Benefits of investing in the Merlon Australian Share Income Fund

• Diversification: The Fund allows access to a portfolio of high free cash flow producing companies selected without reference to the benchmark.
  
• Investment professionals: Access to an experienced team of investment professionals who specialise in Australian equities.
  
• Franking credits: The Fund aims to provide reliable and consistent monthly income, predominantly from franked dividends.
  
• Sustainable income: Potential for consistent and sustainable income by investing in undervalued shares expected to deliver an attractive dividend stream, supported by strong underlying cash flows.
  
• Reduced risk: The Fund utilises a derivatives overlay to remove a large part of the volatility associated with traditional equities portfolios.
  
• Inflation protection: By investing in equities, the Fund aims to provide capital growth and assist investors with increases in the cost of living.
  

Risk level

Medium to High

The Fund offers the potential for favourable returns over the long term, with a large proportion of returns coming from income, but may exhibit moderate levels of volatility over the short to medium term.

Investor suitability

The Fund is intended to be suitable for investors who are happy to invest for at least five years, are seeking high levels of return, with a large proportion of returns coming from income (predominantly via franked dividends) and who are comfortable with moderate volatility including the possibility of periods of negative returns.    

About the Fund

The Merlon Australian Share Income Fund's investment approach is to construct a portfolio of undervalued companies, based on sustainable free cash flow, whilst using options to overlay downside protection on holdings with poor short-term momentum characteristics. An outcome of the investment style is a higher level of tax-effective income than the broader market, paid monthly, along with the potential for capital growth over the medium-term.

Differentiating features of the Fund

• Deep fundamental research with a track record of outperformance: This is where we spend the vast majority of our  time and ultimately how we expect to deliver superior risk-adjusted returns for investors.
  
• Portfolio diversification with no reference to index weights: The benchmark unaware approach to portfolio construction is a key structural feature, especially given the concentrated nature of the ASX200 index.
  
• Downside protection through fundamental research and the hedge overlay: In addition to placing a heavy emphasis on capital preservation through our fundamental research, we use derivatives to reduce the Fund's market exposure and risk by 30% whilst still retaining all of the dividends and franking credits from the portfolio.
  
• Sustainable income, paid monthly and majority franked: As the Fund's name suggests, sustainable above-market income is an outcome of our investment approach and a key objective of the Fund.
  

Investment approach

Merlon's investment approach is to build a portfolio of undervalued companies with high levels of sustainable free cash flow and to then reduce some risk through the use of derivatives. Merlon aims for the Fund to be fully invested in large and mid-cap companies listed on the ASX, which are selected based on Merlon's investment philosophy.

There are two elements to Merlon's investment philosophy:

1. Value: Merlon believes that stocks trading below fair value will outperform through time. Merlon measures value by sustainable free cash flow yield. Merlon views franking credits similarly to cash and takes a medium to long term view for investments in the Fund.
   
2. Risk management: Merlon believes that the impact of risk associated with investing can be reduced through derivative based hedging strategies. By entering into a derivative contract whose value moves in the opposite direction to the underlying asset, the risk of a reduction in the value of the underlying asset can be reduced. Derivative based hedging strategies may also have the potential to provide additional returns and may deliver beneficial tax outcomes. Refer to 'Derivative Risk' in Risks section for further information.
   

About Merlon

Merlon Capital Partners is an Australian based fund manager established in May 2010. The business is majority owned by its five principals, with strategic partner Fidante Partners Limited providing business and operational support.

How we invest your money

Investment universe and portfolio construction

The Fund's investment universe is primarily securities listed on the ASX, or those that Merlon expects to list within the next six months. The Fund can also invest in cash and over-the-counter derivatives related to securities listed on the ASX.

Consistent with Merlon's philosophy the portfolio is constructed in two components:

• Fundamental equity portfolio: Initial portfolio allocations are based on the results from Merlon's fundamental research. Single stock, sector and liquidity constraints are then applied to derive an underlying model portfolio. Subject to qualitative, tax and risk considerations, trades are implemented to continually align the Fund with this underlying model portfolio. Merlon does not short sell securities.
  
• Derivative overlay: Stocks requiring a derivative overlay are identified based on criteria set by Merlon. Subject to qualitative review, appropriate derivative hedging strategies are applied.
  

Strategic asset allocation ranges*

(Asset class: Min (%) - Max (%))**

• Securities: 90 - 100

• Physical Cash: 0 - 10

*These are asset allocation ranges for the Fund. If market movements, investments into or withdrawals from the Fund, or changes in the nature of an investment, cause the Fund to move outside these ranges, or a limit set out in the PDS, this will be addressed by the RE or Merlon as soon as reasonably practicable.

**The Fund targets to be fully invested in shares for the purposes of earning dividend income and uses derivatives to reduce exposure to share market volatility to a typical range of 60%-80%.