Accounting

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Merrill Lynch Mercury's1 investment philosophies are as follows

A belief in active management

Merrill Lynch Investment Managers believes in actively managing portfolio where there is an active approach to all levels of the investment process stock selection, sectors weightings and asset and geographical allocation.

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Commitment to primary research

The investment process is driven by research where investment managers undertake double responsibilities of fund management and extensive individual research covering markets open to international investment. Managers are also benefiting from a vast range of analysis from brokers where the management has a privileged relationship. Experience and extensive research has provided confidence to commitments to investment decision.

Style flexibility

In contrast with a restrictive style that might lead to under performance in times of economical change, a flexible approach is practice to accommodate economic circumstances. Thus in the long run, this flexibility allows consistency in performance over the economic cycle. Flexibility also allows investment in a wide range of stocks which are described as "growth", 'value" or "contra-cyclical"

A strong team approach

There is a strong emphasis on collective consensus where individual skills are factored into house views and ideas are discussed within teams.

An emphasis on risk management

A dedicated Performance and Risk management Team monitors all investment performance within the group. To ensure consistency and discipline, a risk control model is implemented where the level of risk in a portfolio is analysed quantitatively

.Investment Style/Process

Merrill Lynch Investment Managers' Australian Equity investment style can be characterised as a bottom-up stock picker. MLIM approach on stock picking depends on factors that drive share prices Management Quality, Business Strength and Valuation (MBV).

Research.

The research process is the first part of MLIM investment process in the Australian Equity. MLIM undertakes team-based research to identify and further evaluate stocks that comply with the MBV criteria.

1) Team Based Research

Each of Australian Equity team's eight Portfolio Managers has individual stock research responsibilities that covers up to 150 top companies in the Australian equity market. These stocks are rated strictly to the MBV criteria and MLIM has an expert in each stock sector that monitors the key development and trend that drives future earnings and growth in that particular sector. Furthermore, the use Lotus Notes research will enable the team to communicate research information efficiently amongst the team. MLIM's team based research efforts allow diverse input on an individual stock, which they call it '60 Degree Stakeholder analysis'. MLIM also research for good value investment based on the multi level analysis of the Discounted Cash Flow model that is also known as a 'waterfall analysis'. This analysis method is more likely to determine the upside or downside of stock as opposed to just using a simple DCF model. Finally the buy/sell decision of a stock must pass through the consensus of the whole team after rigorous team discussion and scrutiny.

) Filters

Incorporated into the investment process are investment filters that seek to filter and organise research information relating to management, business strength and valuation. They are briefly outlined below

a) Merrill Lynch Investment Managers seek to identify management teams who focus on shareholder value principles. Specifically, good management practice will focus on increasing earnings per share and net present value of cash flows.

b) Business strength filters incorporates the competitive advantage a company has which allows it to survive in a competitive and global marketplace.

c) Valuation filters include a primary valuation method of a discounted cash flow approach. In addition to this there are other valuation models and ratios such as the dividend yield and earnings yields/earnings growth

Risk Management

Risk management is an integral part of the investment process where portfolios are constructed with risk controls in place. As there is a pro-active stance in managing the portfolios to reflect changes in market conditions risk, assessment is incorporated into stock research and portfolio reviews. The ultimate aim is to outperform within a controlled environment.

. Portfolio Construction

Stock Selection

After completing the research and filtering process as mentioned above, the construction of portfolio rests in the hands of senior members of the team. 5 to 40 stocks are targeted for the portfolio. A Barra analysis will be run through these stocks to determine the impact to the portfolio's risks. Portfolio construction will be undertaken from the steps outlined below.

Set Indicative Weights

Indicative weights of stocks are assigned based on fund manager's rating in accordance to the MBV criteria. Each stock is given an indicative weighting based on fund manager conviction which in turn is based on the stock's overall rating.

Risk Assessment

MLIM's quantitative team employs a Barra Analysis to ensure that the indicative portfolio weights are appropriate given different opinions of the team in regards to overweight /underweight positions.

Modify Institutional Portfolio

With the alpha analysis, changes are made to indicative portfolio to improve the alignment of conviction levels with portfolio weights.

Scale Up To indicative Specialist Portfolio

Using the Barra Aegis optimiser, an indicative specialist portfolio is constructed with a targeted tracking error of between 4%-7% per annum.

Review Indicative Specialist Portfolio

The output from the optimisation process is reviewed and checked for reasonableness. Allowance might be made to the assumptions that supports the optimisation

Modify Specialist Portfolio

With the aid of implied alpha analysis, the indicative portfolio is modified to a Specialist portfolio.

4.Investment Guidelines, Risk Controls and Compliance

All of Merrill Lynch Investment Managers' funds are audited annually where the fund's financial statements are covered specifically. KPMG will verify all work by reviewing unit pricing procedures, verify valuations and all other associated work as a form of risk control. The use of accounting systems (HiPortfolio) and extensive procedures further enhances accuracy of all auditing.

Compliance

Merrill Lynch Mercury has a dedicated compliance department, which operates on a real time basis, analysing all derivatives position held within all portfolios. Analyses are carried out using an electronic compliance monitoring system developed in house. Any breaches will be detected on the day itself where remedial actions can carry out immediately.

Guidelines and Restrictions

Guidelines and Restrictions are imposed on the use of derivatives. Use of derivatives are governed by

- Trust deeds

- Client investment management agreements

- The investment strategy of a given portfolio

- The terms of Risk management Statement

Derivatives cannot be used to gear portfolios and must be backed by either cash or asset. It can only be used to create exposures that are consistent with the strategy of a portfolio and no net short positions are allowed. Derivatives such as futures contracts on the ASX is used only to the extent to manage cash flow of the portfolios.

5.Investment Personnel/Team

As of June 001, the Australian Equity team is headed by Mark Himpoo, B.Bus, and ASIA. The team consists of 8 members with investment experience that ranges between 1 to 14 years. All the fund managers in the Australian Equities team have diverse qualifications i.e. Medical, Politics and Modern History, Applied Finance, Accounting, Commerce, Engineering and Agricultural Economics. This diverse background of MLIM's fund managers allows them to have a professional insight into different sectors of the economy and stock market. To retain these important human capital in the firm, MLIM ensures that the remuneration packages is in the top quartile of the industry. This includes profit sharing and bonus elements based on profitability. Staffs can also participate in a Long Term Incentive Compensation Plan that has share options.

6.Business/Company Factors

Merrill Lynch Investment Managers target two groups of investors, namely retail investors and institutional investors. They are different products for each type of investors. MLIM have different funds to cater for different investors needs. For a complete list of MLIM's products, you can visit http//www.mlim.com.au.

MLIM's distinguishing marketing strengths can be summarised as

- Creativity and Innovation MLIM has a professional team of personnel with high calibre in investment planning

- Openness stresses on the importance of team based research and collaboration

- Proven Investment Expertise MLIM has over AUD 800 billion in assets worldwide as of 0th June 1

- Emphasised on research excellence

- Discipline Portfolio Construction

- Dedication to Client Service

- Ability to Leverage Resources of Merrill Lynch Group resources and size of parent company provides credibility and stability to managed institutional funds.

Financial Status

Table 1 summarizes key figures concerning financial conditions for the 6 months ended June 0 000

Table 1

Operating Results

$144

$1

14.4%

$4.8

$4.8

Net revenues ($ million)

Net earnings ($ million)

Return on average common shareholders' equity

Earnings per share

Basic

Diluted

Client Service

MLIM has made it a priority to communicate with clients therefore clients are always updated with comprehensive written reports and verbal updates including significant events relating to their business. Investors in pooled products receive monthly updates and quarterly report. For retail clients, they are serviced by the Managed Fund Services while institutional investors will be serviced by an appointed Account Manager.

Corporate Resources Backing / Ownership

MLIM is a part of the Asset Management Group, which is ultimately under the wings of the Merrill Lynch & Co INC. Merrill Lynch, & Co Inc is one of the largest US investment bank and therefore provides the stability and credibility to MLIM, resulting in a secured investment management environment for all investors.

Investment In Research/Development/Technology.

In recent times, many enhancements have been carried out to many aspects of the investment process they are

- Development of the Lotus Notes research to efficiently communicate research information amongst the team.

- Restructuring research responsibilities away from sector specialists to a more robust team configuration including stock/sector specialists.

- Simplifying the books of business from three (retail, wholesale and specialists) to two (Institutional and specialist)

- Clarification of the 7-step portfolio construction process.

In addition, MLMAM invested in various systems to complement accounting practices, compliance and research. In accounting, the principle system HiPortfolio is complemented by an internally developed system for pricing and reconciliation. In the Compliance department, an electronic compliance monitoring system is use to conduct analysis on derivatives positions and in research, all information is organised around the Lotus Notes research system.

IT Systems

In recent years Merrill Lynch has focussed on developing its e-commerce business that is expected to play a significant part in the company's growing business. MLMAM has its own Internet portal, which connects clients to one of the strongest trading, research and investment banking capabilities in the world. It also has a number of online facilities such as the MLX online (Merrill Lynch Direct) which provides online trading/research, M&A online advisors, web facilities which allows clients (especially institutional) to get data and provide data, and an excellent web site which facilitates communication, access to products (marketing aspect) and continuity of clients.

7.Performance and Risk Characteristics of the Fund

MLIM has two different portfolios that exhibit different risk and return characteristic

- Institutional portfolios with a target of -% above the ASX All Ord's Index over the medium term and a tracking error of -4%

- Specialist portfolios with a target of -5% above the ASX All Ord's index over the medium term and a tracking error of 4-7%.

The table below will exhibits the performance of MLIM Australian Equity and key performance indicators of the portfolio benchmarked against the ASX All Ordinary Index

1 year years 5 years

ASX Ave MLIM ASX Ave. MLIM ASX Ave. MLIM

Returns 4.1% .16% 8.00% 11.% 15.6% 15.7% 1.10% 15.0% 1.%

Risk/Reward 0.41 0.81 0.66 0.5 1.4 1. 0. 1.6 1.55

Info ratio .46 0.77 .00 0.85 1.68 1.4

Std Deviation 1.08% 11.6% 1.10% 11.81% 11.40% 1.05% 1.1% 11.6% 1.8%

Tracking Error 1.7 4.00 .0 5.1 1.74 5.6

ASX- ASX All Ordinary Index

Ave- Average Fund Manager

MLIM Merrill Lynch Investment Manager (Australian Equity)

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