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Alpha POWER Shares (Aegis) Portfolio - March 2008

Aegis Market Commentary

March was another down month for the domestic equities market with the S&P/ASX 100 Accumulation Index down by 2.9% for the month. Intra-month volatility remained high. Telecommunications was the worst-performing sector, reflecting a drop in Telstra, with the Materials and Consumer Discretionary sectors also down significantly. Information Technology was the best-performing sector, with Consumer Staples and Financials also delivering small positive returns for the month. Market performance continued to be influenced by the ongoing sub-prime issues in the US and growing evidence the US economy is in recession. The US Federal Reserve cut rates by a further 0.75%, taking the Fed funds rate to 2.25%. In Australia, the Reserve Bank again increased its cash rate by 0.25% in its attempts to slow the economy and keep inflation under control. The key issues for the market remained the rising cost of credit and the impact on highly geared companies. Concerns also emerged that the Reserve Bank’s tight monetary policy would slow the domestic economy and impact consumer spending. The banks staged a recovery after a major fall in February, but concerns about increased funding costs and higher bad-debt charges remain. While in broad terms the outlook for the domestic economy remains strong, the ongoing fallout from the US sub-prime issue will continue to have a negative impact on domestic market sentiment. Tighter credit market conditions and higher funding costs will continue to have an impact on the financial sector and those companies with high debt levels. Additionally, the impact of the Reserve Bank interest-rate rises is expected to lead to a slowing in consumer demand. We retain our positive view of Chinese growth and the favourable outlook this has for the resources, energy and related sectors. Overall, we expect the domestic market to remain volatile and potentially move lower.

Aegis comments on major out-performers:

ANZ Banking Group – ANZ (+8.4%). After incurring major share-price losses in February, the major banks staged a partial recovery in March. Apart from the announcement that it would receive a $245M one-off gain (after tax) from the IPO of Visa, there was no other major news from ANZ. We decided to remove ANZ from the portfolio at the end of March as part of a move to reduce exposure to the banking sector given our view that disruptions in credit markets will continue for some time and that this will continue to impact market sentiment towards the banks. Following its removal ANZ issued its second earnings downgrade in seven weeks.

National Australia Bank – NAB (+6.6%). NAB also participated in the rally in the banking sector in March. The only real news from the stock was that it would book a $221M one-off gain (after tax) from the Visa IPO. We also decided to remove NAB from the portfolio at the end of March as part of a move to reduce exposure to the banking sector and a view that there were other banks with better short- to medium-term prospects.

Westpac Banking Corporation – WBC (+5.4%). The only news to emerge from WBC in March was that it would book a $189M after-tax gain on the Visa IPO. Despite our view that the banking sector is in for a rough ride over the next few months, we have retained WBC in the portfolio. In our view, WBC has a relatively conservative balance sheet and is better placed to deal with the current difficult environment than some of its peers. Furthermore, we do not see the dividend as being at risk.

Aegis comments on major under-performers:

Asciano Group – AIO (-21.3%). AIO has a portfolio of sound port and rail businesses that generate solid cash flows. However, the company has a high level of gearing and the 1H08 result disappointed the market due to the underperformance of its rail division. We recently undertook a visit to AIO and note the group is undertaking a number of initiatives to improve its performance and reduce debt. Although we continue to believe that AIO’s domestic port and rail industries have good prospects of earnings growth in the medium term, we have removed the stock from the portfolio. In the short-term, we think the market aversion to highly geared stocks will continue to weigh on the security price.

Fairfax Media – FXJ (-8.5%). FXJ fell through March in the absence of any major news from the company. We maintain a positive view of FXJ’s underlying assets and its moves to diversify away from its traditional metropolitan markets. Earnings should also continue to benefit from the recent acquisitions. However, we have removed the stock from the portfolio at the end of March given concerns of a slowdown in the advertising market.

Telstra – TLS (-7.2%). After a strong performance in February on the back of a solid profit result, TLS retraced some of its gains through March. We continue to view TLS favourably and see its transformation strategy as a positive that should better position it to respond to changing market dynamics. We note this initiative is still only 60% complete and has many challenges ahead, notably the rationalisation of IT platforms. Nevertheless, TLS' legacy telecom business is delivering encouraging results, and we expect TLS to focus on organic growth and improving cost efficiencies in its current markets.

IMPORTANT NOTICE:Aegis Investment Partners Pty Ltd (ABN 98 096 109 125, AFSL 226 957) ("Aegis") is the stock selector for the Alpha Model Portfolio – Aegis. The information contained in this document is prepared by Aegis for use solely by professional investment advisers and is not intended to be provided to retail clients. In preparing this information, it is not possible to take into consideration the investment objectives, financial situation or particular needs of any individual recipient. Investors should obtain individual financial advice from their investment advisor to determine whether information contained in this document is appropriate to their investment objectives, financial situation or particular needs before acting on that information. Prior to deciding whether to acquire, hold, or sell the Alpha Model Portfolio - Aegis, you should obtain and consider the Alpha Customised Portfolio Service Product Disclosure Statement dated 19 December 2006 (to be read in conjunction with individual financial advice), available on request from Alpha Structured Investments (1300 769 694 or www.alpha-invest.com.au). While all information is provided by Aegis in good faith, Aegis makes no warranties as to its accuracy, reliability, completeness or whether it is free from error or omission. Subject to statutory limitations, Aegis, together with its directors, officers, employees and related body corporates, do not accept any responsibility or liability arising from decisions made relying upon information contained within this document. This document is only to be distributed to Australian residents. All intellectual property relating to this document vests with Aegis unless otherwise expressly agreed.