ARNOTT OPPORTUNITIES (CAYMAN) FUND July 2020...DISCLAIMER 2 This document is given to only wholesale clients (as defined in the Corporations Act 2001 (Cth)) by representatives of Arnott

ARNOTT OPPORTUNITIES (CAYMAN) FUND

July 2020

INVESTING IN ASYMMETRIC

OPPORTUNITIES SINCE 1999

DISCLAIMER

2

This document is given to only wholesale clients (as defined in the Corporations Act 2001 (Cth)) by representatives of Arnott Capital Pty Limited (AFS

Licence Number 233743) (Arnott). By viewing this document, you are representing that you are a wholesale client and agree to keep this document

confidential. This document is directed at persons who are sophisticated investors with sufficient professional or other experience to properly assess the

nature of the matter discussed herein. This document has been prepared for general information purposes only without taking into account any potential

investors’ personal objectives, financial situation or needs. It should not be relied upon by the recipient in making an investment decision. This document

is intended to provide a general outline only and is not intended to be a definitive statement on the subject matter. The document is not intended to be

relied upon by recipients given the contingent nature of the content matter.

Forward-looking information in this document is provided as a general guide only and should not be relied upon as an indication of the future performance

of any financial products (including the Arnott funds). No representation is made as to future performance or volatility of the financial products. Persons

should rely solely upon their own investigations in respect of the subject matter discussed in this document. Past performance information given in this

document is given for illustrative purposes only and should not be relied upon as (and is not) an indication of future performance.

No representations or warranties, express or implied, are made as to the accuracy or completeness of the information, opinions and conclusions contained

in this document. In preparing these materials, Arnott has relied upon and assumed, without independent verification, the accuracy and completeness of

all information available to Arnott. To the maximum extent permitted by law, neither Arnott nor its director, employees or agents accept any liability for

any loss arising in relation to this document. The offer of interests in the Arnott funds will only be made in the offering document for the respective

fund.

Hong Kong

This document has not been reviewed or approved by any regulatory authority in Hong Kong. This document does not constitute an offer or invitation to

the public in Hong Kong to acquire the units in the Fund. Accordingly, unless permitted by the securities laws of Hong Kong, no person may issue or have

in its possession for the purposes of issue, this document or any advertisement, invitation or document relating to the units in the Fund, whether in Hong

Kong or elsewhere, which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong other than in relation to

the units of the Fund that are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” (as such term is defined in

the Securities and Futures Ordinance of Hong Kong (Cap. 571) and the subsidiary legislation made thereunder).

DISCLAIMER

3

Singapore

This document is being furnished to you on the basis that you are an “institutional investor” (as defined in the Securities and Futures Act (Chapter 289) of

Singapore) and on a confidential basis, solely for your information. This document may not be reproduced, disclosed, or distributed to any other person in

Singapore. Arnott, as the responsible entity and manager for the Fund has not taken any steps to ensure that the capital markets products referred to in

this document are suitable for any particular investor and will not treat recipients as its customers by virtue of their receiving this document. This

document has not been, and will not be, registered as a prospectus with the Monetary Authority of Singapore and this document is not intended to

constitute an offering, and is not regulated by any financial supervisory authority pursuant to any legislation in Singapore. The investments or services

referred to in this document may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt

about such investments or investment services. Nothing in this document constitutes investment, legal, accounting or tax advice or a representation that

any investment or strategy is suitable or appropriate to your individual circumstances or otherwise constitutes a personal recommendation to you.

United Kingdom

This document may be distributed in the United Kingdom only to persons who: (i) have professional experience in matters relating to investments in

accordance with Article 19 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended) (“FPO”); or (ii) to whom this

document may otherwise be lawfully distributed (all such persons together being referred to as “Relevant Persons”). This document is only directed at, or

available to, Relevant Persons and must not be acted on or relied on by persons who are not Relevant Persons. Any investment or investment activity to

which this document relates is available only to, and will be engaged in only with, Relevant Persons.

United States

This document may not be distributed in the United States and does not constitute an offer to sell, or a solicitation of an offer to buy, securities in the

United States. Any securities described in this document have not been, and will not be, registered under the US Securities Act of 1933 and may not be

offered or sold in the United States except in transactions exempt from the registration of the US Securities Act, the US Investment Company Act of 1940

and applicable US state securities laws.

OUR INVESTMENT APPROACH

4

Find asymmetric themes

To generate an asymmetric return profile

Invest in the best stocks within those themes

Focus on macro drivers for risk & opportunities

-20%

0%

20%

40%

60%

80%

100%

120%

7/99 7/00 7/01 7/02 7/03 7/04 7/05 7/06 7/07 7/08 7/09 7/10 7/11 7/12 7/13 7/14 7/15 7/16 7/17 7/18 7/19 7/20

5

QUARTERLY FUND PERFORMANCE

OUR COMPETITIVE EDGE – ASYMMETRIC RETURNS

An asymmetric return

is the set of possible results of an investment strategy

where the upside potential is greater than the downside

risk

2010 - April 2013. The Strategy was inactive. Kenny Arnott had a sabbatical

Finding

Investing

Delivering

Asymmetric Returns

since 1999

6

1999-2005 Data. Arnott Capital Pty Ltd (managed account). Performance net of 2 & 20 fees. Leverage used during this time was much higher than later periods. Currency AUD. These returns are not audited.

2005 - 2010 Data. Arnott Opportunities Fund (Cayman). Performance net of 2 & 20. Currency is USD. Fund administered by Citco and audited by EY.


2013 - 2017 Data. Bondi Capital Investments Pty Ltd (managed account). Performance net of 0 & 25 fees. Currency AUD. Fund administered by Mainstream. Fund was not audited.

2018 – 2019 Data. Australian Unit trust. Performance net of 0 & 25 fees. Currency AUD. Fund administered by Mainstream. Fund audited by EY.

2019 – July 2020 Data. Arnott Opportunities Fund (Cayman). Performance net of 0 & 25 fees. Currency USD. Fund administered by Mainstream. Fund audited by EY.

July 2020 – Current Data. Arnott Opportunities (Cayman). Performance net of 1.5 & 20 fees. Currency USD. Fund administered by Mainstream. Fund audited by EY.

ASYMMETRIC RETURNS = LOW DOWNSIDE + HIGH UPSIDE

SIMPLE STRATEGY WITH

COMPETITIVE EDGE

1. Invest in uncorrelated opportunities

2. Where upside far outweighs the downside

3. That will perform through different

market cycles

This return asymmetry is rare

MONTHLY RETURNS SUMMARY

C Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov DecAdj Net

return

1999 -4.20 112.97 104.03

2000 61.94 14.18 33.07 4.08 156.07

2001 68.06 -1.54 42.61 109.40 394.17

2002 31.66 1.63 17.99 0.85 59.21

2003 1.82 2.16 7.50 1.58 13.58

2004 -2.21 20.36 3.37 33.07 61.90

2005 7.83 -4.50 16.94 11.17 1.07 1.55 35.31

2006 2.29 1.18 5.26 2.48 -0.80 1.16 -0.41 0.71 1.68 0.92 2.13 2.31 20.51

2007 1.05 1.28 1.53 0.27 2.82 2.37 0.97 -5.82 -0.41 1.76 2.48 -2.71 5.48

2008 0.50 1.81 2.91 -0.75 0.48 0.01 -2.63 -0.11 1.87 0.27 -2.64 0.26 1.62

2009 1.30 0.97 1.07 -0.41 0.83 0.47 -0.61 0.07 -0.62 1.42 -2.23 1.11 3.37

2010 -0.59 -0.10 -1.33 0.04 -0.79 -0.23 2.99 2.96 -1.57 3.12 0.02 0.15 0.05

2013 13.07 7.63 2.97 2.82 -2.69 5.23 -5.25 25.00

2014 7.61 6.56 2.43 0.77 8.87 -0.93 8.46 -3.78 0.34 7.78 3.24 1.92 51.59

2015 4.46 2.88 1.99 3.19 4.12 -0.52 3.44 11.47 5.23 0.00 3.67 5.72 55.80

2016 -6.09 2.14 -5.17 -2.83 3.30 0.40 2.69 7.49 6.29 -1.15 -2.34 0.48 4.33

2017 7.99 -4.01 -2.94 -0.34 0.43 4.08 4.21 -0.02 3.37 2.79 -2.32 5.51 19.58

2018 3.47 0.88 0.72 -1.68 -1.86 0.09 0.03 0.66 1.24 -0.18 -2.61 -0.50 0.12

2019 -1.33 0.20 -0.21 -0.95 -1.87 0.50 1.75 1.53 -1.91 -2.00 3.28 1.12 -0.04

2020 -2.03 -5.10 7.77 7.95 1.60 -1.31 3.22 11.95

-60%

-50%

-40%

-30%

-20%

-10%

0%

7/99

12/99

5/00

10/00

3/01

8/01

1/02

6/02

11/02

4/03

9/03

2/04

7/04

12/04

5/05

10/05

3/06

8/06

1/07

6/07

11/07

4/08

9/08

2/09

7/09

12/09

5/10

10/10

3/11

8/11

1/12

6/12

11/12

4/13

9/13

2/14

7/14

12/14

5/15

10/15

3/16

8/16

1/17

6/17

11/17

4/18

9/18

2/19

7/19

12/19

5/20

Quarterly Drawdown's Arnott (Cayman) Vs Indices

Arnott (Cayman) Drawdown (Qtrly) MSCI World Drawdown (Qtrly) ASX 200 Accum Drawdown (Qtrly) SPX Drawdown (Qtrly)

7

ASYMMETRIC RETURNS = MANAGING BEAR MARKETS

Arnott maximum

drawdown 9.03% from

high water mark

since 1999

vs market down 50%

This is rare


CUMULATIVE PERFORMANCE (2013 to Current) KEY PERFORMANCE METRICS (2013 to Current)

8

ASYMMETRIC RETURNS – ARNOTT STILL DELIVERING

From May 2013

Arnott MSCI

Annualised returns 21.87% 6.46%

% Positive months 65.12% 0.651163

Average monthly return 1.73% 0.60%

Avg return in MSCI up months 1.36% 2.66%

Avg return in MSCI down months 2.43% -3.27%

Best month 13.07% 10.80%

Worst month -6.09% -13.47%

Largest drawdown -11.61% -21.44%

Longest drawdown (mths) 24 20

Sortino 3.76 0.60

Sharpe ratio 1.63 0.49

-50%

0%

50%

100%

150%

200%

250%

300%

350%

5/13

9/13

1/14

5/14

9/14

1/15

5/15

9/15

1/16

5/16

9/16

1/17

5/17

9/17

1/18

5/18

9/18

1/19

5/19

9/19

1/20

5/20

Perf

orm

ance %

MSCI WORLD ASX ACCUM ARNOTT

INVESTMENT PROCESS

9

First, find early

stage thematic

opportunities that

are not yet priced

by the market

IDENTIFY THEMES

IDENTIFY STOCKS

WITHIN THE

THEME

IDENTIFY MARKET

FACTORS

PORTFOLIO

CONSTRUCTION

Next, valuation work

determines the best

stock or other

instrument within the

theme

No position is entered till the

entry is right.

IE is there optionality from a

trading angle

These names make up the

portfolio.

NB – names move in and out

depending on valuation and

market factors

Disciplined four stage process

1 2 3 4

10

INVESTMENT PROCESS - Finding Themes

First, find early stage thematic opportunities that are not yet priced by

the market

Next, valuation work determines the best stock or other

instrument within the theme

Only enter position when market factors are

asymmetric

Current themes in portfolio

L

Asset

backing

Temporarily

out of

favour

Supply

Demand

imbalance

Early stage

secular

trend

Global Universe

15 to 25 themes eligible

for portfolio entry

Approximately 100 themes

identified as interesting

10 to 20 themes in the

portfolio at any one time

Typical

opportunities

Go where the

money is not but

the money will go

Always consider

downside risks

first

These

opportunities

require a lateral

thinking approach

Always keep an

eye on macro

drivers

1

2

3

4

IDENTIFY THEMES DETERMINE VALUATION IDENTIFY MARKET FACTORS PORTFOLIO CONSTRUCTION

INVESTMENT PROCESS


VALUATION

SUMMARY

Good investment

=Downside protection

(margin of safety)

+Upside earnings (moat)

▪

Security prices rise

and fall much more

than profit.

Therein lies the risk

and opportunity

▪Valuation method

depends on industry &

point in life cycle

11

FACTORS TO CONSIDERBUSINESS

TYPE OF COMPANY

Fast grower, Stalwart,

Cyclical, Asset play, Turnaround

▪

LIFE CYCLE PHASE

Development, Growth,

Mature, Decline

▪Bad business or great

company - What would

change this?

▪What is the major

misperception?

MANAGEMENT

Reputation, Skill,

Integrity

▪

Past success/failure

▪Effective capital

allocator

▪Compensation aligned

with shareholders

▪

Stock ownership

EARNINGS

SUSTAINABLE

Volumes, Revenue,

Earnings, Margins

▪Overstated/

understated due to

boom/bust conditions?

▪Cash conversion

tailwinds enhancing

FCF?

CAPITAL

STRUCTURE

ROE/ROCE

past 5 years

▪

Debt too high

relative to

revenue and

earnings

▪

Pay sufficient tax

▪

Excess cash

INVESTMENT PROCESS


MARKET

FACTORS

SUMMARY

What is the range

of likely future

outcomes?

▪

What is our view?

▪

Probability we are right?

▪

What is currently priced?

▪How far are we from

consensus?

12

FACTORS TO CONSIDERSUPPLY AND

DEMAND

PRICE ACTIONTrend, Patterns,

Oscillators, Volume▪

SELL SIDE ESTIMATESEarnings, Targets,

Recommendations

▪

OWNERSHIP AND

SENTIMENTLong only,

Hedge funds, Insiders, Short interest,

Promoters

PEER CROSS

CHECK

SANITY CHECKInternal analyst

▪

Sell side contact

▪

Long only contact

▪

Hedge fund contact

▪

Industry contact

EVENTS

COMPANY EVENTSDividend ex date,

Roadshow, AGM,Earnings

(history of surprise?)

▪

CAPITAL MANAGEMENT

AND MARKET EVENTSRights issues,

Buybacks, Placements,

Index changes

LINKAGES

DERIVATIVE MARKETSCredit markets,

Option markets

▪

RELATED

PRODUCT MARKETSCommodities,

Interest rates,

Building approvals,

Other links

INVESTMENT PROCESS – Portfolio construction

▪ Overall net delta exposure determined by macro view and managed via Index futures.

▪ Gross exposure determined by a combination of top down and bottom up view.

▪ All positions generally designed to create alpha. That is, shorts are not a hedge.

▪ The portfolio is set up for a broad range of market outcomes.

▪ Use of dynamic stops and profit targets to assess payoff of individual bets.

▪ Portfolio contains 10 to 20 themes and key themes typically are 10 to 25% of AUM

▪ Number of individual positions typically 50 to 70 positions with key positions 5 to 10%

each of AUM.

13


INVESTMENT PROCESS – Portfolio exposure

14

EXPOSURE SUMMARY TYPICAL RANGE LIMIT

OVERALL PORTFOLIO EXPOSURE

Net +/- 120% 200%

Gross 50 - 300% 400%

OTHER GROSS EXPOSURES

Sector +/- 50% 75%

Index +/- 120% 300%

Theme +/- 50% 50%

Stock 0 - 10% 20%

▪ Typically both gross and net exposures will

reduce during drawdown periods.

▪ Typically when net and gross exposures are

large, there will be large index exposure.

▪ Stop losses are based on price and

information.

▪ Concentration risk assessed by theme as well

as sector.

Risk Limits


-150%

-100%

-50%

0%

50%

100%

150%

200%

250%

300%

May-1

3

Aug-1

3

Nov-1

3

Feb-1

4

May-1

4

Aug-1

4

Nov-1

4

Feb-1

5

May-1

5

Aug-1

5

Nov-1

5

Feb-1

6

May-1

6

Aug-1

6

Nov-1

6

Feb-1

7

May-1

7

Aug-1

7

Nov-1

7

Feb-1

8

May-1

8

Aug-1

8

Nov-1

8

Feb-1

9

May-1

9

Aug-1

9

Nov-1

9

Feb-2

0

May-2

0

Net and Gross Exposure

Gross total Net total

INVESTMENT PROCESS – Portfolio turnover

15


• We seek to invest in long term asymmetric

themes

• Theme and individual stock investment

horizon period generally two to five years

• This means name turnover is very low

• Positions upsized and downsized

depending on market factors. IE we will

upsize on short term hiccups and downsize

on upside price movesYears

1 2 3 4 5

Upsize position

on dips

Downsize position

on rallies

INVESTMENT PROCESS – Current Themes


LONG THEMES

• Uranium

• Gold

• Connecting the Future

• Hong Kong

• Agriculture

16

SHORT THEMES

• Core shorts

• Crowded defensive longs

• August reporting season

• Equity Index Futures and Puts

URANIUM LONG THESIS

17

IDENTIFY THEMES DETERMINE BENEFICIARIES

Higher demand

• China’s growth is enormous

• Nuclear is the only way to

generate green baseload

• New Western reactors built and

life extensions

• Policy uncertainty led to US

utilities holding low inventory

Lower supply

• Cost of production almost twice

its current selling price so

either the price rises or the

production of the commodity

ceases

• 229M lbs supply reduction since

2017

• Current supply/demand in

deficit – only met by drawing

inventory

• All that before COVID-19

production cuts have reduced

global production by 50%

BENEFICIARIES:

Uranium Participation Corp

Invest in holdings of physical

uranium without actively

speculating or trading

We actively trade around the

Premium / Discount to NAV

Lotus Resources Ltd

Kayelekera Uranium Project

located in Malawi which was

bought from Paladin Energy Ltd

Fully permitted for production

with all permits and licenses in

place

Excellent infrastructure -

+US$200m capex spent 3.3M Ib

plant

Currently on care and

maintenance

Simple Mining & Metallurgy Open

pit mining operation with 1.5Mtpa

(87.5% recovery)

TRADING AROUND THE LONG GOLD THEME

18

We are structurally positive Gold However we look for value. Presently finding it in Gold Equities

In late ‘08, the fed printed US$1.3trn, significantly expanding their balance sheet

Setting gold up for a multi year bull run in gold, returning +155% over 3 years

Gold Miners are trading at historically low ratios versus the S&P 500

And have significantly lagged the recent rally in the Gold price (Gold Miners White, Gold Yellow)

CONNECTING THE FUTURE – TELSTRA STOCK EXAMPLE

19


THEME: CONNECTING THE FUTURE

5G is a transformational technology

that is set to drive an explosion in the

internet of things (Ericsson is

forecasting a 350% growth in cellular

connected devices over 2020 – 2025).

This is enabled by low latency, lower

power usage and higher reliability

than 4G. In the future of technology

milliseconds count, consider the

following innovative technologies:

• Autonomous vehicles;

• Robotic surgery.

In this upgrade cycle we believe the

enablers are better positioned to

capture incremental margins by

becoming solutions providers not just

operators.

BENEFICIARY: TELSTRA (‘TLS’)

Is a classic example of how we find

single stock asymmetry within a

theme. Market perception = negative,

our view, low risk structural growth.

ASSET BACKING: TLS currently own

all their assets and are currently

separating these into a separate

entity known as InfraCo. We estimate

InfraCo is worth A$2.95 per share.

INDUSTRY RATIONALISATION: After 4

years of declining ARPU, the industry

is rationalising. TLS has the largest

opportunity to benefit with a 12 to 24

month lead on 5G roll out.

ENTERPRISE SOLUTIONS: Currently

15% of revenues, given forecast

explosion of the IOT, TLS stands to

benefit by being the solution provider

verse the operator to enterprise.

Source: Ericsson 2020 Investor day

Source: Ericsson & Arnott research

HONG KONG LONG THESIS

20


THEME: HONG KONG

“The Death of Hong Kong” Since

Fortune published this article in 1995,

the HSI Index rose > 100% from 1995 –

1997. Given geopolitical uncertainty

we believe the same sentiment exists

at the present time.

The Immigration of US listed Chinese

ADR’s onto the Hong Kong Bourse

could potentially add US$557bn of

market cap to the HSI Index, raising >

US$30bn of capital.

Recent changes in the share

structures of HSI Index provides for a

significant revamp of the index

weighting, seeing a significant

increase in technology weighting of

stocks to this index.

DETERMINE VALUATION:

BENEFICIARIES

INDEX

Hong Kong is now trading at near

record valuation discount to the MSCI

All word Index.

EXCHANGE

Increased number of companies lifts

trading volumes, capital raised and

acts as an important facilitator of

capital between China & the rest of

the world.

INDEX INCLUSION CANDIDATES

Changes of Weighted Voting Class

shares enables technology names

previously excluded in the index to be

added.

INVESTMENT PROCESS – TRADE EXAMPLES

21

IDENTIFY THEMEComing Home / Hong Kong – Chinese listed ADR’s re-listed in HK to outperform

IDENTIFY STOCKS WITHIN THEMEAlibaba group is viewed as a global bell weather for Chinese consumption with multiple secular growth trends driving earnings: Cloud, Payments, Bricks to Clicks etc.

IDENTIFY MARKET FACTORSHK IPO provided a very attractive value entry into the name and at the end of May, post a very impressive Q420 earnings results HK security concerns enabled us to re-enter the name

LONG ALIBABA GROUP (‘9988.HK’)

Portfolio position

sizing (% AUM)

AGRICULTURE LONG THESIS

22


• The Agriculture sector is

uncoupled from the

traditional business cycle,

vital to the functioning of

any country and deeply

unloved by the investment

community.

• ‘Green shoots’ emerging

with promising rainfall

through early 2020 and above

median rainfall forecast for

June – July ‘20

• ABARES forecasting winter

crop production of 44,520kt

in winter 2020 - 21. +53%

from pcp.

DETERMINE VALUATION:

BENEFICIARIES

Improved growing conditions

drives earnings upgrades.

In this space we own

• Costa Group ('CGC’),

• Graincorp ('GNC’),

• Inghams Group ('ING')

EQUITY SHORTS

23

CORE SHORTS

• Financial shenanigans

• Weak / Stretched

Balance Sheet

• Deteriorating Operating

Environment.

• Inflated Valuation.

DEFENSIVE SHORTS

• Perceived defence

• Valuations higher or

unchanged from pre

Covid-19

*Please note our single stock short equity exposure is usually significantly higher than current levels with more active themes. However, given the heightened volatility in markets we

have made a conscious decision to limit our single stock equity exposure from the short side.

AUGUST REPORTING

SEASON

• Withdrawal of guidance

means the market is

presently blind

• Actively speaking to

companies to determine

where trading / recovery

is verse market

expectations

MANAGER INFORMATION & INVESTMENT TERMS

24

FUND INFORMATION MANAGER AND TRUSTEE

STRATEGY INCEPTION 1999 ARNOTT CAPITAL PTY LTD (AFSL # 233743, ABN 23086081889)

Portfolio Manager - Kenny Arnott ([email protected])

Investor contact details ([email protected])BASE CURRENCY USD

PERFORMANCE FEE 20% SERVICE PROVIDERS

MANAGEMENT FEE 1.5% PRIME BROKER Morgan Stanley

MINIMUM SUBSCRIPTIONS USD $100,000 FUND ADMINISTRATOR Mainstream

SUBSCRIPTIONS Monthly FUND AUDITOR Ernst & Young

WITHDRAWALS Monthly LEGAL ADVISORSErnst & Young

mailto:[email protected]

mailto:[email protected]

ORGANISATIONAL STRUCTURE

NB – Years are time with

Arnott.

25

BOARD OF DIRECTORS

MIDDLE OFFICE AND

RISK REPORTING

INVESTMENT

MANAGEMENT

FINANCE AND

COMPLIANCE

COMPLIANCE

COMMITTEE

James McNally

Vanessa Puchert

ARNOTT CAPITAL PTY LTD

Portfolio Manager

Yianni Gertos – 1 year

Portfolio Manager

Kenny Arnott -20 years

Portfolio Manager

Steve Clarke -18 years

IT Support

Ace Internet - 5 years

Attentus

3 years

Chief Financial Officer

& Compliance OfficerVanessa Puchert - 3 years Kenny Arnott

MARKET RISK

COMMITTEE

Steve Clarke

Kenny Arnott

Bespoke Research Provider

Diogenes Research - 11 years

Documents

ARNOTT OPPORTUNITIES (CAYMAN) FUND July 2020...DISCLAIMER 2 This document is given to only wholesale clients (as defined in the Corporations Act 2001 (Cth)) by representatives of Arnott