MARKET UPDATE

Adviser Update October 2021. how do you see the world . build managed accountö.

PART A. Macro Environment.

2021 will see the strongest global growth rate since WW2 Led by the US and Europe (as opposed to China in previous cycles) Global Growth will slow next year, but to still above trend levels, supported by: Infrastructure Spending (US & Europe) Inventory Cycle rebuild: Inventory’s have been drawn down (estimated to have been a 1.1% drag on US GDP – strong demand vs supply chain issues). Liquidity : We have never seen looser Monetary (Central Bank) and Fiscal (budget deficit spending) conditions..

Inflation – (cost pressures rising, impacting margins and policy) Monetary Policy – Fed about to Pivot and start tapering, which will eventually lead to rising rates: “normalisation” of monetary policy (2022) US Tax hikes – (Fed Debt Spiral and looming debt ceiling again) - further impacting margins (2022). Will see both corporate and individual rate hikes Growth – rate of growth slowing, following pull forward of demand (what happens once inventories are re-built?) China – has slowed and will no longer be the driver of global growth- plus increased political and regulatory risk COVID – further variants (China locking down again, EM heavily impacted now).

5. Vaccine Rollout status. Vaccine rollout* Per cent of population vaccinated, o Italy France Brazil Australia I-JK Israel Germany United States Mexico India o 10 10 20 20 30 30 40 40 28/10/2021 50 60 50 60 70 70 80 80 *Major economies, updated on a weekly basis First dose Second dose Source: Refinitiv Datastream / Watershed Funds Management.

6. We are Past the Peak in Growth but above trend 4.5% Global GDP forecasts next year.

7. Fuelled by the loosest financial conditions since WW2.

8. China grew at a rate of only 3.5% in H1, 2021.

9. And Chinese property markets slowing significantly.

10. Which suggests commodity prices will fall from recent peaks.

11. Wage inflation is coming?. There are more jobs advertised in the US than unemployed people. Companies are increasingly mentioning labor constraints in results..

12. and some inflation is not transitory?. Commodity prices will eventually soften and Supply bottlenecks will dissipate. But inflation lags stimulus And we have strong inflation already, at the start of the cycle.

13. What is the “new” neutral setting, 2%?. Fed will start to taper Soon -$15bn per month which ends i n 7 months. First rate increase in late 2022 – covid permitting Very high correlation between S&P500 and Fed Balance Sheet Expansion / contraction We expect yields to rise further over the next several months, as it remains below pre-covid levels..

PART B. Market Environment.

Earnings have been strongly upgraded this year Companies are paying out mountains of cash (Special Dividend/buybacks) Companies have strong operating leverage early cycle (record margins) Elevated cash/savings rates should see demand remain strong in H2 2021..

Low rates have fuelled a rally in EVERYTHING -Market Valuations on almost every metric are at record highs. Bond Markets are expensive (record low global yield with almost record high duration) Credit Markets are expensive (most spreads tighter than pre Covid-Levels) 2022 earnings are not being upgraded (and in Oz, may actually be downgraded).

17. The recovery in corporate earnings has been strong.

18. ASX 200 is trading on 17.8 times this year's earnings and 18x 2022 forecast earnings (i.e. negative earnings growth next year!).

PART C. Portfolio Positioning and Performance.

After buying the dip aggressively in March last year we were overweight Equities vs Fixed Income. With valuations now full we have started to slightly increase cash levels in equity mandates and are now slightly underweight equities: Aus Share Net exposure ~84%, EL (25% Cash), International ETF Net exposure 78%, International Share (USD) 7.8% cash. Within equites (regionally) we have increased exposure to Europe (particularly UK) and Japan. Reduced EM Exposure late last year (increased active mandate) USD will likely remain strong (which along with COVID issues and China slowdown, is a headwind for Emerging Markets). It is similarly a headwind for US earnings, but this is largely offset for Australian (unhedged) investors. Within Equity Mandates, sector positioning is moving more defensive (but want to increase cyclical exposure – leveraged to rising bond yields – during weakness) Within Fixed Income we hold no developed market duration – Preference for Global Credit (high yield), Domestic Floating Rate Corporate (Hybrids) and Emerging Market Bonds. We have however reduced hybrid exposure (very tight margins) and are increasing cash. Within Alternatives we have introduced a 3% exposure to the PIMCO Trends Managed Futures Strategy, which provides a source of returns that are non-correlated to traditional equity and fixed income markets.

Income Portfolio August: We trimmed exposure to several longer dated hybrids: NABPH, MQGPC and MQGPD. These sales have increased cash in the portfolio to 8%, while reducing hybrid exposure to 52%. Australian Equities Portfolio August: We topped up leveraged short position BBOZ as the market surged to new highs. This dialled equity exposure in the portfolio back to 80 %. September: We moderately increased our positions in BHP and RIO, taking advantage of share price weakness. We also introduced James Hardie (JHX) into the portfolio at 2% weight. JHX’s full year profit result highlighted James Hardie’s continued market share gains in an already very strong US housing market and momentum in shifting sales to higher value products . October: We reduced our exposure to CBA and ANZ by ~2.5%. While we continue to see CBA as Australia’s highest quality bank, it is now trading at over 19 times forecast earnings – a significant premium to both domestic and offshore peers. In addition, with the government’s emergency funding rolling off (making it hard for banks to maintain margins), likely additional macro prudential controls ahead and increasing competition, we see a more challenging outlook for the sector . We also added to our positions in JHX and Star Entertainment Group (SGR). SGR had been hit by allegations in media reports about money laundering, which the company responded to by outlining the actions they had already taken, including updating their Anti Money Laundering Policy and procedures and have investing significant funds into improving their compliance processes and technology. Star is very well positioned to benefit from the opening up of NSW and rebound in tourism forthcoming ..

Emerging Leaders Portfolio August: Afterpay ( APT) was divested, given that the portfolio is mandated to hold stocks for up to two years after moving into the ASX100 index, and after the recent takeover offer from global payments giant Square (SQ.NAS - listed on the Nasdaq) for an all script bid, the stock popped 30% and was divested into this strength. Nuix (NXL) was also divested, after a string of disappointing announcements with respect to profit downgrades, management upheaval and potential governance issues that had seen its share price slump after its strong ASX debut in December. International ETF Portfolio August: The portfolio added to its position in the UK FSTE 100 (F100) and Japan via (HJPN), two markets we view as set to be big beneficiaries of the global economic recovery and re-opening. The portfolio also added to the short Nasdaq position (SNAS) given elevated valuations and fears that rising inflation may bring forward central bank tightening and pressure valuation of the tech sector. International Share Portfolio August : We reduced our exposure to the Technology sector by lowering exposure to Amazon (AMZN), Intel (INTC), and Microsoft (MSFT ). We also increased our exposure to the Banking sector by adding to our positions in Bank of America (BAC), JP Morgan (JPM), and Wells Fargo (WFC ). In addition, we have exited our position in Nestle (NESN), which was at 1.9 %. We increased our positions in Home Depot (HD) and Johnson and Johnson (JNJ), while reducing exposure to Berkshire Hathaway (BRK.B ). With the US likely moving into an environment of rising bond yields and interest rates, we expect the banking sector to outperform the technology sector, while some companies (such as Nestle) that will face difficulty on passing on higher costs..

Multi-Asset Portfolios September: We sold out of our remaining holding in the Pengana listed Private Equity Trust (PE1). The fund has performed to expectations but due to a number of market timing issues was unable to raise the amount of funds initially expecting, creating liquidity issues. We introduced a 3% exposure to the PIMCO Trends Managed Futures Strategy, which provides a source of returns that are non-correlated to traditional equity and fixed income markets.

24. BALANCED PORTFOLIO – September 2021. Asset Allocation Positioning:.

CONSERVATIVE PORTFOLIO – September 2021. Asset Allocation Positioning:.

GROWTH PORTFOLIO – September 2021. Asset Allocation Positioning:.

Watershed balanced portfolio September 2021. 27. Holdings Value % Annual Income % (Est)* CASH Cash # 2.5% 0.10% Total for CASH: 2.5% 0.10 % INCOME SECURITIES Watershed Income Portfolio 28.5% 3.73% Total for INCOME SECURITIES: 28.5% 1.05% AUSTRALIAN SHARES Watershed Australian Share 27.1% 4.37% Watershed Emerging Leaders 9.7% 2.52% Total for AUSTRALIAN SHARES: 36.8% 1.48% INTERNATIONAL SHARES Watershed International Share 19.6% 0.79% Managed LIC 10.0% 2.74% Total for INTERNATIONAL SHARES: 29.6% 0.45% ALTERNATIVES Managed Funds 2.6% 0.00% Total for ALTERNATIVES: % 0.00% Total 100.0% 2.98% * Estimated yield including franking credits forecast by Bloomberg for the 2020/21 Financial Year #NB cash sits outside this structure and the depending on Platforms will have a minimum amount. Total Defensive 30% Total Growth 69% Total Alternatives 2%.

Australian share portfolio September 2021. 28. ASX Code Company Name Current Price $ Portfolio Weight % Grossed Up Dividend Yield % BANKS & FINANCIALS ANZ ANZ Banking Group $28.15 4.38% 7.31% CBA Commonwealth Bank $104.33 9.23% 5.31% MQG Macquarie Group Limited $182.00 3.12% 3.38% CONSUMER DISCRETIONARY ALL Aristocrat Leisure $46.95 5.07% 1.95% SGR Star Entertainment Group $4.47 3.13% 4.15% CONSUMER STAPLES EDV Endeavour Group Limited $6.98 0.61% 2.87% WOW Woolworths Group Ltd $39.35 3.53% 3.70% ENERGY ORG Origin Energy $4.73 1.96% 6.64% OSH Oil Search Limited $4.39 2.17% 2.73% WPL Woodside Petroleum $23.88 3.77% 7.42% HEALTH CARE COH Cochlear Limited $220.40 2.32% 2.07% CSL CSL Limited $293.40 9.46% 1.01% RMD Resmed Inc $37.25 2.78% 0.59% RHC Ramsay Health Care Limited $69.62 2.92% 2.91% SHL Sonic Health Care $40.66 2.13% 2.84% INDUSTRIALS ALX Atlas Arteria $6.49 1.68% 8.36% AZJ Aurizon Holdings $3.79 2.11% 10.55% SYD Sydney Airport $8.24 4.37% 2.66% TCL Transurban Group $14.16 3.39% 4.00% MATERIALS AMC Amcor Limited $16.48 4.12% 3.87% NCM Newcrest Mining $22.64 3.31% 2.65% BHP BHP Billiton Ltd $37.61 5.95% 16.41% JHX James Hardie Industries $50.27 1.99% 2.11% RIO RIO Tinto $100.18 2.29% 13.69% REITs GMG Goodman Group $21.68 3.71% 1.48% LLC Lendlease Group $10.85 1.38% 3.59% Other BBOZ BetaShares Aus Equities Str Bear $4.42 6.79% 0.00% CASH 2.33% 0.10% Watershed Australian Share Portfolio 100.00% 4.37%.

Emerging leaders portfolio SEPTEMBER 2021. 29. ASX Code Company Name Current Price $ Portfolio Weight % Grossed Up Dividend Yield % CONSUMER DISCRETIONARY ABY Adore Beauty Group Limited $4.61 2.87% 0.00% BAP Burson Group Limited $7.57 4.24% 3.96% BBN Baby Bunting $5.56 5.19% 4.37% CCX City Chic Collective Limited $6.50 7.16% 1.10% CKF Collins Foods Limited $12.23 4.90% 3.04% PWH PWR Holdings Limited $8.81 6.74% 1.78% CONSUMER STAPLES AHF Australian Dairy Farms $0.05 0.80% 0.00% DIVERSIFIED FINANCIALS JHG Janus Henderson Group $58.52 5.08% 3.64% PSI PSC Insurance Group Limited $4.20 4.54% 3.74% ENERGY WOR Worley Parsons Ltd $9.91 2.69% 4.94% INDUSTRIALS ASB Austal Limited $1.88 1.91% 5.32% SRL Sunrise Energy Metals Ltd $1.59 0.77% 0.00% NWH NRW Holdings Ltd $1.57 2.51% 7.30% SIQ Smartgrp Corporation $9.50 3.32% 5.86% SVW Seven Group Holdings Limited $20.69 4.30% 3.66% INFORMATION TECHNOLOGY APX Appen Limited $8.96 1.16% 2.26% PPS Praemium Limited $1.08 4.65% 0.09% MATERIALS IGO Independence Group NL $8.88 6.97% 1.61% MIN Mineral Resources Limited $44.81 5.33% 9.05% CASH 24.87% 0.10 % Watershed Emerging Leaders Portfolio 100.00% 2.52%.

International portfolio SEPTEMBER 2021. 30. Code Company Name Price (AUD) Portfolio Weight % Div Yield % Consumer Staples NESN.SWX Nestle SA (Swiss) $167.32 1.97% 2.44% COST.NAS Costco Wholesale Corp $621.61 5.46% 0.61% Retail Staples AMZN.NAS Amazon $4,544.35 10.40% 0.00% HD.NYS The Home Depot $454.10 3.12% 1.96% Financial WFC.NYS Wells Fargo $64.20 2.65% 1.15% BRK.B.NYS Berkshire Hathaway $377.57 7.40% 0.00% JPM.NYS JPMorgan Chase & Co $226.44 7.15% 2.19% AXP.NYS American Express Co $231.75 5.02% 1.01% BAC.NYS Bank of America Corporation $58.72 3.31% 1.74% PYPL.NAS Paypal Holdings $359.96 5.41% 0.03% Industrials MMM.NYS 3M Company $242.67 3.81% 3.24% BA.NYS The Boeing Company $304.25 1.49% 0.00% Technology AAPL.NAS Apple $195.74 6.59% 0.58% MSFT.NAS Microsoft $389.99 15.42% 0.75% INTC.NAS Intel $73.70 4.28% 2.48% GOOGL.NAS Google $3,698.40 5.93% 0.00% Healthcare JNJ.NYS Johnson & Johnson $223.41 4.76% 2.50% Cash 5.83% 0.10 % Watershed International Portfolio 100.00% 0.79%.

Income portfolio SEPTEMBER 2021. 31. ASX Code Company Name Current Price $ Portfolio Weight % Gross Running Yield % ANZPI ANZ Capital Note 6 $102.61 5.55% 2.96% ANZPE ANZ Capital Notes 2 $100.67 6.32% 3.26% BENPH Bendigo & Adelaide Bank $104.95 1.50% 3.19% BOQPE Bank of Queensland Capital Note $103.95 0.97% 3.63% CBAPD CBA Perls VII $100.98 5.44% 2.84% CBAPG CBA Perls X $104.08 2.90% 3.36% CGFPB Challenger Capital Notes $103.30 1.03% 4.31% MBLPC Macquarie Bank Capital Note 3 $108.54 2.42% 4.40% MQGPC Macquarie Group Capital Note 3 $104.75 3.00% 3.94% MQGPD Macquarie Group Capital Notes 4 $106.45 2.98% 4.16% NABPH NAB Converting Pref Shares $104.95 5.00% 3.42% NABPD NAB Capital Notes 2 $102.55 1.70% 4.83% RHCPA Ramsey CARES $103.80 3.83% 4.78% WBCPH Westpac capital note 5 $103.70 5.47% 3.19% WBCPI Westpac capital notes 6 $105.20 3.52% 3.64% MXT MCP Master Income Trust LIC (NTA $2) $2.05 15.20% 4.50% KKC KKR Credit Income Fund (NTA $2.50) $2.27 12.81% 4.50% EBND Vaneck Emerging Inc Opportunities $11.26 12.39% 5.00% CASH 7.97% 0.10 % Income Portfolio updated at 30.09.21 100.00% 3.73%.

International etf & alternatives portfolio SEPTEMBER 2021.

Multi-asset performance SEPTEMBER 2021. Net Performance (%) 1m 6m 1yr 3yr Inception* Watershed Balanced Portfolio -0.72% 8.15% 18.01% 7.66% 8.78% FE UT PG Multi-Asset Balanced Index -1.32% 5.62% 14.94% 6.35% 6.34% Relative Performance 0.60% 2.53% 3.07% 1.31% 2.44%.

SeCTOR PORTFOLIO performance SEPTEMBER 2021. Gross Performance (%) 1m 6m 1yr 3yr Inception* WFM Aus Share Portfolio -0.33% 9.42% 26.13% 7.06% 7.44% S&P/ASX 200 Accum Index -1.85% 10.14% 30.54% 9.65% 9.08% Relative Performance 1.52% -0.72% -4.41% -2.58% -1.64%.

Watershed Funds Management. Watershed Funds Management is a specialist Managed Account provider and has been a pioneer in the delivery of MDA & Managed Account (SMA) solutions to financial advisers. Watershed leverages the expertise of a highly credentialed investment team to form a global thematic view that determines asset class and sector allocations. Our investment committee structure differs for each Managed Account (SMA) and is chaired by an individual with niche expertise and a proven track record for managing portfolios within that asset class. With a research process that is both rigorous and thorough we have been able to deliver strong historical returns across our full suite of SMA’s. An investment in a Watershed SMA provides professional and active investment management with full transparency of holdings, transactions and structure. Watershed seeks to form a collaborative relationship with advisers, actively communicating portfolio strategy in the current market environment so that advisers are better equipped to communicate with their clients..

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