Diversified Portfolios - InvestSMART Balanced - 30 June 2016

COMMENTARY

PORTFOLIO COMMENTARY

The big news in markets for the month of June centred around the UK's decision toleave the European Union, this generally impacted equity markets negatively but hada positive impact on bond prices as investors flocked to the safety that these assetspurportedly provide. This impacted the portfolio negatively over the month as theportfolio is overweight Australian equities and within international equities tends tohave a bias towards Europe due to the portfolio’s underweight to the US.

The InvestSMART Balanced Portfolio returned -1.4% over the month of June. TheAustralian equity exposure returned -2.4% for the month, while the internationalequity exposure was impacted by the bias to Europe which was down around 9%versus the broader market return of -3.8%. Positively, the allocation in emergingmarkets (which were broadly flat) had a positive impact on the portfolio, mitigatingsome of the fall in European exposures.

The portfolio's exposure to Australian REITs contributed positively to the portfolioover the month with local REITs up 3.8% over the month. It is apparent that A-REITsare being supported by a low interest rate environment and investors desire for yield.From this perspective we believe that valuations in the REIT sector appear stretchedand may look to trim the exposure in coming months. The global property exposurewas broadly flat, which would have been positive had it not been mainly impacted bythe currency.

Within fixed interest the portfolios exposure to Australian government bondsperformed well returning 1.4%, while the exposure to Macquarie Income OpportunitiesFund lagged the broader bond market, returning 0.1%.

Since inception the portfolio continues to track ahead of its cash 2% objective by around 0.2%.

PORTFOLIO OBJECTIVE

The portfolio remains overweight Australian equities on the basis that valuationsappear reasonably compelling when compared to other asset classes and given theattractive yield characteristics of the asset class. Within fixed interest the portfolioholds Australian government bonds and has an exposure to Australian credit andoverseas securities. The portfolio is expected to do well in an environment whereAustralian equities outperform other asset classes and where credit outperformsgovernment bonds. Within international equities the portfolios have a bias towardsemerging markets and an underweight to US equities, therefore the portfolio willbenefit when US equities underperform broader equity markets and emergingmarkets do well.

Growth of $10,000

Income Reinvested

Asset Allocation as at 30 JUNE 2016

Source: Praemium, RBA
Returns are before expenses and fees. Returns are shown as annualised if the period is over 1 year. * Since Inception (SI) date is 29 December 2014.

PORTFOLIO POSITIONING

The portfolio remains overweight Australian equities on the basis that valuationsappear reasonably compelling when compared to other asset classes and given theattractive yield characteristics of the asset class. Within fixed interest the portfolioholds Australian government bonds and has an exposure to Australian credit andoverseas securities. The portfolio is expected to do well in an environment whereAustralian equities outperform other asset classes and where credit outperformsgovernment bonds. Within international equities the portfolios have a bias towardsemerging markets and an underweight to US equities, therefore the portfolio willbenefit when US equities underperform broader equity markets and emergingmarkets do well.

Current market pricing implies that the portfolio's RBA Cash Rate 2% objective isachievable over the long-term but only through a reasonable allocation to relativelyvolatile equity investments. This means that investors should be comfortable withabove average volatility, which could result in a short-term fall in the portfolio's valueof around 18%.

Peformance Summary to 30 June 2016

Contribution to Return 1 Month to 30 June 2016

Important Information

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