The Milford Income Fund Fund Update April 2015 Portfolio Manager Economic and Market Review Jonathan Windust CFA ..................................................... Fund Portfolio Mix 3% 5% 11% 30% 20% 31% NZX Listed Companies ASX Listed Companies Fixed Income - High rated Fixed Income - High Yield NZ Listed Property Cash ..................................................... Key Fund Stats As at 31 March 2015 Fund Size Unit Price Target Quarterly Distribution Next distribution Yield of investments* $1,101 million $1.4552 1.5cents 20 May 2015 6.2% * Weighted average yield of current investments gross of fees and tax, but including tax credits. The Fund’s actual return will differ to the yield due to capital gains or losses on investments. ..................................................... Fees 0.65% p.a. capped management fee plus a performance fee of 10% of returns (after fees and before tax) above the 90 day bank bill index. .................................................... Investment Objective The Fund’s objective is to exceed the 90-day Bank Bill Index (after fees and before tax). We consider the Fund suitable for investors with a time horizon of at least three years. The New Zealand economy remains strong with official figures showing strong growth of 3.5% for 2014. Forward looking indicators also remain strong with high levels of consumer and business confidence and record levels for immigration. The main negative are falling dairy prices and other export prices. The Reserve Bank of NZ left the official cash rate on hold during the month and indicated a period of stability at 3.5%. Growth in Australia is more mixed as the mining slowdown continues whilst the housing markets are responding positively to lower interest rates. Markets currently expect further falls in Australian interest rates this year. The Australian and New Zealand share markets gave back some of their recent gains during the month falling 0.1% and 0.8% (in local currency) respectively during March. Fixed income markets produced steady returns during the month ending up 0.6%. Fixed income benefited as investors look to lock in longer term interest rates. Portfolio Review The Milford Income Fund rose 0.6% during March (after fees and before tax). The Fund benefited from its fixed income holdings which helped to offset some negative returns from share market investments, which gave back some of their recent strong gains. The key company performance during the month was iiNet +36.1%, Z Energy +8.0% and National Storage +6.7%. iiNet is an Australian telecommunications provider and during the month received a takeover offer from rival TPG telecom. Key underperformers were listed property companies in Australia which gave back some of their recent very strong returns partially due to the expectation of rises in United States interest rates. Whilst rate rises in the US may cause some short-term volatility they should not affect the medium-term value of Australian companies. During the month we added a holding in Australian law firm Slater & Gordon on the potential for it to complete an attractive acquisition in the United Kingdom adding to its current presence there. We also participated in the new high yield bond issue from ANZ which offers a yield of 7.2%. At month end the Fund had approximately 34.2% invested in income producing shares, 60.5% in fixed income and 5.3% in cash. Market Outlook and Investment Strategy The outlook for shares remains supported by very low interest rates, high levels of liquidity and generally stable economic conditions. Headwinds are the relatively high company valuations, the prospect of rising rates in the United States and slowing growth in China. On balance we continue to believe that income producing shares remain attractive relative to low yields on investment grade fixed income although this preference has reduced given the increase in valuations. Furthermore, future returns are likely to be lower than those achieved in recent years given the starting point of higher valuations. Within fixed income we believe return premiums on select higher yielding fixed income investments remain attractive. Consistent with the above outlook, the Income Fund has a bias towards income producing shares. However, we maintain a diversified portfolio and core holding in fixed income to control risk consistent with the Funds low to medium risk objective. In terms of regions, we continue to favour Australia over New Zealand given more attractive valuations and the tailwind of potential further interest rate cuts. Disclosure of interest: Milford and Milford Staff had $7,874,522 invested in the Fund as at 31 March 2015 unit price. April 2015 Milford Income Fund Update Performance to 31 March 2015 Milford Income Fund Benchmark (90 Day Bank Bill Index) Over / Under Performance Benchmark Milford Income Fund after tax returns 28.0% PIR tax rate 17.5% PIR tax rate 10.5% PIR tax rate (after fees and before tax) Past Month Past 1 Year Past 3 Years (p.a.) Past 5 Years (p.a.) Since Inception 1 April 2010 (p.a.) 0.55% 0.32% +0.23% 17.15% 3.58% +13.57% 15.81% 2.99% +12.82% 13.44% 2.97% +10.47% 13.45% 2.97% +10.48% 0.31% 0.40% 0.46% 15.11% 15.85% 16.38% 13.47% 14.34% 14.92% 11.17% 11.99% 12.57% 11.18% 12.00% 12.58% For details of how investment performance is calculated, please see www.milfordasset.com/fund-performance/ Performance figures include the reinvestment of the quarterly distribution. Please note past performance is not a guarantee of future returns. .......................................................................................................................................................................... Historic Asset Allocation to 31 March 2015 (cumulative returns are since inception, after fees and before tax) .............................................................................................................................................................................. Top Holdings (as at 31 March 2015) Fixed Income Investments Holding NZ Shares Holding Australian Shares Holding Aristocrat International 2.94% Argosy Property Trust 2.01% Cromwell Group 1.75% Transfield Services 2.49% Meridian Energy 1.72% Charter Hall Retail 1.70% Commonwealth Bank 2.19% Air New Zealand 1.69% National Storage REIT 1.68% ANZ Banking Group 2.06% Chorus 1.51% Goodman Group 1.56% Goodman Plus Trust 1.98% Contact Energy 1.49% Mirvac Group 1.54% Westpac Bank 1.80% Restaurant Brands NZ 1.20% Spark Infrastructure 1.41% Macquarie Bank London 1.72% Kiwi Property Group 1.02% Transurban Group 1.38% Insurance Australia Group (GBP) 1.71% Z Energy 0.89% Galileo Japan Trust 1.14%