CIO Letter to Shareholders COVID-19 Update

26 March 2020

Dear Fellow Shareholders,

The global events that have occurred at rapid pace over the past few weeks have led to unprecedented government policy action from major economies, including the US, UK, China and Australia among others, aiming to prevent a significant peak in COVID-19 cases and avoiding a situation where hospital systems are completely overrun and unable to treat all patients. These policies will leave many businesses across a diverse range of industries experiencing a significant reduction in revenue, or in some extreme cases no revenue at all, potentially for the next 2-6 months. We believe it will be completely irrelevant for investors to focus on a company’s short term (6 months) earnings profile, in our view the next 6 months will be about a company’s liquidity and solvency profile or to put it bluntly ‘the ability of the company to survive’.

Within this letter I want to convey what we are seeing at a company specific level across our portfolios, as well as highlighting all the variables that I believe investors will should try and understand before making any new investment decision. I also want to share how we are positioning the portfolio to ensure that it performs well post this pandemic, as investors who went through the GFC would understand, many equities went down at a similar rate but not all recovered at the same rate for a variety of reasons.

Many of our investors would be aware that NAOS prides itself on providing investors with a long-term, concentrated exposure to Australian undervalued listed micro, small and mid-cap companies with an industrial focus. Key to our investment process is a focus on the balance sheet flexibility and cash flow generation of each investment so that they can continue to operate during times of unforeseen market stress such as the situation we are currently in. We are generally fully invested through a market cycle, but we firmly believe that on a look through basis (i.e. looking through to the balance sheets of our respective investments) our overall portfolio structure is more conservative than many would be aware. At all times we aim to minimise the potential for permanent capital loss across our investments.

We will not be commenting on when we believe a recovery will occur and whether this will be a protracted or a sharp V-shaped recovery, simply because there are too many unknown variables to consider. Such variables include the timing of when COVID-19 cases will start to reduce daily and the subsequent timing on the relaxing of recently enacted government shutdowns. In addition to this, it is unknown what effect the fiscal and monetary policy responses will have on the long-term and short-term growth prospects of the domestic and global economy.

It is important for us to remain rational in such extreme and unprecedented times. Any sudden and substantial changes to the portfolio structure may well lead to significant permanent capital loss as well as a reduction in the ability of the portfolio to generate what we believe should be meaningful returns when conditions start to normalise. Our core focus is to ensure that all current investments have the means to remain liquid and solvent for the foreseeable future and make it through to the end of this pandemic. Business that can do this will find themselves in a much stronger position compared to those that are unable to do so and will reap the benefit of highly accommodating fiscal and monetary policies. As closed end company structures, the NAOS Listed Investment Companies (LICs) do not face the redemption risk that a traditional open ended managed fund may do in times such as these, and as such we are not forced to sell of any of our investments during a time that could be devastating to the long-term performance of the LICs.

It is also worth noting that as a large shareholder, and sometimes the largest shareholder in many of our investments, the NAOS investment team have frequently engaged with the management teams and/or Boards of all of our investments over the past few weeks. This provides us with granular insights into the changes taking place within the respective companies and the contingency plans being prepared and/or implemented to ensure these companies survive.

NAOS directors, staff, family and friends are amongst the largest investors within the three LICs and will remain aligned with all shareholders.

An investor update (webinar) will be held on the 8^th of April at 11:00 am (AEST),  where all investors are welcome to join as we provide a brief presentation and Q&A session, the event details and registration can be found on our website https://www.naos.com.au/investorupdate.

Finally, if you wish to read on, the investment team and I have put together some thoughts around:

• Key Economic and Business Issues to Consider
• Current Portfolio Structuring
• Company Specific Variables to Consider for Survival
• Recovery

Read the letter to shareholders in full

Thank you for your continued support and stay well,

Sebastian Evans

Managing Director and Chief Investment Officer

NAOS Asset Management Limited