MORPHIC ETHICAL EQUITIES FUND LIMITED — Fund Information / Factsheet 2017

Sep 11, 2017

Focussed | Vigilant | Agile

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Morphic Ethical Equities Fund Limited – August 2017

Ethical Investing in Focus

Fund Objective

During last month, Chad Slater, one of the founders of Morphic Asset Management, wrote for the AFR an article about why diversity of teams is not just something that is “nice”, it’s something that is essential for improving performance. You may be surprised by some of the conclusions.

Morphic’s Head of Research, James Tayler, will be presenting a Q&A video as part of Ethical Investing Week this month. We will upload the video later this month to our website for investors that are interested in learning more.

The Morphic Ethical Equities Fund Limited (the Fund) seeks to provide investors a way to grow their wealth and feel confident they do so without investing in businesses that harm the environment, people, and society.

The Fund excludes direct investments in entities involved in environmental destruction, including coal and uranium mining, oil and gas, intensive animal farming and aquaculture, tobacco and alcohol, armaments, gambling and rainforest and old growth logging.

Performance Report

The Fund fell 0.2% in August, despite a slight softening of the Australian Dollar pushing global markets up 1.0% over the month in local currency terms. Since inception (May 3[rd] 2017), the Fund is down 2.2%.

Market Recap

Market jitters caused by aggressive rhetoric from North Korea and its growing nuclear and missile capacity resulted in high intra month volatility.

At various periods during the month, we raised cash levels as high as 30%. This less reflected genuine fear a shooting war would break out on the Korean peninsula, than concerns a perhaps overstretched market might be looking for reasons to trigger a sell-off.

Prudence required us to raise cash briefly when fragility looked greatest, even if this insurance proved to be a slightly expensive exercise as calm prevailed. By month end we felt that the markets’ resilience confirmed the bull market remained intact.

Emerging markets once again did better than developed markets, while amongst the developed markets the US did slightly better than Europe, Japan or Australia.

Portfolio Review

The Fund underperformed global markets over August. Asset allocation to South Asia and a handful of individual long stock positions were mainly responsible. Rates, currencies and commodities made a small positive gain overall. Shorts were generally of assistance.

Two of the major positive contributors came from recent established long positions in smaller Japanese companies. Investors Cloud is a virtual property developer offering individual investors entry into the build-for-rent small apartment block market. Ateam develops games for mobile devices, owns various market share-leading internet portals as well as a newer e-commerce business. Both are growing fast and have innovative business models.

Performance

	Name	Fund1	Index2
	1 Month	-0.19%	1.04%
	3 Month	-4.28%	-2.71%
	Since Inception (p.a.)	-2.22%	-0.10%

Key Facts

ASX code / share price	MEC / 1.12
ASX code / option price	MECO / 0.029
Listing Date	03 May 2017
Management Fee	1.25%
Performance Fee3	15%
Market Capitalisation Shares Outstanding Options Outstanding	$51m 45,455,627 43,425,626
Options Exercise price	$ 1.10
Options Expire	30 November 2018

Net Tangible Assets (NTA)

Net tangible asset value before tax4 Net tangible asset value after tax4	$ 1.0387 $ 1.0552

Top 10 Holdings

Long Stocks(Shorts)	Theme	Region	Weighting
Power Grid	Indian Infrastructure	Central Asia	3.7%
Samsung Electronics	Global Tech	Asia Pacific	3.2%
Alstom Panalpina	Global Rail Global Freighters	Europe Europe	3.1% (3.0%)
SES	Global Satellite	Europe	2.6%
Service Corp	US Deathcare	North America	2.6%
Wells Fargo	US Quality Banks	North America	(2.4%)
IRB InvIT	India Infrastructure	Central Asia	2.4%
Western Alliance	US Quality Banks	North America	2.4%
DSV	Global Freighters	Europe	2.3%

VISIT US: www.morphicasset.com CALL US: +61 2 9194 6707 EMAIL US: enquiries@morphicasset.com

Focussed | Vigilant | Agile

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Our long-short pair in European Freight companies, DSV (long) and Panalpina (short) again made a good contribution. We have written extensively about our views on the declining prospects of the sector.

Hedge Positions

Key	Facts3 Name Long AUD	Risk Limit Utilisation (%)* 1.5%
	Short Australian Bonds	0.6%
	Long Copper	0.2%

Our largest detractor for the month came from US retailer Office Depot, which reported slightly disappointing quarterly results, and gave a very unimpressive management update on its turnaround strategy. The office and home stationery supplies business is in long term decline and big box retailers are facing challenges from the likes of Amazon. Even at a mid-single digit earnings multiple the stock was pricing into too much hope that earnings could be stabilised by the new management team. We have exited the position.

• As a percentage of the Fund’s Value at Risk (VaR) Limit

Risk Measures

Net Exposure5	100%
Gross Exposure6	150%
VAR7	0.99%

The continuing deterioration in the political outlook in Pakistan followed the court order sacking of President Nawaz Sharif, saw us cut our residual stake in cement maker D.G. Khan as it hit its stoploss. This saw us exit completely our Pakistan positions, whilst over the medium-term we retain some confidence that this period of turbulence will pass, the increasing likelihood of a currency devaluation coupled with IMF risks and our stop-loss rules suggest that we wait to re-examine later in the year.

T Top 5 Contributors[8] (bps) Top 5 Detractors[8] (bps)

DSV Investors Cloud Wells Fargo	20 14 13	Office Depot D.G. Khan Cement Macromill	-29 -15 -14
Tsuruha	9	Samsung Electronics	-13
Ateam	8	Open House	-12

Outlook

The US Federal Reserve is still expected to announce a reversal of its Quantitative Easing program of 2008-14 later this month. However, there is growing market scepticism about there being any rate hikes this year, and very little baked in for next year either.

We expect North Korea to continue to feature in news headlines this month – and this might cause more market volatility. Nevertheless, we feel prospects for a shooting war are too remote to be worth taking the risk of raising cash, against the background of a strengthening global economy and accelerating corporate earnings.

The Fund remains fully invested, with increasing appetite for Japan, where intermittent geopolitical scares are presenting some interesting dip-buying opportunities in companies we already have a toehold in and know well. Our emerging markets overweight has been further reduced following the complete exit from Pakistan. We remain somewhat underweight the US market and have hedged a proportion of the Fund’s risk to a rising Australian Dollar.

Jack Lowenstein, Chad Slater, Geoff Wood, James Tayler, Cameron Halkett, Claudia Kwan, Lucina Martin, Daniel Hayman, Irene Kardasis, Nadeem Ali, Eva Trabaud

By Region

Fund Equity Exposure Summary

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43.0%
North America
Asia Pacific 29.2%
Western Europe 17.7%
Central Asia 7.2% Morphic Ethical Equities
Fund
Africa / Middle East 1.1%
Benchmark
South & Central America 1.1%
Eastern Europe 0.7%
0.0% 20.0% 40.0% 60.0%
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By Sector

-10 Telecomm Consu Inform	Energy unication Services Materials Utilities Consumer Staples Real Estate Industrials Health Care Financials mer Discretionary ation Technology	-0.3% 2.5% 4.3% 5.8% 5.9% 6.7% 10.4% 10.6% 17.2% 17.2% 19.8% Morphic Ethical Equities Fund Benchmark

This communication has been prepared by Morphic Ethical Equities Fund Limited (“MEC”) (ACN 617 345 123) and its Manager, Morphic Asset Management Pty Ltd (“Morphic”) (ACN 155 937 901) (AFSL 419916). The information contained in this communication is for information purposes only and is not investment or financial product advice and is not intended to be used as the basis for making an investment decision. Please note that, in providing this communication, MEC and Morphic have not considered the objectives, financial position or needs of any particular recipient. MEC and Morphic strongly suggest that investors consult a financial advisor prior to making an investment decision. No warranty, express or implied, is made as to the fairness, accuracy, completeness or correctness of the information, opinions and conclusions contained in this communication. To the maximum extent permitted by law, none of MEC, its related bodies corporate, shareholders or respective directors, officers, employees, agents or advisors, nor any other person accepts any liability, including, without limitation, any liability arising out of fault or negligence for any loss arising from the use of information contained in this communication. If this communication includes “forward looking statements”, such forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties and other factors, many of which are beyond the control of MEC and its officers, employees, agents or associates that may cause actual results to differ materially from those expressed or implied in such statement. Actual results, performance or achievements may vary materially from any projections and forward-looking statements and the assumptions on which those statements are based. MEC and Morphic assume no obligation to update such information. This communication is not, and does not constitute, an offer to sell or the solicitation, invitation or recommendation to purchase any securities and neither this communication nor anything contained in it forms the basis of any contract or commitment.

The Certification Symbol signifies that a product or service offers an investment style that takes into account environmental, social, governance or ethical considerations. The Symbol also signifies that Morphic Ethical Equities Fund adheres to the strict disclosure practices required under the Responsible Investment Certification Program for the category of Product Provider. The Certification Symbol is a Registered Trade Mark of the Responsible Investment Association Australasia (RIAA). Detailed information about RIAA, the Symbol and Morphic Ethical Equities Fund’s methodology, performance and stock holdings can be found at www.responsibleinvestment.org, together with details about other responsible investment products certified by RIAA.The Responsible Investment Certification Program does not constitute financial product advice. Neither the Certification Symbol nor RIAA recommends to any person that any financial product is a suitable investment or that returns are guaranteed. Appropriate professional advice should be sought prior to making an investment decision. RIAA does not hold an Australian Financial Services Licence.

1 Performance is net of investment management fees, before company admin costs and taxes; 2 The Index is the MSCI All Countries World Daily Total Return Net Index (Bloomberg code NDUEACWF) in AUD; 3 The Performance Fee is payable annually in respect of the Fund’s out-performance of the Index. Performance Fees are only payable when the Fund achieves positive absolute performance and is subject to a high water mark;[4] The figures are unaudited;[5] Includes Equities and Commodities - longs and shorts are netted;[6 ] Includes Equities, Commodities and 10 year equivalent Credit and Bonds - longs and shorts are not netted;[7 ] VAR is Value at Risk based upon the 95[th] percentile with a 1 day holding period using a 1 year look back; 8 Attribution; relative returns against the Index excluding the effect of hedges.

VISIT US: www.morphicasset.com CALL US: +61 2 9194 6707 EMAIL US: enquiries@morphicasset.com