Challenger High Yield Retail Fund

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Challenger High Yield Retail Fund
September 2003
Presented by
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What is the High Yield Fund?

• A fund seeking to outperform cash and Fixed
  Interest markets.
• Providing a greater return than bonds and less
  risk than equities
• With a significant income component
• Tax Benefits

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What are the High Yield Funds Assets?

• Any securities which can be analysed for their
  cashflow characteristics including
• Hybrid Securities
• Corporate Bonds
• Asset Back Securities

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What is a Hybrid Security?

• A major part of High Yield Funds are hybrid
  securities
• Hybrid securities are issued by Australian
  Corporates and have both debt and equity (share)
  characteristics
• Includes Investments
• reset securities
• convertible notes
• converting preference shares

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Examples of Listed Hybrid Securities
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Trends Toward Hybrid / Debt Securities

• Diminishing supply of government bonds
• Trend away from bank oriented financing
• Corporate capital management becoming more
  sophisticated
• The Future
• Leading to a growth in the issuance of high
  yielding fixed interest and hybrid debt/equities
  securities

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CBA Research July 2003The case for investing
in lower rated investment grade credit

• Under normal assumptions, lower grade credits
  clearly provide the best risk reward ratios.
• The further investors moved down the credit
  spectrum the better the risk/return trade off.
  In other words, the lower the credit rating, the
  better the return and the lower the volatility of
  returns.
• AAA was never the least volatile, or the optimal
  place to be.
• We (CBA) conclude that investing in bonds lower
  down the credit spectrum not only provides
  greater returns, but diversity and stability.

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Where Does a High Yield Fund Fit?
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Where Does High Yield Fit?

• As a component of a clients Fixed Interest or
  Alternative Investments sector allocation

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Relevance of High Yield in Current Conditions

• Global economy is recovering
• Cash rates unattractive
• Global search for credit / yield products stems
  from equity market caution
• Declining Government Issuance
• Increased Investor appetite
• Corporates issuing via capital markets because
  banks adopting a different preference
• Diversification from equities, bonds and property

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Likely Impact of Rising Interest Rates

• Healthy economic and credit conditions likely to
  prevail.
• Shorter Duration an advantage (average 1.8 yrs vs
  3.7 yrs for bonds)
• Improving Corporate credit quality expected to
  co-exist at a time when interest rates are
  increasing hence credit spreads to narrow
• Higher yield likely to provide additional buffer
  to interest rate rises
• Conclusion
• High Yield Fund is more likely to outperform bonds

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Why Choose Challenger High Yield Fund?
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Philosophy

• Challenger is an active manager of Australian
  high yield and hybrid securities because we
  believe that the market is not perfectly
  efficient and that pricing anomalies can and do
  occur
• This is particularly true of the less-researched
  and less well understood hybrid and high yield
  bond markets in Australia

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Investment Style

• Active bottom up securities selection
• Active top down macro approach
• Tight risk management framework

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Investment Process
MACRO
Portfolio Construction
Ideas Filters
Intrinsic Value Analysis
Portfolio Construction
Idea Generation
25 45 stocks
150 stocks
300 - 400 stocks
50-75 stocks
250 stocks
RISK MANAGEMENT STRATEGIES
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Portfolio Construction Rules

• Number of stocks in portfolio 50-75
• Benchmarks are UBS Composite Bond Index, UBSW
  Core Credit and UBS Warburg Australian Hybrid
  Index
• Illiquid bonds no greater than 20 of portfolio
• No greater than 20 single industry exposure
• Maximum exposure to one investment is 6
• Cash 0-20

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Portfolio Risk Controls

• Portfolio construction rules
• Triggers for review include
• Changes in issuers share price
• Credit rating change
• Risk assessment Probability of our analysis
  being correct and size of downside risk (Stress
  testing)
• Liquidity Ensure portfolio has a mix of mature
  and new investments to ensure liquidity of
  overall portfolio is good
• Derivatives are available to manage risk

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Fund as at 31 August 2003
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Diversification by Industry SectorNot more than
25 of fund value in any single industry
Calculated on exposure basis. Figures are as at
August 2003
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Diversification by Security Typeas at 31 August
2003
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High Yield Portfolio Top 10 Securitiesas at 31
August 2003
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How Has the Fund Performed?Inception date 3
July 2001 to 30 June 2003
Total Return 10.73 p.a
Distribution Return 6.33 p.a


Growth Return 4.40 p.a
Past performance is not necessarily indicative
of future performance. The distribution was
franked at an average of 15.56. After all
fees applying to Wholesale Class Units, excl.
Imputation Credits since Date of Inception 3
July 2001. Since inception figures are
reported on a per annum basis.
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Growth in 10,000Since Inception to 31 August
2003
High Yield
Jun. 02 0.07
Bonds
Sep. 01 0.30
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Performance to 31 August 2003
Past performance is not necessarily indicative of
future performance. Current performance figures
are updated monthly and can be obtained by
contacting Challenger Customer Service on 13 35
66. After Performance fees, excl. Imputation
Credits Date of Inception 3 July 2001 since
inception figures are reported on a per annum
basis.
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Risk/Return Chart as at 31 August 2003
All return figures calculated on an annualised
basis
All return figures calculated on an annualised
basis
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High Yield Fund Benchmark Comparisons(No of
Issuers) to 30 June 2003
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Chal HYF
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Asset Comparisons

• High probability of excess returns
• Tax Advantaged distributions
• Performance is largely uncorrelated to other
  asset classes diversification benefits
• Better risk/return tradeoff

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Peer Comparisons

• Core business for Challenger
• Long track record
• Managed by large investment team (6 members)
• Managed by experienced team
• Large investment universe
• Highly diversified Securities and Industries
• Low volatility

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Research Accreditation

• InvestorWeb Research Rating
• Overall Rating Investment Grade
• InvestorWeb Research Quotes
• Short-term performance has been outstanding .
  We believe the fund could be used as a small part
  of clients fixed interest exposure to generate
  additional alpha.
• InvestorWeb Research believes that the
  Challenger High Yield approach is the most
  sensible approach to managing high yield
  portfolios.
• InvestorWeb believes the process employed by
  Challenger is well structured and transparent and
  we believe the research conducted by the team is
  comprehensive.
• The team is able to leverage significantly off
  Challengers highly regarded Australian equities
  teams qualitative research and quantitative
  models.

Source InvestorWeb Research Australian Fixed
Interest Sector Review October 2002
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Research Accreditation (cont)

• No manager is rated higher than Challenger in the
  Australian Hybrid asset class.
• Van Eyk
• Challengers people rated A, Overall rating B
• Van Eyk Quotes
• The manager has a well articulated philosophy
  to justify why it is an active manager of
  Australian high yield and hybrid securities.
  Indeed, the fund was one of the early entrants
  to the market
• Paul van Ryn has nine years experience in
  credit portfolio management and is a recognised
  authority on Australian High Yield and Hybrid
  Securities

Source Van Eyk Investment Manager Profile 2003
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Why use the Challenger High Yield Fund?

• Solid Income Content
• Tax Benefits
• Performance
• Core Business
• Experienced and Large Team
• Diversification of Portfolio

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APPENDIX
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Investment Team Fixed Interest
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Process in Practice
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Process in Practice
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Process in Practice
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Investment Summary and Fees Expenses
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Master Trusts and Wrap Availability
The fund is available on the following Master
Trusts and Wrap Services

• BT Investment Wrap
• Questor (Bridges)
• Symetry
• Macquarie Wrap
• First Quest Retirement Service
• MAX-Portfolio Management Service
• Synergy
• Ausmaq
• Oasis

• Personal Choice MasterFund
• Mentor
• NetWealth
• Your Prosperity
• Asset Choice
• Avanteous
• Beacon
• Navigator
• Strategy
• Tower Trust

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Challengers Fixed Interest Biographies
Paul van Ryn B. Com (Hons), M. Com. AASA.
Head of Fixed Interest. Paul has 20 years
Investment Industry experience. His
responsibilities include fixed interest strategy,
portfolio construction, dealing, and business
development. Paul joined Challenger Portfolio
Management Ltd in Feb 2001 from County (now
Invesco) Investment Management Ltd. Paul joined
County from the State Electricity Commission of
Victoria where he managed the SECVs interest
rate risk and was also a director of the 1.6B
SECV Superannuation Fund. Paul is a lecturer for
the Securities Institute of Australia and tutor
for the CFA program. Ryan Wilson B. Com.
Graduate Diploma - Applied Finance. Analyst with
2 years experience. Responsible for equity
analysis, security analysis and dealing of fixed
interest and hybrid securities. Ryan joined
Challenger in 1998 and initially worked in the
businesss accounting area before joining the
Portfolio Management part of Challenger. Damon
Shinnick B. Com (Hons). Assistant Portfolio
Manager with 3 years investment
experience. Responsibilities include security
analysis ,quantitative analysis and assisting in
the construction of investment portfolios. Prior
to joining Challenger in September 2001 Damon was
a Statistical Analyst with HSBC Asset Management
responsible for statistical and quantitative
analysis and research in both fixed interest and
equities markets. Damon is studying for the CFA
qualification.
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Challengers Fixed Interest Biographies (contd)
David Bickford - B.Juris / LLB, M. App. Finance
Credit Analyst. As Credit Analyst David is
responsible for the analysis of fixed interest
investments from a credit perspective. David has
previously worked as Head of (Fixed Interest)
Trading with Citibank and also traded with his
own capital. Ian Hardy - B.Ec. ASIA - Investment
Director (CIO) with 28 years experience. Equity
strategy and economics, Equity portfolio
construction, consumer staples (alcohol and
tobacco, tourism and leisure) and fixed
interest/hybrid instruments. Ian has a lengthy
and varied background in investment markets
having worked at senior levels for a number of
large investment groups over the past 28
years. Jordan Mason - Dip. Financial Markets
Analyst Jordan joined Challenger in April 2003.
Jordans role as an additional analyst to the
unit and is responsible for data integrity in the
Funds Management Analytical Tools used in the
Unit and also undertakes analysis of new
investment propositions. Prior to joining
Challenger, Jordan worked for Credit Suisse First
Boston assisting in the private client broking
operation. Michael Watt B.Ec / M. App.
Finance. AAIBF (Snr) - Business Analyst Michael
has 10 years experience as a business analyst
working for various organisations such as
National/MLC, Merrill Lynch Asset Management,
Citibank, Prudential Financial Services. At
Challenger, he is responsible for the analytical
and modeling support for the equity, debt and
hybrid securities and the development of risk
management systems.
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The information contained in this presentation is
general in nature and is not intended to
constitute advice or securities recommendation.
It does not take into account a particular
investors information requirements or needs.
Past performance is not a guide to future
performance. Individuals should seek expert
financial advise to determine suitable
recommendations for individual circumstances. Off
ers of interests in the Challenger High Yield
Fund are contained in the relevant current
Prospectus. Investors must complete the
Application Form that is attached to the
Prospectus issued by Challenger Managed
Investments Ltd ABN 94 002 835 592. Investors
should consider the Prospectus carefully before
deciding whether to acquire or to continue to
hold units in the Fund.