Joint Managing Directors & Fund Managers John Deniz + Nick Reddaway
The Paragon Fund - Introduction + Australian long-short equities absolute return fund, focusing on core competencies in the resource and industrial sectors. + Paragon deploys a high conviction, long bias / long-short strategy, focusing on proprietary, fact based research. + This fundamental bottom up stock selection, coupled with a global macro perspective to manage exogenous risks, places capital preservation as a key objective of Paragon. 02
Investment Team John Deniz + 18 years relevant industry specific experience, including 10 years in financial markets (Eye Management / Patersons), and 8 years as a mechanical engineer (Jacobs, AMEC). + Jan 2009 – Nov 2012: A key member of the Investment Management team focusing on Australian long-short equities, with Eye Management, a global resources absolute return fund. While at Eye Management: + The overall fund generated top tier returns, with the Australian long-short equities component of the fund delivering outstanding compounded returns; and + Funds under management (FUM) grew from US$37m to US$85m, predominantly driven by performance. + John holds an MBA from the Melbourne Business School, and a Bachelor of Engineering (Mechanical) (Hons), with first class honours in Applied Mathematics from the University of Melbourne. John also has PS146 accreditation and has undertaken CFA Level 1. 03
Investment Team Nick Reddaway + 12 years of equity experience working across Australia (K2) and the United Kingdom (BlueCrest Capital, Lazard, Schroders). + Jan 2008 – Jun 2011: Portfolio Manager, Global Equities, Melbourne with K2 Asset Management, one of Australia’s pre-eminent absolute return funds with $800m in FUM. While at K2 Asset Management: + The Fund generated top tier returns, with assets in the global equity fund doubling from $120m to $250m. + Nick was a founding member of the K2 Asset Allocation team which determined the tactical and strategic outlook for K2’s funds. + Nick holds a postgraduate diploma in Applied Finance from FINSIA, and a Bachelor of Business (International Trade), from Monash University. Nick also has Investment Management Certification, PS146 accreditation and has undertaken CFA Level 1. 04
Paragon Fund : Track Record HISTORICAL PERFORMANCE (net of fees) HISTORICAL EXPOSURE 20.0% 100% 15.0% 80% 10.0% 60% 5.0% 40% 0% 20% -5.0% 0% -10.0% -20% MAR APR MAY JUN JUL AUG SEP OCT NOV DEC MAR APR MAY JUN JUL AUG SEP OCT NOV DEC All Ordinaries Accumulation Index Paragon Fund Long Short Net Exposure JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC YTD 2013 1.1% 0.3% -2.2% 1.8% 1.8% 1.6% 5.3% 4.9% 2.8% 18.7% 0.0% + We have averaged ~60% net long exposure (~75% gross) and to date not used any leverage + We have liquid underlying positions (>50% in large or >80% in mid & large caps) Note: Inception date for the Paragon Fund was 1/3/2013. A full list of our monthly reports are available via www.paragonfunds.com.au. 05
Investment Process Macro + Investment Portfolio Thematic Evaluation + Construction Analysis Selection 06
Investment Process : Macro & Thematic Analysis Business Impact of Secular Cycle Global Macro Dynamics Analysis + Position in the + Global growth + Disruptive business cycle trajectory technologies + Likely direction + Interest and + Demand supply exchange rates imbalances + Impact on stock selection + Commodity prices + Resource scarcity + How will it impact + Deleveraging Australian economy + Managing exogenous risks 07
Investment Themes Mobile Internet SMARTPHONES LEAD TRAFFIC GROWTH + Technological advances and the smartphone Exabytes per month 66% CAGR 2012-2017 have driven immense change in the way we 12 communicate, use the internet and consume content. + According to Cisco, by 2017 devices connected to IP networks globally will be nearly three times as high as the global 6 population, mobile data traffic will increase 13 fold, and video viewed and downloaded on the internet will represent over 80% of all global consumer internet traffic. 0 Key beneficiaries : 21st Century Fox, Xero, Telstra 2012 2013 2014 2015 2016 2017 Other Portable Devices (0.2%) Tablets (11.7%) Non-Smartphones (1.4%) Laptops (14.0%) M2M (5.1%) Smartphones (67.5%) Figures in legend refer to traffic share in 2017. Source: Cisco VNI Mobile Forecast, 2013 08
Investment Themes Emerging Consumer CHINA PER CAPITA DISPOSABLE INCOME + With 25% of income earners in China, or 14,000.0 100% roughly 330m people defined as middle class today (vs. 50m in the US), China is already 90% 12,000.0 the world’s biggest consumer of cars and 80% luxury goods. 10,000.0 70% 60% + By 2022, McKinsey Consulting expects more 8,000.0 than 75% of China’s income earners will be 50% 6,000.0 classified as middle class. Asia’s middle class 40% as a whole is forecast to triple over the next 30% 4,000.0 decade to 1.7bn people, comprising roughly 20% half the words middle class population. 2,000.0 10% 0.0% 0.0 1980 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Key beneficiaries : Crown Resorts, Donaco Per capits disposable income (LHS) % growth (RHS) Source: National Bureau of Statistics, China, BofA Merrill Lynch Global 09
Investment Themes Ageing Society FEMALE WORFORCE PARTICIPATION RATE BY AGE, 1983 TO 2013 + Since the middle of the 70’s, Australia’s fertility rate has fallen below the level 90 required to maintain the population without 80 immigration, while we are also healthier and 70 living longer. Participation Rate 60 + As society on average becomes older, there are wide-ranging ramifications for the 50 provision of services like healthcare and 40 housing but this secular trend has other 30 implications in services such as childcare. 20 10 Key beneficiaries : G8 Education, Virtus Health 0 15-19 20-24 25-34 35-44 45-54 55-59 60-64 65+ JAN 1983 JAN 2003 JAN 1993 JAN 2013 Source: ABS, Labour Force, Australia, Detailed-Electronic Delivery Jan 2013 (cat no. 3291055001)-Table 1:Labour Force 10
Investment Process : Investment Evaluation LONG STRATEGY SHORT STRATEGY + Value driven approach + Changing competitive dynamics + Favourable sector dynamics + Overvalued firms with unrealistic forecasts + Strong management with sustainable business models + Declining fundamentals + Improving fundamentals + Excessive leverage and equity dilution risk + Catalyst 11
Example Long : Xero (XRO AU) + Xero is the global leader in cloud based MARKET SHARE TODAY accounting software + We view the fundamentals of XRO as compelling given: AU UK NZ 1) Cloud computing is a disruptive technology and XRO has first mover advantage targeting an industry controlled by dominant players (MYOB, Intuit, Sage) with ageing desktop based software offerings. 2) XRO’s CEO Rod Drury has an exceptional technology track record and has added highly experienced management from the world’s best technology companies including Microsoft and US / Rest of World Google. Staff own 47% of XRO. 3) They are now fully funded to seek out their biggest market opportunity (USA) after ensuring the product and marketing strategy were tried and tested in Australia and New Zealand. + We believe XRO’s target of 1m customers (<3% market share) by 2016 is conservative and we Xero customers calculate the medium term upside at AU$50/sh Small businesses *Market share is indicative only - $75/sh. 12
Example Long : Orocobre (ORE AU) + ORE is on track to commence commercial WORLD: Electric vehicle production and lithium demand for electric vehicle batteries, 2008-2010 production of battery grade LCE from Olaroz in JunQ 2014, 6 140 Lithium demand for electric vehicle batteries + We view the fundamentals of ORE as 120 5 compelling given: Battery vehicle sales (M units) 100 1) Strong Lithium carbonate industry 4 (tLCE) x thousand fundamentals 80 3 2) Olaroz is the first project of its kind to be 60 built for 20 years - ORE is the best pure-play to the Lithium market globally 2 40 3) ORE’s Olaroz project’s compelling 1 20 economics and significant re-rating potential as the company completes 0 0 construction and begins production in mid 2008 2010f 2012f 2014f 2016f 2018f 2020f CY2014. EV sales (Li-ion) Lithium demand from vehicles (10% penetration scenario) + Our base case valuation for ORE is $3/sh, our PHEV sales (Li-ion) Lithium demand from vehicles high case valuation for ORE is $8.30/sh within (5% penetration scenario) HEV sales (Li-ion) 3 years. HEV sales (NiMH) Source: Roskill 13
Example Short : Sirius Resources (SIR AU) 12 + SIR, a nickel-sulphide base metals High Risk - Lowered Risk Full Value exploration stock, was recently High Potential Value 10 crowned “stock of the year”, after rising Speculators 3,547% in FY13 on the back of its Leave 1 year 8 Nova-Bollinger discovery. Relative Value SIR Speculation + We view SIR as a compelling short 6 2-3 years Orphan s given r a Period e Institutional y 4 2 Investment - 1) the poor industry dynamics for Nickel 2 years 1 – oversupplied and in surplus for 2 -4 to 5 years next 3-5 yrs 0 2) a market capitalisation well in excess Concept Pre-discovery Discovery Feasibility Development Startup Deplete of its fundamentals and its peers EXPLORATION MINING Time 3) SIR’s early stage means material funding and development risks. + We initiated our short position in April 2013 at $3.30/sh having valued the company at $1.40/sh. 14
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