Benefits of investing in the Spheria Australian Smaller Companies Fund

• Focus on cash generative businesses: Spheria is a fundamental based investment manager with a discounted cash flow valuation model

• Team experience: The investment team of Spheria has over 60 years' combined experience investing in equities.

• Potential for higher growth: Smaller companies generally have more potential for growth relative to large companies as they may be in the early stages of development or are providing new services or technologies.

• Open-minded, holistic thinking: Spheria assesses businesses with a broader view, noting that global parallels are important in a technologically evolving environment.

• Risk aware: Assessing risk is central to Spheria's thinking around portfolio construction and investment.

Risk level

High

About the Fund

The Fund is an actively managed portfolio, investing in a broad range of small companies predominantly from Australia with the objective of specifically seeking out securities where the present value of future free cash flows can be reasonably ascertained and the security is trading at discount to its intrinsic value, subject to certain risk criteria.

Investment philosophy

Spheria believes the share market is inefficient, increasingly so when gravitating down the market capitalisation spectrum. Successful investing in the smaller companies' segment of the market requires maintaining an open mind as the market is prone to inefficiency. Whilst some managers are categorised as either growth or value focussed, we believe these styles are not mutually exclusive and Spheria's systems and processes allow the team to research and invest in a wide range of opportunities across both the growth and value spectrum.

Spheria's investment philosophy is to focus on higher quality companies, where quality is defined as having competitive advantage and a degree of predictability to earnings. Spheria believes investing in shares is akin to buying a piece of a business, and, as long as the business meets Spheria's investment process, it is considered investable when the prevailing share price is at a discount to the calculated intrinsic value (subject to risk controls).

Assessing risk is fundamental to Spheria's investment philosophy. Risk is implicitly mitigated by ensuring businesses it invests in are capable of generating free cash flow, and that Spheria is buying them with a margin of safety. Explicit risk controls include a preference for companies with low or no balance sheet gearing. When the company does have debt, Spheria ensures that free cash flow can support the level of gearing and is appropriate for the nature of the business.

How we invest your money

The Fund aims to hold approximately 20 to 65 securities at any time. Individual asset holdings are limited to 10% of the Fund's NAV.

The Investment Manager may use exchange traded derivatives for hedging purposes as part of its investment strategy subject to the underlying effective face value being limited to 10% of the NAV of the Fund.

Investment process

The investment process of Spheria can be summarised as follows:

Screening & Identification

Quantitative screens are used to scan for companies that meet Spheria's free cash flow criteria. A model for the identified company is then automatically populated, which provides detailed financial information including historical analytics.

Qualitative techniques, including industry and company meetings, are also used to identify companies that might meet Spheria's philosophical requirements.

New listings are also a potential source of ideas for the Investment Manager.

Fundamental Analysis

Spheria's analysis includes reviewing financial reports and supporting data to better understand the business. Industries in which the company operates are researched and dimensioned, and the business position determined. The company's management, board practices, and track record are also examined.

These leads to Spheria forecasting earnings, cash flows and ultimately a valuation for the company, which is the basis for an investment decision.

Risk Factors

Spheria assesses risk on several levels with a primary focus on a company's ability to generate free cash flow, and therein self-fund, through various market cycles. In addition, Spheria examines gearing levels to ensure there is enough earnings and cash flow to cover fixed charge obligations (including interest) with a minimum fixed charge cover required for it to be investable. The portfolio weights are determined based on risk versus return and are adjusted when necessary. In cases of high assessed risk Spheria will hold little to no exposure to an investment. Finally, Spheria also assesses where the business is operating within its own business cycle; is it close to the top in which case forward looking risk assessment should indicate an increase in risk, or near the bottom of its cycle in which case risks are likely to be reducing going forward.

Portfolio Construction

Spheria assesses each company on its valuation merit with a risk overlay. Its core holdings (larger active weights) have valuation upside and have generally lower risk. Satellite holdings (smaller active weights) have valuation upside but perhaps greater risk.

Asset class and Investment range

• Australian and New Zealand equities: 80%-100%

• Cash: 0%-20%

While the Fund primarily invests in Australian equities, the Fund may at times also invest in overseas listed equities.