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Fund Manager

Commentary

December Quarter 2016

Contents

Australian Shares 3

International Shares 9

Australian Fixed Income 13

International Fixed Income 14

Credit 15

Cash 16

Australian Property 20

International Property 22

Active Balanced 23

Performance as at 31 December 2016 29

Fund Manager Commentary – December 2016 3

Australian Shares

BT Wholesale Core Australian Share Fund

Market review

Risk sentiment swung dramatically during the December quarter as pre-US election jitters were

squashed after investors quickly re-evaluated 'Trumponomics’ post the billionaire’s victory. This in turn

saw the S&P/ASX 300 gain a solid 4.9% into year end. Central bank activity including upbeat Fed

verbiage and an emphasis on QE flexibility from the ECB also offered investors guidance during the

period.

On global developments, a hawkish tone from Fed Committee members leading into its decision to

raise rates by 0.25% added fuel to a sell-off in bonds, which showed signs of fatigue into year-end.

Importantly, the FOMC raised both their growth and rate forecasts for 2017. This was against a

backdrop of significant improvements in key economic indicators like consumer confidence,

manufacturing and service activity surveys, as well as retail sales. Revisions to third quarter GDP were

also positive with the annualised metric eventually raised to 3.5%. While the number of jobs added

averaged below the 200,000 mark, wage growth was healthy.

Across the Atlantic, the ECB finally announced plans for its QE programme following months of

speculation. The central bank will reduce the size of purchases by 20 billion euros each month, but also

reduce the maturity of securities that qualify. With scope for adjustments if needed the outcome was

perceived as supportive for risk appetite. Investors in the region also felt relief after the Italian

referendum proved a non-event and concerns over the health of their banking system faded. Further

north, the wave of global optimism offset ‘Brexit’ implementation fears in the UK.

In Asia, the Bank of Japan appeared more optimistic on the outlook for the country’s economy in the

wake of USD/JPY’s 15.4% rally over the quarter. In neighbouring China, data was perceived as

reasonably strong with improvements in manufacturing survey data and decent reads from Industrial

Production and Profits. The Producer Price Index also ended 54 consecutive months of deflation.

However, concerns over continued capital outflows and the Yuan’s depreciation garnered increasing

press coverage heading into year end.

The forces highlighted above largely overshadowed the RBA’s first three meetings with Philip Lowe

presiding as Governor. The central banker noted improvements in Australia’s terms of trade from higher

commodity prices, but also a soft patch for economic growth and mixed labour market data. Importantly,

market pricing shifted from suggesting a cut to a hike as early as November 2017.

Data-wise, a number of quarterly domestic releases surprised the market. Third quarter wage growth

sunk to 1.9% year-on-year – the weakest since the series began in 1998. GDP over the same period


shrunk by 0.5% and the year-on-year reading dropped to its lowest since the GFC at 1.8%. Similarly,

headline CPI grew at a sluggish pace of 1.3% over the previous year.

Sector returns saw a fairly large dispersion in the final three months of the year. At the top of the league

tables were Financials (+12.5%) and Utilities (+9.3%). The former was a large beneficiary of

‘Trumponomics’ given expectations for significant deregulation in the industry. Energy (+7.4%) also

performed strongly as production cut commitments from oil producers sparked an 11.4% gain for crude

oil (WTI). At the other end of the spectrum, Health Care suffered an 8.8% drop. Trump’s election has

prompted uncertainty for parts of the Healthcare sector given the noise around the wind-back of

‘Obamacare’ and the little to no visibility of what might replace it. Telcos (-4.2%) were also hurt as more

domestically-orientated challenges – namely the NBN rollout – weighed on the sector.

Portfolio performance

The BT Wholesale Core Australian Share Fund returned 5.60% (post-fee, pre-tax) over the December

2016 quarter, outperforming its benchmark by 0.67%.

Contributors

Rio Tinto, RIO, OW, +16.1%

Another sizeable run for Rio Tinto’s key commodity exports pulled its share price higher by 16.1%

during the December quarter. Iron ore gained a staggering 41.2%, coal added 22.4% and copper

climbed an impressive 13.8%. Such an improvement in the pricing environment overshadowed news of

a bribery scandal that broke in November and deepened in December. The only other major company-

specific news was the launch of a debt reduction program valued at US$9 billion, which was received

positively by investors. We believe management’s sound balance sheet management and successful

cost reduction measures have made it a preferred play to leverage a brighter commodities outlook. It

also also a purer play than rival BHP on commodities like iron ore and has a more attractive valuation.

ANZ, ANZ, OW, +13.3%

Easing concerns regarding the health of the Australian banking sector helped lift shares in ANZ by

13.3% over the quarter. The release of its FY16 earnings report was the only major announcement

during the period. The result provided further evidence of its ongoing rationalisation as it reduces costs

and divests non-core businesses. The provision for bad debts remained flat and changes to mortgage

risk weight rules did not have the negative effect feared by the market. Overall, the update justified our

preference for ANZ over its peers. However, we acknowledge its strong outperformance has closed part

of the valuation gap relative to others in the space as well as industrials. This in turn may limit the

potential to repeat such a stellar run.


Incitec Pivot, IPL, OW, +29.5%

Shares in Incitec Pivot enjoyed a strong recovery during the quarter to finish higher by an impressive

29.5%. The fertiliser producer has been the beneficiary of ‘Trumponomics’ tailwinds. This is given

speculation of a resurgence for the US coal industry – a large customer of IPL’s explosives. Rumours of

Chinese fertiliser production cuts in December also aided IPL’s performance. Going forward, earnings

appear to be on a firmer footing and its greater exposure to a cyclical upswing than rival Orica (+18.2%)

supports a positive outlook for the stock.

Detractors

Caltex, CTX, OW, -11.1%

The loss of a key customer dragged shares in Caltex lower by 11.1% over the December quarter.

Woolworths announced it would sell its petrol station network to BP, who would in turn become the

preferred supplier. We believe the market’s reaction was exaggerated, given the earnings hit would be

smaller than suggested by the punishment of its share price. Caltex remains the only player with the

required infrastructure to continue supplying the network in certain geographies. More generally we

remain positive on CTX with a view there are still significant benefits to be realised from its greater

supply chain control.

Amcor, AMC, OW, -1.3%

Shares in Amcor lagged the broader index and slipped a marginal 1.3% over the period. Given a lack of

major negative announcements, its slight pullback was likely tied to profit-taking following a strong

performance in preceding months. During the quarter, the packaging giant announced the acquisition of

a Chinese flexibles providers for $36 million – the latest in a series of takeovers. Several new product

lines were also unveiled, which were met with a muted reaction from investors. Going forward, we

maintain a constructive outlook for the Melbourne-headquartered multinational, based on its positive

growth prospects both organically and via new business.

QBE Insurance, QBE, UW, +33.7%

QBE maintained a strong upward ascent from early November to finish higher by over 33%. The insurer

received a tailwind from Trump’s surprise election victory and ensuing bounce back in bond yields. This

is given the company’s earnings sensitivity to interest rates and its North American operations. While

we acknowledge its leverage to these positive macro developments it still faces overriding challenges.

Chief among these is pricing pressure as part of the current phase of the insurance cycle.

Strategy & Outlook

The portfolio outperformed the index over the quarter, helped by strong gains from Rio Tinto (our

preferred resources exposure) as well as ANZ and chemical company Incitec Pivot. The underweight in


bond sensitives, which weighed on performance over the first half of 2016, was also beneficial.

Infrastructure stocks such as Transurban and Sydney Airport continued to underperform given the

combination of previously high valuations and the view that bond yields will continue to rise in an

environment of higher inflation and interest rates.

We believe we remain in a low-market return environment, given a lack of strong, broad-based earnings

growth and limited scope for a sustained valuation re-rating, especially given that rating gains surprised

on the upside in H2 2016. That said, the market can continue to make steady gains, particularly if

underpinned by a moderate level of economic growth which does not accelerate to the point where

tightening is required – a scenario which appears reasonable at this stage.

Economic growth in the US appears underpinned by household balance sheets having healed to pre-

GFC levels, which could provide enough confidence to sustain an uptick. Meaningful tax reform under a

Trump presidency would also be stimulative, however it is too early to see if reality reflects rhetoric and

investors must be ready to react as events evolve in the US.

The major risks are geopolitical: elections loom throughout Europe, while the only certainty around

Trump foreign and trade policy is that there is no certainty as to what he will do. If there is a key lesson

to take from 2016 it is not to get too caught up in the headlines – the year that gave us the shock of

Brexit, a Trump victory, and repeated scares around Chinese growth also delivered an 11.8% total

return for the S&P/ASX 300. It is important to focus on the underlying trends of growth, which appear

reasonable at this point.

Our highest-conviction positions remain at the individual company level, where we have identified clear

triggers for outperformance as a result of our fundamental research. In this vein, we like Qantas, ANZ,

packing group Amcor, and wholesaler Metcash.

While resources are unlikely to repeat 2016’s strong outperformance, given investor exposure is more

balanced today than was the case twelve months ago, we remain broadly positive. Resources are the

only major segment of the market likely to see earnings upgrades, as most sell-side model expectations

are based on commodity prices significantly below today’s levels. We do believe analyst earnings

upgrades are probably less influential upon resource stock performance than for other parts of the

market. Nevertheless, earnings momentum is likely to provide a tailwind in 2017.

Chinese policy remains the key factor for resource stock performance. Having buoyed the sector in

2016, the possibility of a change provides the largest risk in 2017. There are clear signs that Beijing is

tightening policy at the margin. However the positive side, a significant number of infrastructure projects

will hit their sweet spot in terms of spending this year. The upshot is that Chinese economic growth

remains reasonable; unlikely to surprise on the upside, but strong enough to support decent commodity

prices. Our exposure is primarily through well-diversified, less-leveraged stocks such as BHP and RIO,

mindful that Chinese policy can change quickly and with little warning.


Australian Shares

BT Wholesale Smaller Companies Fund

Market review


squashed after investors quickly re-evaluated 'Trumponomics’ post the billionaire’s victory. This in turn

saw the S&P/ASX 300 gain a solid 4.9% into year end. Central bank activity including upbeat Fed

verbiage and an emphasis on QE flexibility from the ECB also offered investors guidance during the

period.

On global developments, a hawkish tone from Fed Committee members leading into its decision to

raise rates by 0.25% added fuel to a sell-off in bonds, which showed signs of fatigue into year-end.

Importantly, the FOMC raised both their growth and rate forecasts for 2017. This was against a

backdrop of significant improvements in key economic indicators like consumer confidence,

manufacturing and service activity surveys, as well as retail sales. Revisions to third quarter GDP were

also positive with the annualised metric eventually raised to 3.5%. While the number of jobs added

averaged below the 200,000 mark, wage growth was healthy.


speculation. The central bank will reduce the size of purchases by 20 billion euros each month, but also

reduce the maturity of securities that qualify. With scope for adjustments if needed the outcome was

perceived as supportive for risk appetite. Investors in the region also felt relief after the Italian

referendum proved a non-event and concerns over the health of their banking system faded. Further

north, the wave of global optimism offset ‘Brexit’ implementation fears in the UK.

In Asia, the Bank of Japan appeared more optimistic on the outlook for the country’s economy in the

wake of USD/JPY’s 15.4% rally over the quarter. In neighbouring China, data was perceived as

reasonably strong with improvements in manufacturing survey data and decent reads from Industrial

Production and Profits. The Producer Price Index also ended 54 consecutive months of deflation.

However, concerns over continued capital outflows and the Yuan’s depreciation garnered increasing

press coverage heading into year end.

The forces highlighted above largely overshadowed the RBA’s first three meetings with Philip Lowe

presiding as Governor. The central banker noted improvements in Australia’s terms of trade from higher

commodity prices, but also a soft patch for economic growth and mixed labour market data. Importantly,

market pricing shifted from suggesting a cut to a hike as early as November 2017.





headline CPI grew at a sluggish pace of 1.3% over the previous year.

Sector returns saw a fairly large dispersion in the final three months of the year. At the top of the league

tables were Financials (+12.5%) and Utilities (+9.3%). The former was a large beneficiary of

‘Trumponomics’ given expectations for significant deregulation in the industry. Energy (+7.4%) also

performed strongly as production cut commitments from oil producers sparked an 11.4% gain for crude

oil (WTI). At the other end of the spectrum, Health Care suffered an 8.8% drop. Trump’s election has

prompted uncertainty for parts of the Healthcare sector given the noise around the wind-back of

‘Obamacare’ and the little to no visibility of what might replace it. Telcos (-4.2%) were also hurt as more

domestically-orientated challenges – namely the NBN rollout – weighed on the sector.


The BT Wholesale Smaller Companies Fund returned -2.32% (post-fee, pre-tax) over the December

2016 quarter, outperforming the S&P/ASX Small Ordinaries Accumulation Index by 0.13%.

Contributors

Fantastic Holdings, FAN, OW, +45.7%

Fantastic Holdings is the company behind Fantastic Furniture, Australia’s third largest furniture retailer

by sales volume, and the owner of several other furniture and bedding franchises. It was subject to a

cash takeover offer in October from Dutch company Steinhoff at a 43% premium to its price at the time,

which was recommended by the board. The proposal was cleared by the Federal Court of Australia in

mid-December and the shares were acquired later in the month.

Cover More Group, CVO, OW, +33.1%

Cover More is an insurance company, primarily focused on travel insurance, which has expanded from

Australia to operations in the UK, NZ, Asia and the US. It surged over 47% in December following a

cash takeover offer from Swiss giant Zurich Insurance. While the offer is subject to regulatory approval,

its hefty premium was enough to secure board approval, and the takeover is expected to be

implemented towards the start of Q2 2017.

Detractors

Mayne Pharma Group, MYX, -32.8%

Mayne Pharma manufactures and distributes both branded and generic pharmaceuticals, with around

85% of its revenues sourced from the United States. It has done well in recent years on the back of a

pipeline of rights to several drugs, including portfolios from larger peers. It fell in December on the news

that it is one of six companies subject to legal proceedings brought by a collection of US states, who are


accusing the drug companies of artificially inflating the price of a specific drug. At this point, the lawsuit

has just been filed, and there is no certainty around the timing or any possible effect on earnings. The

stock price of the other companies named did not react to the news and MYX’s initial fall appears to

have been an over-reaction.

Sims Metal Management, SGM, UW, +39.8%

The persistence of strong iron ore and coking coal prices has seen a surge in the price of scrap metal

as an alternative, to the benefit of scrap metal dealer Sims Metal management. We do not hold the

stock, which dragged on performance as a result.

Strategy & Outlook

Strong performance from several of the portfolio’s larger positions – such as Cover More, Japara

Healthcare and Cleanaway Waste Management – as well as the lack of exposure to many of the small

cap gold miners, saw it outperform the index in Q4.

The small cap sector has seen several savage responses to earnings disappointments over the past six

months, with the sharp falls in Estia Health, Bellamy’s Australia and Asaleo Care providing pertinent

examples. This is a factor of the hefty valuations to which many small cap stocks have been driven as

investors seek the kind of growth which is not widely available at the large-cap end of the market. There

is in some sense an asymmetric risk at the moment, as those companies which delivered good news

during the AGM season generally only saw modest share price appreciation. This demonstrates that

stock selection is critical in small caps at this juncture – and it is as much about avoiding the more

egregiously over-valued stocks which are vulnerable to earnings disappointment, as it is about

identifying the opportunity for growth and long-term alpha.

The latter opportunity persists. Whilst only the resource sector looks set to benefit from earnings growth

momentum in 2017 among large caps, the small cap sector continues to offer profitable pockets of

growth in areas such as tourism and travel, technology, agriculture, and in niche services or retail. As

always, we maintain our bias to quality and earnings stability and visibility. At the moment, this

approach leads to our largest positions including auto-parts distributor Bapcor, accommodation provider

Mantra, Super Retail Group (which includes franchises such as BCF and Rebel) and in enterprise

software provider Technology One.

The steady pipeline of IPOs which has helped refresh the small cap universe in recent years, removing

the previous resource-related dominance, appears to have dried up. This is at least partly due to

investor exhaustion following a series of over-hyped listings. At the same time, there has been an uptick

in M&A activity in the sector, such as construction company CIMIC’s (previously Leighton) takeover bid

for small cap UGL. This provides opportunities among the cheaper stocks, or those undertaking a

turnaround.


Broadly speaking, we believe we remain in a low-market return environment, given a lack of strong,

broad-based earnings growth and limited scope for a sustained valuation re-rating, especially given that

rating gains surprised on the upside in H2 2016. That said, the market can continue to make steady

gains, particularly if underpinned by a moderate level of economic growth which does not accelerate to

the point where tightening is required – a scenario which appears reasonable at this stage.

International Shares

BT Concentrated Global Share Fund

Market review

Global developed equity markets had a strong quarter shrugging off another quarter of political

uncertainty and market volatility with the MSCI World ex Australia returning 7.68%. US markets were

positive with the S&P 500 up 3.3% driven by a post Trump election win rally to end the year

optimistically on the outlook for fiscal stimulus to continue to drive growth and stimulate the economy.

The US Federal Reserve increased rates as expected, however the language was still very dovish

which saw markets react positively. Key sectors that outperformed for the quarter were Telcos, Utilities

and REITs.

European markets ended the year on a high note, with a strong December quarter supported by gains

in the price of crude oil, movements in the US dollar and central bank actions. At central bank policy

meetings, the European Central Bank held interest rates steady, whilst extending its Quantitative

Easing programme until December 2017, but will reduce purchases from €80 billion to €60 billion from

April 2017.The French CAC index was strongest returning 9.3%, the German DAX was up 9.2% and

the UK FTSE 100 was up 3.5%. Asian markets were mixed with the Japanese Nikkei returning a strong

16.2% with the large fall in the Yen saw optimism that Trump may be able to help with increasing

growth in Japan. The rest of Asia was more negative with the Hang Seng Index dropping 5.6%.

Currency markets were dominated by a continuation of a stronger US dollar as expectations around

Fed tightening in 2017 increased as the markets started to price in increasing inflation expectations for

2017 and beyond. Emerging market currencies and the Yen were the big casualties against the USD,

with the dollar/yen rallying 15.4% for the quarter. The AUD continued to decline, falling 5.9% to

US$0.72, although it fared much better on a trade-weighted basis.


The BT Concentrated Global Share Fund returned 8.82% (post fee, pre-tax) over the December 2016

quarter, outperforming its benchmark by 1.14%.

The December 2016 quarter marks the first full calendar quarter for the Fund. The quarter started with

global markets still grappling with the uncertainty that the Brexit vote back in June delivered, and ended


with the unknown outcome of a Trump Presidency and an Italian referendum which has resulted in the

reformist Prime Minister Renzi’s resignation. Amid the volatility and uncertainty we have focused on

investing in companies that we view are trading below their intrinsic value. It was pleasing to that end,

that two of the stocks we held in our portfolio - Janus and Time Warner - received take-over offers

during the quarter.

Our 10%+ holding in regional banks contributed 3.9% to our performance over the quarter. Our

investment in regional banks was predicated on a belief that earnings are cyclically depressed and

valuations are appealing, with companies trading below book value. Each of the banks we own have

the dominant market share in the region that they operate. Balance sheets have strengthened

considerably since the global financial crisis and arguably we have passed the regulatory peak for the

sector. Macro events such as the Brexit vote, speculation as to the outcome of the US election and the

Italian referendum in our view created opportunities to buy these businesses below what we consider to

be their intrinsic value.

US railways were another significant contributor of approximately 1% to the portfolio performance in the

quarter. We added to our holdings over the quarter as we saw the weakness as an opportunity to add to

our position. The businesses have strong balance sheets, declining capital expenditure and are

favourably exposed to a normalisaton of economic growth in the US.

MGM Resorts contributed 0.63% to the Fund’s performance this quarter. MGM Resorts is the dominant

integrated resort operator on the Las Vegas Strip, with 14 properties. They also have a 55% stake in

MGM China. MGM China has one property on the Peninsula in Macau, whilst the other is due to open

in Cotai, Macau in the first quarter of 2017. On December 8th MGM also opened their US$1.4bn

National Harbour property in the Washington DC area. The property is situated within an hour’s drive of

four of the country’s five riches counties by median household income. The company has excess

capacity to deploy as demand normalizes and also becomes ex capital expenditure in 2017, targeting

all free cash flow back to shareholders.

Detracting 0.51% from performance in the quarter was our holding in consumer staple companies. A

general sector rotation into more interest sensitive companies resulted from the Trump election win. We

do not view the consumer staples in our portfolio as bond proxies and instead focus on strong and

growing free cash flows, high margins and growing dividends.

Strategy & Outlook

We continue to be of the view that unlike the last five years equity markets are best suited to stock-

picking than broader market exposure. We remain cognisant of macro and geo-political risks, however

are comfortable that the companies we invest in have dominant positions in their respective industries

and have balance sheets to withstand economic downturns. We also believe that despite the macro

risks our portfolio of companies are well positioned to prosper and reward shareholders.



BT Wholesale Core Global Share Fund, managed by AQR

Market review

Global developed equity markets had a strong quarter shrugging off another quarter of political


positive with the S&P 500 up 3.3% driven by a post Trump election win rally to end the year

optimistically on the outlook for fiscal stimulus to continue to drive growth and stimulate the economy.

The US Federal Reserve increased rates as expected, however the language was still very dovish

which saw markets react positively. Key sectors that outperformed for the quarter were Telcos, Utilities

and REITs.


in the price of crude oil, movements in the US dollar and central bank actions. At central bank policy

meetings, the European Central Bank held interest rates steady, whilst extending its Quantitative

Easing programme until December 2017, but will reduce purchases from €80 billion to €60 billion from

April 2017.The French CAC index was strongest returning 9.3%, the German DAX was up 9.2% and

the UK FTSE 100 was up 3.5%. Asian markets were mixed with the Japanese Nikkei returning a strong

16.2% with the large fall in the Yen saw optimism that Trump may be able to help with increasing

growth in Japan. The rest of Asia was more negative with the Hang Seng Index dropping 5.6%.




with the dollar/yen rallying 15.4% for the quarter. The AUD continued to decline, falling 5.9% to



The BT Wholesale Core Global Share Fund returned 7.97% (post-fee, pre-tax) over the December

2016 quarter, outperforming its benchmark by 0.29%.

The Fund outperformed its benchmark over the fourth quarter of 2016. Outperformance was sourced

from each of the North American, European and developed Asian regions.

In terms of notable thematic performance drivers, the outperformance over the quarter was largely

driven by relative value and investor sentiment themes, which drove positive returns in all regions.

Offsetting somewhat was weakness in momentum measures, again in all regions. Business quality

orientated measures had mixed performance from region to region, with minimal net influence on active

returns at the portfolio level.


Active industry/sector positioning was a source of underperformance over the quarter, largely due to an

underweight position in Financials (which outperformed the broader market) though the underweight in

Energy and overweight in Utilities also contributed negatively. Outperformance at the Fund level was

due to stock selection within Industry groups, with strong results within each of the Industrials, Utilities

and Information Technology sectors all contributing notably over the quarter.

At a stock level, strongest positive contributions came from overweight positions in: PNC Financial

Service Group Inc, an American financial services corporation; United Continental Holdings Inc, the

holding company for United Airlines; and Southwest Airlines Co, a major US low-cost carrier. Largest

detractors were: underweight positions in Bank of America Corp and JPMorgan Chase & Co, both of

which are multinational banking and financial services holding companies headquartered in the US; and

Tyson Foods Inc, a US headquartered multinational operating in the food industry.

Strategy & Outlook

Entering January, the largest active sector positions are overweights in Information Technology and

Utilities and underweights in Health Care and Consumer Discretionary. Relative to long-term

allocations, we remain mildly tilted towards higher quality companies with positive momentum and away

from cheaper industry peers in Europe, while mildly tilted towards relative value considerations in Japan

and the US.

Australian Fixed Income

BT Wholesale Fixed Interest Fund

Market review

During the quarter Australian 3 year bond yields leapt higher by 46 basis points to 1.94% from 1.48%

and 10 year yields climbed a sizeable 83 basis points from 1.94% to 2.77%. This saw the 3-10s yield

curve steepen to 83 basis points. The solid increases were largely attributable to expectations of pro-

growth, pro-inflation Trump policies. This overshadowed to a degree the RBA’s first three meetings with

Philip Lowe as Governor. The central banker noted an improvement in Australia’s terms of trade, but a

soft patch for economic growth and mixed labour market data. Indeed, a motley set of employment

figures over the period revealed no clear trend and left the unemployment rate 0.1% higher at 5.7%.

Leading indicators like business and consumer confidence witnessed a clearer deterioration.

Meanwhile, lagging metrics were weak with third quarter GDP at 1.8% year-on-year (the lowest since

the GFC), wage growth over the same period at 1.9% and a mediocre 1.3% increase in headline CPI.

However, these developments left little lasting impact amid broader global optimism which ultimately

saw markets shift from pricing a cut by the RBA to a hike as early as November 2017.



The BT Wholesale Fixed Interest Fund returned -3.57% over the December 2016 quarter (post-fees,

pre-tax), underperforming its benchmark by 0.71%.

The Fund underperformed its benchmark over the quarter. The Cross-Market and Duration strategies

were the largest detractors from performance in the alpha overlay, while the other strategies were

largely flat. The Government bond component underperformed its benchmark with the Yield Curve and

Cross-Market strategies being the main detractors. The Duration strategy was flat over the quarter.

The Credit component outperformed its benchmark with positive performance coming from an

overweight in infrastructure, utilities and subordinated bank paper.

Strategy & Outlook

Fourth quarter inflation data is the key domestic economic data release due in January, however would

need to be much weaker than expected to see the Reserve Bank ease monetary policy in the near

term. The labour market remains weak and household balance sheets remain stretched. The risks to

financial stability have increased and the hurdle for any further monetary policy easing is very high.

Currency moves will be key. The Reserve Bank would become concerned if currency appreciation

occurred without an accompanying increase in either commodity prices or global economic growth

prospects. The market is now looking for further policy tightening from the Federal Reserve in the

United States, which should be supportive for US dollar strength. It is likely that external developments

drive market pricing and expectations more than domestic events in the nearer term.

International Fixed Income

BT Wholesale Global Fixed Interest Fund

Market review

Risk sentiment swung dramatically during the December quarter as pre US election jitters were

squashed after investors quickly re-evaluated ‘Trumponomics’ post the billionaire’s victory. The heavy

sell-off in bond markets that ensued was fanned to some extent by hawkish FOMC verbiage. Ultimately,

the central bank delivered its second rate hike in as many years and issued a more upbeat growth and

rate forecast than anticipated. This was against a backdrop of improving US economic data. This

spurred a sizeable 43 basis point increase in US 2 year yields, from 0.76% to 1.19%. Longer-dated 10

year yields jumped an outsized 85 basis points from 1.59% to 2.44%. Outside the US, investors in

Europe were relieved as the Italian constitutional reform referendum proved a non-event and the ECB

announced the extension of its QE program. While in Asia, the BOJ offered upbeat commentary in the

wake of USD/JPY’s 15.4% rally over the quarter. Japanese 10 year yields rose a modest 14 basis


points to remain near the central bank’s 0% target at 0.05%. At home, the Australian dollar pulled back

by 5.9% against the US dollar as the reserve currency regained its upward momentum. Finally,

developed market equities and commodities enjoyed strong gains.


The BT Wholesale Global Fixed Interest Fund returned -3.34% over the December 2016 quarter (post-

fees, pre-tax), underperforming its benchmark by 0.52%.

The Cross-Market, Yield Curve and Duration strategies detracted while FX and Macro strategies were

largely flat. The Cross-market strategy was the largest detractor over the quarter with losses mainly

from long New Zealand vs Australia in the front-end and Australia vs the US in the long end. The

majority of the losses in the Yield Curve strategy were from our Australian front end bill flatteners and

European curve flatteners, although the losses were partially offset by curve steepeners in the front end

of the US curve. Losses in the Duration strategy were from long positions in the Australian and Swedish

front-end earlier in the quarter, and from long positions in the New Zealand front-end in December. The

FX strategy was flat and gains from long USD, short emerging market currencies were offset by losses

in long AUD against a basket of currencies. Our protection positions in Australian iTraxx were largely

flat over the quarter.

Strategy & Outlook

The market is expecting further monetary policy tightening in the US. The FOMC factored in some

expectation of Trump’s fiscal expansion and raised its expected interest rates in the ‘dot plot’. Inflation

has bottomed out in the past few months and is returning to Fed’s target level. Other elements of

Trumponomics include the heightened probability of trade conflicts between the US and its trade

partners. As a result, there are downside risks for emerging markets. They will be impacted via the

exchange rate and international trade channels.

Credit

BT Wholesale Enhanced Credit Fund

Market review

Over the quarter ending December physical cash credit spreads continued to tighten. The positive

performance in credit spreads was helped by perceived market risks largely not materialising and lower

supply of new corporate credit in the domestic market. During the quarter commodity market pricing

remained stable and fears that China would not be able to manage its economic transition to a more

inward focused economy appeared premature. Over the period concerns that the Brexit vote and US

election could induce adverse credit market volatility did not eventuate. Expectations of future US Fed


raising rates and a potentially strengthening US economy saw underlying government yields globally

and domestically increasing, resulting in the Bloomberg Non-Government Index recording a negative

total return for the quarter.

The US Fed rate increase in December was fully priced in by the market before the announcement. In

anticipation of the rate rise, and expectations of increased growth, the US government 10 year bond’s

yield increased nearly one percent from the start of the quarter. This rise in rates impacted the domestic

market with Australian government bond yields increasing upwards of 86 basis points by quarter end.

Whilst global economic data over the period did not exhibit significant changes, expectations of

potential economic and political changes covered the headlines. Event risks included: elections in the

US; anticipated fallout from Brexit; and, the Italian referendum. Fears were that any of these could have

adversely impacted risk markets. The potential of any of these events causing significant market

volatility combined with smaller intermediaries’ inventory, amongst other factors, resulted in lower

secondary market liquidity for corporate credit.

Issuance of corporate credit was approximately 20% lower than the prior comparative period. The

lower issuance helped support secondary market pricing of credit. Over the quarter, consistent with a

strong rebound in commodity pricing the resources sector was the strongest performer on a spread to

swap basis. In addition, the defensive sectors of infrastructure and utilities were strong performers.

Over the quarter physical credit and CDS tightened.


The BT Wholesale Enhanced Credit Fund returned -1.57% over the December 2016 quarter (post-fees,

pre-tax), outperforming the benchmark by 0.05%.

Positive performance came from an overweight in infrastructure, utilities and subordinate bank paper.

Negative performance came from swap spread movements.

Activity over the quarter included acquiring utility, infrastructure and finance company bonds.

Strategy & Outlook

Our macro credit view remains neutral. Going into 2017 there is the potential for significant event risk

and associated volatility. Early in 2017 the new US President will be inaugurated and it’s unclear what

mix of policies will be enacted and their impact. We expect continued monetary policy action from

central banks such as the US Federal Reserve and ECB to impact risk appetite. In Europe and the UK

we will have the start of Brexit and elections in France and Germany which could influence investor

sentiment.


We continue to have ongoing concerns over solvency of some European banks that could be a

headwind in 2017 without new capital injections. Going forward it will be the impact of new banking

regulations that could be the catalyst for improving solvency. Given the potential headline risks and

associated contagion concerns we continue to remain underweight European financials.

Whilst we maintain a more sanguine longer term view we believe near term volatility could erupt to

negatively impact credit performance. Risk markets will continue to suffer from uncertainty and

unexpected consequences from events mentioned above. In addition, shifting expectations on central

bank interventions will feed volatility.

Global growth appears to be tracking around 2.8% going into 2017 with corporate capital spending

expected to increase given improved global business sentiment. Underpinning this is the expectation of

China maintaining it balancing act of stimulus, credit easing and currency depreciation. China’s growth

story underpins commodity price stability. That said, iron ore, whilst performing strongly in the fourth

quarter of 2016, appears likely to weaken with increases to Vale’s iron ore production and high China

port inventories. This could represent a vulnerability to commodity price stability.

Accordingly whilst near term market tone is positive we remain cautious with many unknowns going into

2017. Domestically we see weak growth persisting and improvement largely dependent on commodity

price stability and housing. As such we continue to recommend a defensive approach with any

overweights in operationally resilient sectors such as utilities and infrastructure that provide a higher

yield to index returns.

Cash

BT Wholesale Managed Cash and BT Wholesale Enhanced Cash Funds

Market review


squashed after investors quickly re-evaluated ‘Trumponomics’ post the billionaire’s victory. This largely

overshadowed the RBA’s first three meetings with Philip Lowe presiding as Governor. The central

banker noted improvements in Australia’s terms of trade from higher commodity prices, but also a soft

patch for economic growth and mixed labour market data. Importantly, market pricing shifted from

suggesting a cut to a hike as early as November 2017.




headline CPI over the previous year grew at a slow pace of 1.3%, despite the quarter-on-quarter print of

0.7% beating the consensus forecast.


Most major leading indicators of economic growth also deteriorated. This included business confidence

and consumer confidence. However, retail sales were actually reasonably resilient over the period.

Meanwhile, a motley set of employment figures revealed no clear trend and left the unemployment rate

0.1% higher at 5.7%.

On global developments, aside from the US election the other major development in the world’s largest

economy was the Fed’s rate rise in December. A hawkish tone from Committee members leading into

the decision added fuel to the sell-off in bonds, which lost some momentum into year-end. Alongside

more upbeat verbiage from the central bank, the FOMC raised both their growth and rate forecasts for

2017. This was against a backdrop of significant improvements in key economic indicators like

consumer confidence, manufacturing and service activity surveys, as well as retail sales. Revisions to

third quarter GDP were also positive with the annualised metric eventually raised to 3.5%. While the

number of jobs added averaged below the 200,000 mark, wage growth was healthy.


speculation. The central bank will reduce the size of purchases by 20 billion each month, but also

reduce the maturity of securities that qualify. With an added emphasis on flexibility for adjustments if

needed the outcome was perceived as supportive for risk appetite. Investors in the region also felt relief

after the Italian referendum proved a non-event and concerns over the health of their banking system

seemingly became a smaller blip on the radar. Further north, the wave of global optimism offset ‘Brexit’

implementation fears in the UK.

In Asia, the Bank of Japan appeared more upbeat on the outlook for the country’s economy in the wake

of USD/JPY’s +15% rally over the quarter. In neighbouring China, data was perceived as reasonably

strong with improvements in manufacturing survey data and decent reads from Industrial Production

and Profits. The Producer Price Index also ended 54 consecutive months of deflation. However,

concerns over continued capital outflows and the Yuan’s depreciation garnered increasing press

coverage heading into year end.

Regarding rates, the heavy global bond sell-off pushed Australian 3 year yields higher by 46 basis

points to 1.94%, while their 10 year counterparts rose 83 basis points to 2.77%. At the front end, BBSW

rose 8 basis points to 1.82%. In the US, 2 year rates climbed 43 basis points to 1.19% and further out

the curve 10 year yields rose 85 basis points to 2.44%. The excitement regarding prospective Trump

policies was also felt strongly in FX markets with the AUD/USD dropping -5.9% to finish the quarter at

0.7208.

Credit markets performed well in the face of significant events over the December quarter. These

events included an unexpected result in the US elections, concerns around the outcomes of FOMC and

ECB meetings and the Italian constitutional reform referendum. Strengthening commodity prices were

supportive for risk assets.


Delving deeper on a month-by-month basis, credit spreads finished October relatively unchanged with

accruals driving total returns. The market held up well given concerns around ECB tapering. Bloomberg

reports emerged citing unnamed eurozone central bank officials, reporting that the ECB is likely to

gradually wind down bond purchases before the scheduled March 2017 conclusion of its quantitative-

easing program. However, later both the ECB President and Vice President denied the reports which

saw risk assets recover. Soft Chinese and US payrolls data weakened sentiment. However, supporting

markets was a dovish Yellen statement suggesting the US economy could be allowed to overheat as

the current recovery has not been strong enough, as well as firm US manufacturing and GDP data. A

better-than-expected US earnings season also helped risk appetite; 77% of companies beat

expectations while both revenue and earnings increased by 2% and 3% respectively versus the prior

corresponding period.

In November, credit markets performed reasonably given significant event risks. An unexpected Trump

win in the US elections saw a sharp rise in global bond yields on the back of an increase in future

inflation expectations as well as more government debt supply to help fund the potential new policies.

This sharp rise in yields would normally see a widening of credit spreads. Trump policies are expected

to be pro US growth through fiscal spend on infrastructure, manufacturing and tax cuts for corporates

and individuals. Also, policies around reducing banking regulation were taken positively by markets.

However, there were concerns around his protectionist stance on international trade due to his

comments on raising tariffs on imported goods. This sparked fears of a trade war with China that could

result in a reduction in global GDP growth. The markets had also been grappling with the Italian

constitutional reform referendum and implications for the country’s troubled banks. Italy is grappling with

slowing growth, high unemployment and distress in its banking system. Italian banks have been under

pressure because of the high number of nonperforming loans they are holding and worries about

whether the banks can recapitalize. Physical credit spreads were actually a little tighter in November on

the back of a rally in commodity prices. The strength in crude oil (+5.5%), iron ore and coking coal

prices over the month on the back of the expected Trump infrastructure spend and supply constraints

has supported credit market spreads.

Finally in December, credit spreads performed well. Supporting the market was a continuation of

positive sentiment around Trump’s pro US growth policies, the European Central Bank extending its

asset-purchase program, oil producing nations agreeing on production cuts, the FOMC showing greater

confidence in the US economy going forward, whilst the Italian referendum “no” vote had minimal

impact on markets.

The ECB’s announcement of a nine-month extension to their asset purchase program at a reduced rate

of €60billion month from March onward, a reduction of €20 billion a month compared with market

expectations of a six-month extension at an unchanged pace. In a positive move, the minimum maturity

of the purchases was reduced from 2 years to 1 year and the yield on security purchases no longer

constrained by the ECB’s deposit floor of -0.4%, i.e. they can be bought at a lower yield. This is bullish

for shorter dated bonds and acts as a curve steepening policy which is supportive for banks. Draghi


said the ECB decision didn’t constitute a move to taper and tapering had not been discussed and the

presence of the ECB on the markets will be there for a long time. The dovish tone of the press

conference suggest that the high level of monetary accommodation in the Euro area remains in place.

The Australian iTraxx index (Series 26 contract) traded in a 14 basis point (bp) range finishing the

quarter 1bp tighter to +104bps. Physical credit spreads also strengthened, tightening 2bps on average.

The best performing sectors were resources, RMBS, infrastructure and telecoms narrowing 17, 8, 7 and

6bps respectively, whilst domestic banks underperformed, finishing the quarter 3bps wider. Semi-

government bonds narrowed 1bp to government bonds.


Managed Cash

The BT Wholesale Managed Cash Fund returned 0.47% over the December 2016 quarter (post-fee,

pre-tax), outperforming its benchmark by 0.03%.

The Fund returned 52 basis points for the quarter, outperforming its benchmark by 9 basis points and

26 basis points for the year. With a higher running yield than the index the Fund remains well positioned

to outperform. Themes and credit exposure remain consistent with prior months, with excess spread

from A-1 rated issuers likely to be the main driver of outperformance. The Fund ended the quarter with

a weighted average maturity of 65 days (maximum limit of 70 days). Yields further out the curve

continue to offer better relative value and the weighted average maturity has consistently been longer

than benchmark due to this. With longer dated yields offering better value and with Reserve Bank

monetary policy tightening a distant prospect we will remain longer than benchmark.

Enhanced Cash

The BT Wholesale Enhanced Cash Fund returned 0.67% over the December 2016 quarter (post-fee,

pre-tax), outperforming its benchmark by 0.23%.

The Fund had a strong quarter of performance. Positive performance came from infrastructure,

financials, industrials and RMBS sectors. Activity during the quarter included investing in financials,

infrastructure and RMBS sectors funded out of cash.

As at the end of the quarter, the Fund had a credit spread of 83basis points over bank bills, interest rate

duration of 0.12 years and credit spread duration of 1.50 years.

Strategy & Outlook

Fourth quarter inflation data is the key domestic economic data release due in January, however would

need to be much weaker than expected to see the Reserve Bank ease monetary policy in the near

term. The labour market remains weak, with wage inflation at record low levels and employment growth


concentrated in part time jobs over the past 12 months. Household balance sheets remain stretched:

the ratio of household debt to disposable income is elevated and has continued to rise. The risks to

financial stability have increased and the hurdle for any further monetary policy easing is very high.

Currency moves will be key. Lower interest rates and the fall in the currency have helped support the

economy as it transitions away from the mining investment boom. The Reserve Bank would become

concerned if currency appreciation occurred without an accompanying increase in either commodity

prices or global economic growth prospects. The market is now looking for further policy tightening from

the Federal Reserve in the United States, which should be supportive for US dollar strength if it occurs.

It is likely that external developments drive market pricing and expectations more than domestic events

in the nearer term.

Australian Property

BT Wholesale Property Securities Fund

Market review

The REIT sector generated a total return of -0.73% for the December quarter, underperforming the

broader market which was up 4.9%. Year rolling AREITs have returned 13.2%, outperforming the

broader market by 1.4%. In global REITS, Australia was the best performing (+15% in USD terms) in

2016, while UK (-22%) was the worst performing market.

The best performing stocks over the quarter were Dexus (+7.5%), Cromwell (+7.0%) and Viva Energy

(+6.2%). The worst performing stocks were mostly large caps and Generation Healthcare REIT -9.1%.

It was another volatile quarter for global capital markets, with the US equity market surging almost 9%

after a pre election slump. The surge reflects confidence about the buoyant US economy with payrolls

and unemployment pointing to a recovery in the US economy. The Australian share market performed

particularly well (+4.9% over the quarter) despite a weak GDP print. The Australian economy

unexpectedly contracted 0.5% in the third quarter of 2016, compared to an upwardly revised 0.6%

growth in the June quarter and missing market consensus of a 0.3% expansion. It was the first

contraction since the March quarter 2011. Through the year, the economy grew by 1.8%, slowing

sharply from a 3.3% annualised expansion in the June quarter.

REIT news for the quarter included GPT selling its stake in Woden Shopping centre at an 11% premium

to book value and Investa office reporting an 8-9% uplift in office values. This sale and valuation

increase bodes well for the asset rich AREIT sector. Over the quarter we also saw a new AREIT debut

Charter Hall Long WALE, a diversified REIT with 66 properties, managed by Charter Hall Group with a

lease expiry of 12.5 years. In total there have been three new REITS (Charter Hall long WALE, Viva

Energy and Propertylink) debut this year increasing choice in the sector.



The BT Wholesale Property Securities Fund returned -0.85% over the December 2016 quarter (post-

fee, pre-tax), underperforming its benchmark by 0.12%.

The Fund performed close to benchmark for the December quarter. Overweight positions including

Propertylink, Lifestyle Communities and Investa Office and underweight positions in Iron Mountain and

BWP added to performance. The main detractors were from our underweight positions in Cromwell

Dexus and Charter Hall Retail. An overweight to Charter Long WALE also detracted.

Strategy & Outlook

The sector is now priced on an FY17 dividend yield of 4.7%, 28% premium to NTA and a PE ratio of 18

times.. However, earnings and balance sheets are stable with sector gearing at 30% and falling slowly

as asset prices continue to rise. Falling bond and cash yields continue to be supportive. The better

managed REITs continue to use the buoyant direct market as an opportunity to divest non-core assets.

International Property

BT Wholesale Global Property Securities Fund, managed by AEW

Market Review (In USD)

For the quarter ended 31 December 2016, performance of the global property securities market (on an

ex-Australia basis) as measured by the FTSE EPRA/NAREIT Developed Index declined, posting a total

return of -5.4%. Europe (down 8.9%) was the weakest performing region, followed by Asia Pacific

(down 8.0%) and North America (down 3.4%). In Asia Pacific all countries were in negative territory for

the quarter. Hong Kong (down 12.1%) posted the largest decline, followed by Singapore (down 12.0%),

New Zealand (down 9.1%) and Japan (down 4.2%). Similarly, results in Europe were negative in all

countries. Germany (down 13.5%) was the weakest performer, followed by Sweden (down 11.9%) and

France (down 11.5%). Within North America, the US and Canada returned -3.5% and -2.1%,

respectively.


The BT Wholesale Global Property Securities Fund returned -2.23% over the December 2016 quarter

(post-fee, pre-tax) outperforming its benchmark by 0.22%.


North America

For the quarter ended 31 December 2016, BT’s North America portfolio returned -2.60% before fees

and taxes, beating the FTSE EPRA/NAREIT North America Index by 79 basis points. Outperformance

relative to the benchmark was driven by positive sector allocation results and, to a lesser extent,

positive stock selection results. Regarding sector allocation, positive results were attributable to the

portfolio’s underweight to the underperforming triple net lease and health care sectors. The portfolio’s

small cash position was also a positive contributor given the REIT sector’s negative absolute

performance for the quarter. In terms of stock selection, results were strongest in the triple net lease,

data centre, and health care sectors and were weakest in the office, apartment, and manufactured

home sectors. Among the portfolio’s holdings, top individual contributors to relative performance

included overweight positions in outperforming Host Hotels & Resorts (HST) and DuPont Fabros

Technology (DFT), and a lack of exposure to underperforming HCP, Inc. (HCP). Detractors most

notably included overweight positions in underperforming Simon Property Group (SPG) and Welltower

(HCN), and a lack of exposure to outperforming Essex Property Trust (ESS).

Europe

For the quarter ended 31 December 2016, BT’s European portfolio returned -9.52% before fees and

taxes, lagging the FTSE EPRA/NAREIT Developed Europe Index by 55 basis points.

Underperformance relative to the benchmark was attributable to both negative country allocation results

and negative stock selection results. Regarding country allocation, negative results were driven by the

portfolio’s overweight to the underperforming Sweden and France, as well as an underweight to the

outperforming Switzerland. In terms of stock selection, results were weakest in France, Germany, and

Switzerland and were strongest in the United Kingdom, Netherlands, and Sweden. Among the

portfolio’s holdings, top positive contributors to relative performance included overweight positions in

outperforming Workspace Group Plc. (United Kingdom) and Segro Plc. (United Kingdom), and a lack of

exposure to underperforming Fastighets Balder AB Class B (Sweden). Detractors most notably

included overweight positions in underperforming Deutsche Wohnen AG (Germany) and Gecina SA

(France), and a lack of exposure to outperforming Derwent London Plc. (United Kingdom).

Asia

For the quarter ended 31 December 2016, BT’s Asia portfolio returned -7.80% before fees and taxes,

outperforming the regional EPRA benchmark return by 18 basis points. Outperformance relative to the

benchmark was attributable to both positive stock selection results and positive country allocation

results. In terms of stock selection, positive results in Japan were partially offset by negative results in

Singapore and Hong Kong. Positive country allocation results were largely driven by the portfolio’s

underweight to the underperforming Singapore. Among the portfolio’s holdings, top contributors to

relative performance included a lack of exposure to underperforming New World Development (Hong

Kong) and overweight positions in outperforming Tokyo Tatemono (Japan) and Mitsui Fudosan (Japan).

Detractors most notably included an underweight position in outperforming Sumitomo Realty &


Development (Japan) and overweight positions in underperforming Cheung Kong Property Holdings

(Hong Kong) and Japan Retail Fund Investment (Japan).

Strategy & Outlook

North America

Looking ahead, while higher interest rates could put some upward pressure on cap rates, real estate

fundamentals are strong. Demand growth was a bit slower than prior years in 2016, though still

generally enough to offset new supply. On a national level, supply risk is limited outside of apartments

and seniors housing. A few select office, industrial and hotel markets are seeing meaningful

construction, though in most cases it is being built to fill strong demand in these same markets.

Construction costs would likely rise if increased infrastructure spending becomes a reality and should

help keep new supply under control. At the end of 2016, REITs continued to trade within fair value

range versus other asset classes. With interest rates moving up, we expect investors to pay increased

attention to the factors that differentiate REIT returns from bond returns, most notably that REIT

incomes rise faster in a more rapidly growing economy and that rising rents and property values help

offset inflation. Some investors will inevitably lump REITs in with bonds and react negatively to

increases in interest rates, but it is important to be mindful that interest rate increases will likely only be

sustained if the economy is growing. A more sophisticated view will factor in the higher earnings growth

that will likely accompany any meaningful improvement in the economy. Overall, for the sector, we

expect average cash flow growth for REITs to be roughly 7% per share in 2017.

Europe

During the quarter, interest rates moved up from their all-time lows by a range of 30 basis points

(Germany) and 50 basis points (United Kingdom and Spain). It is likely that the continued trend will be

upwards as world economic growth is on a solid recovery path and central banks have begun to

recognize the negative effects of very low interest rates. The Bank of England is done cutting interest

rates to protect the value of the British pound as import inflation could become a problem. The

European Central Bank (ECB) extended quantitative easing during the quarter from March through

December 2017, but the amount of its monthly purchases will be scaled back. Other measures from the

ECB, such as the ability to buy shorter-dated debt, are signs that the central bank is targeting a steeper

yield curve but also that quantitative easing will wind down in the future, though at a slow pace. During

the fourth quarter, the worst performing real estate sector in Europe was German residential. These

stocks are seen as the most interest rate sensitive sector by investors as leases are long, risk of

vacancy is limited, and rents are moving up. The best performing sector in the fourth quarter were the

London office REITs, which underwent a significant correction following the Brexit vote in June 2016

and were trading at greater than 20% discounts to their net asset values. The London office market has

been reasonably resilient in the second half of the year. Demand for space has continued to be fairly

good, and the investment market has been buoyant due to strong demand from foreign investors, who

wanted to take advantage of the fall of the British Pound. London office REITs bounced back on this


news but were still trading at double digit discounts to net asset values at year-end. Looking ahead,

although rising interest rates could be a headwind for property equities, it is expected that interest rates

will stay reasonably low in historical terms. Moreover, the spread between interest rates and property

yields will continue to be relatively attractive. A more solid economic environment will lead to increased

demand for space and, thus, rising rents in the better locations. Higher inflation is a positive for the

REIT sector as Continental European rents are contractually indexed to inflation. Still, a significant or

rapid increase in interest rates would be a risk to property valuations and the European property sector

(as well as other asset classes). Overall, after the relatively disappointing performance of 2016, the

sector no longer traded at a premium and stocks had no growth priced in. At year-end, European REITs

were trading at a 3% discount to net asset values with an earnings yield of 5.4% and a dividend yield of

3.7%.

Asia

Key events this year like Brexit and Trump’s victory in the US election resulted in changes in interest

rate expectations and currencies, driving the performance of property stocks. In Japan, following

Trump’s victory in the US, the Japanese yen weakened by 15%, and developers rallied strongly on

growth and inflation expectations. JREITs underperformed, however, as the 10 year Japanese

Government Bond yield crept up from -0.05% to 0.03%, reducing the attractiveness of JREITs. Demand

for property assets remained strong with both domestic investors such as pension funds and quasi-

government agencies (e.g. Japan Post) as well as overseas investors looking to deploy capital,

increasing the possibility of further cap rate compression as assets available for sale are limited. The

Hong Kong property market saw the greatest decline in the region during the quarter, led by

developers. The Hong Kong government announced in November that it will increase the Double Stamp

Duty for residential homes to a standardized rate of 15%. The new measures came on the back of a

12% rebound in property prices since the trough in March and increasing concerns that investment

activities were driving the market upwards. We believe this new measure is aimed at curbing

investment demand, especially in light of the recent run-up in prices, and could have a material impact

on transaction volumes. Singapore was the worst performing market in 2016, driven by a weak property

outlook and rising bond yields. Both CBD office and retail rents declined in 2016, and Singapore's 10

year Government Bond yield ended the year at 2.47%, inching closer towards the 2.6% level at which it

began 2016. Most of the Singapore REITs have been fixing their debt in the range of 70-80% and, thus,

the impact of higher interest costs remains fairly limited in the near term. Looking into 2017, we expect

Australia to have the best property fundamentals within the region, while the outlook for the rest of the

region is mixed. With the correction in the fourth quarter, value has emerged within the region. The

portfolio continues to seek the best relative value in the sub-property markets where we expect to see

improving property fundamentals, with potential earnings, dividend, and net asset value upside.


Active Balanced

BT Wholesale Active Balanced Fund

Market review

The S&P/ASX 200 index ended the year strongly delivering a 4.93% return for the December quarter.

The banks performed the strongest, rebounding 13.8% for the quarter after a tough few months

previously. A combination of rising bond yields and the Trump election win saw investors become more

confident of future earnings potential and less regulation headwinds for banks. The other strong sectors

were Utilities (9.2%), Resources (8.7%), Materials (7.9%) and Energy (7.5%) all enjoying a strong

rebound in underlying commodity prices over the last six months, but especially the December quarter.

Global developed equity markets also had a strong quarter shrugging off another quarter of political


positive with the S&P 500 up 3.3% driven by a post Trump election win rally to end the year on

optimism on the outlook for fiscal stimulus to continue to drive growth and stimulate the economy. The

US Federal Reserve increased rates as expected, however the language was still very dovish which

saw markets react positively. Key sectors that outperformed for the quarter were Telcos, Utilities and

REITs.


in the price of Crude Oil, movements in the US dollar and central bank actions. At central bank policy

meetings the European Central Bank held interest rates steady, whilst extending its Quantitative Easing

programme until December 2017, but will reduce purchases from €80 billion, to €60billion from April

2017.The French CAC index was strongest returning 9.3%, the German DAX was up 9.2% and the UK

FTSE 100 was up 3.5%. Asian markets were mixed with the Japanese Nikkei returning a strong 16.2%.

Japan saw a large fall in the Yen on the back of optimism that Trump may be able to help with

increasing growth in Japan. The rest of Asia was more negative with the Hang Seng Index dropping

5.6%.




with the dollar/yen rallying 15.4% for the quarter. The AUD continued its decline, falling 5.9%% to


During the quarter Australian 3 year bond yields leapt higher by 46 basis points to 1.94% from 1.48%

and 10 year yields climbed a sizeable 83 basis points from 1.94% to 2.77%. This saw the 3-10s yield

curve steepen to 83 basis points. The solid increases were largely attributable to expectations of pro-

growth, pro-inflation Trump policies. This overshadowed to a degree the RBA’s first three meetings with

Philip Lowe as Governor. US bonds also moved higher: a sizeable 43 basis point increase in US 2 year


yields, from 0.76% to 1.19% and longer-dated 10 year yields jumped an outsized 85 basis points from

1.59% to 2.44%.

Australian bonds were negative with the Bloomberg Composite Bond Index down -2.86% and the JP

Morgan Global Bond Index also down -2.82%.


The BT Wholesale Active Balanced Fund returned 2.45% (post-fee, pre-tax) over the December 2016

quarter, underperforming its benchmark by 0.36%.

The key drivers of the positive absolute returns was stronger equity markets that continued their rally

post Trump’s election on renewed optimism of fiscal policy driving growth in the US and hopefully

globally. This was offset by negative bond markets where yields rose dramatically as markets started to

price in more rate rises due to increasing inflation.

The Australian equity component realised a reasonable outperformance relative to its benchmark over

the December quarter. The largest individual contributors were overweights in Rio Tinto and ANZ. The

former rallied alongside significant gains for its key commodity exports, while the latter strengthened on

fading domestic banking concerns and broader global deregulation speculation.

On the global equities front, a decent return above the benchmark was delivered over the quarter. This

was sourced from each of the North American, European and developed Asian regions. Relative value

and investor sentiment themes made contributions, while the momentum sub-strategies

underperformed. Sector-wise, an underweight in Financials detracted given the area’s strong run.

The alternatives component delivered a strong excess return over the period. Contributions were made

by all subcomponents barring Managed Futures and Pure Alpha Fixed Income, with the most value

added by the Equity Market Neutral, Global Macro and Event Driven strategies. The Tactical Asset

Allocation detracted -0.36% from returns. This stemmed largely from the alternatives bucket, which

includes commodities like copper, crude oil and gold. Meanwhile, positions in Australian and

International equities added value.

Strategy & Outlook

Equity markets ended the year on a positive note with all the recent political uncertainty taken a positive

and the uncertainty around the Trump presidency - for the time being - taken as less concerning.

Whilst bond markets seem to have consolidated from their recent rise in yields and despite the US

Federal Reserve raising rates for the second time this decade, there is less of a concern now about

bond yields rising too quickly.


China still remains a wildcard and growing debt is definitely a concern for both global markets and the

Australian share market, especially commodities that have enjoyed a nice recovery and continue to go

higher on the belief that growth in the US and China will continue to remain strong.

We remain cautious in our positioning relying on our active management of the underlying asset

classes to help offset volatility combined with our exposure to alternatives as well as tactically moving

the portfolio around. As always active management plays an important role in managing these risks and

taking advantage of market dislocations driven by sentiment rather than underlying fundamentals.


Performance as at 31 December 2016

F YT D 1 year 2 Years 3 Years 5 Years Since

(pa) (pa) (pa) (pa) Incp. (pa)

Australian Shares - All Cap

B T Who lesale C o re A ustralian Share F und A P IR - R F A 0818A U

Total Return (post-fee, pre-tax) 4.05 5.60 10.26 10.26 5.74 5.94 5.84 11.61 9.90

Total Return (pre-fee, pre-tax) 4.12 5.81 10.69 10.69 6.56 6.77 6.67 12.49 10.91

Benchmark 4.34 4.93 10.43 10.43 11.79 7.20 6.57 11.64 9.97

B T Who lesale Imputat io n F und A P IR - R F A 0103A U



Benchmark 4.34 4.93 10.43 10.43 11.79 7.20 6.57 11.64 8.65

B T Who lesale F o cus A ustralian Share F und A P IR - R F A 0059A U



Benchmark 4.34 4.93 10.43 10.43 11.79 7.20 6.57 11.64 7.28

B T Who lesale Ethical Share F und A P IR - R F A 0025A U



Benchmark 4.34 4.93 10.43 10.43 11.79 7.20 6.57 11.64 7.95

Australian Shares - Mid Cap

B T Who lesale M idC ap F und A P IR - B T A 0313A U



Benchmark 4.24 -0.08 6.93 6.93 16.48 13.28 12.12 12.50 4.45

Australian Shares - Small Cap

B T Who lesale Smaller C o mpanies F und A P IR - R F A 0819A U

Total Return (post-fee, pre-tax) 3.91 -2.32 4.73 4.73 3.41 13.85 8.44 13.18 13.24

Total Return (pre-fee, pre-tax) 4.03 -2.01 5.38 5.38 4.70 15.28 9.80 14.60 14.53

Benchmark 3.61 -2.45 5.84 5.84 13.18 11.66 6.24 4.87 7.49

Australian Shares - Micro Cap

B T Who lesale M icro C ap Oppo rtunit ies F und A P IR - R F A 0061A U



Benchmark 3.61 -2.45 5.84 5.84 13.18 11.66 6.24 4.87 1.94


B T Who lesale C o re Glo bal Share F und A P IR - R F A 0821A U



Benchmark 4.48 7.68 9.78 9.78 7.92 9.84 11.53 18.58 7.05

B T Glo bal Emerging M arkets Oppo rtunit ies F und - Who lesale A P IR - B T A 0419A U

Total Return (post-fee, pre-tax) 1.77 -2.22 5.19 5.19 4.48 2.71 4.99 N/A 8.80

Total Return (pre-fee, pre-tax) 1.89 -1.87 5.93 5.93 5.95 4.14 6.61 N/A 11.29

Benchmark 2.26 1.28 7.44 7.44 11.72 3.40 4.56 N/A 8.62

B T C o ncentrated Glo bal Share F und A P IR - B T A 0503A U

Total Return (post-fee, pre-tax) 3.10 8.82 N/A N/A N/A N/A N/A N/A 8.25

Total Return (pre-fee, pre-tax) 3.20 9.16 N/A N/A N/A N/A N/A N/A 8.81

Benchmark 4.48 7.68 N/A N/A N/A N/A N/A N/A 7.63

Property

B T Who lesale P ro perty Securit ies F und A P IR - B T A 0061A U

Total Return (post-fee, pre-tax) 6.84 -0.85 -2.27 -2.27 13.01 13.11 17.32 18.02 7.70

Total Return (pre-fee, pre-tax) 6.90 -0.69 -1.94 -1.94 13.75 13.83 18.08 18.77 8.52

Benchmark 6.75 -0.73 -2.60 -2.60 13.18 13.78 17.96 18.51 7.56

B T Who lesale Glo bal P ro perty Securit ies F und A P IR - R F A 0051A U



Benchmark 3.39 -2.45 -0.94 -0.94 5.59 4.72 12.09 13.48 9.25

Fixed Interest

B T Who lesale F ixed Interest F und A P IR - R F A 0813A U

Total Return (post-fee, pre-tax) -0.59 -3.57 -2.94 -2.94 1.42 1.49 4.67 4.39 6.58

Total Return (pre-fee, pre-tax) -0.55 -3.45 -2.69 -2.69 1.93 2.00 5.19 4.91 7.14

Benchmark -0.17 -2.86 -1.96 -1.96 2.92 2.75 5.05 4.95 6.80

B T Who lesale Glo bal F ixed Interest F und A P IR - R F A 0032A U



Benchmark 0.29 -2.82 -2.61 -2.61 4.93 4.28 6.55 5.95 7.34

B T Who lesale Enhanced C redit F und A P IR - R F A 0100A U

Total Return (post-fee, pre-tax) -0.22 -1.57 -0.33 -0.33 3.32 3.01 4.81 5.50 5.86

Total Return (pre-fee, pre-tax) -0.18 -1.46 -0.11 -0.11 3.79 3.48 5.28 5.98 6.39

Benchmark -0.23 -1.62 -0.40 -0.40 3.40 3.14 4.82 5.53 5.98

Cash & Income

B T Who lesale Enhanced C ash F und A P IR - WF S0377A U



Benchmark 0.15 0.44 0.92 0.92 2.07 2.20 2.37 2.78 5.06

B T Who lesale M anaged C ash F und A P IR - WF S0245A U



Benchmark 0.15 0.44 0.92 0.92 2.07 2.20 2.37 2.78 6.73

B T Who lesale M o nthly Inco me P lus F und A P IR - B T A 0318A U



Benchmark 0.13 0.38 0.78 0.78 1.75 1.94 2.14 2.59 3.18

Diversified

B T Who lesale A ct ive B alanced F und A P IR - R F A 0815A U



Benchmark 2.85 2.81 5.62 5.62 8.49 6.71 7.51 10.23 7.49

(%)1 M o nth 3 M o nths 6 M o nths

For more information Please call 1800 813 886, contact your Business Development Representative or visit btim.com.au

All returns calculated by BT Investment Management (Fund Services) Limited, ABN 13 161 249 332, AFSL 431426 (BTIM). No part

of this Fund Manager Commentary (Commentary) is to be circulated without this page attached.

This Commentary is dated 17 January 2017 and has been prepared by BTIM. The information in this Commentary is for general

information only and should not be considered as a comprehensive statement on any of the matters described and should not be

relied upon as such. The information contained in this Commentary may contain material provided directly by third parties and is

believed to be accurate at its issue date. While such material is published with necessary permission, neither BTIM nor any

company in the BTIM Group of companies accepts any responsibility for the accuracy or completeness of this information or

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This Commentary has been prepared without taking into account your objectives, financial situation or needs. Furthermore, it is not

intended to be relied upon for the purpose of making investment decisions and is not a replacement of the requirement for individual

research or professional tax advice. Because of this, before acting on this information, you should seek independent financial and

taxation advice to determine its appropriateness having regard to your individual objectives, financial situation and needs.

BTIM does not give any warranty as to the accuracy, reliability or completeness of the information contained in this Commentary.

This Commentary is not to be published without the prior written consent of BTIM.

Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs.

Performance data (pre-fee) is calculated by adding back management costs to the (post-fee) performance. Past performance is not

a reliable indicator of future performance. The term ‘benchmark’ refers to the index or measurements used by an investment

manager to assess the relative risk and the performance of an investment portfolio.

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BT Wholesale Core Australian Share Fund ARSN 089 935 964

BT Wholesale Smaller Companies Fund ARSN 089 939 328

BT Concentrated Global Share Fund ARSN 613 608 085

BT Wholesale Core Global Share Fund#

ARSN 089 938 492

BT Wholesale Global Fixed Interest Fund ARSN 099 567 558

BT Wholesale Enhanced Credit Fund ARSN 089 937 815

BT Wholesale Fixed Interest Fund ARSN 089 939 542

BT Wholesale Property Investment Fund ARSN 089 939 819

BT Wholesale Global Property Securities Fund ARSN 108 227 005

BT Wholesale Managed Cash Fund ARSN 088 832 491

BT Wholesale Enhanced Cash Fund ARSN 088 863 469

BT Wholesale Active Balanced Fund ARSN 088 251 496

A product disclosure statement (PDS) is available for each of the above products and can be obtained by contacting BTIM on

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# AQR began managing international equity for BT Financial Group in June 2006.

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