Microequities High Income Value Microcap Fund

Microequities High Income Value Microcap Fund provides investors with an income plus growth portfolio within the context of a value investment ethos including some of the leading Australian microcap companies. The Fund, launched in March 2012, is an open ended unregistered Managed Investment Scheme designed for the Australian market.

All companies selected for the Fund have met a rigorous investment selection process. They need to be paying regular high dividends, and have robust business models in place that provide solidity and security of the dividend income stream. In addition, companies purchased by the Fund are acquired at a large discount to our assessed intrinsic value.

The Fund holds a concentrated portfolio generally not exceeding forty companies. Microequities Asset Management’s approach to investing in this asset class requires a discerning and discriminating approach. The Fund manages its risk not by portfolio diversification but rather through a fundamentally driven investment research process. Risk mitigation is also undertaken by buying companies at a large discount to their assessed intrinsic value.

The Fund invests primarily in ASX listed Microcap securities, which at the time of initial investment are generally below a market capitalisation of A$500 million. The Fund is able to hold and make further investments in Microcaps which have subsequently grown above a market capitalisation of A$500 million. If the Fund invests in an Australian securities exchange listed company which spins off an entity or relists on a foreign stock exchange, the Fund is allowed to continue to hold the security.

The Fund may at times invest in companies with a higher market capitalisation, but these will be limited to no more than 20% of the assets of the Fund. This 20% is not inclusive of companies whose market capitalisation was less than $500 million at the time the Fund made its initial investment and which has subsequently grown above it.

At times the Fund may invest in IPO securities that are due to be listed on an Australian securities exchange within 3-6 months. The company must have lodged a prospectus with ASIC. These will be limited to no more than 10% of the assets of the Fund.

The Fund will be limited to investing no more than 20% of its assets in any single security or company. The Fund will make investments with a medium to long term time horizon of 5+ years.

The Fund invests only in cash and equities, and does not engage in derivative speculation. It will be permitted to hold other securities that are directly associated with a particular investment, such as options granted with a specific company issue. The Fund will not engage in short selling or stock lending, and will not hold financial debt of any kind.

• Seeks to provide monthly cash distributions
• Portfolio structured with the objective of providing long term capital growth and regular cash income
• Dividend income distributions not subject to performance fee
• Exclusive access to Special Purpose Vehicles (SPVs)
• Higher long term growth profile than large cap funds
• Manager with extensive experience in the Microcap sector
• Value investing philosophy
• In-house research expertise and capability
• Bottom-up investment research based experience
• Early access to potential high growth companies
• Performance based incentive for the Manager
• Management team members are significant co-investors in Microequities' Funds
• Distributions may carry imputation tax credits
• Stocks generally held for longer than 12 months thus delivering mostly discounted capital gains to unitholder

Profile of Companies the Fund will Invest in

There is information asymmetry in the market for Microcap securities. Information asymmetry arises when one party has more or better quality information than the other. Stockbroking firms and investment banks generally produce research material for their clients in order to generate commissions from trading volume. They tend to cover mainly the largest 200-400 stocks listed on the exchange as these tend to have the largest daily volume of trading activity. By way of example, there are approximately 2,200 companies listed on the ASX, and many of these would not have been considered for research by brokers or other research firms. Hence, there may exist opportunities to profit from intrinsically undervalued and unresearched companies.

Additionally, many index fund managers tend to structure their portfolios to track or follow specific indices. This can suggest that the index fund managers are investing in both well performing companies and poor performing companies simply to imitate the particular index.

Microequities is a fundamental deep value investor focused on growing profitable companies with a performance track record and an undervalued share price. We use a bottom-up approach to investing. Fundamental analysis of companies is undertaken using various models and key indicators to value companies before consideration of inclusion for investment by the Fund.

We conduct research that includes information gathering from customers, suppliers and competitors. As part of the investment process, we conduct face to face meetings with company’s senior management to gain valuable insights into the operations of the company’s business units, strategy, and plans. We will only invest the Fund in businesses that we understand and that have a historical track record of earnings.

The list below is a sample and is in no way exhaustive of some of the factors that may be looked at and taken into consideration when considering an investment by the Fund. As each company is unique, not all factors below will be suitable to be taken into consideration for the purposes of a valuation model of the company.

• Companies with a well established business model
• Companies generally should be at least 2 years or longer EBITDA profitable
• Companies with low manageable debt or no debt are preferred
• High cash flow generating businesses
• Companies with high earnings visibility and disclosure
• Companies with a predictable future earnings stream
• Companies in a growing sector
• Companies paying a consistent dividend stream
• Companies that have a growth catalyst division, product or service
• Companies with a highly competitive advantage or brand name
• Companies with a stable management and track record of delivering value to shareholders
• Companies where management has a significant stake
• Companies with a reputable board of directors

This approach to investment necessitates a medium to long term perspective, and only under such an investment time horizon do investors capture superior capital generation. The investment performance of companies invested in is regularly reviewed. We are in close contact with senior executives and management of those companies and their investment case is re-examined. Companies that have not yet met our investment criteria are also monitored. The world is a dynamic place and investment cases do change.