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COVERING OCTOBER 2016 FUND COMMENTARY THREADNEEDLE GLOBAL EQUITY INCOME FUND (Unhedged) Summary Global equity markets fell back in October. The fund underperformed its benchmark. Regional allocation detracted, as did stock selection in sector terms. Significant positive contributors included Reynolds American and Kroton Educacional. AstraZeneca and Cypress Semiconductor detracted. The fund opened positions in Wells Fargo, Novo Nordisk and Watsco, and exited National Bank of Canada, Canon and Outfront Media. Market Background Global equities fell back in US dollar terms in October. Factors influencing sentiment included earnings reports from high-profile US companies, uncertainty over the manner of the UK’s exit from the EU, poor Chinese trade figures and, as ever, speculation about potential changes in central-bank policy. Fluctuating oil prices were also in the headlines. Early surges, driven by OPEC’s productioncutting agreement and Russia’s subsequent support for it, gave way to declines as hopes faded that OPEC members would actually follow through on the deal. US economic data painted a mixed picture. Job-creation figures for September undershot expectations, but retail sales were up, the non-manufacturing purchasing managers’ index (PMI) hit its highest level in a year, and the thirdquarter GDP estimate came in well above expectations. After a disappointing start, earnings releases generally improved as the month progressed. Banks did particularly well, and hopes increased that the US might have escaped the “profits recession” that has been in place since the second quarter of last year. Sterling continued to weaken, despite better-than-expected GDP growth in the UK. In a speech at the Conservative Party conference, Prime Minister Theresa May outlined plans to invoke Article 50 by next March and voiced her determination to regain control of immigration. In response, the pound fell to a fresh 31-year low amid fears that Britain was heading for a “hard Brexit” (i.e. without access to the European single market). Early in the month, the eurozone composite PMI for September was shown to have fallen to a 20-month low, but still at a level indicating continued expansion. There was some better data as the month progressed. The flash composite PMI reading for October rose to a 10-month high, helped by growth in German manufacturing. In Japan, the yen fell against the dollar during the month. This was perceived as positive for the export-heavy Japanese stock market, and sparked anticipation that Japan’s third-quarter results season may beat forecasts as overseas earnings are translated back into yen. Asian emerging markets underperformed, pressured by some poor Chinese export figures. FOR INVESTMENT PROFESSIONAL USE ONLY 1 Issued November 2016 | Valid to end February 2017 FUND COMMENTARY | NOVEMBER 2016 Performance The fund underperformed its index on a net basis. Regional positioning detracted, driven by the overweight in the UK and the underweight in Japan. Despite the fund’s picks in the US performing well, stock selection detracted overall, especially in Japan and East Asia ex Japan. At the sector level, the overweight in real estate was unhelpful. While selections in the consumer sectors and energy contributed strongly, those in financials, utilities, technology and healthcare detracted. Reynolds American led positive stock-level contributors over the month; the company’s shares surged after it became the target of a takeover bid by British American Tobacco. By contrast, BAT’s share price fell back amid concerns related to the deal. College operator Kroton Educacional rallied on the announcement of solid Q3 results. Suncor Energy traded higher, after bouncing back from difficulties earlier in the year to record a healthy third-quarter profit. Themepark operator Six Flags Entertainment rose during October and, in a strong month for financial stocks, JPMorgan Chase gained after reporting a sizeable rise in its trading revenues. Among detractors, AstraZeneca slipped after one of its treatments for heart disease failed to show appreciable benefits over an older drug. Cypress Semiconductor dipped following broker downgrades, while shares in consumer-goods giant Unilever fell after the company became embroiled in a dispute with Tesco over the wholesale pricing of one of Unilever’s products. Activity During the month, the fund exited its position in National Bank of Canada, switching instead into Wells Fargo to benefit from the latter’s greater sensitivity to a rising US interest rate. The position in Merck was trimmed to fund a purchase of Novo Nordisk. This is a high-quality Danish pharma business and a market leader in diabetes care. Its recent sell-off offers an attractive entry point. An overreaction to a recent earnings miss provided an opportunity to build a position in Watsco, a premier US heating, ventilation and air conditioning (HVAC) distributor. The company should benefit from pent-up demand in the replacement market, particularly within the Sun Belt states where it is over-indexed. In addition, Watsco will continue to consolidate a still-fragmented market with deals tending to be highly accretive. The fund also topped up positions including Advanced Semiconductor, Deutsche Telekom and Legal & General. Among sales, Canon was exited due to concerns that its competitive position within printers could be eroded following Hewlett Packard’s purchase of Samsung’s printer operations. Japan Retail Fund and Outfront Media were sold to fund better ideas. Outlook Political and macroeconomic uncertainty will continue to dominate investor sentiment, likely resulting in additional rotations that have characterised equity markets this year. Against this backdrop, the fund continues to focus on its ‘quality income’ approach, seeking competitively advantaged companies with strong cashflow generation that offer high, growing and sustainable dividend yields. In the fund manager’s view, a strategy that emphasizes both income and growth characteristics should be attractive to long-term investors against the current market backdrop of low economic growth and low interest rates. Despite the market’s hunt for yield, the fund manager’s research continues to show that dividend stocks trade at attractive valuations relative to the broader market. Geographically, the fund still favours the developed markets; despite some reduction to the exposure to Europe, the fund manager has been increasing positions in North America. While the fund is currently underweight in emerging markets, valuations across the region are looking more attractive and offer interesting opportunities to invest in financially robust companies with good dividend yields. The portfolio remains well balanced and diversified. FOR INVESTMENT PROFESSIONAL USE ONLY 2 Issued November 2016 | Valid to end February 2017 FUND COMMENTARY | NOVEMBER 2016 Ironbark Asset Management (Fund Services) Limited ABN 63 116 232 154 AFSL 298626 (“Ironbark”), is the issuer of units in the Threadneedle Global Equity Income Fund (Unhedged) ARSN 161 086 497 ('the Fund'). Ironbark is the responsible entity of the Fund and has selected Threadneedle International Limited ('Threadneedle’) to manage the investments of the Fund. The information contained in this report is not personal financial product advice, does not constitute an investment offer or invitation to anyone in any jurisdiction in which such offer is not authorised. This publication has been prepared without taking into account the objectives, financial situation or needs of any particular person. Before making an investment decision to continue to hold units in the Fund you should consider, with the assistance of a financial or other professional adviser, whether the investment is appropriate in light of those circumstances. A copy of the latest Product Disclosure Statement (‘PDS’) is available at www.ironbarkam.com/reservices/columbiathreadneedlefunds or by contacting Client Services directly on 1800 03 44 02. Neither Ironbark, nor its directors, officers, representatives, employees, associates or agents of Ironbark, or any party named in the PDS guarantee the repayment of capital or the performance of the Fund. Past performance and asset allocation is not a reliable indicator of future performance. The value of investments and any income is not guaranteed and can go down as well as up and may be affected by exchange rate fluctuations. This means that an investor may not get back the amount invested. Please note that the securities mentioned herein should not be considered a recommendation to purchase or sell any particular security. The information stated, opinions expressed and estimates given constitute best judgement at the time of publication and are subject to change without notice to you. Although the information was compiled from sources believed to be reliable, no liability for any error or omission is accepted by such source(s), Ironbark or its affiliates or any of their directors or employees for any loss whatsoever arising directly or indirectly from any use of this publication. Performance figures and other data relating to a fund or a representative account are provided for illustrative purpose only and may differ from that of other separately managed accounts due to such differences as cash flows, charges, applicable taxes, and differences in investment strategy and restrictions. The information contained in this update was current at time of publication. This document describes some current internal investment guidelines and processes. These are constantly under review, and may change over time. Consequently, although this document is provided in good faith, it is not intended to create any legal liability on the part of Ironbark or any other entity and does not vary the terms of a relevant disclosure statement. Threadneedle International Limited (TINTL) is registered in England and Wales (no. 2283244) and is authorised and regulated by the Financial Conduct Authority under UK laws, which differ from Australian laws. TINTL is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 (Cth) in respect of the financial services it provides. Threadneedle International Limited is regulated by the Financial Conduct Authority under UK laws, which differ from Australian laws. Columbia Threadneedle Investments (Columbia Threadneedle) is the global brand name of the Columbia and Threadneedle group of companies. FOR INVESTMENT PROFESSIONAL USE ONLY 3 Issued November 2016 | Valid to end February 2017