Alpha POWER Shares (Aegis) Portfolio

Alpha POWER Shares (Aegis) Portfolio - January 2008

Aegis Market Commentary

January was one of the worst months for some time for the Australian share market, with the S&P/ASX 100 Index down by 10.57% for the month. In terms of monthly sector performance, HealthCare was the best performer, while Information Technology and Property Trusts were the worst performers. While our market was, in part, driven by negative US market sentiment, there were heightened concerns that the global turmoil in financial markets and uncertain economic outlook in the US and Europe would have an impact on the earnings and financial positions of a number of Australian companies. The property sector suffered on debt refinancing concerns and fears that property valuations may decline, particularly in the US and Europe. Financial stocks also felt the wrath of investors, despite most companies in the sector being relatively well placed to cope with the current market turmoil. Allco and MFS both had spectacular falls from grace as investors became concerned about debt refinancing and opaque structures. A delay in ASX equity settlements through January also contributed to the volatility and negative market sentiment. Although the outlook for the domestic economy remains good and there is minimal direct exposure to subprime by Australian companies, we believe the uncertain global outlook and tighter conditions in the credit markets will continue to negatively impact investor sentiment over the coming months. The current reporting season should help to highlight those companies that are well placed to cope with the current global economic uncertainty.

Aegis comments on major out-performers:

Macquarie Infrastructure Group – MIG (+0.3%). MIG held up particularly well in a weak market. The fund released its December quarter traffic data in January, with some mixed results from its various toll roads. Despite good traffic increases on a number of roads, some roads also experienced traffic declines. MIG also announced that it had completed its $1B buyback in January. With its relatively stable cash flows, we continue to view MIG as a good defensive income stocks, particularly in the current volatile market.

Transurban Group – TCL (-3.5%). Transurban is another stock that we view as a good defensive income stock, with stable cash flows from its portfolio of toll roads. In January the fund announced it had recorded increases in revenue and traffic numbers for the December 2007 quarter for all of its toll roads in Australia and the US. The company also announced that it had signed reciprocal tolling agreements with ConnectEast (CEU), operator of the soon to be opened EastLink toll road in Melbourne. This will facilitate traffic flow between these two roads. TCL has a 4.92% interest in CEU and, although it has indicated that it has no current takeover intention towards CEU, we would view the EastLink as being a good fit with TCL’s current toll road portfolio.

ANZ Banking Group – ANZ (-5.3%). ANZ was our best performing bank stock in a market where sentiment towards financial stocks has turned distinctly negative. We made a company visit to ANZ in January and remain comfortable with the short- to medium-term outlook for the bank. It has no real direct exposures to US subprime, although the disruptions in credit markets have resulted in higher wholesale funding costs. The bank has taken action to recover these higher costs, including an increase in lending rates. Lending volumes remain strong, particularly in the business and corporate markets, with customers who previously borrowed directly in the credit markets now returning to the bank. The biggest earnings risk is the potential for an increase in bad debts, although general asset quality remains sound. Our earnings forecasts for ANZ remain intact and we expect the bank to achieve high single-digit growth in earnings per share and dividends in FY08.

Aegis comments on major under-performers:

Asciano Group – AIO (-21.4%). AIO securities experienced a significant decline despite holding an attractive portfolio of port and rail infrastructure assets with strong cash flows and good earnings growth prospects. We believe this can be partly blamed on concerns about the tighter credit markets, a lack of understanding of the company, given its short listed life-span, and concerns about its growth ambitions. In our view, AIO is in a good position despite the current tightening credit markets. It has a very small proportion of its debt maturing in 2008 and less than 10% of borrowings are due for repayment over the next two financial years. AIO maintains a hedging policy, which locks in a high proportion of its interest rate exposure, reducing the risks to the company with rising interest rates. AIO's asset base has strong cash flows with monopolistic attributes, which positions it well in the current market. At current levels, we view the securities as attractively priced and offering a good yield.

Babcock & Brown Infrastructure – BBI (-20.6%). BBI is another stock with a good portfolio of infrastructure assets, predominantly in ports and energy. Its assets are primarily long-life, monopolistic-style assets with strong and stable underlying cash flows, secured by regulated tariff regimes or contracted revenues. At current price levels, the distribution offers a very attractive, tax-deferred yield, with the promise of growth over the next few years. We view the recent sell-down as unjustified, given the strong distribution profile and sound balance sheet position.

QBE Insurance Group – QBE (-16.6%). QBE fell in January despite the company announcing an earnings-accretive acquisition in the US and also providing advice that its substantial investment portfolio is well positioned in the current market. Its equity portfolio is substantially hedged and its fixed interest and cash portfolio is invested in relatively short, high quality liquid securities. QBE is scheduled to release its FY07 earnings results on 26 February 2008 and we are expecting further strong growth in earnings and dividends.

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.