Indian Entrepreneur Fund

A 5 Star Rated Fund by Morningstar

Advised by
Contents
 Indian Entrepreneur Fund: The Strategy

 Philosophy

 Value Creating Traits

 The Study: Indian Entrepreneur Businesses

 About ASK Investment Managers

 Fund Features

 Biography

Advised by

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 Indian Entrepreneur Fund
The Strategy
A 5 Star Rated Fund by Morningstar
• Invests into Indian entrepreneurial businesses of size, superior quality and high growth at fair
valuations
• IEF follows a very rigorous, disciplined, strong filters-based investment approach, while embracing
value-creating traits (more about it later)
• Invests into quality entrepreneurs with
• Vision and dynamism
• High standards of governance
• Wisdom
• Demonstrated capital allocation and capital distribution skills
• Superior quality achieves the preservation of value and high growth is sought to achieve expansion
of value
Advised by
• Promoter with adequate skin in the game ensures alignment of management and shareholder
interests
Note: Promoter / Family stake of at least 26% is desired in portfolio companies, except in rare and fit cases.

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Why Entrepreneurial/Family Businesses?

We believe Entrepreneurial / Family Businesses have

• Passion, Conviction and Commitment

• Longer term view

• Own skin in the game – Alignment of interest

• Ability to spot opportunities early

• Dynamic leadership

• High score on innovation and intellectual capital

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Key Investment Objectives

1) Capital Preservation

2) Capital Appreciation over a period of time

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Overarching Investment Philosophy and Principles

• Greater certainty of earnings Vs mere quantum of earnings growth

• Superior and consistent quality of earnings Vs mere quantum of earnings growth

• High quality at a reasonable price Vs inferior quality at arithmetically “cheap” price.

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Investment Approach

• Price the value rather than valuing the price

• Buy “growth” businesses at “value” prices

• Disciplined investing into outstanding businesses

• Seek compounding opportunities

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Value Creating Traits that we seek in our investments…

• Material Size of Opportunity

• Superior Management Quality

• Strong Earnings Growth – A Compounding Machine

• Superior Quality of Business

• Favorable Value

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Value Creating Traits
Size of Opportunity

• Size of Opportunity is a foundation for Continual Growth (of profits) and creating a Compounding
Machine: Foundation on which large Value Creation rests

• It is Less about “How Large a Business is” and more about “what it Can Be”. Debate is really about
Future Size rather than the Present One.

• Size of pond Vs. size of fish: It is more about size of pond rather than size of fish. Even a small
capable fish can grow big if it is in a big pond and if the pond conditions are right.

• The debate between Large-Cap and Mid-Cap is largely an artificial one

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Value Creating Traits
Management Quality

• Two vital tests for Management: Capital Allocation and Capital Distribution

• Conglomerate Complexity leads to less Value Creation

• Corporate Governance is not a Jargonistic Buzz-Word. Honest Mistakes, even if significant, are
punished less by the markets compared to relatively less significant but Deliberate Violations of the
Value System.

• Capital Allocation has a deep Impact on the Investment Returns

• Good Businesses typically seems to attract Good Management and Vice versa

• Management Quality has far higher impact on returns than investors care to imagine

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Value Creating Traits
Earnings Growth

• Price is nothing but a slave of earnings and its relentless growth over a period of time

• When Growth goes away, Equities reduce to a Bond

• Growth has a Way of covering Valuation Mistakes and fighting with Prolonged Period of Market
Machinations

• (Capital) Dilutive Growth results in lower Relative Value Compounding compared to Non-Dilutive
Growth.

• Qualitatively growth has to be secular, predictable, less volatile and business having character simple
enough to understand, even for a lay person

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Value Creating Traits
Quality of Business

• Two vital tests for Quality are Capital Intensity and Capital Efficiency

• Persistent and Superior Capital Efficiency is the single most important evidence of Quality

• Earnings Growth is necessary but not a sufficient condition for Value Creation

• Growth and Quality of Growth are not co-incidental for creating value but they actually cohabit to
do so

• Root to Preservation of Wealth solely resides in Quality i.e. Quality of Business and Quality of
Management…..

• Even with significant but Temporary Earnings Destruction, a High-Quality Business will manage to
shrug-off the blues

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Value Creating Traits
Value

• Price is Servant, Value is Master: Our investing is about Pricing the Value, rather than Valuing the Price

• Price–value gap: Margin of safety (or Implied Returns)

• Cash Flow is the only enduring reality: Accounting Profits and PE Multiples are Popular, but Unreal,
Pastimes

• Quality of Business Vs Valuation: Superior Business at a Reasonable Price is Wealth Creating rather
than Inferior Business at a Mathematically Cheap Price

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Key Investment Attributes

Size of the Opportunity Quality of Business

• Size of pond Vs. size of fish • High quality of business (Superior RoCE)
• Dominance • Strong moat. Impregnability.
• Resilience • Sustainability
• Liquidity • Key pivot of strong wealth creation

Four key
investment
attributes
Earnings Growth Value
• Quantum • Favorable Price-Value Gap
• Consistency • Margin of Safety
• Durability
• Predating (Early Vs Later)
• Compounding power
Advised by

In addition to the above, good management quality is a given constant

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Imperatives of Equity Investing

Equity investing comes as a package!

Returns
•Quantum
•Qualitative
 Consistency
 Permanence
 Degree of Certainty
Volatility
•Inherent in the character of equity investing
•Diminishes with time
Time Period
•Time is more important than timing • Proper calibration needed
•Risk inversely correlated to time across all aspects
Real Risk • Quantum of returns being
• Margin of Safety / Risk of permanent loss of capital just one of them
 Paying excess price over value
Advised by
 Buying inferior quality
•Investor psychology towards investing

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Rigorous Filters Based Approach
Value Creating Traits Parameters Tangible Rule
Value Creating Traits are converted into Rules as below

Trait Parameter Tangible Rule

Top 500 businesses as per Market
Size of Opportunity Top 500 businesses
Capitalization
Minimum PBT of INR 100 cr. (Trailing
Scale and Resilience Bottom-line
12 months or current fiscal)
Management Quality Integrity, Vision, Execution, Capital Allocation and Capital Distribution skills
Minimum 20 to 25% earnings growth
Earnings growth without capital
Earnings Growth over the next 3 to 5 years without
dilution
capital dilution
Strong Capital Efficiency
Quality of Business Minimum ROCE of 25%
(Demonstrated or Imminent)
Value Margin of Safety Price Value Gap of 20% or better Advised by

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Portfolio Research Methodology and Filteration

500  Top 500 as per market capitalization

 Only companies > 25% promoter / family holding (except in very rare and fit cases)
306  Universe of Entrepreneur and/or Family Owned Business = 306 cos

Condition of minimum PBT of INR 100 cr (USD 16 mn)

210 

 Subjective evaluation on management quality, their integrity, vision, past track record,
123 execution, capital allocations and distribution skills, corporate governance standards etc.

59  Quality of Business (Capital Efficiency) – Minimum ROCE of 25%

 Two more filters for selection of stocks a) Minimum 20 to 25% earnings growth over the next 3
Advised by
to 5 years without capital dilution and b) Price-Value gap (margin of safety) of 20%
20  Indian Entrepreneur Fund

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 The Study
Indian Entrepreneurial Businesses

Advised by

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Indian Entrepreneur Fund
The Study and the Origins

We analyzed the top 500 companies over a period of ten years (from 1999 to 2009) on four principal
parameters
• Top-line
• Profitability (Operating Profit, Profit Before Tax, Profit After Tax)
• Capital Efficiency (Return on Capital Employed, Return on Equity)
• Actual Investment Value delivered (net of any capital dilution)
Four ownership buckets were examined
• Entrepreneur led firms
• Public Sector Undertakings
• Multi-national Corporations
• Pure Professional Firms Advised by

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The Study
Empirical Findings on Family Owned Businesses (FOBs)

 Continued Dominance

 Fastest growing businesses

 Superior operating performance

 Strong capital efficiency

 Biggest wealth creators

On most parameters entrepreneurial firms had done far better than the other forms of
ownership and Indian Entrepreneur Fund was launched in March 2010 following our study
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The Study
Indian Entrepreneurial Firms

2013 2003

% of Market Cap. % of Market Cap.

Categories No. of Firms Avg. Market Cap.
(Top 500) (Top 500)
Entrepreneur run and/or Family
306 $1.8 bn 50 38
Owned Businesses (FOB)

Public Sector Undertakings (PSU) 39 $ 4.2 bn 15 32

Multi-National Corporations (MNC) 57 $ 1.9 bn 10 15

 Entrepreneur/Family Owned Firms comprise ~50% of market cap of top 500 companies.

Advised by

Note:
• Source: Capitaline
 Top 500 publically listed companies as per market capitalization (as on 31-Dec-13)
 Banks and Financial firms are excluded throughout this research study for definitional consistencies

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The Study
Growth of FOBs

Source: Capitaline

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Note:
 Banks & Financial firms are excluded from the above study for definitional consistencies.
 Audited consolidated results as on 31-March-2013 are considered for the above study.

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The Study
Sectoral Spread

Top 5 - FOB Top 5 - MNC Top 5 - PSU

IT - Software 21% FMCG 35% Crude Oil & Natural Gas 27%

Pharmaceuticals 11% Pharmaceuticals 10% Mining & Minerals 24%

Power Generation &
Automobile 9% Capital Goods 9% 20%
Distribution
Refineries 9% Automobile 8% Refineries 9%

Telecom-Service 7% Cement 7% Gas Distribution 6%

Source: Capitaline

 Entrepreneurial firms are present across vibrant and emerging sectors

 Entrepreneurs identify sunrise sectors early e.g. Pharmaceuticals, IT, Telecom etc.
 Entrepreneurial firms include a blend of both manufacturing as well as service sectors
Advised by
Note:
 Banks & Financial firms are excluded from the above study for definitional consistencies.
 Audited consolidated results as on 31-Dec-2013 are considered for the above study.
 Figures above are percentage of market cap of that category (FOB,MNC & PSU) within Top 500

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The Study
Capital Efficiency

Source: Capitaline

 High operating efficiency for Entrepreneurial firms

 Tight cost control
 High RoE for Entrepreneurial firms
Advised by

Note:
 Banks & Financial firms are excluded from the above study for definitional consistencies
 Audited company results as on 31-March-2013 are considered for the above study.

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The Study
Wealth Creators
TOP PERFORMERS – Investment Returns: 5-Year price CAGR (as on Dec 2013)

FOBs PSUs MNCs

PI Industries 100% Petronet LNG 28% Hexaware Tech. 72%

TTK Prestige 97% GMDC 25% WABCO India 65%

Eicher Motors 86% Indraprastha Gas 24% Bata India 60%

Eclerx 82% Guj Gas Company 22% GlaxoSmith C H L 53%

Page Industries 77% Engineers India 19% Blue Dart 53%

TOP PERFORMERS – Investment Returns: 10-Year price CAGR (as on Dec 2013)

FOBs PSUs MNCs

P I Industries 80% NMDC 25% United Spirits 44%

TTK Prestige 73% MMTC 25% CRISIL 39%

Amara Raja 51% Guj Gas Company 19% Blue Dart Exp. 37%

Havells 46% GMDC 19% Accelya Kale 34%

Emami 45% BHEL 15% Bata India 34%

Source: Capitaline & Bloomberg

Advised by
 Entrepreneurial firms have significantly outperformed PSUs and MNCs in Wealth Creation
Note:
 Data as on Dec-13
 Bank & Financial firms are excluded from the above study for definitional consistencies

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The Study
Snapshot
Criteria  / Category  FOBs PSUs MNCs

In aggregate, underperform Shown steady but lower growth than

Growth Highest Growth rates
FOB companies FOBs

High Growth coupled with Good efficiency ratios;

Capital Efficiency High capital efficiency
strong capital efficiency although much lower growth

Promoter's own skin in the Transparency may be an issue and may

Alignment of Interest Social priorities, Low-float?
game impact minority shareholders
Wealth Creation of
Highest Wealth Creation Low contribution Steady contribution of wealth
Shareholders'
Value-creating business areas, Natural resources,
Pharma, FMCG, Automobile
Sector/Industries innovation led, intellectual Commodities, Power and
property rich businesses Energy
Over-regulated /bureaucratic
Usually driven by parent company
Decision Making Speedy and Dynamic and hence could often lack
priorities
speed, tends to be rigid

Competitive environment; often Natural monopolies in many Often satellite operations of parent
Business Environment
results in more efficiency sectors they operate companies abroad Advised by

Improving with emphasis on

Overall good governance
Corporate Governance independent professional Governmental practices
boards

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 Some Successful Family Firms

Industry Spectrum
 NEW AGE TO TRADITIONAL 


AGRO
Size Spectrum  TECHNOLOGY HEALTHCARE AUTO CONSUMER FINANCE COMMODITY
COMMODITIES

Sun Pharma, Asian Paints,

LARGE TCS Eicher Motors Kotak Bank Coromandel Shree Cement
Lupin Dabur

Divis Lab, Apollo Motherson Marico, Bajaj Hindustan

MID-SIZED Eclerx PI Industries
Hospitals Sumi Emami Finance Zinc

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Risks
Risks Associated with Investments in Entrepreneurial Businesses

 Succession planning

 Corporate governance concerns

 Centralized decision making

 Nepotism

 Control retention concerns can affect capital structures

 Capital allocation issues

However, we have addressed these issues by adopting rigorous filters on management

quality for stock selection Advised by

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Examples
Lupin

• Only Indian firm to make successful foray in US branded and Japanese market

• Focused on the large and evolving generic pharma opportunity

• Strong product pipeline

• Track record of strong and sustained domestic growth

• Earnings growth of 20-25% for the next few years

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Examples
Pidilite

• Market leader in adhesives and sealants, construction chemicals, hobby colours and polymer
emulsions in India.
• Brand name Fevicol has become synonymous with adhesives in India and is ranked amongst the
most trusted brands in India.
• Expanded its presence in emerging segments like mechanized joinery, modular furniture, flooring,
auto care and waterproofing through brands like Dr Fixit and Roff
• Sales and EBIDTA grown at CAGR of 24% and 26% respectively over the last 5 years.

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Examples
Motherson Sumi
• Motherson Sumi is a JV of the Sumitomo Group of Japan and the Motherson group in India. It has
transformed itself from a domestic player to a global tier 1 supplier by acquiring Visiocorp and
Peguform recently.

• Has been growing through expanding its product portfolio in the wiring harness, plastic moulds
and rear view mirrors business through JVs and acquisitions and has thereby increased its
customer base significantly.

• The company will benefit from the recovery in the global car demand, improving share of
premium vehicles in the domestic business and increasing content per vehicle.

• Reasonable balance sheet strength with 5 year average core ROCE at 26% and average payout of
25%.

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About ASK Investment Managers

Advised by

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Introduction : ASK Investment Managers

 Leading private money management firm in India

 Singular focus on managing money in Indian equities – ‘long only’ style

 Long term investors

 ‘Bottom-up’ fundamentals driven, value-based stock picking

 Disciplined research and investment process

 Experienced team of 3 portfolio managers and 5 investment professionals headed by a CIO

 Purely discretionary money management

 Clients include family offices, pension funds, private clients across the globe

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Introduction: Profile

Investment Universe Listed Indian Equities

Investment Style Long only

Active / Passive Actively managed equity portfolios

Investment Vision Long term wealth creation

Investment Approach Bottom up stock picking

Discretionary / Non-Discretionary Discretionary money management

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Research Process

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Investment Edges

 Disciplined adherence to investment philosophy / process

 Strong in-house proprietary research

 Team bandwidth and experience

 Strong relationships and industry interfaces

 Comprehensive understanding of Indian businesses and industries

 Comprehension of long term secular nature of India opportunity

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Portfolio Construction

 Investment universe of nearly 200 companies

 Detailed evaluation of the character of business and valuation of each firm

 Optimal aggregation of about 20 stocks, to construct a stable and consistent portfolio, to

generate superior returns over time

 Adequate sector diversification

 Model portfolios for all strategies

 “Portfolio Psychographics” - proprietary portfolio review tool

 Strict buy discipline: Focus on margin of safety, pre-defined levels for each strategy/concept

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Risk Management
 Integrated risk management and review mechanism throughout the investment process

 Disciplined Buy and Sell mechanism

 Discipline of buying businesses with reasonable margin of safety

 High discount factor (of 15%) for cash flows in our financial models builds conservatism in value
estimation

 6-8 interactions per year with the management team of every portfolio company

 Individual stock cap at 10%

 Risk Manager is responsible for monitoring and supervising the risk of the portfolio and
implementing the risk management framework

 Regular and ongoing monitoring and reporting

Advised by
 Independence of Risk Management Function – reports to Group CFO & Head Compliance

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Fund Features

Advised by

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Fund Features

Name Indian Entrepreneur Fund

Launch March 26, 2010

Geography Indian Equities

Strategy Long only

Domicile Mauritius

Base Currency USD

Fund Structure Pooled/Commingled fund

Umbrella Fund India Emerging Opportunities Fund* (IEOF)

MU0185S00191 (Retail T1)

ISIN/WKN MU0185S00035 (Retail B)
MU0185S00217 (Institutional T1)
Advised by
Liquidity Weekly once (every Thursday)

Note: * 1) IEOF is the flagship fund under ASKIM’s advise. It facilitate creation of customized accounts under the defined strategy like Growth,
India Select & Strategic (Value) portfolios. 2) IEF is a pooled share class under IEOF.

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Fund Features

Service Providers
Administration Apex Fund Services (Mauritius) Limited
Auditors KPMG, Mauritius
Global Banker Deutsche Bank, (Mauritius) Limited
Custodian Kotak Mahindra Bank Limited (India)

Fee Structure
Fee Structure (Retail)
(Institutional)

Minimum Investment US$3,000 – US$250,000 US$ 250,000 – US$1million Above US$ 1 million

Management Fee 2.50% p.a 2.25%p.a. 1.75 % p.a

Exit Charges Up to 1% in the First year

Advised by

Note: Please refer to the subscription agreement for details on subscription fees.

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Biography
Bharat Shah – Executive Director – ASK Group
 Bharat provides strategic guidance to the CEOs in managing their respective businesses while closely
supervising the IM business of the group.
 Internationally renowned with nearly 29 years of experience in the Indian capital markets.
 Deep interface in Indian corporate world and comprehensive insights in Indian capital markets (equity
and fixed-income).
 Bottom-up investment philosophy, with stock picking being a special strength.
 Prior to joining ASK, was CIO at Birla MF, the then largest mutual fund of India, managing nearly USD
1.65 bn.
 Built ASK Investment Managers into one of India’s largest providers of discretionary PMS services,
managing currently close to USD 1.1 bn.

Prateek Agrawal – Business Head & CIO – ASK Investment Managers

 Has 22 years of experience in capital markets with SBI Capital Markets as Head of Research (10yrs) ,
and Head of Equity with ABN Amro and Bharti Axa AMCs (3.5yrs each)
 In SBI Capital Markets besides heading research he was part of team that handled VSNL privatization
for the government and handled Hindustan Zinc for Vedanta group. On the advisory side he was
actively involved in the power sector and in the oil and gas space.
 At ABN AMRO MF, he was head of equity and managed nearly INR 1200 cr of equity domestically and
advised offshore assets worth USD700 mn and delivered stellar performance. He then helped set up
the equity business at Bharti Axa IM in the post Lehman period. He joined ASK Investment Managers
as CIO in April 2011

Sumit Jain – Portfolio Manager Advised by

 10 years of experience with ASK Investment Managers
 Manages Indian Entrepreneur Portfolio and Lighthouse Infrastructure strategy
 Also engaged in research of business within ASKIM universe, identifying new
investment opportunities and tracking their performance at regular intervals

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Disclaimer

RISK FACTORS:

Equities as an asset class carry a higher risk in comparison to debt. While risk cannot be totally eliminated, it can be mitigated through
a well-designed investment strategy. ASK Investment Managers Portfolios seek to mitigate risk and deliver superior returns through
research-based investing. However, this objective may not be fully achieved due to various reasons such as unfavorable market
movements, misjudgment by portfolio manager, adverse political or economic developments etc.

DISCLAIMER:

Any information contained in this material shall not be deemed to constitute an advice, an offer to sell/purchase or as an invitation or
solicitation to do for security of any entity and further ASK Investment Managers Private Limited (ASKIM) and its employees/directors
shall not be liable for any loss, damage, liability whatsoever for any direct or indirect loss arising from the use of this information.
Recipients of this information should exercise due care and caution and read the offer document (if necessary obtaining the advice of
finance/other professionals) prior to taking any decision on the basis of this information.

ASK Investment Managers Private Limited has not independently verified all the information and opinions given in this material.
Accordingly, no representative or warranty, express or implied, is made as to the accuracy, completeness or fairness of the information
and opinions contained in this material.

This information is of a general nature only and does not constitute an invitation or an offer in respect of any financial product or a
recommendation to buy or sell any financial product or to carry out any other transaction.

This or any material is provided to parties that are clients/ potential clients of ASK Investment Managers Private Limited (ARBN 146 559
980) (“ASKIM”), corporate authorized representative of Falconer & Co Ltd (AFSL No. 244315).
Advised by

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Thank You

Advised by

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