured over rolling three-year periods.

Investment Philosophy and Style

PVM believes that investment markets are not fully efficient as asset prices may, from time to time be driven by irrational influences. These influences often create “overshoots” that cause market value to differ significantly from intrinsic or fundamental value.

PVM believes fundamental factors can be used to assess the prospects for investment markets over the medium to long term and provide the basis for identifying situations where irrational or non- fundamental influences are driving prices. The ability to understand and value the growth prospects of companies is critical to superior performance in managing share portfolios. PVM adopts a medium to long term decision-making perspective on the basis that the source of value we aim to capture is most often released over this time frame.

PVM is an active, value-based manager focussing on stocks, which have sustainable businesses and whose share prices offer good value. The investment style is underpinned with an underlying belief that good businesses are eventually recognised by markets and are positively re-valued.

Investment Strategy

The Trust seeks to add value over the long term via a combination of capital growth and tax effective income by investing in a diversified portfolio of Australian small companies. The Trust primarily invests in stocks not included in the S&P/ASX 100 Index, down to a market capitalisation of $50 million.

The Trust invests in companies which PVM believes have sustainable operations and whose share price offers good value. The cornerstone to this approach is a strong emphasis on company research. The aim is to develop a detailed understanding of each company before committing investors' funds.

The strategy aims on buying stocks offering good value and selling stocks offering poor value.

Derivatives and Compliance

PVM rarely uses derivatives and will not use derivatives to gear a portfolio. The most common use would be investing in SPI futures to obtain immediate market exposure in the event of significant cash inflows. The portfolio managers are responsible for managing and implementing derivatives strategies.

Perennial Compliance monitors all portfolios on a daily basis for compliance with investment policies and guidelines. Monitoring is performed by a proprietary investment compliance system on a post trade basis.

PERFORMANCE

* S&P/ASX Small Ordinaries Accumulation Index

Established in March 2002, the Trust has significantly outperformed its benchmark over all periods to May 2011.

COMMENT

PVM is a well structured boutique investment manager with strong alignment of interest reflective of staff co-ownership. Perennial outsources select functions to IOOF who is well resourced to provide support across compliance and administration. The investment team is suitably experienced, which tempers the risk of the Trust’s high conviction stock selection. The research function is well disciplined with excess capacity.

Performance of the Trust has been exceptional to May 2011, while fees are in line with the average for similar products.

More than a third of the portfolio comprises stocks outside the S&P/ASX 300, however liquidity screens are applied. Risk limits are broad to facilitate flexible portfolio construction.

This product suits investors with a broad investment horizon and those willing to accept greater volatility in exchange for prospectively higher returns.