Fund Manager Commentary · Chinese data including trade figures and manufacturing PMI eased back. China also suffered a downgrade of its sovereign credit rating. Portfolio performance

Fund Manager

Commentary

May 2017

Contents

Australian Shares 3

International Shares 10

Australian Fixed Income 14

International Fixed Income 15

Credit 17

Cash 18

Australian Property 21

International Property 22

Active Balanced 24

Performance as at 31 May 2017 27

Fund Manager Commentary – April 2017 3

Australian Shares

BT Wholesale Core Australian Share Fund

Market review

The S&P/ASX 300 Accumulation Index lost its momentum from the previous month, retreating 2.7%

over May - the largest monthly loss since January 2016. This was largely attributable to the significant

de-rating of the Banking sector (Financials ex-REITS -7.7%) off the back of weak reported earnings

from the ‘Big Four’ followed by the Bank Levy proposal announced in the May Federal Budget. The

market, at least initially, expected the new Bank Levy to drag on large banks’ future earnings,

accentuating share price falls. All four major banks pulled back significantly, ranging from -8.6% (NAB)

to -12.2% (ANZ).

Turning to other sectors, Healthcare slid 2.4% over the month, as sector heavyweight CSL (CSL,

-2.5%) took a respite from its strong rally since the beginning of this year. REITs (-0.7%) also retreated,

as investors became wary of retail concerns both domestically (VCX, -4.2%) and in the US (WFD,

-6.6%). In contrast, losses from Materials (-0.2%), Consumer Discretionary (-0.3%) and Consumer

Staples (-0.4%) were relatively small.

On the other side of the tally board, Industrials (+4.7%) and Telecoms (+3.4%) posted some solid

gains over the month. Returns from Energy (+1.5%) and Utilities (1.0%) were also positive. Within

Industrials, Qantas (QAN, +18.2%) and Sydney Airport (SYD, +8.0%) were the top performers. The

share price of the national airliner rallied after releasing its 3Q17 trading update and FY17 guidance

which beat market consensus, reinforcing an improved outlook for its business. SYD also reported its

April traffic data which showed evident boost from the Easter holiday period. The airport operator also

benefited from the gradual sectoral rotation from Cyclicals to Defensives which occurred though the

month, as thematic momentum from ‘Trumponomics’ further abated. Peers of SYD including Aurizon

(AZJ, +6.8%) and Macquarie Atlas (MQA, + 9.6%) also performed strongly.

Finally on global macroeconomics, fresh flare-ups of geopolitical uncertainty, tied chiefly to Trump,

helped underpin a strong performance from bonds (and bond-sensitives) during the month. The latest

round of media headlines centred on the President’s dismissal of FBI Director James Comey and

accusations that Trump had asked for an FBI investigation to be dropped. In turn, US 10 year yields fell

8 basis points to 2.20%, while the 2 year yield actually added 2 basis points to 1.28% over the month.

The latter’s move was likely tied to an upbeat outlook from the Fed that reinforced expectations of a

June rate hike. The central bank also offered some clarity on its balance sheet contraction plans, which

helped ease investor uncertainty. Meanwhile in Europe, ECB President, Mario Draghi offered a

constructive outlook for wage growth, but reiterated a need to retain an “extraordinary amount of

monetary policy support”. This added to confidence instilled by the victory of pro-Euro, centrist


candidate Emmanuel Macron in the final round of the French Presidential Election. Finally in Asia,

Chinese data including trade figures and manufacturing PMI eased back. China also suffered a

downgrade of its sovereign credit rating.

Portfolio performance

The BT Wholesale Core Australian Share Fund returned -2.14% (post-fee, pre-tax) in May 2017,

outperforming its benchmark by 0.60%.

Contributors

Overweight Qantas

Qantas (QAN, +18.2%) remains our largest active position within the portfolio, and this paid off again

over May. The airliner has maintained its momentum since November last year, extending gains into

May with another outstanding monthly return. The share price of the national airliner rallied after it

released its consensus-beating 3Q17 trading update and FY17 guidance, reinforcing the improved

outlook for its underlying business. The recent strong share price performance has not diminished our

conviction towards Qantas moving forward. While the market has started to realise the relative

attractiveness of Qantas’ valuation versus peers, we believe strong cash flow, capital management and

cost discipline will continue to support the airliner and drive further positive returns for shareholders.

Overweight Caltex

Shares in Caltex (CTX, +10.7%) performed strongly in May. Caltex took a material hit in October last

year as a result of speculation in the press that Woolworths might be favouring a bid from BP for its

network of petrol stations, and its shares had been trading sideways since. Contrary to market views,

we believe management at Caltex have other options to drive growth even if they were to lose the

contract with Woolworths. May gave weight to our view with the ACCC’s approval of Caltex’s Milemaker

Petroleum deal driving the share price up. Going forward, the stock’s current valuation still implies the

market is perhaps underestimating the growth potential from the marketing and retail parts of its

business. As a result, Caltex is among our preferred consumer defensive stocks. It trades at a more

attractive valuation than other stocks within this space, while offering good scope for outperformance.

Overall, we believe the investment case for Caltex remains strong.

Underweight Westpac Banking Corporation

Share price of Westpac (WBC, -10.4%) fell heavily in May due to a confluence of the bank’s reporting

season result and the Bank Levy proposal that was announced in the May Federal Budget. Westpac’s

reported result was broadly in line with market consensus at the headline level. On an underlying basis,

cost management was seen as better than expected, but partially offset by moderately lower revenue

growth. That said, the impact from the result was completely overwhelmed by the surprise

announcement of the Bank Levy proposal, which aims to tax the big banks about $6.2 billion over the


next four years, putting pressure on bank’s already squeezed margin in a low interest rate environment.

In our view, the valuation gap in the banking sector largely closed after recent strong gains, and given

the potential headwinds ahead we reduced our allocation to the Big Four banks prior to most of the

recent falls.

Overweight Resmed

Resmed (RMD, +3.2%) has recouped all the losses it incurred in the previous two months, posting a

moderate gain in May. Its share price oscillated moderately early in the month and started rising after

positive trial results for its Home Oxygen Therapy - Home Mechanical Ventilation (HOT-HMV). Patients

in the study who received this non-invasive ventilation treatment at home in addition to oxygen therapy

had a 51 percent decreased risk of re-hospitalization or death, and stayed out of the hospital more than

three times longer, compared to those who received oxygen alone. Going forward, Resmed remains our

largest active position in the Healthcare sector due to its product innovation and its track-record of

effectively bringing products to market.

Detractors

Overweight ANZ Banking Group

Similar to its Big Four peers, ANZ suffered an acute sell-off in May, finishing the month 12.2% lower.

Whilst there were both good and bad elements within their May update, the reported cash profit of $3.4

billion was slightly below consensus, highlighting the continued trade-off between an improving balance

sheet position and softness in underlying earnings. The decisive blow was the newly announced Bank

Levy proposal in the May Federal Budget, which aims to tax the big banks about $6.2 billion over the

next four years, putting pressure on bank’s already squeezed margin in a low interest rate environment.

In our view, the valuation gap in the banking sector largely closed after the recent rallies, and given the

potential headwinds ahead, we reduced our allocation to the Big Four banks. Moving forward, ANZ

remains our preferred exposure amongst the major banks as we believe it has a greater scope to

reduce costs and improve capital efficiency via the disposal of non-core and under-performing assets

than its peers.

Underweight Sydney Airport

The global reflation trade, or ‘Trumponomics’ tailwind, further abated in May, driving sectoral rotation

from Cyclicals back to Defensives over the month. As a result, bond-proxies including Sydney Airport

(SYD, +8.0%) attracted buying attention and performed strongly over the month. The airport operator

also reported its April traffic data which showed a boost from the Easter holiday period. Whilst we had

avoided holding the stock due to the stretched valuation, its pull-back last year has made it relatively

attractive again. Alongside our decision to reduce the portfolio’s exposure to the reflation thematic, we

have moved the portfolio’s position in SYD from a zero weight to under-weight.


Underweight Origin Energy

Origin Energy (ORG, +7.2%) maintained its momentum from the previous month. During the month the

market responded favourably to Origin’s announced sale of both the Stockyard Hill windmill and the

Darling Downs Pipelines to Jemena. The first sale (which is still subject to final closure) was priced at

$110 million, above the asset’s book value of $60-70 million; whereas the second sale was done at

$392 million. These latest sales will take total proceeds from Origin’s asset sale program close to $1

billion. Whilst the portfolio has a moderate overweight in Energy, Caltex and Santos remain our

preferred picks within the space, given the better potential upside from both businesses compared to

peers.

Underweight Aurizon

The global reflation trade or ‘Trumponomics’ tailwind further abated in May, driving sectoral rotation

from Cyclicals back to Defensives over the month. As a result, bond-proxies including Aurizon (AZJ,

+6.8%) attracted buying attention. Whilst we have decided to reduce the portfolio’s exposure to the

reflation theme, we continue to avoid holding Aurizon given its all-time-high valuation.

Strategy & Outlook

The portfolio outperformed the index in May helped by strong gains in Qantas (QAN), Caltex Australia

(CTX), and Macquarie Atlas (MQA). The latter’s strength illustrates the thematic reversal that has taken

place in recent weeks as wavering conviction in President Trump’s ability to deliver his pro-growth

agenda of tax reform and deregulation has seen bond yields stabilise and many bond-sensitive stocks –

including listed infrastructure such as MQA – regain all the losses they suffered in the ‘reflation trade’ in

H2 2016. We remain wary of some of the highest-profile bond-sensitives, both the defensive yield and

high growth variants, which remain on challenging valuations. At the same time, we believe underlying

growth in the US remains decent – even without the added impetus of the Trump agenda – and the Fed

remains on track to gently raise interest rates in coming months. As a result we remain broadly

underweight bond-sensitives. However we are also mindful that the absolute level of interest rates is

likely to remain low and the equity dividend yield remains at a significant premium to the yield from

other asset classes. As a result, we have been using the pullback over the last six months as an

opportunity to add to specific bond-sensitives.

The market as a whole remains at a reasonable valuation. The current index P/E is above the long-term

average, however this is entirely consistent with today’s low interest rates and we believe historically

low rates can support a slightly elevated market rating. That said, we think it is unlikely that the market’s

valuation can increase significantly from here, given muted domestic economic growth. This leaves

earnings to drive market growth and, with earnings likely to be mid-single digit at best, underpins our

expectations for lower market returns than has been the case in recent years.


Lower overall returns increases the importance of active management in extracting extra gains for the

investor. The current investment environment is challenging, given heightened geopolitical volatility, the

waning influence of monetary policy, and significant levels of disruption within a swathe of Australian

industries. Ironically, these very challenges provide a beneficial environment for active managers:

greater uncertainty drives greater mispricing – and greater mispricing drives greater opportunities.

At the moment, several of our highest-conviction positions are in industrials which have been

overlooked by a market obsessed with defensive yield and high growth in recent years. Qantas,

Metcash and Caltex Australia provided cases in point. The recent strength in Qantas demonstrates that

the market is recognising the significant opportunity in these stocks, which are at significant discounts to

their long-term ratings and illustrate that there is no lack of opportunities in this market despite its

overall valuation.

Australian Shares

BT Wholesale Smaller Companies Fund

Market review

The Small Ordinaries Index extended losses from April into May, finishing the month 2.1% lower than

the previous period. However, the index outperformed its larger cap sibling, the S&P/ASX 300 index as

the Bank Levy announced in the May Federal Budget weighed more heavily on the ‘Big Four’ banks.

From a sector perspective, performance was again relatively evenly split with five sectors posting

positive returns whereas the other six finished the month in the red. In particular, Healthcare was the

largest detractor from the benchmark return, with a double digit loss of -13.7% incurred in May.

Amongst other losers, the share price of two large pharmaceutical companies within the small cap

universe fell significantly during the month: Sigma Healthcare (SIG) retreated 35.8% over the month,

after it initiated legal proceedings against its largest client, My Chemist/Chemist Warehouse Group,

over certain aspects of the current supply agreement. Mayne Pharma (MYX, -19.3%) also posted a

significant monthly loss which was partly attributable to an unusually aggressive pricing environment

overseas that is expected to affect Mayne Pharma’s US generic business in 2H17. The strong gain from

Fisher & Paykel Healthcare (FPH, +10.1%) wasn’t enough to turn the tide within the sector.

The other sector which dragged the index’s performance down was Consumer Discretionary (-4.5%).

Within it, double-digit losses from both Myer (MYR, -22.1%) and Super Retail Group (SUL, -18.5%)

detracted from sector performance. Putting aside the perceived competition hit from global e-commerce

giant Amazon (which has become more imminent after Amazon’s announcement the previous month),

the March retail sales figure released in May showed the domestic industry was struggling: retail sales

dropped 0.1% in March compared to the consensus forecast of a positive 0.3%. The news that Top

Shop was placed into voluntary administration following Marcs, David Lawrence, Pumpkin Patch,


Payless Shoes, Herringbone and Rhodes & Beckett didn’t help market sentiment. Taken together, it all

weighed heavily on the sector.

Turning to the positives of the month, Industrials (+3.0%), Information Technology (+5.0%) and

Telecoms (+4.6%) were the stand-out sectors. Within Industrials, performance was upbeat in general,

with some solid returns from RCR Tomlinson (RCR, +21.1%), Reliance Worldwide (RWC, +8.2%)

and sector heavyweight Cleanaway (CWY, +3.9%) contributing positively. The share price of Wisetech

(WTC, +24.5%) soared after the cloud-based software solution developer reaffirmed FY17 guidance in

light of strong industry tailwinds. It was the largest contributor to the IT sector performance, alongside

outstanding returns from Isentia (ISD, +21.4%) and Netcomm (NTC, +32.1%).

Finally on global macroeconomics, fresh flare-ups of geopolitical uncertainty, tied chiefly to Trump,

helped underpin a strong performance from bonds (and bond-sensitives) during the month. The latest

round of media headlines centred on the President’s dismissal of FBI Director James Comey and

accusations that Trump had asked for an FBI investigation to be dropped. In turn US 10 year yields fell

8 basis points to 2.20%, while the 2 year actually added 2 basis points to 1.28% over the month. The

latter’s move was likely tied to an upbeat outlook from the Fed that reinforced expectations of a June

rate hike. The central bank also offered some clarity on its balance sheet contraction plans, which

helped ease investor uncertainty. Meanwhile in Europe, ECB President, Mario Draghi offered a

constructive outlook for wage growth, but reiterated a need to retain an “extraordinary amount of

monetary policy support”. This added to confidence instilled by the victory of pro-Euro, centrist

candidate Emmanuel Macron in the final round of the French Presidential Election. Finally in Asia,

Chinese data including trade figures and manufacturing PMI eased back. China also suffered a

downgrade of its sovereign credit rating.


The BT Wholesale Smaller Companies Fund returned -0.62% (post-fee, pre-tax) in May 2017,

outperforming the S&P/ASX Small Ordinaries Accumulation Index by 1.43%.

May saw a rebound for several of our core positions which have been weak over the last six months,

including accommodation provider Mantra Group and enterprise software company Technology One.

Two of our New Zealand-listed holdings, Synlait Milk and Mainfreight, also helped drive the month’s

outperformance. There was broad-based weakness in the health care sector and our avoidance of

Sigma Healthcare and Mesoblast also helped, although our holdings in Mayne Pharma Group did drag

slightly.


Contributors

Overweight Synlait Milk

Synlait Milk (SML.NZ) is a Canterbury-based dairy company which produces a range of milk-based

products including infant milk formula for the Chinese market. It gained 17.4% for the month, boosted

by the news in late April that it had received the green light from the US Food and Drug Administration

(FDA) to export lactoferrin – a milk protein - to the United States for use in infant formula, becoming

only the second company to have such approval. Late in the month it also announced the acquisition of

Auckland-based The New Zealand Dairy Company, which allows it to diversify its production line,

mitigating some of the risk inherent in single-site manufacturing companies.

Underweight Sigma Healthcare

Sigma Healthcare (SIG) is a distributor of pharmacy products. The stock fell 35.8% for the month after

My Chemist – which owns the Chemist Warehouse brand – announced it was using another supplier for

its medicines. We do not own the company.

Detractors

Overweight Greencross

Greencross (CXL) is an integrated pet care company which operates over 130 vet practices, under the

Greencross brand, as well as 230 specialty pet retail stores under the Petbarn brand, among others. It

fell 17.2% in May as the market’s outlook for earnings softened. We maintain a positive view on their

strategy of co-location – where vets are available inside Petbarn stores – which promotes cross-selling.

At the same time, trends in pet ownership and insurance provide a relatively defensive earnings stream.

Overweight Automotive Holdings Group

Automotive Holdings Group (AHG) is Australia’s largest auto dealership group and also operates a

logistics business. It fell over 21% in May after management downgraded their earnings expectations

for the full year on weaker car sales and tighter condition in the auto finance market. While the

combination of a weaker Australian dollar and compressed household incomes has weighed on the

auto industry, there remains significant opportunity for consolidation, given its highly fragmented nature,

and we think AHG is well placed in this regard.

Outlook

The small cap retail sector came under pressure in May. This was partly due to some disappointing

data which indicates that Australian consumer demand remains soft, a notion reinforced by the

announcement of Top Shop’s liquidation, the latest in a regular stream of closure over the past year.

This is all exacerbated by speculation over the arrival of Amazon Prime in the Australian market. At this


point, there is very little information available about when Amazon will arrive and in what form. There

are many questions over whether the economics of it model would work in Australia, given the

differences from the United States in terms of minimum wages, union power and population density,

among others. At the same time, Amazon’s arrival in markets such as the US and UK has not resulted

in the obliteration of the retail sector – there have been winners and losers among the bricks-and-mortar

chains.

The upshot is that Amazon’s potential arrival is undoubtedly a salient example of the kind of disruption

that we are seeing in many sectors of the Australian market today. Disruption provides challenges – but

it also provides the opportunity when the market typically washes its hands of an entire sector. The

ability to understand a company’s management and their strategy, and determine whether they are

capable of responding to disruption or not, is key to making money from these challenges and is the

ongoing focus of our large team of research analysts in the small cap sector.

Looking forward, we continue to place great emphasis on earnings stability and visibility in what

continues to be a challenging period for the economy. We have key positions in companies with

reasonably defensive revenue streams, such as auto parts distributor Bapcor, as well as where we see

structural thematic opportunities, such as in agriculture where we hold Synlait Milk, Tassal Group and

Nufarm.

International Shares

BT Concentrated Global Share Fund

Market review

Global developed equity markets continued their strong run over the last few months with the MSCI

World ex Australia in AUD returning 2.75%. This was despite growing geo-political uncertainties with a

snap UK Election, Trump impeachment rumblings and the UK terrorist bombing. The US market was up

with the Nasdaq up 2.5% and the broader S&P500 up 1.2% (closing at an all-time high of 2411). Trump

made some announcement regard breaking up big banks and the FOMC left rates on hold and mapped

out a plan for scaling back its balance sheet. Towards the end of the month there were fresh concerns

around Trump’s involvement with Russia and potential impeachments, however the markets looked

past this as continued reasonable economic data continued to show US growth and inflation on track.

European markets were also stronger as the outcome of the French Presidential election saw a relief

rally, whilst a continued uplift in economic data supported the positive mood. The UK market was

strongest returning 4.4%, whilst Germany and France both delivered positive returns of 1.4% and 0.3%

respectively.

Japanese, Korean and Hong Kong equities rallied throughout May, despite ongoing geo-political

tension in the region surrounding North Korea. The South Korean market delivered a strong 6.4%,


Hong Kong next at 4.2% and Japan’s Nikkei index was up 2.4%. China shares rebounded strongly

returning 3.7% (H shares) buoyed by strong positive economic results for April including imports and

exports rising +11.9% and +8% YoY respectively, while M2 Money Supply grew +10.5% YoY and Retail

Sales grew +10.7%.

The Australian dollar was broadly weaker over the month with falls against the USD (-0.8%), Euro

(-3.8%) and Pound (-0.3%). The US was also weaker against both the Yen (-0.1%) and the Euro

(-2.3%).


The BT Concentrated Global Share Fund returned 3.95% (post fee, pre-tax) in May 2017,


YUM! Brands, one of the world’s largest restaurant operators and owner of the Taco Bell, KFC and

Pizza Hut brands was a positive contributor to our performance this month after reporting better than

expected first quarter earnings. Taco Bell is arguably YUM's strongest brand, and its performance this

quarter was impressive with same store sales up 8%. Taco Bell contributes 32% of YUM’s operating

profit, even though it represents only 15% of YUM’s units domestically, and 1% internationally. KFC

continued its turnaround reporting 2% growth in same store sales. Pizza Hut, however, was relatively

soft, down 3% after a weak performance in the US. What is pleasing is management have come to an

agreement with the Pizza Hut franchisees in the US which should lay the groundwork for a turnaround

in sales. This agreement, similar to what proved to be a catalyst for the transformation of KFC sales,

involves restaurant upgrades and investment in technology and marketing. Our investment in YUM!

Brands is predicated on their dominant market position and our confidence in management to transition

the company to an asset light, 98% franchised business, whilst at the same time extracting significant

costs out of the business. This more capital-efficient low cost model will lead to greater earnings

predictability, a significant increase in margins and step up in free cash flow. Management have

committed to returning the free cash flow to shareholders via increased dividends and buybacks.

Lloyds Banking Group, the largest domestic retail bank in the United Kingdom was also a positive

contributor to the Fund this month, following a robust quarterly earnings report. Underlying profit of 2.1

billion pounds was 10% ahead of expectations. It appears net interest income has reached an inflection

point, growing meaningfully for the first time in two years. Guidance for net interest margins was also

upgraded for the full year which resulted in 8% earnings upgrades for the business this year. Strong

capital generation lifted Lloyds’ Core Tier 1 ratio to 14.3% which underpins a very healthy dividend and

buyback policy and offers a significant buffer to unforseen risks in the economy.

During May the Government reduced its stake to less than 1% shareholding in the business down from

42% holding at the peak of the GFC. Lloyds is now a simpler business, focused on the domestic

market, with a balance sheet which has been strengthened considerably. The management team is

focused on cost savings and benefiting from net interest income dynamics, with free cash flow being


directed back to shareholders. We believe we are buying Lloyds Banking Group exactly like Kerry

Packer bought Westpac in 1992 and intend to hold this business for many years to come.

Our media holdings detracted from performance this month. One such holding, Discovery

Communications, was down 10% following the release of its quarterly earnings report. The earnings

release highlighted a better US advertising market but was offset by significant currency headwinds and

a softer international advertising and education environment. Whilst the company reiterated full year

guidance of low to mid- teens earnings per share growth and low double digit free cash flow growth, a

3% year-on-year decline in US subscribers was a key source of concern for the market. Media

companies are facing headwinds, with consumers cancelling subscriptions and becoming more

selective about the content the pay for. However, with superior content, we believe over the longer term

media companies can go direct to the consumer, similar to what Netflix have done with their original

House of Cards content. Over the past three years Discovery has significantly increased their content

production budgets and focused their exposure on more exclusive content related to the Olympics,

European cycling and their core male ‘how things work’ genre. With the business trading on a current

year 11x price to earnings multiple, with EBIT margins of 32% and high returns on assets of 80% we

have used the weakness to increase our weighting in Discovery and our other US media holdings.

Strategy & Outlook

Looking forward we believe we have entered a period in equity markets that is best suited to selective

stock picking rather than broader market exposure. Tailwinds over the last five years that have helped

propel equity markets higher have become headwinds. We have positioned our portfolio to the leading

businesses in sectors that are trading below their intrinsic value. Over time, and as interest rates

normalise, we believe these businesses will revert to their intrinsic value and in the interim we are being

paid a dividend to wait. The companies we own have astute management teams and strong balance

sheets in order to circumnavigate a challenging geopolitical outlook.

We prefer to know fewer stocks very well than many stocks not so well, and hence we have a

concentrated portfolio of 35-55 stocks in our portfolio.


BT Wholesale Core Global Share Fund, managed by AQR

Market review



snap UK Election, Trump impeachment rumblings and the UK terrorist bombing. The US market was up

with the Nasdaq up 2.5% and the broader S&P500 up 1.2% (closing at an all-time high of 2411). Trump


made some announcement regard breaking up big banks and the FOMC left rates on hold and mapped

out a plan for scaling back its balance sheet. Towards the end of the month there were fresh concerns

around Trump’s involvement with Russia and potential impeachments, however the markets looked

past this as continued reasonable economic data continued to show US growth and inflation on track.

European markets were also stronger as the outcome of the French Presidential election saw a relief

rally, whilst a continued uplift in economic data supported the positive mood. The UK market was

strongest returning 4.4%, whilst Germany and France both delivered positive returns of 1.4% and 0.3%

respectively.

Japanese, Korean and Hong Kong equities rallied throughout May, despite ongoing geo-political

tension in the region surrounding North Korea. The South Korean market delivered a strong 6.4%,

Hong Kong next at 4.2% and Japan’s Nikkei index was up 2.4%. China shares rebounded strongly

returning 3.7% (H shares) buoyed by strong positive economic results for April including imports and

exports rising +11.9% and +8% YoY respectively, while M2 Money Supply grew +10.5% YoY and Retail

Sales grew +10.7%.



(-2.3%).


The BT Wholesale Core Global Share Fund returned 2.67% (post-fee, pre-tax) in May 2017,

underperforming its benchmark by 0.08%.

The Fund underperformed its benchmark over May 2017. Outperformance in North America was offset

by underperformance in Europe and developed Asia, versus regional benchmarks.

The thematic drivers of active returns varied across regions over the month. In North America,

momentum themes were the largest driver of positive results, outweighing negative performance of

relative-value signals. In Europe, underperformance of momentum themes drove underperformance,

offset somewhat by positive contributions by investor sentiment and earnings quality measures.

Underperformance in Asia was attributable to Japan, where relative-value and investor sentiment

signals drove underperformance, outweighing positive results to momentum and business quality

measures.

Sector/industry selection was a positive contributor to active returns, though offset by negative

contribution from stock selection within industry groups over the month. At a sector level, the

underweight to Energy along with overweight to Information Technology sectors were the largest

positive contributors, with the largest negative being offset the underweight to Consumer Staples. Stock


selection within industry groups detracted overall, notably within Consumer Staples and Health Care

with the largest offset the outperformance of active positioning within Industrials.

At a stock level, the strongest positive contributions came from overweight positions in: Applied

Materials Inc., an American semiconductor and electronics industry supplier and service provider; Atos,

a European IT services corporation headquartered in France; and UAL Corporation, an American airline

holding company and parent of United Airlines, a major international carrier. Largest detractors over the

month were an: underweight in Nestle S.A., a Swiss multinational food and drink company; an

overweight position in SunTrust Banks, Inc., American bank holding company and parent of SunTrust

Bank, which operates in the United States; and an overweight in Tyson Foods Inc., an American

multinational food company.

Strategy & Outlook

Entering June, the largest sector tilts are overweights in Industrials and Information Technology and

underweights in Consumer Staples and Energy. Relative to long-term allocations, we remain mildly

tilted towards higher quality companies with positive momentum and away from cheaper industry peers

in Europe and the US, while mildly tilted towards relative value considerations in Japan.

Australian Fixed Income

BT Wholesale Fixed Interest Fund

Market review

Australian yields fell across the curve, which flattened further during the month. At the shorter-end, 90

day BBSW ended 1 basis point lower at 1.74% and the 3 year fell 15 basis points to 1.66%. The longer-

dated 10 year maturity slid even further by 19 basis points to 2.42%. A fresh round of geopolitical flare-

ups, related chiefly to Trump, drove some demand for bonds at a global level. In addition, a number of

domestic developments sapped investor sentiment. This included credit rating downgrades for local

financial institutions as well as the sovereign debt of neighbouring China. The banks were also hit after

the announcement of a levy on the ‘Big Four’ as part of the 2017 Budget. Adding to local woes was

another leg lower for key commodity prices with iron ore suffering its third consecutive double digit

monthly decline. Meanwhile on the monetary policy front, the RBA left the cash rate unchanged at

1.50% as widely expected. Its statement repeated comments on improving global growth, but mixed

domestic labour market metrics. This was reflected in the April employment figures released later in the

month. Other indicators painted a similarly patchy picture with Business Confidence improving, but

Consumer Confidence, Retail Sales and Building Approvals slipping.



The BT Wholesale Fixed Interest Fund returned1.27% in May 2017 (post-fees, pre-tax), outperforming

its benchmark by 0.10%.

The portfolio outperformed its benchmark in May. The performance of the alpha overlay was slightly

positive. Duration and Yield Curve strategies added to performance while Cross-Market and FX

strategies detracted and Macro strategy was flat. The Government bond component also outperformed

its benchmark. Both the Duration and Yield Curve strategies performed strongly. Finally, the Credit

component was in line with its benchmark as negative performance from a short supra-nationals

position was offset by positive performance from long infrastructure and utilities holdings.

Strategy & Outlook

Information over the past month has not swayed the Reserve Bank’s view - the Board remains on hold

and has not suggested a desire to ease monetary policy further at this point. Early indications are that

macro-prudential measures are having the desired effect on the housing market and lending practices.

This in turn may provide the Reserve Bank with some comfort that rapid house price appreciation won’t

occur if policy easing was required. In our view this helps skew risks towards a rate cut.

That said, we acknowledge there are some positive signs for the Australian economy with the global

economic backdrop improving and forward looking indicators for the Australian labour market modestly

encouraging; job ads and vacancies reflect moderate employment growth in the near term. Significant

slack does however remain and it is unlikely that wage inflation picks up noticeably anytime soon.

Inflationary pressures remain well contained in Australia. The direction of the Australian dollar will be of

most concern to the Reserve Bank and their course for monetary policy. The RBA has stated previously

that currency appreciation risks stalling the rebalancing in the Australian economy that is underway.

They do however remain reluctant to ease further given the already accommodative monetary policy

stance.

International Fixed Income

BT Wholesale Global Fixed Interest Fund

Market review

Fresh flare-ups of geopolitical uncertainty, tied chiefly to Trump, helped underpin a strong performance

from bonds during the month. The latest round of media headlines centred on the President’s dismissal

of FBI Director James Comey and accusations that Trump had asked for an FBI investigation to be

dropped. In turn US 10 year yields fell 8 basis points to 2.20%, while the 2 year actually rose 2 basis

points to 1.28% over the month. The latter’s move was likely tied to an upbeat outlook from the Fed that


reinforced expectations of a June rate hike. The central bank also offered some clarity on its balance

sheet contraction plans, which helped ease investor uncertainty. Meanwhile in Europe, ECB President,

Mario Draghi offered a constructive outlook for wage growth, but reiterated a need to retain an

“extraordinary amount of monetary policy support”. This added to confidence instilled by the victory of

pro-Euro, centrist candidate Emmanuel Macron in the final round of the French Presidential Election.

Finally in Asia, Chinese data including trade figures and manufacturing PMI eased back. China also

suffered a downgrade of its sovereign credit rating.


The BT Wholesale Global Fixed Interest Fund returned 0.58% in May 2017 (post-fees, pre-tax),

underperforming its benchmark by 0.01%.

Performance for the month was driven largely by the Duration strategy with a more modest contribution

from the Yield Curve strategy. The former was tied to long duration positions in the 3 and 10 year

maturities of the Australian yield curve, which fell and flattened over the month. This also served the

latter component thanks to a flattener trade.

On the other side of the ledger, the Cross-Market, FX and Macro strategies dragged on performance.

Losses in the Cross-Market area were related to a long Germany versus short Italy position, which was

closed out during the month. Towards the end of May, a long Australia position against both the US

long-end and European front-end was opened. Meanwhile losses in the FX strategy arose from short

EUR/GBP, long USD/JPY and long USD/KRW trades, which were closed out during the period. The

USD directional bias was also shifted to short and gains were made on subsequent positions into the

end of the month. Finally, the marginal loss in the macro strategy was due to hedging of the Euro Main

vs US High Yield trade.

Strategy & Outlook

Further monetary policy tightening is expected from the Federal Reserve in the United States in June

although the pace of subsequent tightening is expected to slow with inflation benign, signs of slowing

economic growth and much policy uncertainty from the Trump administration. Central bank balance

sheet reduction in both the United States and Europe will also receive more attention. There is also a

re-emergence of political risks in the US as the market speculates on a possible impeachment of

President Trump. In Europe, the market hasn’t fully priced in the unfavourable outcomes of political

events. The general election in the UK and the chance of early Italian elections cast doubts on the

outlook of both economies.


Credit

BT Wholesale Enhanced Credit Fund

Market review

Domestic cash credit spreads continued to tighten in May, albeit the rate continued to slow. The US-

inspired risk market excitement has seemingly abated. It hasn’t helped that its flag bearer, President

Trump, has turned out to be rather ineffectual. Macron’s win in France was seen as a victory for the

centre of politics. Commodity markets, while testing lower levels have remained close to prior month

levels.

At the end of May the market has priced in a 91% probability of the US Fed raising the cash rate 25

basis points. That said, no further rate rises are priced for the remainder of the year by the market in

contrast to the Fed’s stated total of three raises in 2017.If the Fed raises the cash rate in June that will

represent two increases to-date.

During May President Trump embarked on his first major overseas tour, including meeting with other

G7 leaders in Sicily. Whilst away his budget proposal was circulated. Most parties believe it’s unlikely to

pass in its current form as it markedly changes the government’s spending programs. From the

perspective of markets, perhaps no news is good news.

On May 21 S&P downgraded the stand-alone credit profiles (SACP) of 23 Australian financial

institutions. This downgrade did not impact the long term foreign currency rating of Australia’s big four

banks due to the “extraordinary support” from the government that S&P inputs into their rating but

hasn’t removed the risk of an additional one notch downgrade if Australia’s sovereign rating drops

below AAA.

Moody’s downgraded China’s long term sovereign rating one notch to A1 from Aa3. The downgrade

was based on the expectation of a weakening of China’s financial strength. In response the markets

largely shrugged off the downgrade.

One of the strongest performing credit sectors during the month was senior domestic banks. The banks

rallied in the latter part of the month after S&P lowered SACP’s by one notch.

The Australian iTraxx and US CDS tightened over the month.


The BT Wholesale Enhanced Credit Fund returned 0.96 % in May 2017 (post-fees, pre-tax),

underperforming the benchmark by 0.03%.


Performance from credit was solid during the month but negative performance was generated by the

Fund’s short positions in supra-nationals and offshore banks. Positive performance was generated from

being long infrastructure and utilities. Activity over the month involved participating in the primary

issuance of Westpac’s covered bond.

Strategy & Outlook

Our macro credit view remains neutral. There is the potential for significant event risk and associated

volatility for the remainder of 2017. Early in 2017 the new US President has not wasted time in signing

Executive Orders. What is clear so far is to expect the potential for significant change in government

policies which could test markets. We also 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 have the

start of Brexit and elections in Germany which could influence investor sentiment.

Whilst to-date, the Trump administration has been unable to implement any new policies regarding

taxes and trade, we would not rule out the distinct possibility the Republican Party coalescing over the

area of tax and possibly trade which could represent a meaningful change to global growth. The impact

spans the spectrum of outcomes from a pick-up in growth to damaging trade wars.

Global growth started the year tracking around 2.8% 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. Statements coming out

of the National People’s Congress appear to support a continuation of the balancing act. China’s growth

story underpins commodity price stability.

Accordingly whilst near term market tone is positive we remain cautious with many unknowns in the

latter half of 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

May was an interesting month in terms of market divergence. While Australian shares took a dive, other

global equity markets rallied to record highs. At the same time fresh flare-ups of geopolitical uncertainty,

tied chiefly to Trump, helped underpin a strong performance from bonds. The latest round of media


headlines centred on the President’s dismissal of FBI Director James Comey and accusations that

Trump had asked for an FBI investigation to be dropped.

Domestically, sentiment was dampened by credit rating downgrades for local financial institutions as

well as the sovereign debt of China. The banks were also hit after the announcement of a levy on the

‘Big Four’ as part of the 2017 Budget. Adding to local woes was another leg lower for key commodity

prices with iron ore suffering its third consecutive double digit monthly decline.

In terms of monetary policy developments, the RBA kept the cash rate unchanged at 1.50%, as widely

expected. Its statement revealed few changes from prior months with comments on improving global

growth, but mixed domestic labour market metrics. This was reflected in employment figures during the

month that indicated an encouraging 37,400 jobs added, which pulled the unemployment rate 0.2%

lower to 5.7%. However, once again this was driven by part-time jobs and wage growth remained

sluggish. Other domestic data points painted a similarly mixed picture with Business Confidence

gaining, but Consumer Confidence, Retail Sales and Building Approvals slipping once more. In turn,

near-term expectations for the cash rate held steady.

Abroad, the Fed stayed its hand at its May gathering, but offered fairly upbeat commentary that

reinforced expectations for a June rate hike. Some greater clarity on its balance sheet contraction plans

also helped ease investor uncertainty. The path to normalisation was entrenched further by a 0.1% fall

in the unemployment rate to 4.4%. Additionally, the soft first quarter GDP print was downplayed as

“transitory”. Meanwhile in Europe, ECB President, Mario Draghi offered a constructive outlook for wage

growth, but reiterated a need to retain an “extraordinary amount of monetary policy support”. This

added to confidence instilled by the victory of pro-Euro, centrist candidate Emmanuel Macron in the

final round of the French Presidential Election.

Finally on market movements, Australian yields fell across the curve, which flattened further during the

month. At the shorter-end, 90 day BBSW ended 1 basis point lower at 1.74% and the 3 year fell 15

basis points to 1.66%. The longer-dated 10 year maturity slid even further by 19 basis points to 2.42%.

This was a much deeper decline than in the US, where 10 year yields fell 8 basis points to 2.20%, while

the 2 year actually rose 2 basis points to 1.28%. In turn, the yield differential between Australian and US

bonds narrowed to a 16 year low. Together with the aforementioned weakness in commodity markets,

this put pressure on the AUD/USD, which slipped 0.9% to 0.7430.


Managed Cash

The BT Wholesale Managed Cash Fund returned 0.15% in May 2017 (post-fee, pre-tax), matching the

benchmark performance.


With a higher running yield than the index the Fund is well positioned to outperform. Themes and credit

exposure remain consistent with prior months, with excess spread from A-1 rated issuers and yield

curve positioning likely to be the main driver of outperformance. The Fund ended the month with a

weighted average maturity of 68 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. The Fund is well positioned

to continue to outperform its benchmark.

Enhanced Cash

The BT Wholesale Enhanced Cash Fund returned 0.25% in May 2017 (post-fee, pre-tax),


Positive performance came from industrials, financials, infrastructure and RMBS sectors. As at the end

of the month, the portfolio had a credit spread of 75 basis points over bank bills, interest rate duration of

0.09 years and credit spread duration of 1.64 years.

Strategy & Outlook

Information over the past month has not swayed our view on the Reserve Bank - they remain on hold

and have little desire to ease monetary policy further in this cycle. Early indications are that macro

prudential measures are having the desired effect on the housing market and lending practices and

may provide the Reserve Bank with some comfort that rapid house price appreciation won’t occur if

policy easing was required. The next key domestic economic release is first quarter gross domestic

product data due in early June, which is expected to be weak with some economists raising the

possibility of the economy contracting. There were however one-off factors weighing on growth,

including Cyclone Debbie, that the Reserve Bank will look through. A weak GDP number is unlikely to

change the Reserve Bank’s immediate stance.

There are some positive signs for the Australian economy with the global economic backdrop improving

and forward looking indicators for the Australian labour market modestly encouraging with job ads and

vacancies reflecting moderate employment growth in the near term. Significant slack does however

remain and it is unlikely that wage inflation picks up noticeably anytime soon. Increasing competition in

the retail sector is also dampening inflationary pressures, despite a depreciating currency that should

be adding to tradeables inflation. Inflationary pressures remain well contained in Australia.

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

in the nearer term. Further monetary policy tightening is expected from the Federal Reserve in the

United States in June although the pace of subsequent tightening is expected to slow with inflation

benign, signs of slowing economic growth and much policy uncertainty from the Trump administration.

Central bank balance sheet reduction in both the United States and Europe will also receive more


attention. The direction of the Australian dollar will be of most concern to the Reserve Bank and their

course for monetary policy. The RBA has stated previously that currency appreciation risks stalling the

rebalancing in the Australian economy that is underway. They do however remain reluctant to ease

further given the already accommodative monetary policy stance.

Australian Property

BT Wholesale Property Securities Fund

Market review

The ASX AREIT index generated a total return of -1.1% last month, outperforming the broader market

which was down 2.8%. Year rolling, REITs have returned 1.3%, underperforming the broader market by

9.2%. Stand out performers for the month were Goodman Group (+4.8%), Bunnings Property Trust

(+4.1%) while retail REITs were mostly down with Westfield down 6.6%, Vicinity Centres down 4.2%

and Stockland Group down 2.7%. Globally REITs were up 0.9%, with Singapore the best performing

region, up 23% YTD.

The Federal Reserve left policy rates on hold in May, however the markets have all but priced in a 25

basis point rate hike for June 2017. Non farm payrolls in the US were strong, up 211,000 for April and

the unemployment rate fell to 4.4%, well below what the Fed considers the NAIRU rate of 4.7%. The

University of Michigan consumer sentiment index was strong at 97.1 and retail sales were solid, up

0.4%, although excluding gas and building materials were up 0.2%. The US 10 year bond yield fell 8

basis points to 2.20% and the Australian dollar fell 1% against the US dollar.

The Reserve Bank left the cash rate unchanged at 1.5% and noted that slow wages growth was likely to

persist. The Treasurer delivered the 2017/18 Commonwealth Budget forecasting a deficit of $29.4B,

equal to 1.6% of GDP. It was a terrible month for the broader equity market with Financials (-9.2%)

dragged down by the Federal Budget’s proposed bank levy. Retail sales were down 0.1% for March

(reported in May) bringing the YOY rate to 2.1%, the slowest in almost four years. Employment growth

was solid over the period, up 37, 400 jobs with the unemployment rate falling from 5.9% to 5.7%.

The AREITs’ quarterly updates revealed a very soft retail environment with Scentre Group sales

decelerating (-20 basis points) to +2.4%, Vicinity Centre sales decelerating (-90 basis points) to +0.4%

and Charter Hall Retail sales decelerating (-110 basis points) to +0.5%. Also during the month, the

majority of unitholders (56%) voted against the partial internalisation proposal recommended by the

directors and management of Investa Office Fund. Aventus Property Group also raised $215 million via

a 1:4.3 entitlement issue for the purchase of two large format retail centres in Sydney (Castle Hill and


Marsden Park) on a blended cap rate of 5.6%. The Manager of Generation Healthcare REIT, Northwest

Australia, made a $2.30 all cash offer for GHC, which has been recommended by directors.


The BT Wholesale Property Securities Fund returned-0.89% in May 2017 (post-fee, pre-tax),


The portfolio outperformed the benchmark over the month. Overweight positions in Propertylink Group,

Mirvac Group, Aveo Group and Arena REIT and an underweight position in Vicinity Centres all added to

performance. Underweight positions in Goodman Group, BWP Trust, Dexus Property Group and

Centuria Industrial REIT as well as our overweight position in Stockland Group all detracted from

performance.

Over the month we increased our overweight positions in Charter Hall Long WALE REIT, Scentre

Group and Aveo Group. This was funded by reducing our overweight position in Stockland Group and

accepting Northwest’s $2.30 cash offer for our entire position in Generation Healthcare REIT.

Strategy & Outlook

The sector is now priced on an FY17 dividend yield of 4.8%, a PE ratio of 17 times and a 26% premium

to NTA. While this is still some way ahead of its long term average, AREIT valuations still lag the

physical market, so there is still some catch up in NTA. Balance sheets are stable with sector gearing at

29% and falling slowly as asset prices continue to rise. Low cash rates 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)

Performance of the global property securities market (on an ex-Australia basis) as measured by the

FTSE EPRA/NAREIT Developed Index continued to climb in May, posting a total return of 1.1%.

Europe (up 5.5%) was the strongest performing region, followed by Asia Pacific (up 2.8%), while North

America (down 0.8%) was negative. In the Asia Pacific, results were positive across the region. New

Zealand (up 4.5%) posted the highest return, followed by Japan (up 3.3%), Hong Kong (up 2.5%), and

Singapore (up 1.8%). Results in Europe were positive in all countries with the exception of the United

Kingdom (down 0.6%). Italy (up 12.3%) posted the largest gain, followed by Germany (up 12.0%) and

Sweden (up 9.3%). Within North America, the US and Canada returned -0.9% and 1.2%, respectively.



The BT Wholesale Global Property Securities Fund returned 0.56% in May 2017 (post-fee, pre-tax)

underperforming the benchmark return by 0.07%.

North America

The North America portfolio returned -0.73% in May before fees, outperforming the FTSE

EPRA/NAREIT North America Index by nine basis points. Outperformance relative to the benchmark

was attributable to positive sector allocation results, which were partially offset by negative stock

selection results. Regarding sector allocation, positive results were driven by the portfolio’s underweight

to the underperforming triple net lease sector as well as an overweight to the outperforming data center

sector. Conversely, the portfolio’s overweight to the underperforming regional mall sector was a

detractor to relative performance. In terms of stock selection, results were weakest in the diversified,

regional mall, and apartment sectors and were strongest in the triple net lease, health care, and

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

included overweight positions in outperforming Rexford Industrial Realty (REXR), Dupont Fabros

Technology (DFT), and Gramercy Property Trust (GPT). Detractors most notably included overweight

positions in underperforming American Assets Trust (AAT) and Penn REIT (PEI) and a lack of exposure

to outperforming Essex Property Trust (ESS).

Europe

The European portfolio returned 5.64% in May before fees, exceeding the regional EPRA benchmark

by nine basis points. Modest outperformance relative to the benchmark was driven by both positive

stock selection results and positive country allocation results. In terms of stock selection, results were

strongest in Germany, the United Kingdom and the Netherlands and were weakest in Sweden, Austria,

and France. Regarding country allocation, positive results were attributable to the portfolio’s

underweight to the underperforming United Kingdom as well as an overweight to outperforming markets

in Sweden and France. Among the portfolio’s holdings, top contributors to relative performance included

a lack of exposure to underperforming Great Portland Estates Plc. (United Kingdom) and Derwent

London Plc. (United Kingdom), and an overweight position in outperforming Deutsche Wohnen AG-BR

(Germany). Detractors most notably included overweight positions in underperforming United Group

Plc. (United Kingdom), Workspace Group Plc. (United Kingdom), and Segro Plc. (United Kingdom).

Asia

The Asia portfolio returned 2.28% in May before fees, trailing the regional EPRA benchmark by 52

basis points. Underperformance relative to the benchmark was attributable to negative stock selection

results in Japan and Singapore, which were partially offset by positive results in Hong Kong. Country

allocation results were neutral, while the portfolio’s small cash position was a detractor to relative

performance in light of the regional benchmark’s positive absolute performance for the period. Among


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

outperforming Invincible Investment (Japan) and Aeon Mall (Japan), and a lack of exposure to

underperforming CapitaLand Ltd. (Singapore). Detractors most notably included underweight positions

in outperforming Nomura Real Estate Holdings (Japan) and Sumitomo Realty & Development (Japan),

and an overweight position in underperforming HongKong Land Holdings (Hong Kong).

Active Balanced

BT Wholesale Active Balanced Fund

Market review

Australian shares underperformed global share markets and delivered their largest negative return in

over 12 months. The S&P/ASX 200 Accumulation Index returned -3.3%, whilst the MSCI World index

ex-Australia in AUD returned 2.75%, driven by a combination higher global markets and a falling

Australian dollar.

Australian shares had a terrible month primarily driven by Financials (especially banks) which started

the month poorly but continued their fall after the Federal Budget when the government announced their

intention to introduce a new Bank Levy. Weaker economic data, especially around consumer sales and

sentiment, saw retail stocks and healthcare also under pressure. There were, however, a handful of

bright spots, with Industrials (+4.7%), Telco (+3.4%) and Energy (+2.0%) all delivering reasonable

gains. Miners continued to do it tough with Iron Ore Prices prices slumping over 17% to US$57.02/t,

driven by growing concerns surrounding ructions in the China Interbank market.



snap UK Election announced, Trump impeachment rumblings and a UK terrorist bombing. The US

market was up with the Nasdaq up 2.5% and the broader S&P500 up 1.2% (closing at an all-time high

of 2411). Trump made some announcements regard breaking up big banks and the FOMC left rates on

hold while mapping out a plan for scaling back its balance sheet. Towards the end of the month there

were fresh concerns around Trump’s involvement with Russia, however the markets looked past this as

reasonable economic data continued to show US growth and inflation is on track.

European markets were also stronger as the outcome of the French Presidential saw a relief rally,

whilst a continued uplift in economic data supported the positive mood. The UK market was strongest

returning 4.4%, whilst Germany and France both delivered positive returns of 1.4% and 0.3%

respectively.


Japanese, Korean and Hong Kong equities rallied throughout May, despite ongoing geopolitical tension

in the region surrounding North Korea. South Korea delivered a strong 6.4%, Hong Kong next at 4.2%

and Japan’s Nikkei index was up 2.4%. China shares rebounded strongly returning 3.7% (H shares),

buoyed by strong positive economic results for April including Imports and Exports rising +11.9% and

+8% YoY respectively, M2 Money Supply +10.5% YoY and Retail Sales +10.7%.



(-2.3%).

Bond yields globally continued their drift lower. The Australian curve flattened with the spread between

long-term rates and short-term rates narrowing again in May (-2 basis points). The Australian 3-year

bond yield fell 16.5 basis points to 1.63%, while the 10-year bond yield fell 18.5 basis points to 2.39%.

The US curve flattened, with the spread between long term rates and short term rates narrowing 9.7

basis points. The US 2-year bond yield rose 2 basis points to 1.28%, while the US 10-year bond yield

fell 7.7 basis points to 2.2%.Overall bond returns were positive with Australian bonds returning a

positive 1.17% and global bonds producing a positive return of 0.59%.


The BT Wholesale Active Balanced Fund returned -0.03% (post-fee, pre-tax) in May 2017,


The key drivers of returns were stronger global equity and Australian bond markets which helped offset

losses from Australian share and listed property markets. Our Australian and global equities and

Australian and global fixed income strategies all delivered strong active returns, whilst our Alternatives

underperformed which detracted from overall returns. Our tactical asset allocation positioning

contributed positively to returns adding 0.07%.

Our Australian equity strategy outperformed the market by 0.70% The portfolio exceeded the

benchmark return helped by our underweight positions in the sold-off banking and property sectors, as

well as our key individual overweight positions in Qantas, Resmed and Aristocrat, which all performed

strongly on the back of solid reporting updates during the month.

Our global equities exposure also outperformed, delivering a return of 0.3% above benchmark. Over the

month our large cap concentrated, Emerging Market and quant strategies all outperformed and our

European exposures underperformed as our non-financial exposure detracted.

Our Alternatives strategy underperformed in May delivering a positive return of -0.66% versus cash of

0.15%. Our Risk Parity, Pure Alpha Fixed Income and our equity market neutral strategies all added to

returns, whilst our managed futures and global macro strategies detracted.


Our tactical asset allocation added 0.02% to returns as our overweight equities offset losses in our long

Oil and Copper positions.

Strategy and Outlook

Markets seem to be more focussed on rising political risks as the uncertainty seems to increase with

every month this year. There is an increasing view that despite improving economic growth in Europe

and parts of Asia, the potential for not-so-solid growth out of the US has seen some profit taking and

risk aversion creeping into markets.

Further monetary policy tightening is expected from the Federal Reserve in the US in June although the

pace of subsequent tightening is expected to slow, with inflation benign, signs of slowing economic

growth and much policy uncertainty from the Trump administration. Central bank balance sheet

reduction in both the US and Europe will also receive more attention. There is also a re-emergence of

political risks in the US as the market speculates on a possible impeachment of President Trump. In

Europe, the market hasn’t fully priced in the unfavourable outcomes of political events. The general

election in the UK and the chance of early Italian elections casts doubt on the outlook of both

economies.

Bond markets have erased all the post-Trump reflation trade, with bond yields back to November levels,

which seems to be in contrast to equity markets.

We continue to recommend a defensive approach: being active in pursuing some opportunities in

markets, however looking to take profits and rotate positions when markets move. Overall active

management across all asset classes at the moment appears to be prudent in controlling risks.


Performance as at 31 May 2017

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) -2.14 1.84 7.50 13.92 9.63 2.98 6.00 11.96 9.87

Total Return (pre-fee, pre-tax) -2.07 2.04 7.92 14.74 10.48 3.80 6.84 12.85 10.87

Benchmark -2.74 1.43 7.30 13.57 10.80 4.15 6.04 11.70 9.92

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



Benchmark -2.74 1.43 7.30 13.57 10.80 4.15 6.04 11.70 8.61

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



Benchmark -2.74 1.43 7.30 13.57 10.80 4.15 6.04 11.70 7.27

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



Benchmark -2.74 1.43 7.30 13.57 10.80 4.15 6.04 11.70 7.93

Australian Shares - Mid Cap

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



Benchmark -0.13 4.44 9.95 12.78 10.63 9.66 12.15 12.87 4.86

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) -0.62 -0.32 1.40 2.20 0.86 4.83 7.15 10.83 12.89

Total Return (pre-fee, pre-tax) -0.51 -0.01 2.02 3.35 2.10 6.14 8.49 12.22 14.17

Benchmark -2.05 0.31 2.72 4.92 3.55 5.22 6.04 4.22 7.32

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

Total Return (post-fee, pre-tax) 1.49 1.52 3.36 13.02 14.73 13.19 17.48 19.67 18.37

Total Return (pre-fee, pre-tax) 2.44 2.16 4.18 16.35 19.03 16.59 21.85 25.16 23.92

Benchmark -2.05 0.31 2.72 4.92 3.55 5.22 6.04 4.22 1.79


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



Benchmark 2.75 8.36 12.14 17.84 13.33 7.31 14.15 18.72 7.24

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) 3.83 13.73 18.45 22.44 23.98 2.93 10.94 N/A 11.62

Total Return (pre-fee, pre-tax) 3.97 14.13 19.27 24.00 25.70 4.40 12.56 N/A 13.97

Benchmark 3.43 11.40 16.63 22.54 23.99 3.88 9.47 N/A 10.86

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

Total Return (post-fee, pre-tax) 3.95 10.86 12.11 N/A N/A N/A N/A N/A 17.72

Total Return (pre-fee, pre-tax) 4.06 11.20 12.81 N/A N/A N/A N/A N/A 18.94

Benchmark 2.75 8.36 12.14 N/A N/A N/A N/A N/A 15.53

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) -0.89 2.18 8.92 -0.37 3.11 8.88 15.09 15.82 7.63


Benchmark -1.00 2.25 8.30 -1.18 2.30 8.73 15.21 16.29 7.48

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

Total Return (post-fee, pre-tax) 0.56 -0.16 5.93 1.30 3.76 3.60 7.47 11.41 9.41


Benchmark 0.63 -0.08 6.43 1.97 5.00 4.31 8.06 11.95 9.18

Fixed Interest

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



Benchmark 1.17 2.38 3.00 1.16 2.50 3.56 4.85 4.48 6.82

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

Total Return (post-fee, pre-tax) 0.58 1.28 1.43 -1.93 0.74 2.74 4.87 4.66 6.33

Total Return (pre-fee, pre-tax) 0.63 1.42 1.70 -1.45 1.28 3.28 5.43 5.20 6.92

Benchmark 0.59 1.29 1.95 -1.00 1.53 4.26 5.49 5.37 7.25

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



Benchmark 0.99 2.16 2.93 2.76 3.53 3.74 4.72 5.05 6.02

Cash & Income

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



Benchmark 0.15 0.45 0.89 1.67 1.84 2.05 2.25 2.55 5.01

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



Benchmark 0.15 0.45 0.89 1.67 1.84 2.05 2.25 2.55 6.67

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 0.75 1.41 1.56 1.78 2.00 2.36 3.09

Diversified

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



Benchmark -0.21 2.89 6.62 9.48 8.39 5.20 7.54 10.10 7.51

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

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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 14 June 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

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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

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

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Fund Manager Commentary · Chinese data including trade figures and manufacturing PMI eased back. China also suffered a downgrade of its sovereign credit rating. Portfolio performance

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