For your interest, attached is my monthly 'Over the Horizon' share market commentary for October 2014

1. October 2014 — Over the Horizon Market Commentary by David Offer
October was a positive month for the Australian share market, rising 3.8% and 201 points to close at 5,498. The positive
month put our share market in the black for the financial year to date, with total returns including dividends and capital growth
approximately 3.3% since June.
Ironically, it was weaker than expected economic data from Europe, Japan and China that triggered a rebound in many share
markets including America and Australia, with global share markets appearing to take the view that an anaemic global
economy will put the brakes on US economic growth and thus delay and slow the rate of likely interest rate rises in the US
next year. However, we remain unconvinced, with US economic data remaining resilient. Unlike Australia, which depends on
trading with other countries to prosper, America has a more insular and rounded economy that arguably has the ability to
function much more in isolation than most other countries.
At present the only obvious indicator that does not support a strengthening US economy is US wage growth. However, this is
a lagging indicator, with the US first needing to once again reach full employment, along with strong businesses and
consumer confidence in the future. Given full employment doesn’t appear to be far away, which in itself should improve
confidence, US wage growth could occur sooner than expected. Being inflationary in nature, should wage growth occur, this
would increase the probability of interest rates rising from current historically low levels. The Federal Reserve juggling act of
2015 will be managing the process of raising interest rates in line with a strengthening economy while trying to avoid
excessive volatility in global financial markets.
Closer to home, the Medibank float is now upon us. In line with the enclosed Morningstar research and prior monthly
commentaries, we recommend applying for shares.
Medibank is being offered across a broad price range of between $1.55 and $2.00 a share, with the final price to be
determined by an institutional book build. Due to the exceptional demand for shares, we suspect the listing price will be at the
top of the indicative price range. However, indications are that retail investors will receive their shares at a discounted price
to institutional investors. Given the Company’s solid long term fundamentals and attractive industry dynamics, as well as
Medibank needing to be bought by index orientated fund managers as it will be included in the ASX (Top) 50 index, we think it
is likely that the shares will trade above $2.00 post listing.
We have pre-registered all clients for Medibank multiple times and over the next week our office will be in touch with our
suggestion as to the number of shares to apply for and then duly arrange applications. We expect significant scaling to occur
and so will consider adding to investor holdings should Medibank list below $2.10 a share and once we are aware of
allocations. Conversely, in the event Medibank trades above $2.30 post listing, it may be simpler to take profits than
amalgamate holdings as investors’ combined shareholding in Medibank shares received on float is unlikely to form a
meaningful holding within portfolios.
During October, we attended a presentation by Perpetual with respect to an upcoming offering of a newly established Listed
Investment Company (LIC) to be run by Perpetual. The ‘Perpetual Equity Investment Company Ltd’ is being structured
specifically for Self-Managed Superannuation Funds (SMSFs), with Perpetual suggesting that most SMSFs hold the major
shares listed on our share market but do not necessarily have a lot of diversification towards Australian mid-caps or overseas
shareholdings. Perpetual intends this LIC to be complementary by being a concentrated stock picking fund that will comprise
of approximately 15 Australian shares that are at least $400 million in value plus 5 international shares with market values of
at least $5 billion. The LIC will also have the option to be able to hold up to 25% in cash in the event investment opportunities
are limited, meaning the fund should provide some downside protection in the event our share market becomes materially
overheated.
Investors that take up shares on the float at the $1 issue price will receive a free option exercisable at $1 until June
2016. Based on other LIC listings with comparable structures, these options are likely to trade at around 5 cents on
listing. The Net Tangible Asset backing (NTA) of the shares on listing will be 98.3 cents. Perpetual expects that in time the
LIC will pay a fully franked dividend of approximately 4% that will grow consistently over time.
As a means to grow the size of the LIC, Perpetual’s immediate goal will be to have the free option exercised in June
2016. This means Perpetual will be working hard to grow the NTA of the LIC over the next few years. If they do a good job

2. in time the LIC is likely to trade at a premium to NTA in line with other quality LICs listed on the share market. For example,
the Platinum Capital LIC is presently trading at $1.77 versus a NTA of $1.55 (a 14% premium) and the Magellan Flagship
fund is trading at $1.54 versus a NTA of $1.30 (18% premium). We consider Perpetual’s investment expertise comparable
to both Platinum and Magellan, with Perpetual’s flagship Industrial Share Fund boasting the enviable track record of
returning an average of 15.3% per year for the last 38 years!
Given that the proposed composition of the Perpetual LIC is complementary to how our portfolios are structured at the
current time, coupled with the medium term potential for the LIC to trade at a premium to NTA, we believe the Perpetual LIC
will be a complementary inclusion for many portfolios. We will be reviewing for suitability of inclusion within portfolios over
the next few weeks. For further information on either of the above share offers or on any other aspect of your investment
portfolio, please do not hesitate to contact our office.
Sincerely
David Offer
AUTHORISED REPRESENTATIVE 259188
Director
HORIZON INVESTMENT SOLUTIONS PTY LTD
SUITE 1, POST OFFICE PLAZA, 153 VICTORIA STREET, BUNBURY WA 6230
T. 08 9791 9188 F. 08 9791 9187
E.david.offer@horizonis.com.au www.horizoninvestmentsolutions.com.au
Horizon Investment Solutions Pty Ltd, ACN 083 142 438, ABN 79 668 035 212, AFSL 405897
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