Risks
It is imperative that before making any investment decisions, consideration is given (with the assistance of a qualified financial adviser) to its suitability or otherwise in light of your particular investment needs, objectives and financial circumstances.

There are risks associated with an investment in the Company. The following is a brief summary of what the Directors believe are the principal risks of an investment in the Company.

Market Risks
There are risks associated with the Company’s investments on the stock market, as with any investment on the stock market. These risks may include:

• The market value of shares and other investments purchased by the Company can fall as well as rise. Share markets can be volatile.
• Investing in shares carries risk. Whilst it is not possible to list all risks, these are the major risks that may affect the Company (and therefore you) as an investor:
  • Business Risk: This is the risk that a company selected to invest in does not run its business well. This poor business management can result in the income or capital growth expectations of the Company not being met. Business risk then becomes financial risk – that is, the value of the shares will drop and the Company will lose part, or in a severe case, all of its investment in that company.
  • Credit Risk: This is a risk if a company defaults on its debts because debt investors rank before share investors, and a subsequent wind-up of the company may deteriorate shareholder value.
  • Reputation Risk: Even very well-managed companies can face severe reputation risk for unexpected events. The management of these events can ruin a company’s reputation. For example, when an oil tanker runs aground – it is usually the oil company who faces the environmental repercussions. Any environmental, work-place or ethical misdeeds can cause a company’s shares to be devalued.
  • Information Risk: This is where the information given to the portfolio manager regarding the investment was wrong or incomplete. It may have been intentional or unintentional.
  • Market Risk: The price of any share has two components, the value placed on the company shares and the value placed on the market as a whole. When investors lose confidence in the market, the market component of the share price will drop. Even solid companies will see their share price drop when investors lose confidence in the market.
  • Political Risk: This can mean that the government is unstable. In Australia, it would mean that there is concern over the strength of the current government and the possibility of an election and a new government being brought in. It can also mean that changes in government policy will impact on the attractiveness of the market as a whole, sectors or specific companies. Political risk will also impact on the currency, which in turn will affect the ability of companies to import needed equipment or make interest payments determined in other currencies.
  • Income Risk: While many investors expect to receive income from their share investments, income or any level or income is not certain.
  • Liquidity Risk: This is the risk that when an investor wants to sell there will not be a buyer within what the investor considers a reasonable price range, or any buyers are not interested in the amount of shares the investor wants to sell. The ASX only provides the platform for buyers and sellers to meet, not a guarantee that there will be a buyer or seller for shares. Institutional investors, even in reasonably liquid shares, have to be careful that other investors do not know they are selling the shares because that can lower the share price.
  • Inflation Risk: When inflation is rising and the company cannot match these rises through increasing their prices, margins may have to be cut. Also, where inflation is rising, workers may demand an increase in their wages to keep up with it. Increases in wages only fuels inflation, as there is no increase in productivity for the extra wage earned. As inflation is associated with higher interest rates, some companies may be hit by lower margins and higher interest payments.

Investment Management Risk
There are risks associated with the management of the Company’s investments:

• Past performance of the sub portfolios should not necessarily be seen as being indicative of future performance of the sub portfolios or the Portfolio.
• The performance of the Company is dependent on the expertise and investment decisions of the Investment Manager and its key personnel. There is no guarantee that the Investment Manager will be able to retain its key personnel or engage suitable replacements for them. In particular, the continued involvement of Peter Spann or an appropriate replacement in developing the investment strategies of the Company is important to its success.
• Management of the investments will be dependent upon the Investment Manager maintaining its Australian Financial Services Licence.
• Continued investment will be dependent on the Investment Manager remaining in operation and continuing to develop the share portfolios or other similar offerings.
• If the Investment Manager must be replaced for any reason, no suitable replacement may be available or a change of manager may require a change in mandate unacceptable to the Directors.
• The investment returns may differ from investment industry benchmarks.
• Foreign currency fluctuations may affect the value of investments.
• It may be argued that the inclusion of a performance fee may encourage the Investment Manager to act in a manner which adds to the risk and volatility associated with the investment.
• The success and profitability of the Company in part will depend upon the ability of the Investment Manager to invest in well-managed companies which have the ability to increase in value over time.
• Operational costs for the Company as a proportion of total assets will be affected by the level of total assets of the Company and by the level of acceptance of the Share Offer, the Bonus Option Issue and any future offer. Operational costs will represent a greater proportion of total assets and may reduce the operating results of the Company and accordingly the ability to make dividend payments, if the Company only achieves no or few acceptances under this Offer than if it secures a greater level of acceptance.
• It is the intention of the Investment Manager to leverage part of the portfolio. Leverage has already been used in the purchase of instalment warrants comprising assets in the portfolio. Leverage (or gearing) generally refers to borrowing and its effect is to magnify the outcome of an investment. This has the potential to be both positive or negative. Leverage allows greater potential return to the investor than otherwise would have been available. However, the potential for loss is greater because if the investment becomes worthless, not only is that money lost, but the loan still needs to be repaid.

Risks of trading call options
There are risks associated with writing call options as part of the Company’s investments:

• Market risks: The market value of options is affected by a range of factors. They may fall in price or become worthless at or before expiry. Changes in the price of the underlying share may result in changes to the price of an option, but the change can sometimes be in a different direction or of a different magnitude to the change in the price of the underlying share.
• Options are a wasting asset: Options have an expiry date and therefore a limited life. An option’s time value erodes over its life and this accelerates as an option nears expiry. This “time decay” usually benefits options writers.
• Effect of ‘Leverage’ or ‘Gearing’: The initial outlay of capital may be small relative to the total contract value with the result that options transactions are ‘leveraged’ or ‘geared’. A relatively small market movement may have a proportionately larger impact on the value of the contract. This may work against the Company as well as for the Company. The use of leverage can lead to large losses as well as large gains.
• Illiquidity and pricing relationships: Market conditions (for example, illiquidity) may increase the risk of loss by making it difficult or impossible to effect transactions or close out existing positions. Normal pricing relationships may not exist in certain circumstances, for example, in periods of high buying or selling pressure, high market volatility or illiquidity in the market for a particular option series.
• Orderly market powers: ASX and ACH have broad powers under their Business Rules to take action in the interests of maintaining fair and orderly markets or of providing services in a fair and effective way. These powers include the ability to suspend trading, impose position limits or exercise limits and terminate open contracts. In some circumstances, this may affect the Company’s positions. Similarly, regulatory authorities such as ASIC may give directions to ASX or ACH, for example to suspend dealings in products.
• Trading disputes: All options transactions on ASX are subject to the rules, procedures, and practices of ASX and ACH. Under the ASX Business Rules, certain trading disputes between market participants (for example errors involving traded prices that do not bear a relationship to fair market or intrinsic value) may lead to ASX cancelling or amending a trade. In these situations the client’s consent is not required for the cancellation of a trade.
• Trading facilities: As with all trading facilities and systems, there is the possibility of temporary disruption to, or failure of the systems used in the options market, which may result in an order not being executed according to the Company’s instructions or not being executed at all. The Company’s ability to recover certain losses may be subject to limits on liability imposed by the system provider, ASX, ACH or its broker.
• Covered calls: The Covered Call or Buy/Write strategy is regarded as one of the lower risk options strategies that can be employed when trading in the options market. Stock must be lodged with the ACH for the purposes of this strategy to cover margin requirements. There are still risks involved with the strategy. One of those risks is the decline in the underlying share. While the premium received for writing the call against stock acts as a partial hedge, it will only protect the Company from a certain amount of downside in the physical stock. With this in mind a suitable capital preservation and stop loss strategy may be implemented to cover the Company in the event of a strong downward movement in the share.There is also the risk that the share price will move upward quickly and by a large amount. This is the risk of opportunity cost where the writer of the call benefits from the rally up to the strike price of the call only. Any gains above that cannot be realised while the call is in place.
  At this point there is the opportunity to roll the call position up to take part in the rally. However this may have to be done at a cost as the price of the written call will have increased in price with the price of the underlying share. The amount by which this will increase will depend on the strike price of the option and also the delta of the option.
• Liquidity risk: The Company may not always be able to get its order filled in the market place at all or at the price the Company wants.

General risks
A number of factors, some of which are beyond the control of the Company, may affect the Company’s business:

• The future earnings of the Company and the value of the investments of the Company may be affected by the general economic climate, commodity prices, currency movements, changing government policy and other factors beyond the control of the Company including force majeure events (such as fire, earthquake, storms, natural disasters, wars, acts of terrorism, strikes or loss of supply of electricity). As a result, no guarantee can be given in respect of the future earnings of the Company or the earnings and capital appreciation of the Company’s investments.
• Variations in legislation and government policies (including, in particular, taxation laws or policy) generally could materially affect operating results of the Company.
• Accounting Standards may change which may necessitate a change in accounting policies in use by the Company.
• Even though the Shares will be listed on ASX, there is no guarantee that there will be a ready market for the sale of Shares. Many factors beyond the control of the Company may affect the price of the Shares and the market for the Shares on ASX, some of which are discussed under the heading ‘Market Risk’ above.
• An outbreak of disease, an act of terrorism or an outbreak of international hostilities may occur, adversely affecting consumer confidence, customer spending and share market performance. This may have an adverse impact on the Company’s operating, financial and share price performance.
• Investors are strongly advised to regard any investment in the Company as a long term proposition and to be aware that, as with any equity investment, substantial fluctuations in the value of their investment may occur.

This list is not exhaustive. Potential investors should seek professional advice.