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Alpha POWER Shares (Aegis) Portfolio - April 2008

Aegis Market Commentary

After a poor March Quarter, the market staged a rally in April, recovering some of its recent losses. The S&P/ASX 100 Accumulation Index rose by 4.6% in April, but remains down by 10.5% year to date. Volatility remains high with some individual stock prices trading in wide bands. Energy and Materials were the best-performing sectors in April, with the major stocks in these sectors benefitting from the relentless rise in the oil price and substantial increases in the prices of base commodities such as coal and iron ore. Consumer Discretionary and Industrials were the worst-performing sectors. With some evidence that the Australian economy is slowing, discretionary retailers are likely to be impacted by a slowdown in sales. Industrial stocks are being impacted on a number of fronts, with margins likely to come under pressure due to rising costs and building-related stocks expected to suffer from a slowdown in the housing market. The signs of a slowing in the economy were behind a decision by the Reserve Bank of Australia to keep interest rates on hold; however, the central bank maintains a close watch on inflation and could be expected to move rates higher on any signs of a breakout in inflationary pressures. In the US, the Federal Reserve dropped the federal funds rate by another 25 basis points to 2%, citing evidence that US economic activity remains weak. While the global investment banks continue to announce large sub-prime-related losses, there seems to be more positive sentiment towards the moves to recapitalise this sector. While the domestic market recovery in April is encouraging, we expect that volatility is likely to continue and the emerging slowdown in the Australian economy will continue to have adverse implications for certain sectors, such as housing and discretionary spending. We retain our positive view of Chinese growth and the favourable outlook this has for the resources, energy and related sectors.

Aegis’ Comments on Portfolio Stock Performance

Main outperformers

QBE Insurance Group – QBE (+13.9%). QBE’s share price continued to move up in April following the significant selldown in February. We maintain that the February sell down was overdone and are pleased to see a continuation of the share-price recovery. In April, QBE announced a proposal to merge with Insurance Australia Group (IAG), offering 0.142 QBE shares and 70 cents cash for each IAG share. If QBE’s bid is successful, it will significantly increase the company’s share of the domestic general insurance market and provide it with a much larger base from which to pursue its continued offshore growth. We believe it would be a positive outcome for QBE given its strong track record in mergers and acquisitions. However, the IAG board has rejected the proposal and, given QBE’s track record of not overpaying for acquisitions, there is no certainty a merger will proceed.

Transurban Group – TCL (+5.5%). TCL reported positive traffic and revenue data for the March quarter, with good revenue growth across all its toll roads and all but one toll road experiencing increased traffic flows. The Pocahontas Parkway in the US experienced a traffic decline of 4.5% due to toll increases. We continue to view TCL and its portfolio of toll roads, with stable, rising cash flows, as a strong defensive investment.

Telstra Corporation – TLS (+3.6%). Although Telstra returned slightly below the S&P/ASX100 Index in April, it put in a positive performance, reversing some of its losses from the previous month. There was no major news from Telstra in April, but in early May the company reaffirmed its FY08 earnings guidance in a presentation at an investmentbanking conference. We continue to view TLS as a good defensive stock with a high dividend yield and expect the benefits of its transformation program will see good returns for shareholders over the next few years.

Main underperformers

Tabcorp Holdings – TAH (-19.3%). TAH fell significantly after the Victorian government announced that from 2012, TAH’s and Tatts Group’s (TTS) duopoly ownership and operation of the state’s gaming market would be broken. In our March 2008 quarterly update, we provided detailed commentary on this announcement; however, in broad terms, the company will lose a business that contributes around 25% of earnings. We continue to like the defensive nature of TAH’s remaining businesses. At current levels the stock is trading below our reduced valuation and offers a high dividend yield. We are retaining the stock in the portfolio at present, but will continue to watch developments.

Wesfarmers – WES (-4.2%). In April, WES announced a $2.57B capital raising via a 1-8 entitlement issue at $29.00 per share. The proceeds are to be used to pay down shortterm debt associated with the Coles acquisition. We view the raising positively as it reduces WES’ financial risk profile significantly and allows management to now focus on the integration of the Coles Group. We maintain our positive view of WES and expect the company to achieve significant medium- to long-term benefits from the Coles acquisition.

Babcock & Brown Infrastructure – BBI (-2.1%). In April, BBI announced the sale of a 6% interest in National Gas Pipeline Company of America, reducing its stake to an economic interest of 26%. We see this as a positive move, as it prevents the need to raise additional equity at the current low price and also allows the company to repay short-term funding. We recently met with BBI management and remain comfortable with the company’s portfolio of monopolistic and strong cash flow generating assets.

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.