The Fund targets Absolute Returns with an annualised return objective of 5% above the RBA Cash Rate over rolling five year periods. 

The Fund will seek to provide investors with a return profile that has a low correlation (ie low relationship) with traditional asset class returns.The Fund is an Absolute Return fund and aims to generate positive returns in all market environments by reducing the majority of market risk and focusing primarily on capital preservation and Alpha generation.

The Manager employs an investment process that combines Quantitative and Fundamental analysis. The process is disciplined, systematic and scalable and focuses on selecting Relative Value trades and Special Situations. 

The Fund predominantly invests in Australian and New Zealand listed securities and may invest Long and Short through Short Selling.The Fund may also invest in Exchange Traded Derivatives and Cash and Cash-like Investments. These assets are typically Australian, however the Fund may also invest in securities listed on another developed sharemarket where the security has a relationship with an Australian listed security. 

The Manager will utilise Leverage and Derivatives as part of its investment strategy with the aim of generating or protecting returns. The key dependency underpinning the investment strategy is the research, analysis, skill and experience of the Manager.

The Ellerston Australian Market Neutral Fund harnesses a unique investment process to produce consistent returns over time regardless of market conditions. The strategy is designed to help reduce or eliminate the extreme highs and lows that so often characterise sharemarket investments, controlling risk and providing more stable returns over time.

Our team quantitatively screens and analyses stocks in our investment universe, identifying pairs of securities that have exhibited a historical long term relationship and that have become temporarily dislocated, causing a relative mispricing.

Where we expect the longer term relationship to prevail, and taking into account our fundamental value of both securities, we can execute a pair trade (relative value).

We also look to take advantage of special situations, including share recapitalisations, mergers, takeovers, restructures, security conversions, placements, IPOs, sell downs and share buybacks. These positions are expected to generate profit in both rising and falling equity markets and in our assessment with a high probability of positive returns and low probability of capital loss.

We favour liquid securities to minimise market impact during trading.

Investment philosophy

The Fund's investment philosophy is built around the assertion that the Australian sharemarket is at times inefficient and "dislocations or mispricing opportunities frequently prevail across securities. These inefficiencies are a function of the structure of both the Australian funds management industry and within the primary Australian equity indices both of which are significantly more concentrated than most developed markets.

The Manager aims to exploit these opportunities by identifying situations where the Relative Value of two securities trades at what we believe to be are unsustainable levels and by investing in Special Situations.

Investment Strategy

The Fund will seek to provide investors with a return profile that has a low correlation (ie low relationship) with traditional asset class returns. The Fund is an Absolute Return fund and aims to generate positive returns in all market environments by reducing the majority of market risk and focusing primarily on capital preservation and Alpha generation.

The Manager employs an investment process that combines Quantitative and Fundamental analysis. The process is disciplined, systematic and scalable and focuses on selecting Relative Value trades and Special Situations.

The Fund focuses on liquid securities (namely securities that can be bought or sold in the market without unduly affecting the asset's price).

Relative Value Strategy

Relative Value positions are identified by a Quantitative screen that filters the investment universe for paired securities that have exhibited a strong Quantitative relationship but where they have recently become mispriced in a relative sense.

Execution of the Relative Value process is achieved by simultaneously buying the security that is expected to outperform and short selling the security which is expected to underperform, thereby allowing the Fund to potentially profit from the expected realignment of the relative value of the pair.

Special Situations Strategy

Special Situations are situations where a security or securities are mispriced and there is an identified catalyst that is expected to reduce the mispricing. Examples of Special Situations include recapitalisations (a company raising additional debt or equity), mergers, takeovers, restructures (restructuring the financial or business operations of a company), sell downs (a company selling all or part of its assets) and buybacks (a company buying its own securities from its shareholders).

As the Fund may invest in foreign securities, the Fund may be subject to movements between the relevant foreign currencies. The Fund's foreign currency exposure may or may not be hedged at the discretion of the Manager. The Manager will not engage in active foreign exchange trading.

The Manager will use the strategy and its investment experience and skill to meet the Fund's return objective. There is no guarantee that the investment objective will be achieved.

Portfolio construction summary

To achieve the target return profile, the Manager will construct a portfolio of Long and Short positions based on the Relative Value of those securities. The Manager will also introduce Special Situations to the Fund.

All positions are assessed on a Fundamental basis prior to inclusion. An identified Relative Value pair or Special Situation investment may be excluded as a result of this assessment.

The final portfolio is constantly monitored with a strong emphasis on risk management.

The Manager monitors and controls the contribution to portfolio relative risk from both individual stocks and from groups of stocks to make certain that no individual stock or group of stocks contribute too much risk.

Investment universe (Long and Short)

• Australian and New Zealand listed securities and securities expected to list within three months
  
• Australian and New Zealand Exchange Traded Derivatives Cash and Cash-like Investments
  
• Securities listed on a foreign developed sharemarket where the security has a relationship with an Australian listed security
  

Maximum net equity exposure

+25% of the Net Asset Value of the Fund.

Minimum net equity exposure

-25% of the Net Asset Value of the Fund.

Maximum gross exposure

300% (150% Long and -150% Short) of the Net Asset Value of the Fund.

Maximum individual security Long / Short exposure

+ / -8% of the Net Asset Value of the Fund except where the maximum individual security exposure exceeds this due to market movements. In such circumstances, the Manager will dispose of any securities within a reasonable period.

Asset types / Allocation ranges

Equities

• Australian and New Zealand listed equities 0-100%

• Australian and New Zealand unlisted equities 0-20%

• International listed equities 0-20%

• International unlisted equities 0%

Cash and fixed interest

• Cash 0-100%

• Cash equivalent securities 0-100%

• Australian government bonds 0-100%

• Australian corporate bonds 0%

• International government bonds 0%

• International corporate bonds 0%

Derivatives (which includes Hybrid Securities)

• Exchange-traded derivatives 0-100%

• OTC derivatives 0%

• Structured products 0%

• Real property 0%

• Infrastructure 0%
  

With respect to the above table, the allocation range to Derivatives represents the fact that the Manager may access investments through Derivatives. The other allocation ranges include allocations that may be obtained through Derivatives.