WAM ACTIVE LIMITED — Fund Information / Factsheet 2011

Sep 4, 2011

WAM Active Limited (WAA) ABN 49 126 420 719 investor newsletter

ISSUE 5: AUGUST 2011

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In this issue

• 02 A message from the Board

• 03 Market Wrap

Dear Shareholder,

Since our last newsletter the markets have again been extremely volatile. In these times you usually find money is transferred from the impatient to the patient. Warren Buffet describes this with his infamous quote, ‘Be fearful when others are greedy and greedy when others are fearful’. We are a patient investor and look forward to seizing opportunities as they present themselves.

We believe the next twelve months will be challenging. Fortunately, the fund is well positioned to take advantage of opportunities as they arise.

On another note, one question I am frequently asked is, “What is my favourite investment book?” For some time it has been “One Up on Wall Street” by Peter Lynch, the highly successful fund manager from Fidelity (USA). Fidelity is one of the largest mutual fund and financial services groups in the world.

• 04 Performance

• 06 Dividends

• 07 Investment Objectives & Process

• 08 What Wilson Asset Management Group offers to shareholders

• 09 What is a Listed Investment Company?

• 10 Small Rocks could be Diamonds

• 13 Stock stories

• 14 Portfolio Summary as at 30 June 2011

Recently, I have been reading a draft copy of a new investment book, “Bulls, Bears and a Croupier who stopped gambling and made millions - the insider’s guide to profiting from the Australian stock market”, which is being written by Matthew Kidman. It is a brilliant book and compulsory reading for anyone interested in investing in the stockmarket. It includes some fascinating investing stories and also provides the framework on how to be a successful investor. A must read!

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Geoff Wilson, Chairman WAM Active Limited

A message from the Board of WAM Active

WAM Active Limited (WAA) is now in its fourth year of operation and the Board is pleased with the fund’s solid performance.

The Board continues its commitment to grow the market capitalisation of the fund towards $100m.

Since listing in January 2008, the investment objectives have been consistently applied. The Board is proud of WAA’s record of delivering shareholders a growing stream of fully franked dividends and preserving shareholders’ capital. The fund has been able to outperform the Australian sharemarket at a time when volatility and uncertainty has been the order of the day. It is pleasing that over the last 3½ years since listing and since the GFC, the investment portfolio has returned 12.9% p.a. while the S&P/ ASX All Ordinaries Accumulation Index returned -4.8% p.a. and this represents and outperformance of +17.7% p.a.

The Board and Management are confident that with the company’s flexible investment approach and ability to take advantage of many varying trading situations, investors will continue to see positive returns in all market environments.

In previous Newsletters, we outlined the Board’s commitment to grow the market capitalisation from its current levels of around $16.5 million towards $100 million. We believe that with $100 million of Funds Under Management, the management team can continue to perform strongly, while the shareholders receive the benefit of a

reduction in costs as a percentage of assets and an increase in liquidity of the shares.

The approach to growing the company has been carefully considered by the Board. Up until now we have stated that we would grow the company through a series of option issues. However, with the changes in the Corporations Act in June 2010 referring to dividends, the Board is exploring the most effective means of growing the company. This approach could see a combination of underwriting the dividend reinvestment plan and/or initiating regular light rights issues. All of these approaches continue to be assessed and will be considered along with the merits of further option issues.

We look forward to discussing this with you at our November 2011 investor roadshows and AGM.

Thank you for your continued support.

From your Board,

Geoff Wilson, Matthew Kidman, Ron Walker and John Abernethy

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August 2011 WAM Active Investor Newsletter

Market Wrap

It continues to be a rollercoaster ride for the Australian sharemarket with volatility rife over the first 6 months of the 2011 calendar year. As we mentioned in our last newsletter, consensus amongst the top ten strategists were for the Australian Equity market to finish 2011 up 14%. We were predicting a 7% fall in the index. At the time of writing we are down almost 9%, a rather large divergence at the half way mark.

The first half of the year was

dominated by global macroeconomic factors, with fears focusing on Europe and the USA. These have dominated investors’ attention and the direction of equity markets rather than individual company fundamentals. Fear has increased with signs that the US economic recovery is faltering. Europe continues to battle with debt concerns in Greece, Italy, Portugal, Spain and Ireland.

The question remains: where does this leave us for the next six months? We continue to expect the Australian equity market will struggle to move higher for the remainder of 2011. The tightening of monetary policy seen over the last 12 months is starting to impact on the economy. We have seen a 1.75% lift in the cash rate over the last two years. House prices are slowing, retail sales are faltering and consumer sentiment is at levels not seen since during the GFC. Sentiment amongst equity market participants is at its lowest point since the GFC. Australians remain extremely cautious as is evident from the rapid lift in the savings rate, now above 10%. A level not seen in over two and a half decades. In our view the east coast of Australia is currently in a mild recession. Manufacturing has hit a wall with the high Australian dollar, domestic tourism is struggling and consumers are no longer parting with their discretionary dollars. A scenario the Reserve Bank is comfortable with as the economy deleverages.

Industrial company earnings growth continues to lag behind analyst expectations. At the start of 2011, the market was priced on a 13 times P/E, with a question mark around the E (earnings) part of the equation. Moving into the new financial year

we get a sense of déjà vu with analysts’ earnings forecasts too high. Analysts are looking for industrial company earnings growth in excess of 15% for the next 12 months. We expect this figure will be closer to zero. Interest rates are vital in stimulating the economic activity and to date in 2011 the Reserve Bank have not changed rates, although jaw boning that there is upside risk to interest rates given their medium term outlook for inflation, which is above their 3% target. Our belief remains that we need interest rate cuts to stimulate the domestic economy which would in turn drive industrial company earnings. We note at the time of writing the bond market is pricing in an interest rate cut before Christmas. This would provide a more positive outlook for equities.

We believe that global macroeconomic fears and news flow will weigh on markets over the next six months. The US remains swamped by the weight of a rapidly increasing budget deficit. Economic data continues to weaken post the latest round of money printing, better known as QE2 or quantitative easing. A QE3 can’t be ruled out given the current environment. In this scenario, the resources sector would be a beneficiary, as they were in the six months to 31 December 2010 when QE2 was in full swing. However, this only provides a temporary solution to a larger problem which will take a number of years to solve.

As we expected, the Chinese economy has started slowing over the last six months. Aggressive tightening of monetary policy in that market and the lifting of liquidity measures for local banks have weighed on China. Commodity prices have come off the highs seen in January with the softer outlook in

China. We expect further downside to commodity prices as world growth slows. The caveat being that this may not occur if the Americans revisit the printing press to stimulate their economy.

We are concerned about the bubble appearing in the Chinese housing market. Prices have skyrocketed over recent years where 50% increases in some provinces were not uncommon. Various authorities have implemented measures to tighten home ownership in China. There are increasing restrictions in owning a second or third property across most provinces in China. An interesting statistic recently quoted on the SBS TV program Dateline was that 64 million apartments in China were empty – the empty city. In our view, this type of investment in unproductive assets is unsustainable in the long term.

All of the above factors will see equities struggle to move higher over the next 6 months. The dark clouds are becoming darker over the US and European economies. These countries are highly indebted and will take a long time to return to more normal levels. The US in particular is significantly damaging its longer term prospects by printing money, which some see as a short term solution. We expect industrial stocks will struggle to achieve earnings growth until we see a loosening of monetary policy in Australia. As always, we continue to research for opportunities. The recent market shake out will provide some significant individual stock opportunities.

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Performance

There are three key performance measures. The first level of performance is used to show how the investment manager has performed before all costs and is compared to the Index which is also before tax and costs. WAA’s gross portfolio increased 11.5% for the year, while the S&P/ASX All Ordinaries Accumulation Index increased by 12.2%.

The second level of performance is the movement in underlying assets (NTA) after taxes, management fees and all other costs. This performance shows the change in the value of the assets which belong to the shareholders over the period. Corporate tax, being 30%, is the most significant item of difference between the gross and the net asset performance. The franking credits attached to this tax paid are available to be distributed to shareholders through fully franked dividends. WAA’s after tax NTA, adjusted for dividends, increased 5.6% for the 12 months to 30 June 2011. This was after the payment of 3.4 cents a share in tax during the year.

The third level of performance is the share price return. The share price, adjusted for dividends rose 12.3% for the 12 months to 30 June 2011. This outperformed the gross portfolio performance due to the closing of the discount to NTA over the 12 months.

All the above performance numbers were achieved while holding an average of 55.2% in cash during the

year. The return on our cash was 5.2% and the return on our equity portion of the portfolio was 19.3%. Over the course of the year the equity component of the portfolio turned over 6.9 times.

Over the year the best performing Market Driven strategies were trades based on relative valuation arbitrages (low price to earnings ratio or discount to NTA) followed by takeovers and then capital raisings.

Top contributing stocks to performance were RHG Limited (RHG), Tower Limited (TWR), Village Roadshow Limited (VRL) and Healthscope Limited (HLN). Key detractors were Pharmaxis Limited (PXS), Symex Holdings Limited (SYM), Dyesol Limited (DYE), and Lynas Corporation Limited (LYC).

In the first 6 months of the year, participating in discounted capital raisings was a very profitable strategy. In the second half, as the market began to struggle, the amount of capital raisings on offer declined. They were unattractively priced and so we rejected the

majority we were offered. The second half trading strategy primarily utilised trading oversold positions, earning momentum/surprise, market themes and trends, short-selling and takeover arbitrages.

Looking ahead, we believe the benign outlook for growth will result in a continuation of corporate activity, particularly in the smaller industrial sectors as companies take advantage of their strong balance sheets to buy growth. The current reporting season may also provide opportunities on the short side, as the market gets further evidence of how the economy has slowed in the June 2011 quarter. We retain high cash levels and are well positioned to take advantage of any opportunities.

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August 2011 WAM Active Investor Newsletter

Attribution Analysis

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Contribution to
Trade Type Performance
1. Block trades at a discount 4%
2. Initial public offerings 6%
3. Relative Value Arbitrages (low P/E, discount to NTA) 92%
4. Takeovers 9%
5. Oversold position, earnings momentum/surprise, market themes and trends -21%
6. Short selling -6%
7. LIC discount to NTA 8%
8. Capital raisings – placements, rights issues, sub-underwriting 8%
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The attributions above are based on the 12 months to 30 June 2011.

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80
60
40
20
0
(20)
(40)
(60)
Jan-08 Apr-08 Aug-08 Dec-09 Apr-09 Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 Jul-11
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WAM Active Ltd - Gross Portfolio before all expenses, fees, taxes and dividends All Ordinaries Accumulation Index

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Dividends

On 2 August 2011, the Board announced a fully franked final dividend of 4.0 cent per share to be paid on 30 September 2011. This brings the full year fully franked dividend to 8.0 cents per share, a 33% increase on the prior year.

The Board is committed to paying an increasing stream of fully franked dividends to shareholders.

The Board is committed to paying an increasing stream of fully franked dividends to shareholders provided the company has sufficient franking credits, and it is within prudent business practices. Dividends are paid on a six-monthly basis.

Government legislation introduced in June 2010 now enables companies to pay dividends if the company is deemed solvent. Dividend payments will be paid with consideration to cash flow, cash holdings and available franking credits. Essentially, providing it is solvent, WAA will always be in a position to pay dividends.

Cents per share

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9.0
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
2008/09 2009/10 2010/11
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Ordinary fully franked dividends

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August 2011 WAM Active Investor Newsletter

Investment Objectives & Process

These strategies are undertaken from detailed monitoring of both primary and secondary market activity.

The investment objectives of WAM Active Limited (WAA) are as follows:

• Preserve capital in both the short term and long term; and

• Deliver investors a regular income stream in the form of fully franked dividends.

To achieve these objectives, the company aims to take advantage of relative short term arbitrages and mispricings in the Australian equities market, rather than investing in any individual companies or portfolio of companies for a prolonged period of time. This is referred to as our ‘Market Driven process’.

The various strategies employed include:

• Participating in initial public offerings, placements, rights issues and underwritings, where the immediate valuation upside appears favourable;

• Trading oversold positions;

• Short selling and option trading opportunities;

• Taking advantage of Listed Investment Company discount arbitrages;

• Trading market trends and themes; and

• Trading opportunities which will deliver acceptable risk adjusted return.

These strategies are undertaken from detailed monitoring of both primary and secondary market activity. In addition, the Manager undertakes regular research, meetings and discussions with various companies listed on the Australian Securities Exchange to identify opportunities. In the last 12 months the Manager conducted over 700 company visits.

• Participating in block trades which are below market values;

• Participating in takeovers, mergers, schemes of arrangement and corporate spin-offs which appear favourably priced;

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What Wilson Asset Management Group offers to shareholders

Our Funds & Investment Process

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Market Research
Driven Driven
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Business Model

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Investment Focus -
Growth Companies
LIC Structure Experienced
Benefits Team
Investment Flexible Tight Cost
Process Mandate Control
Superior Long Term
Performance Record
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Style

• A flat structure that delivers quick decision making;

• A nimble investment process due to the relatively small Funds Under Management;

• A broad coverage of a range of industries, especially at the small to medium end of the market;

• An aversion to risk with above average cash positions; and

• Over 50 years of experience in the Australian sharemarket with a high degree of street smarts.

Structure

• Closed end funds avoiding the problem of being forced sellers and buyers at inappropriate times;

• An investment vehicle that delivers fully franked dividends; and

• An active Research Driven and Market Driven approach that involves staying very close to the market and an in depth analysis of investee companies (over 700 meetings with companies per year).

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August 2011 WAM Active Investor Newsletter

What is a Listed Investment Company?

A Listed Investment Company (LIC) is a listed pooled investment vehicle that offers investors access to a diversified portfolio of shares in other companies also listed on the stock market.

A LIC is a company structure listed on the ASX just like BHP or CBA.

A major benefit of the LIC structure is that it is a closed-end pool of capital. By closed-end we mean that if an investor wants to leave the fund, he or she sells shares to another investor. This is usually done through a stock broker. Effectively, no money leaves the fund so only the shareholders change. This differs from a managed fund/unit trust structure where if an investor wants to leave the fund they redeem units and withdraw the money from the fund.

We believe that a closed-end fund has a superior structure compared to a managed fund/unit trust structures. With closed end funds or LIC’s, the manager of the fund does not have to sell stocks in the portfolio to raise cash for a departing investor. That means investment decisions are based on the fundamentals of the companies the manager invests in, rather than money flow via redemptions.

Most other funds, like managed funds and mutual funds, are openended. This means that when an investor wants to leave the fund the manager is forced to liquidate stocks to finance the redemption. This places pressure on the manager, who has to put fundamental investing to the side, to manage the cash flows. Invariably, most investors depart a fund when the market has fallen significantly, which historically has proven to be the best time to buy. This means the manager may have to sell companies which he believes represent good value.

At the other end of the scale, most money pours into the market and the open-ended funds, when stock prices are soaring in a bull market. The manager may then be forced to buy companies at inflated prices due to their strict investment mandates. This type of investing can cause a serious destruction of capital when the bull market ends.

As a LIC is a closed-end fund it does not have any of these problems which can be of significant advantage and benefit to investors.

LIC’s are unique investment vehicles as they can trade at discounts or premiums to the assets that they own. When investors want to take their money out of LIC’s, selling may result in the share price falling below the value of its net asset backing (or NTA). We refer to this as trading at a discount to NTA. This can provide a great buying opportunity for investors. On the other hand, when investors are buying shares in LIC’s, the share price may trade higher than the value of the assets it owns. This is referred to as trading at a premium to NTA. This can provide a selling opportunity for investors.

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FEATURE ARTICLE

Small Rocks Could Be Diamonds

In most spheres of commercial life big is perceived to be superior to small. A big house, a big car and big bank account are viewed more favourably than a small car, cramped house or a dwindling bank account.

This philosophy also applies to other walks of life such as sport where the saying goes “a good big man will always beat a good small man.” The share market though seems to be a notable exception. Research by US academics Fama and French, displayed in the chart below, shows that small capitalisation value stocks in the United States dramatically outperformed large capitalisation growth companies for 80 years between 1926 and 2005.

To summarise; $10,000 invested in the small cap value index back in 1926 grew to just under $1 billion by 2005 if all returns were reinvested in the market and compounded. In comparison $10,000 invested on the same terms in the large cap growth index would have turned into just $10 million over the same period. That outperformance is stratospheric. It works out that small cap value stocks outperformed big cap growth stocks on average by about 6.6 per cent a year. The small cap value stocks also outperformed the overall market by just over 4 per cent a year.

We have used US data, because of the depth of the market and the extensiveness of the research that has been carried out. The Australian market lacks the history and the research to reproduce comparable numbers, however, it would be a fair assumption that small cap value performance in Australia would not vary greatly from its American equivalent. We would view small cap

companies in Australia as any stock that is outside the top 100 companies.

Now that we have stated the empirical evidence it is worthwhile exploring five distinct reasons why small cap stocks and, in particular small cap value stocks, out perform their big cap growth rivals?

1) GROWTH TRAJECTORY

It stands to reason that a small company has the ability to grow its earnings at a faster pace than a big company. This is not always the case, but if an investor can select a small cap company at the right time in its business cycle then the upside is enormous. The majority of big companies have large market shares in established, low growth industries. As legendary investor Jim Slater said, “elephants don’t run.” In contrast, small cap companies are usually in the enviable position of operating in either a new and rapidly expanding industry or stealing market share in a larger, established industry.

A striking example of this is in the discretionary retail sector. An electronics retailer may have 20 stores sprinkled across NSW earning $1 million profit each when the company decided to float on the sharemarket. Management has plans to roll out its concept across the

Growth of $10,000 invested in 1926

							$1,000,000,000
							$100,000,000
							$10,000,000
	Small-cap	value	stocks
	Small-cap	value	stocks				$1,000,000
							$100,000
							$10,000
							$1,000
20’s			40’s	60’s	80’s	00’s

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August 2011 WAM Active Investor Newsletter

rest of the country with the target of 100 stores over a six year period. Assuming the installed base of shops were able to grow earnings by 5 per cent per annum the company would grow its total profit from $20 million to $118.8 million. That is a percentage gain of 494 per cent. For the investor, if the company floated on a price to earnings multiple of 10 times and over the six years that multiple expanded to 17 times because of the outstanding growth being achieved the market value of the company would grow from $200 million to slightly over $2 billion. That is a 1,000 per cent gain.

Obviously this is a rare occurrence but in small cap value stocks it can happen while in big cap growth stocks this is highly unusual.

2) EFFICIENT MARKET HYPOTHESIS

The Efficient Market Hypothesis (EMH) argues that it is impossible to beat the market because stock market efficiency causes existing share prices to incorporate and reflect all relevant information. As a consequence companies always trade at their fair value on stock exchanges making it impossible for investors to purchase undervalued stocks or sell stocks for inflated prices.

I would strongly argue that as you move from large cap stocks to small cap stocks the EMH impact dilutes. There are so many small cap stocks that it becomes virtually impossible for the market to fully disseminate all of the information available all of the time. There is an army of analysts and investors tracking every movement the top 100 companies in Australia make. Outside this select group of large companies there are close to 1,900 stocks that are not covered with the same scrutiny or, in some cases, not covered at all. How else could you explain how some companies can trade below their cash backing at various times in the market cycle. When we discovered Reckon in 2002 the company was trading at 6 cents a share with its balance sheet showing net cash of 7 cents a share and its quarterly report revealing positive operating cashflow. The market had not taken the time to fully investigate all the publicly available information in relation to this stock.

It stands to reason why market participants follow larger companies more closely. Firstly, stock brokers can generate far greater revenue from trading in larger more liquid companies and so it is in their interest to have an analyst to cover those types of stocks. Secondly, a big company has the ability to generate more corporate fees for stock brokers from takeover activity, mergers or capital raisings.

Investors also feel safer in big stocks because of the liquidity that allows them to trade in and out of the stock.

If, on the other hand, you take the time out to trawl through the many listed small cap stocks then you will eventually discover the previously undiscovered. At that stage your research will put you at the front of the pack when it comes to understanding the stock. Investor, Jim Slater in his book, ‘The Zulu Principle’ talked about his wife reading four pages of a Readers Digest about the Zulu nation. If she then went to the local library and read all the books she could find on the Zulus she would become one of the leading experts in her city on the subject. If she then flew to South Africa and lived in a Zulu kraal for a few months, and studied the subject at a South African University, she would have become one of the most knowledgeable experts on Zulus in her country. Like Jim Slater we believe there is value in becoming the leading expert in an area of the stock market that has been forgotten by the rest of the market.

3) POSSIBILITY OF BEING TAKEN OVER

While large cap companies may generate more fees for merchant bankers, small cap companies are far more likely to be taken over. Bigger companies can swallow small companies on a regular basis but it is virtually impossible for the opposite to happen.

When a company is taken over and control passes from one group of shareholders to the bidder company then a premium for control is expected to be paid. The exact size of the premium is always in dispute but the long term average sits at close to 30 per cent above the prevailing share price. This provides an enormous kick for the small cap market that does not exist in the big cap realm. We would expect this trend to continue into the future.

4) ACCESS TO MANAGEMENT

The decisions made by a senior management team have far more impact on a smaller company’s performance than a large company. Small cap companies typically operate in niche parts of the economy and one false move can be terminal while good strategic planning can see a company’s earnings soar. The example of the discretionary retailer earlier in the article is a prime example of this. A large cap company may operate across many industries or have an unassailable lead in a single industry, making it extremely difficult for poor management to destroy the business. We have seen this many times in Australia with flawed decision making

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placing companies such as AMP, NAB, Rio Tinto and BHP in perilous positions. However, their marvellous industry positions and superior capital bases allow them to survive and potentially prosper in the future.

With this in mind it is critical that investors have access to the senior management team of a small company to help understand the strategic direction of the business. It is also vital to meet the people who run the company to make sure you can trust them and ensure they operate with wisdom and common sense. Over the years at Wilson Asset Management we have rated the management meeting as a critical part of the research process. On many occasions an impressive management team has been one of the clinching decisions to buy a stock, while at other times a poor meeting with management has been a powerful contributor to making a decision not to invest in a company.

segments of the economy, have the ability to do extremely well or extremely poorly. This outcome rarely eventuates at the safer big end of the market.

Additionally, small companies carry the burden of operating in a less liquid environment. This is perceived by the investment community as a higher risk, resulting in small cap companies tending to underperform in the general market during downtrends like the one that we experienced in the crash of 2008. In this segment of the market buyers should always be aware of the dangers.

Regular access to management is far easier in the small company market than it is among larger companies. Big companies are followed by an army of investors and stock broking analysts making it difficult to secure management time. Effectively, this makes it difficult to understand the people running the company you plan to put money into.

5) A LARGE UNIVERSE

The small cap universe is significantly larger and immeasurably more diverse than the big end of the market. There are close to 2,000 companies listed on the Australian Securities Exchange of which the large majority of them are small caps. This allows investors to investigate a vast range of companies that might not have been discovered by other investors.

A situation that we believe has always proven fruitful is when we discover a small company that has good growth, is relatively cheap and has very few institutional investors on the share register. This combination generally means a stock has not been unearthed by the stock broking or professional investment market. This scenario is virtually impossible to replicate among the top 200 companies that are followed in microscopic detail. This fundamental difference between small and large stocks is a tremendous benefit.

As we have argued, the small cap world can be a fruitful place to invest, especially when compared to its larger peers. However, we must always remember that higher returns equates to higher risks. As we have discovered over the years small companies, operating in individual

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August 2011 WAM Active Investor Newsletter

Stock stories

iSoft Group Limited (ISF)

iSoft Group (ISF) is a provider of healthcare information systems and e-health services to public and private hospitals.

In early April 2011, iSoft received a takeover offer from the company’s strategic partner; Computer Science Corporation (CSC). When the takeover was announced we did not initially invest. The rational was that there had been a lot of press reports that iSoft’s former chief executive, Gary Cohen, was against the proposal and that he would initiate court proceedings. At the time we believed the risk/reward payoff was not attractive enough.

Gary Cohen held about 3% of iSoft shares and the rest of the share register was made up of institutional investors, hedge funds and retail shareholders. In mid May 2011 a major risk was removed when the NSW Supreme Court dismissed a litigation claim brought by Gary Cohen to try to block the transaction. The risk/reward equation was now in our favour and we started purchasing stock. The shares were trading at 15 cents, an 11.7%

Thakral Limited (THG)

Thakral Limited (THG) is a property investment company with various hotels, retail and commercial properties in Australia.

Thakral has net tangible assets of $1.05, however, for years the company has traded at a discount to its assets due to its high debt levels and unproven track record of realising asset values. We have met with the company on numerous occasions but never purchased the stock as we could not see a catalyst that would re-rate the company.

We acted quickly and bought stock early on that day at an average price of $0.488, while the stock closed the day at $0.53. Therefore we were up by 8.6% after the first day. We continued buying the stock. At the time of writing we still hold the position.

discount to the 17 cent takeover price and an 80% plus annualised return.

We continued buying stock, with the stock becoming one of our largest positions in the portfolio when the scheme meeting occurred. The scheme meeting approved the arrangement and we received 17 cents in late July 2011.

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On 3 May 2011, Thakral announced the sale of two properties for net proceeds of $204 million, which was above the book value. This was the catalyst which we believed would lead to a re-rating of the company and a reduction in the discount to NTA.

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Portfolio Summary as at 30 June 2011

Asset Allocation

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Cash & Fixed Interest 61.7%
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Short Stock -1.0%
Long Portfolio 39.3%
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Sector Allocation

Industrials 8.0%

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Consumer Discretionary 17.3%
Health Care 14.1%
Consumer Staples 5.3%
Telecommunication Information Technology 7.4%
Services 7.3%
Materials 6.3%
Energy 1.1%
Financial 33.2%
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Top 10 Holdings as at 30 June 2011

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Market Value % of Gross
ASX Code Company Name Sector $m Asset
SGI Signature Capital Investments Limited Financials 1.04 5.6%
AUN Austar United Communications Limited Consumer Discretionary 0.76 4.1%
ISF Isoft Group Limited Health Care 0.57 3.1%
TLS Telstra Corporation Limited Telecommunications 0.53 2.9%
MSF Maryborough Sugar Factory Limited (The) Consumer Staples 0.39 2.1%
CCQ Contango Capital Partners Limited Financials 0.37 2.0%
SYM Symex Holdings Limited Materials 0.36 1.9%
CCP Credit Corp Group Limited Financials 0.30 1.6%
SPL Starpharma Holdings Limited Health Care 0.29 1.6%
FLT Flight Centre Limited Consumer Discretionary 0.19 1.1%
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Best Performing Stocks year to 30 June 2011

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Unrealised /
ASX Code Company Name Sector Realised Gains
RHG RHG Limited Financials $858,422
TAL Tower Australia Group Limited Financials $406,532
VRL Village Roadshow Limited Consumer Discretionary $108,873
HSP Healthscope Limited Health Care $106,714
VTP Van Eyk Three Pillars Limited Financials $76,431
MTU M2 Telecommunications Group Limited Telecommunication Services $72,614
ESS Essa Australia Limited Industrials $69,500
MSF Maryborough Sugar Factory Limited (The) Consumer Staple $64,006
INQ InvestorFirst Limited Financials $62,154
IAU Intrepid Mines Limited Materials $59,126
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Worst Performing Stocks year to 30 June 2011

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Unrealised /
ASX Code Company Name Sector Realised Losses
PXS Pharmaxis Ltd Health Care ($123,698)
SYM Symex Holdings Limited Materials ($86,538)
DYE Dyesol Limited Information Technology ($76,594)
LYC Lynas Corporation Limited Materials ($62,898)
SGI Signature Capital Investments Limited Financials ($61,665)
PGA Photon Group Limited Consumer Discretionary ($61,210)
WFM Webfirm Group Limited Information Technology ($52,308)
KSC K & S Corporation Limited Industrials ($48,952)
RDH Redhill Education Limited Consumer Discretionary ($46,977)
PRY Primary Health Care Limited Health Care ($46,865)
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Wilson Asset Management is an independently owned boutique investment manager established in 1997 by Geoff Wilson. Wilson Asset Management is based in Sydney, Australia.

The Wilson Asset Management Group (WAM Group) is comprised of four investment professionals who have a total investment experience of over 50 years.

The WAM Group is the manager of three listed investment companies with Funds Under Management of $300 million. The Group also manages unlisted funds of approximately $25 million.

In August 1999 the first of the three listed companies, WAM Capital Limited (WAM), was established and has grown from $21.5 million to $176.5 million today. WAM predominantly invests in growth companies with a focus on small to medium sized companies listed on the ASX.

The second listed investment company, WAM Research Limited (WAX), was established in August 2003. Funds Under Management are currently $103.7 million. Previously known as Wilson Investment Fund, WAX predominantly invests in growth companies with a focus on small to medium sized industrial companies listed on the ASX.

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CONTACT US

Level 11, 139 Macquarie Street, Sydney NSW 2000 T (02) 9247 6755 | F (02) 9247 6855 | E info@wamfunds.com.au www.wamfunds.com.au

Chris Stott CIO/Portfolio Manager T (02) 9258 4906 M 0404 099 402

Geoff Wilson Kate Thorley Chairman/Portfolio CEO & Company Manager Secretary T (02) 9247 6755 T (02) 9258 4908 M 0412 242 712 M 0405 115 644

Mary-Ann Baldock Martin Hickson Matthew Haupt Office Manager/ Analyst/Dealer Research Analyst Executive Assistant T (02) 9258 4994 T (02) 9258 4910 T (02) 9247 6755 M 0416 312 987 M 0418 890 070 M 0412 579 713

Mark Tobin Lillie Johnson Accountant Accountant T (02) 9258 4949 T (02) 9258 4938

WAM Active Limited (WAA) is the most recent addition to the Group which was listed in January 2008 with $15.4 million raised. Funds Under Management are currently $18.2 million. WAA is an active investor with high turnover and a focus on absolute returns.

DISCLAIMER: The information in this newsletter is not intended to provide advice. It does not take into account the investment objectives, financial situation and particular needs of any person, and should not be used as the basis for making investment, financial or other decisions. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information.

© Wilson Asset Management Pty Ltd 2011. All rights reserved.