K2 Global Equities Fund (Hedge Fund) (ASX: KII)...For this reason, analysts are not permitted to attend road show presentations by issuers that are corporate clients of the Firm relating

K2 Global Equities Fund (Hedge Fund)

(ASX: KII)

August 2016

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K2 Global Equities Fund (Hedge Fund) (KII)


Contents1. Offer Overview .................................................................................... 1

2. Investment View ................................................................................ 1

3. Recommendation ................................................................................ 1

4. SWOT .................................................................................................. 2

5. Structure ............................................................................................. 3

6. Management & Corporate Governance .............................................. 5

7. Investment Process ............................................................................. 6

8. Portfolio ............................................................................................... 7

9. Performance Analytics ........................................................................ 8

Appendix A – Ratings Process ............................................................. 13

Appendix B – Managed Investments Coverage ................................... 14

1Independent Investment Research

Note: This report is based on information provided by K2 Asset Management Ltd

Rating

Key Investment Information

ASX Code KII

Share Price ($) at 11 August 2016 2.30

Market Cap ($m) 36.7

Units on Issue (m) 16.0

Units Traded ($m) 34.4

12-month L/H ($) 2.15/2.58

Listing Date July 2015

Fees:

Management Fee (p.a) incl. GST 2.05%

Performance Fee 20.5%

Performance Fee Hurdle Previous NAV high

Key Exposure

Underlying Exposure

Long/short portfolio of global stocks.

FX Exposure Given the Fund invests in global stocks, the Fund is exposed to currency risk. The Manager will seek to hedge the AUD when it is strengthening as this will have a negative impact on the portfolio value, however when the AUD is weakening the Manager will not hedge the currency exposure.

K2 Global Equities Fund (Hedge Fund) (ASX: KII)

1. OFFER OVERVIEW

PRODUCT SUMMARY

K2 Global Equities Fund (Hedge Fund), (ASX code: KII), is an exchange traded managed fund (ETMF). KII was listed in July 2015 and is the first of two ETMFs managed by K2 Asset Management Ltd. The Fund will provide exposure to a long/short portfolio of global equities, however has historically had a long bias. The Fund has an absolute return objective with the Manager increasing and decreasing the net equity exposure through cash holdings. The Manager has the ability to hold 100% cash in the event attractive investment opportunities cannot be identified. The Fund will be concentrated with the portfolio typically holding 80 to 120 stocks at any one time. The Fund is a mirror of the K2 Global High Alpha Fund, an unlisted unit trust established in December 2009, with KII being managed in the same manner and making the same investments as the K2 Global High Alpha Fund. ETMFs are required to have a market maker. The RE has appointed the Manager as the market maker for KII, who in turn has appointed Morgan’s Financial to facilitate the process. The Manager will be paid an annual management fee of 2.05% of the gross value of the Fund, calculated daily and paid monthly in arrears. The Manager will also be eligible for a 20.5% performance fee for any outperformance above the previous NAV high. The performance fees are accrued daily and paid semi-annually.

2. INVESTMENT VIEW

INVESTOR SUITABILITY

An investment in KII is suitable for those investors seeking exposure to an actively managed portfolio of global equities with ASX liquidity. The Fund is a unit trust and is therefore an open ended investment vehicle and new units can be issued, which may dilute any distribution received by unitholders. The Fund will seek to pay a distribution, if applicable, shortly after the end of the financial year end (30 June). The K2 Global High Alpha Fund (the fund mirrored by KII) has paid an annual distribution in four out of seven periods. The distribution may vary greatly and as such investors should not have an income focus. The structure of the Fund as a ETMF means the Fund has appointed a market maker to provide liquidity at prices around the portfolio NAV.

3. RECOMMENDATION

Independent Investment Research (IIR) has assigned the K2 Global Equities Fund (Hedge Fund), (KII) a Recommended rating. The Fund provides exposure to an index unaware, flexible, global equity portfolio. Investment limitations are in place to manage portfolio risk, however there is no defined investment strategy for the Fund with Portfolio Managers able to select stocks in any manner they choose. Compensation for the Portfolio Managers is partially performance based which seeks to provide the Portfolio Managers incentive to generate alpha and align the interests of the Manager with unitholders. The Fund has limited history with the Fund only listed in July 2015. However, the Fund is a mirror of the K2 Global High Alpha Fund, which was established in 2009. This provides a longer-term view of the performance of the investment strategy. We note that the strategy has been refined as the Fund size has increased. Since listing to 30 June 2016, KII has performed poorly, with the NAV declining 11.2%. The unlisted trust has performed better over the longer-term, with the portfolio rising 19.6%p.a compared to the benchmark index (MSCI AC World Index $AUD)return of 10.4%p.a. The investment team has been stable with the investment team being with the Manager for an average of nine years and only two Portfolio Managers exiting in the past five years. Fees are high, well above the peer group, and we do not view the performance hurdle as sufficient with the Manager being rewarded for increasing the value of Fund, which is what we believe the annual management fee is for. While the unlisted unit trust has performed well, KII has not enjoyed this success since listing, performing below the peer group and falling well short of its absolute return objective.

The investment opinion in this report is current as at the date of publication. Investors and advisers should be aware that over time the circumstances of the issuer and/or product may change which may affect our investment opinion.

Not

Rec

omm

ende

d

Recommended Recommended+

Highly Recomm

ended

2



4. SWOT

STRENGTHS � Alignment of interest with unitholders is high with the investment teams compensation

partially performance based.

� KII is a mirror of the K2 Global High Alpha Fund, an unlisted unit trust that was established in December 2009. Since it’s inception, the Fund has returned 19.6%p.a, outperforming the benchmark index.

� The Manager has a benchmark unaware investment style with an open mandate. Therefore the investment team are able to pick stocks without being inhibited by an index.

� The investment team has been stable with the investment team members being with the Manager for an average of nine years. In the last five years there have only been two departures.

� The ETMF structure requires a market maker. This provides unitholders with liquidity, which may not otherwise be there. This should also enable unitholders to buy and sell units around the NAV with the Fund not expected to trade at a large premium or discount.

WEAKNESSES

� Fees are high with the Manager receiving an annual management fee of 2.05% and a performance fee of 20.5% for the outperformance of previous highs.

� In its 11 months of trading, KII’s portfolio (NAV) has declined 11.2% in value, with the portfolio only having 5 months of positive performance over the period, falling short of its absolute return objective over its short history.

� There is no policy or process regarding a change in the Manager. As such, in the event of a breach of duties or if the Manager is not producing the outcomes stated, there is no retribution for unitholders, outside of exiting the Fund.

OPPORTUNITIES � KII offers investors the opportunity to gain access to the K2 Global High Alpha Fund with

ASX liquidity.

� KII provides investors the ability to access a high conviction portfolio of global equities.

THREATS � The Manager will hedge currency exposure in the event the Manager believes the AUD

will strengthen against the relevant currencies. In the event the AUD weakens whilst hedging is in place, the Fund will not reap the full benefit from the decline in the AUD.

� The Manager has the ability to short stocks. Shorting stocks is inherently more risky than long positions and may result in greater losses as a result.

� The performance of the portfolio is based largely on the stock picking abilities of the investment team with no defined investment process. In the event the investment team picks the stocks that decline or that underperform the market, the Fund may underperform the benchmark index and its peers and not achieve its absolute return objective.

� The Fund may or may not pay a distribution to unitholders. The Fund did not pay a distribution in 2016. The K2 Global High Alpha Fund has paid four annual distributions over the seven periods. The distribution will likely vary and may or may not be paid depending on the returns generated by the Fund.

� Only one of the four board members are non-executive. Given the Responsible Entity and the Manager are one and the same, there is limited independent representation for the review of the Manager’s operations. They are essentially reviewing their own decisions, which results in a significant conflict.

� As with all open ended structures, the Manager may have to sell down its positions in order to meet any large redemption requests. This may result in unitholders incurring increased capital gains tax payments.

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5. STRUCTURE

PRODUCT OVERVIEWKII is an exchange traded managed fund (ETMF) that seeks to invest in a portfolio of global equities. The Fund has an absolute return objective with the ability to long and short stocks. The Fund has appointed K2 Asset Management Ltd as the Manager. The management agreement is for an indefinite period. KII was listed in July 2015 and is the first of two ETMFs managed by K2 Asset Management Ltd. The Fund is a mirror of the K2 Global High Alpha Fund, an unlisted unit trust established in December 2009.

The Fund invests in a portfolio of global stocks. The Fund can take both long and short positions and will typically hold 80 to 120 stocks. While the Fund can take both long and short positions, the Fund has a long bias with the both the K2 Global High Alpha Fund and KII having had no more than 5% of the portfolio exposed to short positions to date. The Manager uses cash to provide downside protection with the Fund able to hold 100% cash in the event the Manager cannot identify any attractive investment opportunities. Exposure to the market will vary, with the equity exposure position set by the CIO’s and reviewed weekly. Historically the Fund has had an average equity exposure of 85%. Since the inception of the K2 Global High Alpha Fund, the average cash holding has been 15%.

The Manager has an index unaware mandate with the ability to take high conviction positions in stocks deemed as attractive opportunities, subject to the investment limitations. Stocks are selected based on a combination of top down and bottom up fundamental analysis, with Portfolio Managers responsible for the performance of their investment ideas. Portfolio Managers have autonomy with respect to stock selection, with stock selection based on their own investment style. Investment decisions are subject to an ongoing review by the CIO and the investment team. Compensation is partially linked to the performance of the Portfolio Managers stock selections as a part of the portfolio.

Given the Fund invests in global equity markets, the Fund will have foreign currency exposure. The Manager will hedge the currency exposure in the event the AUD is expected to strengthen and as such would have a negative impact on the Fund. In the event the AUD is expected to weaken, the Fund will not hedge the exposure as this will have a beneficial impact on the Fund value.

The Manager will receive an annual management fee of 2.05% (including GST) of the gross value of the Fund, calculated daily and paid monthly in arrears. The Manager is also eligible for a performance fee of 20.5% of the outperformance of the performance hurdle, accrued daily and paid semi-annually. The performance hurdle is the last NAV per unit high. Therefore, the Manager is eligible for a performance fee on any outperformance of the highest NAV per unit. The previous high is set as a high watermark and as such, the Manager is not eligible for a performance fee until it outperforms the previous high.

The Manager is the market maker for KII. The Manager has set a spread of 1% for KII transactions. The Manager has appointed Morgan’s Financial to execute the market making activities. Units sold on market and bought by the market maker will be cancelled, while the market maker issue new units to those orders required to be filled on the ASX. Since listing in July 2015 to 30 June 2016, the Manager has created a net 5.7m new units. Units can be bought and sold off market, however the Manager has stated that this has not been a frequent event to date.

Exchange Traded Managed Funds (ETMFs)

� ETMFs are relatively new products on the Australian market and are effectively actively managed exchange traded funds (ETFs). An ETMF seeks to provide investors access to unit trusts with market liquidity.

� The difference between an ETF and an ETMF is an ETF typically seeks to replicate the performance of an index or commodity before fees. An ETMF is an actively managed fund that does not seek to replicate the returns of an index or commodity. Similar to an ETF, a ETMF must have a market maker, which is typically the Investment Manager.

� A ETMF differs from a listed investment company (LIC) given it is an open-ended fund, meaning new units can be issued. This is compared to a LIC which is closed-ended fund.

4



INVESTMENT STRUCTURE

K2 Global Equities Fund (Hedge Fund) (ASX: KII)

Globally Listed Stocks

K2 Asset Management Ltd

Management Agreement & Market Maker

Agreement

Cash Currency Management

Investors

K2 Asset Management Holdings Ltd

100% owned

Product Leverage

Used: The Fund does not use gearing.

Cost (incl. Fees): na

Capital Protection na

Tax

Disclaimer: Tax consequences depend on individual circumstances. Investors must seek their own taxation advice. The following comments show Independent Investment Research’s expectation of tax for ordinary Australian taxpayers, but cannot be considered tax advice.

Capital gains: A capital gains tax (CGT) event will likely occur in the event the investor sells the units on market for a higher price than it was purchased for. Investors will likely be eligible for the CGT discount if the units are held for more than 12 months.

Distributions: Distribution will likely be on income account in the year earned.

Legal Structure

Wrapper: ASX exchange traded managed fund

Responsible Entity: K2 Asset Management Ltd

Investment Manager.: K2 Asset Management Ltd

Market Maker: K2 Asset Management Ltd

Capital vs. Income: Returns will likely comprise a combination of both capital and income, the extent of which will depend on the composition of the portfolio. Distributions, if applicable, will likely be paid shortly after the end of the financial year (30 June), however distributions may be made more frequently at the discretion of the Manager.

Investor Leverage

Available: No

Risks The below is not a full list of all risks associated with the fund but highlights what IIR considers to be the more significant risks associated with the fund. A detailed risk assessment can be obtained from the PDS.

Short Selling Risk: The Manager may take short positions on stocks it expects to weaken. Short selling entails a greater level of risk than taking a long position, given there is theoretically no limit to the potential appreciation of a stock. The Fund limits a short position to no more than 5% of portfolio value and will typically seek to exit the position if the value declines by 10%, with the Manager required to exit the position if the value declines 20% from the initial cost.

Currency Hedging Risk: The Manager will hedge currency exposure in the event they are of the belief that the AUD is going to rise against the respective currency exposure. In the event the Manager gets the call wrong the Fund will not reap the full benefit from the weakening AUD.

Performance Risk: The performance of the Fund is dependent on the stock picking abilities of the investment team. In the event they do not select stocks that outperform, the Fund may underperform the benchmark index and it peers and not achieve its absolute return objective.

Conflict of Interest Risk: The Responsible Entity and the Manager are one and the same. Therefore, the Manager reviews its own policies and practices. There is only one non-executive director on the board resulting in limited independent representation in the review process.

5



6. MANAGEMENT & CORPORATE GOVERNANCE

INVESTMENT MANAGER - K2 ASSET MANAGEMENT LTD

K2 Asset Management Ltd is an Australian fund manager that was established in 1999 and manages funds for retail, wholesale and institutional investors. K2 Asset Management is a wholly owned subsidiary of K2 Asset Management Holdings Ltd, a listed ASX company (ASX: KAM). The Manager currently manages the portfolio of six funds, four unlisted unit trusts and two ETMFs, with $738m funds under management between the six funds at 31 May 2016.

The Manager has been appointed for an indefinite period of time and there is no policy in place to instigate a change in the Manager.

BOARD OF DIRECTORS

There are four members on the Board of K2 Asset Management Ltd. Only one of the four board members are non-executive, Mr. Hand. Mr. Hand was previously an executive director, holding the position of a Senior Portfolio Manager until October 2013, at which point he resigned as a member of the investment team and became a non-executive member of the Board. At 31 July 2016, Mr. Hand owned 5.8% of shares on issue in KAM.

Board of Directors

Name Position Experience

Campbell Neal Managing Director Mr. Neal is a co-founder of K2 Asset Management Ltd in 1999. Mr. Neal has over 30 years experience in financial industry in both stock broking and funds management.

Mark Newman Chief Investment Officer/ Executive Director

Mr. Newman co-founded K2 Asset Management Ltd with Mr. Neal. Mr. Newman has over 30 years experience in the financial industry, including 10 years at HSBC Asset Management before moving to work with the Abu Dhabi Investment Authority where he was responsible for managing assets across the Asia Pacific region.

Robert Hand Non-Executive Director Mr. Hand joined K2 Asset Management Ltd in October 2001 as a Senior Portfolio Manager and Executive Director. Mr. Hand has over 30 years experience in the finance industry, working on Asian, European and Australian markets portfolios. In October 2013, Mr. Hand resigned as an Executive Director and as a member of the investment team and commenced as a Non-executive Director on the board of KAM.

Hollie Wight Chief Financial Officer/Executive Director/Company Secretary

Ms. Wight joined K2 Asset Management Ltd in 2000 and was appointed Chief Financial Officer in April 2005. Prior to joining K2 Asset Management Ltd, Ms. Wight worked at Pricewaterhouse Coopers in the assurance and business advisory services division.

INVESTMENT TEAM

The investment team has 10 members. The team has been with the Manager for an average of 9 years, four members of which have been with the Manager since inception in 1999. The two newest members of the team have been with the Manager for less than one year, with Mr. Soutter & Mr. Sutton joining the team in February 2016.

The investment team operate independently with each team member using their own investment style and techniques to identify investment opportunities. Bonuses paid to team members are based on the contribution made to the overall performance of the portfolio, aligning the interests of the investment team with unitholders.

There is no specified allocation of capital among team members. If there is the capacity for investment, team members are able to make an investment as long as investment limitations are not breached.

Investment Team

Name Position Years Experience

Years at Investment Manager

Mark Newman Co-Chief Investment Officer 31 17

Campbell Neal Managing Director K2 Asset Management Ltd 22 17

David Poppenbeek Co-Chief Investment Officer/Senior Portfolio Manager 31 17

James Soutter Portfolio Manager 22 <1

6



Investment Team

Name Position Years Experience

Years at Investment Manager

Joshua Kitchen Portfolio Manager 19 17

Nicholas Leitl Portfolio Manager 19 11

Min Kim Portfolio Manager 16 2

Tony Sutton Portfolio Manager 15 <1

James Tsinidis Portfolio Manager/Dealer 10 4

Tim Callan Portfolio Manager/Dealer 7 5

7. INVESTMENT PROCESS

INVESTMENT OBJECTIVE

The Manager seeks to deliver capital growth over the longer-term by identifying opportunities in mispriced securities in all market cycles. The Manager seeks to deliver this objective by exploiting inefficiencies in the market place. The Manager will seek to: (1) protect client funds from adverse moves in markets while also participating in the upside from equity markets; and (2) focus on the key areas of change in the world today and benefit from them. The manager believes their regional and sector unaware style enables the team to become experts in these key areas and exploit the increasing rate of change in these areas across geographies, without being inhibited by an index.

INVESTMENT PROCESS

The below outlines the investment process provided by the Manager, however we note that the below process provides a broad overview and does not have to be followed. Portfolio Managers can invest in any stock where they see a value opportunity as long as it falls within the investment parameters of the Fund. The process includes:

1) Fundamental Analysis

� The investment process is based on fundamental analysis from a bottom-up perspective. Fundamental analysis is crucial to assessing whether an absolute return can be made, and the investment team will only invest when this has been satisfied. Specifically, this analysis involves assessing potential future outcomes for companies and the probabilities of those future outcomes occurring.

� Identifying catalysts and understanding the timing around these catalysts is required to gauge the probability of positive future outcomes.

� Portfolio Managers will also seek to understand consensus views to determine how the market is currently valuing the company, and where our managers’ assessment may be different to broader market views.

2) Industry & Peer Analysis

� The investment team will assess the dynamics of the industry, specifically pricing structures, competitive pressures, barriers to entry and any other industry themes in order to understand the broader dynamic in which the company operates. Additionally, Portfolio Mangers will assess the peers within that industry and evaluate where the company in focus is placed relative to those peers.

3) Assessment of Management

� An important aspect of investing in companies is understanding management and how management view the company and industry they operate in. Management’s experience, incentives and outlook is crucial in determining the probability of the business succeeding in future years.

7



4) Valuation

� The investment team will ultimately provide a valuation target as a part of their investment process, which includes determining a target level for valuation where they believe the growth and catalysts for the company have largely been achieved.

Risk Management

When constructing the portfolio the Manager must adhere to investment limitations to manage the risk of the portfolio. The limitations include:

� A maximum portfolio weighting of an individual stock of 10%. Capital growth in positions will be required to be sold down when the 10% limit is breached.

� No more than 10% weighting to long high alpha positions. High alpha companies are start-ups companies or high growth companies that have a limited track record and limited earnings.

� An individual short position may not exceed 5% of the portfolio value. The total net short exposure of the portfolio cannot exceed 30%.

� The Fund cannot short sell micro cap stocks (market cap less than $100m).

Sell Discipline

� With the exception of long high alpha positions, all positions have a hard stop loss of 20% from the entry price. This includes both long and short positions, however short positions are typically closed out after a 10% loss.

� For long positions, a sell action is flagged when a stock falls 20% from its last high or if the position is in the red after 30 days of holding the stock.

� Long high alpha positions have a hard stop loss of 40% from the initial entry price and another sell action will be triggered when the stock price falls 40% from its last high.

8. PORTFOLIO � The Fund will typically hold between 80 and 120 globally listed stocks, however has the

capacity to hold 100% cash. As at 30 June 2016, the portfolio comprised 106 stocks.

� The largest stock holding in the portfolio was NSR with a 3.1% weighting at 30 June 2016. Given there are over 20,000 companies listed globally, the portfolio is concentrated.

Top 10 Portfolio Holdings (as at 30 June 2016)

Stock Name Stock Code Country of Listing Portfolio Weighting

National Storage REIT NSR Australia 3.1%

Medical Developments International Limited MVP Australia 2.7%

Goldman Sachs Group Inc GS United States 2.6%

Vita Group Ltd VTG Australia 2.3%

Peet Ltd PPC Australia 2.1%

Think Childcare Ltd TNK Australia 2.0%

Abbvie Inc ABBV United States 1.7%

Kina Securities Ltd KSL Australia 1.6%

Alphabet Inc. GOOGL United States 1.5%

PWR Holdings Ltd PWH Australia 1.5%

21.2%

� The portfolio is heavily weighted to Australia with over 30% of the portfolio allocated to the domestic market. This has been the case historically, with an average allocation to Australia of 41% since the inception of the K2 Global High Alpha Fund in December 2009, which the Fund mirrors.

8



Country Weightings (as at 30 June 2016)

Country Portfolio Weighting

Australia 35.0%

Canada 1.8%

China 2.6%

Denmark 0.4%

France 1.8%

Germany 0.9%

Holland 0.7%

Hong Kong 0.0%

Ireland 1.4%

Japan 1.4%

Korea 7.8%

New Zealand 3.7%

Spain 0.6%

United Kingdom 5.2%

United States 17.9%

Cash 17.7%

� The investment team has a focus on industrial stocks and as a result tends to have little to no exposure to the materials sector.

Sector Allocation (as at 30 June 2016)

Sector Weighting

Basic Materials 1.6%

Communications 11.8%

Consumer 27.0%

Energy 1.6%

Financials 24.9%

Industrials 7.1%

Technology 8.3%

Cash 17.7%

9. PERFORMANCE ANALYTICS

SUMMARY OF ANALYTICAL RESULTS

The Fund was listed in July 2015 and therefore has limited performance history. However, the Fund mirrors the K2 Global High Alpha Fund, an unlisted fund established in December 2009. The KII portfolio has the same investment mandate and investment strategy as the K2 Global High Alpha Fund. As such, we have analysed the performance of the K2 Global High Alpha Fund to determine the effectiveness of the strategy and the stock picking abilities of the investment team. The key findings include:

� The KII portfolio (NAV) has underperformed the benchmark index (MSCI AC World Index $AUD) since listing in July 2015 to 30 June 2016. The KII portfolio has generated a total return of -11.2% since inception, compared to the benchmark index total return of -6.5%.

� The K2 Global High Alpha Fund has significantly outperformed the benchmark index since its establishment to 30 June 2016, generating a return of 19.6%p.a compared to the benchmark index return of 10.4%p.a. If we break the performance down by calendar year, it is apparent that the Fund has experienced three years of notable outperformance. The calendar year 2010, was the most influential year, with the Fund outperforming the benchmark index by 58.7%.

9



� The equity exposure of the Fund to the market is adjusted on a regular basis through the adjustment of the cash position. The level of equity exposure is based on market valuations and opportunities identified by the Manager, however there is no process or procedure for setting the equity exposure.

� ETMFs are a relatively new concept on the ASX and as such there are only three unhedged global equity ETMFs listed on the ASX. Compared to its peers, KII has the highest fees and since listing in July 2015 to 30 June 2016, has the worst performance.

� While KII has not performed well over its short history compared to its peers, over the longer-term, the K2 Global High Alpha Fund has outperformed the unlisted Magellan Global Equity Fund, the Fund which MGE mirrors.

PERFORMANCE HISTORY

� Since listing in July 2015, KII’s portfolio (NAV) has underperformed the benchmark index (MSCI AC World Index, $AUD) with a return of -11.2% compared to the benchmark index return of -6.5%.

� KII has not paid a distribution as yet. The Fund is expected to pay an annual distribution shortly after financial year end (30 June), in the event the Fund intends to pay a distribution.

� The KII share price has underperformed the portfolio, which is expected given the spread paid on the share price transaction. For the majority of the time, the share price has traded in a tight range compared to the NAV, however in the months of January and April 2015 there was a 2.4% and 1.8% differential between the NAV and share price, respectively.

KII Indexed Performance (Inception to 30 June 2016)

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KII NAV Benchmark KII Share Price

� The below chart illustrates the monthly return of the KII portfolio, share price and the benchmark index. This chart highlights the differences between the portfolio and share price return.

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Monthly Return (Inception to 30 June 2016)

-8.0%

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KII NAV KII Share Price Benchmark

� As mentioned above, KII is a mirror fund of the K2 Global Alpha Fund, an unlisted unit trust that was established in December 2009. We have provided the performance of the K2 Global High Alpha Fund to provide readers an indication of how the portfolio and investment strategy has performed over a longer period of time, given KII has only been listed for 11 months.

� On a rolling annual return basis (calculated at month-end), the K2 Global Alpha Fund has generated an average annual return of 24.3% compared to the benchmark index average annual return of 12.9%, suggesting the Fund has consistently outperformed the benchmark index. On a month by month basis, the Fund outperformed the benchmark index in 58.2% of months over the period.

� On a monthly basis, the Fund has generated a positive return in 70.9% of months since establishment in November 2009 to 30 June 2016, achieving it’s objective of generating a positive return the majority of the time.

K2 Global Alpha Fund (30 November 2009 to 30 June 2016)

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K2 Global Alpha Fund Benchmark Index

� If we look at the performance of the Fund based on the calendar years since inception, the Fund significantly outperformed in the first year, outperforming the benchmark index by 58.7% over the 12-months to 31 December 2010. The outperformance in 2010 was driven by the Fund being a small start up Fund with much more relaxed risk management policies. The Fund also generated notable outperformance of the benchmark index in the 2012 and 2015 calendar years. The Fund generated a full year negative return only in 2011, however the first six months of 2016 suggest another negative year is on the cards.

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K2 Global Alpha Fund Calendar Year Performance

Calendar Year K2 Global Alpha Fund Benchmark Index Out/Underperformance

Dec-10 57.6% -1.1% 58.7%

Dec-11 -7.3% -7.4% 0.1%

Dec-12 22.4% 14.7% 7.7%

Dec-13 45.0% 42.5% 2.5%

Dec-14 14.7% 13.9% 0.8%

Dec-15 19.1% 9.8% 9.2%

Dec-15 - Jun -16 -11.2% -1.1% -7.9%

� The Manager adjusts the equity exposure of the Fund. The equity exposure is determined by the CIO’s and reviewed on a weekly basis. The equity exposure is based on market valuations and opportunities, however there is no process or procedure for setting the equity exposure, it is based on the ‘feel’ of the CIO’s. The below chart shows the equity exposure of the portfolio of the K2 Global High Alpha Fund since inception to 30 June 2016. The Fund has had an average equity exposure of 85% over the period.

Equity Exposure

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PEER COMPARISON

� ETMFs are a relatively new concept on the ASX and as such there are not many ETMFs listed as yet. We have compared the key investment metrics and performance of the Fund to other unhedged global equity ETMFs.

� BetaShares does not provide the monthly NAV of its funds. As a result, we have compared the share price (plus dividends) performance of the funds, which given the ETMF structure should closely follow the NAV. We note WRLD was only listed in December 2015.

� Of the three funds, KII has the highest fees with a 2.05% annual management fee and a 20.5% performance fee. MGE’s performance fee is determined by the Fund outperforming the higher of the MSCI World Net Total Return Index ($AUD) or the 10-year Australian government bond yield. Given the bond yield is the minimum performance hurdle, the Fund will likely be required to generate a positive performance, however in the current market environment of declining interest rates this may not be the case in future. KII’s performance fee is received if the Manager outperforms its previous NAV high. This means that the Fund is required to generate a positive return to be eligible for a performance fee, however, the Manager may underperform the benchmark index and be eligible for a performance fee.

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� KII has had the worst performance of the three funds to 30 June 2016, with the share price falling 13.7% since listing. While KII has had the worst performance, the volatility has been lower the MGE, with a standard deviation of 11%, compared to MGE’s standard deviation of 15%.

Peer Group

ETMF ASX Code

Management Fee (p.a)

Performance Fee

Performance Fee Hurdle Total Return (20 July 2015 - 30

June 2016)

BetaShares Managed Risk Global Share Fund WRLD 0.39% na na -2.0%*

Magellan Global Equities Fund MGE 1.35% 10%

Higher of: (1) MSCI World Net Total Return Index, AUD; and (2)

10-year Aust gov bond yield. -9.6%

K2 Global Equities Fund (Hedge Fund) KII 2.05% 20.5% Last NAV high -13.7%

*Return from 31 December to 30 June 2016. Returns are after all fees.

� Similar to KII, MGE is a mirror fund of the Magellan Global Equity Fund, an unlisted unit trust established in 2007. Given KII has been listed for less than 12 months we have compared the performance of the two unit trusts to show the longer-term performance of the two funds

� Whilst the K2 Fund has underperformed over the short term, over the longer-term the K2 Fund has outperformed the unhedged Magellan Global Equity Fund, as shown on the below chart. We note that there is a significant difference in the size of the two unlisted funds with the Magellan Global Equity Fund being in excess of $150m in November 2009, compared to the K2 Global High Alpha Fund which was only $5m.

NAV (plus distributions) of K2 Global Alpha Fund vs Magellan Global Equity Fund Performance (30 November 2009 to 30 June 2016)

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K2 Global Alpha Fund Magellan Global Equity Fund

13



APPENDIX A – RATINGS PROCESS

INDEPENDENT INVESTMENT RESEARCH PTY LTD “IIR” RATING SYSTEM.

IIR has developed a framework for rating investment product offerings in Australia. Our review process gives consideration to a broad number of qualitative and quantitative factors. Essentially, the evaluation process includes the following key factors: product management and underlying portfolio construction; investment management, product structure, risk management, experience and performance; fees, risks and likely outcomes.

LMI Ratings SCORE

Highly Recommended 83 and aboveN

ot R

ecom

men

ded


Highly Recomm

ended

This is the highest rating provided by IIR, indicating this is a best of breed product that has exceeded the requirements of our review process across a number of key evaluation parameters and achieved exceptionally high scores in a number of categories. The product provides a highly attractive risk/return trade-off. The Fund is likely effectively to apply industry best practice to manage endogenous risk factors, and, to the extent that it can, exogenous risk factors.

Recommended + 79–82

Not

Rec

omm

ende

d


Highly Recomm

ended

This rating indicates that IIR believes this is a superior grade product that has exceeded the requirements of our review process across a number of key evaluation parameters and achieved high scores in a number of categories. In addition, the product rates highly on one or two attributes in our key criteria. It has an above-average risk/return trade-off and should be able consistently to generate above average risk-adjusted returns in line with stated investment objectives. The Fund should be in a position effectively to manage endogenous risk factors, and, to the extent that it can, exogenous risk factors. This should result in returns that reflect the expected level of risk.

Recommended 60–78

Not

Rec

omm

ende

d


Highly Recomm

ended

This rating indicates that IIR believes this is an above-average grade product that has exceeded the minimum requirements of our review process across a number of key evaluation parameters. It has an above-average risk/return trade-off and should be able to consistently generate above-average risk adjusted returns in line with stated investment objectives.

Not Recommended <60

Not

Rec

omm

ende

d


Highly Recomm

ended

This rating indicates that IIR believes that despite the product’s merits and attributes, it has failed to meet the minimum aggregate requirements of our review process across a number of key evaluation parameters. While this is a product below the minimum rating to be considered Investment Grade, this does not mean the product is without merit. Funds in this category are considered to be susceptible to high risks that are not reflected by the projected return. Performance volatility, particularly on the down-side, is likely.

14



APPENDIX B – MANAGED INVESTMENTS COVERAGE The below graphic details the spread of ratings for managed investments rated by Independent Investment Research (IIR). The managed investments represented below include listed and unlisted managed funds, fund of funds, exchange traded funds and model portfolios.

Spread of Managed Investment Ratings

1.4% 0.0%4.1%

57.5%

24.7%

12.3%

0%

10%

20%

30%

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50%

60%

70%

Not Recommended Speculative Investment Grade Recommended Recommended Plus HighlyRecommended

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Documents

K2 Global Equities Fund (Hedge Fund) (ASX: KII)...For this reason, analysts are not permitted to attend road show presentations by issuers that are corporate clients of the Firm relating