Summer 2010

Big year for Small Caps

As the global financial crisis eases and markets and economies recover, investors are once again beginning to look at opportunities at the small end of the market. Better Investor spoke to Paul Hannan and Noel Webster, co-managers of the BT Wholesale Smaller Companies Fund and BT Wholesale MicroCap Opportunities Fund, about smaller companies and why they have outperformed their larger counterparts in 2009. The small and the very small
means is that when the market began to fall back in 2007 and again in 2008, investors withdrew from the small caps end of the market in favour of more liquid large cap positions, and that had a negative impact on small and micro caps stocks. But as the domestic economy and the broader share market recovered, we began to see a reversal of that trade. Investors got their risk appetites back, and that was reflected in the strong rebound in small caps stocks. Another factor that has contributed to the sectors performance has been the strength of the Australian dollar. Smaller companies are typically domesticallyfocused businesses like service providers and importers, so they usually do well when the Australian dollar and the economy are strong, says Paul. A good example of this is Webjet, an Internet-based company thats performed very well in the leisure travel market despite the downturn. Its a business thats benefited from the structural move of more and more people wanting to shop online and in the process has been able to increase both its earnings and its market share. In 2009, the companys share price jumped 109%.

Small caps and micro caps. Most investors will have heard the terms, but what do they really mean? Paul Hannan of BT Investment Management (BTIM) defines small caps stocks as those companies that sit outside the top 100 listed on the Australian Securities Exchange (ASX) and their equivalent on the New Zealand Stock Exchange (NZSE). Micro caps on the other hand, he says, are even smaller. The micro caps universe of stocks includes more than 1,000 companies listed on the ASX and NZSE with a market capitalisation of between $5 million and $150 million.

Small stocks, big returns

For the 12 months to 31 December 2009, the smaller end of the market outperformed the larger end by 21.24%1. Noel Webster explains that there were several reasons why smaller companies were able to perform better than their larger counterparts over the past 12 months. Essentially what we saw in 2009, he says, is a reversal of the risk aversion trade. What that

Small caps and micro caps measured by the S&P/ASX Small Ordinaries Accumulation Index. Large caps measured by the S&P/ASX 100 Accumulation Index.

market update

The BTIM approach

BTIM adopts a very similar approach to how they manage small and micro caps stocks. In fact, the BT Wholesale MicroCap Opportunities Fund was originally set up to capture the stocks they werent able to include in the BT Wholesale Smaller Companies Fund. Paul Hannan: The way we invest in micros is essentially a carbon copy of the way we invest in smalls. We typically look at earnings and cash flow, but we also spend a lot of time talking to management. When we look at smaller companies we always think of people before product, so in a way what were really doing is backing the key management team. Noel agrees, but he also believes that BTIMs competitive advantage lies with the experience of their team. Paul and I have been around the market for a long time. Were a stable team. Weve proven that we can deliver good performance without taking unnecessary risks. We dont typically buy into speculative plays and our investment style is core, meaning we invest without a predetermined value or growth stock bias.

The Big vs the Small

100 90 80 70
% returns S&P/ASX 100 Accumulation Index S&P/ASX Small Ordinaries Accumulation Index

BT Wholesale Smaller Companies Fund

BT Wholesale MicroCap Opportunities Fund 98.10%

60 50 40 30 20 10 0 -10
1 -0.23% 8.52% 36.19%

57.43%

59.00%

20.58% 6.73% -4.80% -0.25% 10.81% 9.39%

5 Years (pa)

Since inception (March 2006)

Note: Returns as at 31 December 2009. Fund returns are post-fee/pre-tax. Past performance is not a reliable indicator of future performance.

Where to from here?

According to Paul, the two key themes likely to drive the market over the next 12 months are earnings and interest rates. Companies need to earn their stripes, he says. For the market to continue moving forward, companies really need to step up to the plate and deliver earnings growth. In terms of interest rates, they look set to rise further in 2010 and that might dampen the markets recovery since itll make the cost of borrowing money more expensive for smaller companies.

Paul Hannan
Paul Hannan has been the Portfolio Manager of the BT Wholesale Smaller Companies Fund since 2004, jointly running the fund with Noel Webster for the past six years. Paul holds a Bachelor of Economics from the Australian National University and has a diploma from the Financial Services Institute of Australia.

Like to know more?

To find out how you can invest in either the BT Wholesale Smaller Companies Fund or the BT Wholesale MicroCap Opportunities Fund, please visit www.btim.com.au.

Noel Webster
Noel Webster holds a Bachelor of Economics and a Masters of Applied Finance from Macquarie University, and is a Certified Practicing Accountant (CPA). Noel and Paul also run the BT Wholesale MicroCap Opportunities Fund, which has performed consistently well since its inception in March 2006.

caton

Catons Corner
BTs Chief Economist Chris Caton takes a closer look at the recent performance of financial markets.
After a tumultuous 2009, BT Chief Economist Chris Caton writes about his expectations for 2010 and beyond. The questions for 2010 are the usual ones: how much more do markets have to gain, and how strong will the world economies be? There is certainly no shortage of naysayers about the world economies; there are so many analysts who believe that the recoveries are not sustainable simply because the economic problems have not gone away completely. While the doubters are ruminating about W-, L- or square-root shaped recoveries, the world economies are recovering as they usually do, with more upside surprises than downside. Since early in 2009, forecasters have been raising their estimates of how much growth is likely in 2010. There is no reason to think this process is over yet. Just one example; in May 2009, the consensus forecast for growth in the Australian economy in 2010 was 1.5%; that figure is now 2.8%, and it is almost certain to be exceeded. When forecasters are raising their sights, earnings tend to improve faster than anticipated earlier, and share markets thrive. But they wont do as well in the next twelve months as they have in the past nine. The recovery to date has been primarily because stocks have been re-rated. The price/earnings ratio for the Australian market has gone from a bargain-basement level to close to the long-run average. Re-rating is the only way that you can ever get close-to-50% increases in a short period of time. From now on, the market will need to be fuelled by earnings growth. That should happen, but the pace of appreciation of the market will almost certainly be much slower. A 10% gain over the course of 2010 would be a good result. Look for interest rates to rise by about another 1.5 percentage points over the course of 2010 too. its over, but for Australia to stay at the forefront will require significant and intelligent investment. China/India: in 2009, China surpassed Japan as our biggest export market. Japan held No 1 position for 43 years. China may well be our biggest export market for the next 43! Chinas presence softened the blow of the GFC for Australia this year. In the long run, the continued dominance of world economic growth by the developing world means that the resource sector will loom ever larger in the Australian economy. This will require a long-term transferral of resources from other sectors of the economy, notably manufacturing and (other) construction. All of these are slow-burning, but long-lasting stories. They will have significant implications for many sectors of the economy, and for investment markets something to think about as we start a new year.

The long run

On a longer-term note, the Treasury Secretary, Ken Henry, gave a thoughtful speech in late-October, in which he looked at four long-term forces facing Australia: Population Aging: within 40 years, more the one in five Australians will be 65 and over, and one in 20 will be 85 and over. A smaller proportion of the total population will be working, and the calls on the public purse for health spending, aged care and pension payments will expand enormously. The total population will increase by about 60% (13 million) in that time, raising questions about the future of our cities, environmental sustainability, the demand for infrastructure etc. Climate Change: the issue is about both adaptation and mitigation. To achieve the latter, the cost of energy intensive activities has to be raised. Decisions about land use and the energy efficiency of urban infrastructure will also have to be made. The internet revolution: we all now take for granted so many aspects of everyday life that the internet revolution has brought us. There is no reason to think

Chris Caton BT Chief Economist

The views expressed herein are those of the author and should not be otherwise attributed. This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs.

Fund performance
BTIM Wholesale Investments
Fund name Australian Shares1 BT Wholesale Australian Share Fund BT Wholesale Core Australian Share Fund BT Wholesale Focus Australian Share Fund BT Wholesale Geared Imputation Fund2,7 BT Wholesale Imputation Fund BT Wholesale Australian Long/Short Fund BT Wholesale MidCap Fund BT Wholesale Smaller Companies Fund BT Wholesale MicroCap Opportunities Fund International shares1,3 BT Wholesale Core Global Share Fund BT Wholesale Core Hedged Global Share Fund BT Wholesale International Share Fund BT Wholesale American Share Fund BT Wholesale Asian Share Fund BT Wholesale European Share Fund BT Wholesale Japanese Share Fund BT Wholesale Technology Fund4 BT Wholesale Value Global Share Fund10 Australian fixed interest1 BT Institutional Enhanced Fixed Interest Fund BT Wholesale Enhanced Credit Fund BT Wholesale Fixed Interest Fund International fixed interest1 BT Institutional Enhanced Global Fixed Interest Fund BT Wholesale Global Fixed Interest Fund Australian Property1 BT Wholesale Property Investment Fund BT Wholesale Property Securities Fund International Property1 BT Wholesale Global Property Securities Fund5 Australian Sustainable/Ethical1 BT Institutional Australian Sustainability Share Fund BT Sustainable Conservative Fund11 BT Wholesale Ethical Share Fund Diversified1 BT Active Income Fund BT Wholesale Active Balanced Fund8 BT Wholesale Balanced Returns Fund8 BT Wholesale Conservative Outlook Fund8 BT Wholesale Future Goals Fund8 BT Wholesale Tax Effective Income Fund BT Wholesale Split Growth Fund8 Global Macro1 BT Global Macro Fund Cash BT Institutional Enhanced Cash Fund1 BT Institutional Managed Cash Fund6 BT Wholesale Regular Income Fund1,9 Performance % to 31 December 2009 1 mth 3 mth 1 yr 3 yr pa 5 yr pa 4.44 4.39 4.67 7.30 4.38 4.28 5.85 4.12 3.87 3.34 3.53 3.46 4.14 5.65 4.32 0.31 5.21 1.84 -0.15 0.19 -0.19 -0.38 -0.57 3.27 3.27 6.08 4.03 1.10 4.25 0.89 2.81 2.38 0.91 3.21 2.37 3.61 1.21 0.63 0.31 3.32 4.30 4.25 4.06 5.61 3.89 3.88 5.75 8.19 13.47 1.21 4.09 1.32 3.24 3.36 2.86 -7.44 0.49 1.45 1.74 2.29 1.40 1.51 1.15 -5.07 -5.10 6.98 3.45 1.60 3.68 1.93 2.79 2.53 1.70 2.85 1.23 2.48 1.19 1.77 0.86 2.75 38.22 38.13 42.86 56.83 34.91 47.00 50.40 59.00 98.10 1.33 27.07 1.62 1.99 33.52 6.79 -17.64 32.34 3.66 3.83 7.10 4.41 8.42 10.09 1.63 1.81 -0.19 -5.66 0.79 N/A N/A -0.25 9.39 -11.83 -9.06 -11.91 -5.98 -1.43 -8.08 -12.64 -3.33 -16.76 5.56 5.24 6.09 6.46 5.58 10.44 10.47 N/A 7.80 11.10 N/A N/A 10.81 N/A -1.98 1.47 -1.98 0.17 9.26 2.84 -4.11 1.20 -4.42 5.16 5.02 5.34 6.11 5.45 -4.54 -4.47 0.77 8.07 7.02 10.45 N/A 4.81 4.71 4.56 4.56 6.63 1.77 N/A 5.41 5.76 N/A

Rating Upgrade for BT Wholesale Property Securities Fund

The BT Wholesale Property Securities Fund has been upgraded in the latest S&P review from Three Stars to Four Stars* this is the highest rating S&P has assigned in the property sector. The upgrade was a result of the combination of the Funds strong and consistent performance, relative to both its benchmark and peer funds; its well resourced and stable team; fundamental research approach; competitive pricing and the property teams remuneration structure. The BT Wholesale Property Securities Fund invests primarily in Australian listed-property investments, with an objective to provide a return (before fees, costs and taxes) that exceeds the S&P/ASX 300 Property Accumulation Index over the medium to long term. For more information about the fund, visit www.btim.com.au/BTWholesalePropertySecuritiesFund
* To the extent that any ratings, opinions or other information of Standard & Poors Information Services (Australia) Pty Ltd (ABN: 17 096 167 556, Australian Financial Services Licence Number: 258896) (Standard & Poors) constitutes general advice, this advice has been prepared by Standard & Poors without taking into account any particular persons financial or investment objectives, financial situation or needs. Before acting on any advice, any person using the advice should consider its appropriateness having regard to their own or their clients objectives, financial situation and needs. You should obtain a Product Disclosure Statement relating to the product and consider the statement before making any decision or recommendation about whether to acquire the product. Past performance is not a reliable indicator of future performance. Ratings can change or cease at any time and should not be relied upon without referring to the meaning of the rating. For more information regarding ratings please call S&P Customer Service on 1300 792 553 and also refer to Standard & Poors Financial Services Guide at www.fundsinsights.com. Each analytic product or service of Standard & Poors is based on information received by the analytic group responsible for such product or service. S&P and Standard & Poors are trademarks of The McGraw-Hill Companies, Inc. 2009 Standard & Poors Information Services (Australia) Pty Limited

12.71 -18.84 12.45 -18.86 31.90 -14.67 32.97 9.93 32.48 N/A 17.23 15.83 10.46 19.11 17.62 13.63 6.49 6.18 3.43 23.82 -0.80 4.46 -0.23 N/A -2.34 -1.74 1.30 -3.89 -0.62 -8.04 N/A 5.06 5.81 N/A

Things you should know

BT Investment Management (RE) Limited ABN 17 126 390 627, AFSL 316455 (BTIM (RE)) is the responsible entity and issuer of units in the BT Wholesale Smaller Companies Fund, BT Wholesale MicroCap Opportunities Fund and the BT Wholesale Property Securities Fund and each of the funds listed in this publication of Better Investor (Funds). A Product Disclosure Statement (PDS) or Information Memorandum (IM) is available for each of the Funds and can be obtained by contacting BTIM (RE) on 1800 813 886 or by visiting www.btim.com.au. You should obtain and consider the relevant PDS or IM before deciding whether to acquire, continue to hold or dispose of units in a Fund. An investment in the Funds is not a deposit with or any other liability of the Westpac Banking Corporation (ABN 33 007 457 141) or any other company in the Westpac Group of Companies. BTIM (RE) is a member of the Westpac Group. Past performance is not a reliable indicator of future performance. Neither BTIM (RE), nor any other company in the Westpac Group, guarantees the repayment of capital or the performance of the Funds or any particular rate of return. This publication of Better Investor is issued by BTIM (RE). The information contained in this publication is given in good faith and is derived from sources believed to be accurate. Neither BTIM (RE), or its related bodies corporate nor any of their employees or directors makes any representation or gives any warranty as to the reliability, completeness or accuracy of this information nor otherwise endorses or accepts any responsibility for this information. Except where contrary to law, BTIM (RE) intends by this notice to exclude all liability for this material. This publication of Better Investor has been prepared without taking account of your objectives, financial situation or needs. It is general information only and should not be considered as a comprehensive statement on any matter and should not be relied on as such. Before acting on this information, you should consider it appropriateness, having regard to your objectives, financial situation and needs.BTIM is a registered trademark of BT Financial Group Pty Limited and is used under licence 6_Total returns are calculated: to the last day of each month using average daily distribution yields; taking into account management costs of the fund; assuming reinvestment of distributions (which may include net realised capital gains from the sale of assets of the fund). No reduction is made to the unit price (or performance) to allow for tax you may pay as an investor other than withholding tax on foreign income (if any). Certain other fees such as Contribution fees or Withdrawal fees (if any) are not taken into account. 7_As gearing magnifies both gains and losses from the investments, investors in the fund need to understand that returns can be volatile. In extreme circumstances, such as a share market fall of around 40%, investors are at risk of losing all the money they have invested. 8_The asset allocation neutral position, asset allocation ranges and the benchmark have changed over time. As it is historical information, the fund performance reflects the asset allocation neutral positions and ranges that have applied over time. 9_This Fund is closed to new monies from new and existing investors. 10_This Fund is closed to new investors. 11_ Formerly known as BT Wholesale Ethical Conservative Fund BT8358D-1209bt BTIM

Footnotes

1_Total returns are calculated: to the last day of each month using exit prices; taking into account management costs of the fund; assuming reinvestment of distributions (which may include net realised capital gains from the sale of assets of the fund). No reduction is made to the unit price (or performance) to allow for tax you may pay as an investor other than withholding tax on foreign income (if any). Certain other fees such as Contribution fees or Withdrawal fees (if any) are not taken into account. 2_The benchmark changed from the S&P/ASX 100 Accumulation Index to the S&P/ASX 300 Accumulation index from 1 March 2006. Performance before this date may not be directly comparable. 3_The investment manager for these funds changed on 6 June 2006. Performance before this date may not be directly comparable. 4_The benchmark for this fund changed from the MSCI TIME Index (Net Dividends) in AUD to the Goldman Sachs Technology Industry Composite Index (Total Return) in AUD from 6 June 2006. Performance before this date may not be directly comparable. 5_On 11 May 2005, the benchmark for the fund changed from Morgan Stanley REIT Index (hedged to AUD) to the UBS Global Real Estate Investors (ex Australia) Index net of withholding tax (hedged to AUD). Returns before this date may not be directly comparable.