Joint Managing Directors & Fund Managers John Deniz + Nick - - PowerPoint PPT Presentation

Joint Managing Directors & Fund Managers John Deniz + Nick Reddaway

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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.

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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.

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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.

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Paragon Fund : Track Record

+ 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. JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC 0.0% YTD 2013 5.3% 4.9% 2.8% 1.1% 0.3%

• 2.2%

1.8% 1.8% 1.6% 18.7%

HISTORICAL EXPOSURE HISTORICAL PERFORMANCE (net of fees)

• 20%

0% 20% 40% 60% 80% 100% MAR APR MAY JUN JUL AUG SEP OCT NOV DEC

Short Net Exposure Long

15.0% 20.0%

• 10.0%
• 5.0%

0% 5.0% 10.0% MAR APR MAY JUN JUL AUG SEP OCT NOV DEC

Paragon Fund All Ordinaries Accumulation Index

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Investment Process

Macro + Thematic Analysis Investment Evaluation + Selection Portfolio Construction

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Investment Process : Macro & Thematic Analysis

+ Position in the business cycle + Likely direction + Impact on stock selection + Global growth trajectory + Interest and exchange rates + Commodity prices + How will it impact Australian economy + Managing exogenous risks + Disruptive technologies + Demand supply imbalances + Resource scarcity + Deleveraging

Business Cycle Analysis Secular Dynamics Impact of Global Macro

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Investment Themes

Mobile Internet + Technological advances and the smartphone have driven immense change in the way we 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 population, mobile data traffic will increase 13 fold, and video viewed and downloaded

• n the internet will represent over 80% of all

global consumer internet traffic.

Key beneficiaries : 21st Century Fox, Xero, Telstra

SMARTPHONES LEAD TRAFFIC GROWTH

2012 2013 2014 2015 2016 2017 6 12 Exabytes per month 66% CAGR 2012-2017

Other Portable Devices (0.2%) Non-Smartphones (1.4%) M2M (5.1%) Tablets (11.7%) Laptops (14.0%) Smartphones (67.5%)

Figures in legend refer to traffic share in 2017. Source: Cisco VNI Mobile Forecast, 2013

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Investment Themes

Emerging Consumer + With 25% of income earners in China, or roughly 330m people defined as middle class today (vs. 50m in the US), China is already the world’s biggest consumer of cars and luxury goods. + By 2022, McKinsey Consulting expects more than 75% of China’s income earners will be classified as middle class. Asia’s middle class as a whole is forecast to triple over the next decade to 1.7bn people, comprising roughly half the words middle class population.

Key beneficiaries : Crown Resorts, Donaco

CHINA PER CAPITA DISPOSABLE INCOME

0.0 2,000.0 14,000.0 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0.0% 12,000.0 10,000.0 8,000.0 6,000.0 4,000.0

1980 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Source: National Bureau of Statistics, China, BofA Merrill Lynch Global

Per capits disposable income (LHS) % growth (RHS)

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Investment Themes

Ageing Society + Since the middle of the 70’s, Australia’s fertility rate has fallen below the level required to maintain the population without immigration, while we are also healthier and living longer. + As society on average becomes older, there are wide-ranging ramifications for the provision of services like healthcare and housing but this secular trend has other implications in services such as childcare.

Key beneficiaries : G8 Education, Virtus Health

JAN 2013 JAN 2003 JAN 1993 JAN 1983

FEMALE WORFORCE PARTICIPATION RATE BY AGE, 1983 TO 2013

Source: ABS, Labour Force, Australia, Detailed-Electronic Delivery Jan 2013 (cat no. 3291055001)-Table 1:Labour Force

10 20 30 40 50 60 70 80 90 15-19 20-24 25-34 35-44 45-54 55-59 60-64 65+ Participation Rate

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Investment Process : Investment Evaluation

+ Value driven approach + Favourable sector dynamics + Strong management with sustainable business models + Improving fundamentals + Catalyst LONG STRATEGY + Changing competitive dynamics + Overvalued firms with unrealistic forecasts + Declining fundamentals + Excessive leverage and equity dilution risk SHORT STRATEGY

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Example Long : Xero (XRO AU)

+ Xero is the global leader in cloud based accounting software + We view the fundamentals of XRO as compelling given:

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

• 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 calculate the medium term upside at AU$50/sh

• $75/sh.

MARKET SHARE TODAY

*Market share is indicative only

Xero customers Small businesses

NZ AU US / Rest of World UK

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Example Long : Orocobre (ORE AU)

+ ORE is on track to commence commercial production of battery grade LCE from Olaroz in JunQ 2014, + We view the fundamentals of ORE as compelling given: 1) Strong Lithium carbonate industry fundamentals 2) Olaroz is the first project of its kind to be built for 20 years - ORE is the best pure-play to the Lithium market globally 3) ORE’s Olaroz project’s compelling economics and significant re-rating potential as the company completes construction and begins production in mid CY2014. + Our base case valuation for ORE is $3/sh, our high case valuation for ORE is $8.30/sh within 3 years.

WORLD: Electric vehicle production and lithium demand for electric vehicle batteries, 2008-2010

6 5 4 3 2 1 2008 2010f 2012f 2014f 2016f 2018f 2020f

Lithium demand for electric vehicle batteries (tLCE) x thousand Battery vehicle sales (M units)

EV sales (Li-ion) PHEV sales (Li-ion) HEV sales (Li-ion) HEV sales (NiMH) 140 120 100 80 60 40 20 Lithium demand from vehicles

(10% penetration scenario)

Lithium demand from vehicles

(5% penetration scenario)

Source: Roskill

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Example Short : Sirius Resources (SIR AU)

+ SIR, a nickel-sulphide base metals exploration stock, was recently crowned “stock of the year”, after rising 3,547% in FY13 on the back of its Nova-Bollinger discovery. + We view SIR as a compelling short given 1) the poor industry dynamics for Nickel – oversupplied and in surplus for next 3-5 yrs 2) a market capitalisation well in excess

• f its fundamentals and its peers

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.

Concept Pre-discovery Discovery Feasibility Development Startup Deplete

Time

Lowered Risk High Risk - High Potential Value Speculators Leave Speculation Orphan Period Institutional Investment Full Value 12 10 8 6 4 2

Relative Value

EXPLORATION MINING

• 4 to 5 years

1

• 2

y e a r s 2-3 years 2 years 1 year

SIR

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Portfolio Construction : Position Sizing

+ Paragon utilises a relatively simple mathematical process to help determine quantitatively, rather than subjectively, the optimal position size for each holding. + The process considers the outcome under our base case vs. our bear case over a 12 month period based on probability weighted returns derived from our bottom up valuations.

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Portfolio Construction : Risk Management

+ Paragon utilises an integrated electronic trading platform, and maintains a proprietary portfolio construction system, with real time risk monitoring and management. + Positions have defined investment parameters and risk limits, which are then monitored on an ongoing basis. We monitor in real time several key risk metrics linked to our portfolio positions. These include: + Beta adjusted weights + Liquidity (number of days to close) + Stop Losses

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Portfolio Construction & Limits

Risk Parameter Portfolio Limit

Position Diversity 10-50 positions Concentration Longs - not greater than 10% of equity capital (measured at cost) Shorts - not greater than 10% of equity capital (measured at cost) Leverage Typically none, but total assets will not exceed 200% of equity capital Exposure 25% net short to 150% long

+ We target capital preservation by understanding, recognising and controlling risks with: + Stop loss limits put in place and exercised with discipline; and + Active exposure management / hedging practices.

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What have we learned from past experience?

+ Identifying secular changes early and investing ahead of the market + Identifying a catalyst + Resource discovery/delineation and pre-production investing with attractive risk-reward + Scaling the well researched and undervalued investments appropriately + Selling discipline WHAT WE ARE GOOD AT + Being too early in allocating capital + Removing equity short positions too early + Finding appropriate hedges for core holdings + Managing liquidity of portfolio holdings WHERE WE CAN IMPROVE

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Fund Name Paragon Fund Investment Manager Paragon Funds Management Ltd Fund Description Long/short equities, absolute return, for wholesale and retail investors Fund Investment Focus Predominantly Australian resource and industrial focus Fund Suitability Belief in long term wealth creation of share investments Fees 1.5% management fee + 0.5% expenses recovery (capped) 20% performance fee subject to 5% hurdle rate & perpetual high water mark Liquidity Monthly subscriptions & withdrawals Valuations Monthly, on last business day of each month Minimum Investment $25,000 Distribution Frequency Yearly

Investor Term Sheet

APPENDIX A

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Access to fund managers with a multi-year, top tier track record

+ The fund managers collectively have 20 years experience in analysing and managing assets through several financial and commodity cycles. + Nick has worked with BlueCrest Capital, one

• f Europe's largest and most successful

absolute return funds. + John has worked with Eye Management, a global resource fund and whilst there, one of Australia’s most successful absolute return funds.

Intensive Fundamental Research

+ Paragon undertakes its own fundamental research encompassing: + qualitative factors, such as quality of company management and business strength; and + quantitative analysis, including proprietary financial analysis and bottom up valuation. + This enables Paragon to form it’s own views

• n the relative attractiveness of individual

securities, complimenting a strong knowledge base across the resources, commodities and industrials spectrum.

Key Benefits of Investing in Paragon

APPENDIX B

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Flexibility

+ While focusing on the resource and industrial sectors, Paragon has flexibility to invest in a wide range of listed equities and derivatives that is not constrained to any benchmark or index. + This flexibility allows Paragon to take advantage of a wide variety of market

• pportunities unavailable to traditional funds

management businesses.

Capital Preservation

+ Managing risk in order to preserve investor capital is a key objective of Paragon. + Paragon takes an active risk management approach to dynamically adjust the individual position exposure, and the overall portfolio exposure, based on quantitative and qualitative analysis.

Alignment of Interests

+ A substantial portion of the fund managers’ personal wealth is invested in Paragon alongside other investors. + Remuneration of Paragon will be driven by the Fund’s performance.

Key Benefits of Investing in Paragon

APPENDIX C

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PARAGON FUNDS MANAGEMENT

Joint Fund Managers – John Deniz + Nick Reddaway Prime Broker / Custodian Administrator Legal Compliance Auditor Merrill Lynch International White Outsourcing Hall & Wilcox Know Compliance Nexia Melbourne

Paragon Organisational Structure & External Partners

APPENDIX D

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For additional information please contact: John Deniz

Fund Manager 0412 395 004 j.deniz@paragonfunds.com.au

Nick Reddaway

Fund Manager 0400 400 083 n.reddaway@paragonfunds.com.au +61 3 9663 4415 +61 3 9663 4418 Suite 2, Level 2, 1 Little Collins Street, Melbourne VIC 3000

Contact Information

APPENDIX E

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Disclaimer

+ Paragon Funds Management is not providing any general advice or personal advice regarding any potential investment in any financial products within the meaning of section 766B of the Corporations Act. + No consideration has been made of any specific person’s investment objectives, financial situation or needs. The provision of this presentation is not and should not be considered as a recommendation in relation to an investment in any entity or that an investment in any entity is a suitable investment for any specific person. + Recipients should make their own enquiries and evaluations they consider appropriate to determine the suitability of any investment (including regarding their investment objectives, financial situation, and particular needs) and should seek all necessary financial, legal, tax and investment advice. + Paragon, its directors and employees do not accept any liability for results of any actions taken or not taken on the basis of information in this presentation, or for any negligent misstatements, errors or omissions. + This presentation is not an advertisement and is not intended for public use or distribution.