Investment Philosophy

The investment philosophy of the Company is exemplified by the following broad principles:

• The universe of potential investments for the Company will be all Securities quoted on the ASX, bills of exchange, other negotiable investments, debentures and other permitted investments identified in Section 2.10 of the Prospectus. The prime focus will be on ASX listed entities that exhibit the investment characteristics outlined below. The Company believes a higher percentage of these entities will be found in medium to small industrial companies but size will not be a limiting factor for inclusion in the Company's Portfolio.

• The Company's philosophy is to invest predominantly in industrial companies with an emphasis on companies that are under-researched and mispriced, a tendency more pronounced in the small to medium end of the market as measured by capitalisation.

• The Company's priority will be to undertake investments on a portfolio basis. While all investments will be considered on a case-by-case basis, the Company will usually refrain from taking a majority position in investee entities. This will assist the Company to diversify its investments and so reduce its exposure to abnormal falls in the market price of any single investment. The Company believes it achieves acceptable diversification by owning Securities in 20-30 investee entities.

• The Company will seek to manage investment risk by spreading investments over a range of industry sectors.

• The Company will only invest in Securities quoted on a securities exchange located outside Australia if those Securities are also quoted on ASX and the Board considers that the reporting obligations and trading procedures applicable to that exchange are no less rigorous than those of ASX.

• The Company will look to concentrate on absolute returns and preservation of capital. To achieve this objective, the Company's mandate to the Manager includes the ability to short sell Securities, offering investors potential downside protection. This is a distinguishing feature of the Company.

The Directors consider that the investment philosophy outlined above is shared by the Manager.

About the Fund

WAM Capital provides investors with exposure to an actively managed diversified portfolio of undervalued growth companies listed on the Australian Securities Exchange. WAM Capital also provides exposure to relative value arbitrage and market mispricing opportunities. WAM Capital's investment objectives are to deliver investors a stream of fully franked dividends, provide capital growth and preserve capital.

Investment Focus

The Company will focus on the following criteria in appraising potential investments:

• earnings growth;

• return on equity;

• free cashflow generation;

• management;

• valuation; and

• industry and relative industry position.

The typical investment approach of the Company will be to seek a combination of value and growth. An entity attractively priced relative to its appraised value, that exhibits growth characteristics, generates surplus cashflow, is well managed and has a sound position in its industry is an ideal investment for the Company. An entity that is seen as overvalued relative to these characteristics may be short sold.

Once the research and relative ranking has been undertaken, the Manager will seek to identify a catalyst or a major event that alters the market's perception of the entity or its earnings momentum which will lead to a re- rating of the investee's share price.

The Company will have a major bias to industrial companies. It will not invest a significant part of the Portfolio in the resource sector. The Directors consider that resource companies are subject to extreme volatility and are difficult to value according to conservative accounting and investment principles.

How we invest your money

The 2 principal factors determining the investment decisions of the Company are expected to be:

1. Research - buying Securities after extensive research. This may involve detailed discussion with management of the investee entity and its competitors.
2. Market Opportunities - buying Securities in entities through initial public offerings, placements or the purchase of a block of stock below what the Manager believes is the entity's fair value. This requires close monitoring of market activity.

The above strategy may be achieved through the purchase, sale or short sale of shares or other permitted investments.

Permitted Investments

The Company proposes to invest in the following investments:

• listed Securities, being any Security quoted on ASX including, without limitation, shares, units or notes which are redeemable, preference or deferred, fully or partly paid, with or without any right, title or interest thereto or therein (including a right to subscribe for or convert to any such security whether listed on ASX or not), and any Security of whatsoever nature which the Manager expects will be quoted on ASX within a three month period from the date of investment;

• listed Securities for the purpose of short selling. At any time the exposure to these Securities, the Securities referred to in paragraph (c) and the Company's borrowings must not exceed 50% of the net asset value of the Company;

• warrants and options to purchase any investment and warrants and options to sell any investment which is a permitted investment. At any time the exposure to these Securities, the Securities referred to in paragraph (b) and the Company's borrowings must not exceed 50% of the net asset value of the Company;

• discount or purchase of bills of exchange, promissory notes or other negotiable instruments accepted, drawn or endorsed by any bank or by the Commonwealth of Australia, any State or Territory of Australia, or by any corporation of at least an investment grade credit rating granted by a recognised credit rating agency in Australia;

• deposits with any bank or corporation declared to be an authorised dealer in the short-term money market;

• debentures, unsecured notes, loan stock, bonds, promissory notes, certificates of deposit, interest bearing accounts, certificates of indebtedness and any other evidence of indebtedness issued by any bank or by the Commonwealth of Australia, any State or Territory of Australia, or any governmental organisation, body or instrumentality of Australia, or, if authorised by its Directors, a corporation of at least an investment grade credit rating granted by a recognised credit rating agency in Australia; and

• units or other interests in cash management trusts.

Under the Management Agreement, the Manager may only undertake investments in accordance with the above criteria.