Asset Allocation Alpha Fund Update

The major developments in financial markets over the past month have included:

- Major financial institutions going bankrupt or being restructured in a manner that left equity and debt investors in some of those names effectively wiped out;

- A further dramatic intensification in the credit crisis as the perceived ‘safety net’ supporting debt holders in financials was brought into doubt by the Lehmans’ bankruptcy;

- Renewed deterioration in equity markets as the global economic outlook deteriorated at an alarming rate;

- Commodity prices were hit hard as markets priced in a more severe global economic slowdown;

- Further strength in government bond markets (particularly short dated instruments) as monetary policy easings around the world began to be priced; and

- Continued rally in the US dollar over the month, particularly against emerging market currencies.

The credit crisis is getting worse to the point where credit is not available to many good companies. As a result, the global economic outlook has deteriorated dramatically in the past month. This has, in turn, undermined equity markets as profits are expected to fall precipitately from well above trend to well below trend in the next 18 months. Even accounting for a big fall in profits, valuations in credit and many equities appears very attractive. However, momentum remains unremittingly negative and there is no clear catalyst for a turnaround. We expect central banks will respond with further interest rate cuts and governments will re-double in their attempts to open up credit markets again.

- Against this backdrop, changes to Fund positioning over the month include:

- Equity put options were not re-established as the dramatic increase in volatility and sell off in markets makes the risk reward less attractive;

- Similarly, the Brazilian Real put option expired and was not re-established due to the major increase in volatility;

- Long positions in fixed income were established (primarily concentrated on short dated instruments) to position for the likely easing of monetary policy expected from central banks around the world;

- The US curve steepening position (2/10 year) was re-established to capitalise on the same thematic; and

- Small long positions in a range of soft commodities were cut from the portfolio having hit stop losses.

In the directional risk strategies, the Fund’s positions include:

- Equity/Cash – neutral; and

- Bond/Cash – long Australia, German and UK fixed income.

In the relative value risk strategies, the Fund’s positions include:

- Bond/Bond – long Australian September and December 09 bank bill futures vs short December 08 and March 09 bank bill futures; long US 2 yr vs short US 10 yr;

- Equity/Equity – long US Growth vs US Value and long US equities vs European equities;

- Equity/Bond – neutral; and

- FX – long Yen vs USD; long Euro vs Turkish Lira; long Euro vs Polish Zloty.

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The BlackRock Asset Allocation Alpha Fund returned 11.89% (gross) for the month of September, compared with the benchmark return of 0.59%. For the past quarter, the Fund has returned 12.99% (gross) compared with the benchmark return of 1.93%. For the past year, the Fund has returned 37.95% (gross) compared with the benchmark return of 7.65%.

- Currency – primarily reflecting a short position in the Brazilian Real vs USD and Euro; and a short British Pound vs USD and the Yen;

- Equity/Cash – reflecting long put option positions in US and German equities;

- Bond/Cash – reflecting long duration positions in Australia, Germany and the US.

- Commodity/Cash strategy detracted from performance (reflecting long soft commodities).

Other strategies were close to neutral for the month.

To maximise total returns by implementing a diverse range of global tactical asset allocation strategies within a flexible but disciplined risk management framework.

The Fund aims to provide investors the benefits of an active asset allocation process which could either be combined with specialist sector funds or used as a total return fund.

The Fund targets a return of 12 percentage points above the UBS Australia Bank Bill Index over rolling 3 year periods, gross of fees. There is no guarantee that we will achieve this target. Most, if not all, of the Fund’s returns are likely to be in the form of income rather than capital gains.

The Fund implements tactical asset allocation strategies. The strategies adopted are thematic, concentrating on exploiting trends, likely developments and mis-pricing in global asset markets.

The strategies adopted encompass equity, cash, fixed interest, property, commodity and currency markets. Trades executed to implement these strategies may be based on an expectation of the direction of a particular market or focus on relative values between and within regions, asset classes, sectors, currencies and instruments or some combination thereof.

In selecting appropriate trades for the Fund, particular emphasis is placed on being able to execute strategies in a targeted, cost efficient and risk controlled manner. Futures, swaps and options are extensively used in this process although at times physical instruments and securities may be held. The Fund’s benchmark is the UBS Australia Bank Bill Index in Australian Dollars (AUD). However, in aiming to add value the Fund will take currency positions away from this AUD denominated benchmark. Any asset class or sector exposures are opportunistic, reflecting the themes and strategies being pursued. Exposures to asset classes, sectors, currencies and instruments will involve “net short” or “net long” positions and at times these will be substantial.

- Seek a Fund which offers the potential for high absolute returns.

- Seek exposure to asset allocation strategies which are typically overlooked in an increasingly sector specialised world.

- Have a long-term investment horizon and a tolerance for significant volatility in investment returns in the short-term.