MORPHIC ETHICAL EQUITIES FUND LIMITED — Fund Information / Factsheet 2018

Dec 16, 2018

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2018 Finalist “New Fund of the Year”

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Fund Objective

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.

Monthly Report November 2018

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.

Investment returns

Morphic Ethical Equities Fund1	1 Month	3 Months	6 Mon	ths CYTD ITD
	-0.15%	-6.62%	-3.64	% 0.05% 4.
Index2	-1.52%	-6.64%	0.86	% 4.38% 8.

Ethical Investing in Focus

Net Tangible Assets (NTA)
NTA value before tax3	$ 1.1082
NTA value after tax3	$ 1.0969

November saw the team out meeting investors around Australia and as always it is great to hear from those who are interested in Responsible Investing. Morphic was lucky enough to have Nicolette Boele from the Responsible Investment Association of Australasia (RIAA) address our Sydney event. For those that couldn’t attend, a video of the Sydney presentation and a soft copy of the material presented can be found on our website.

MEC share price and Pre-tax NTA performance[4]

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1.20
1.15
1.1082
1.10
1.05
1.00
0.9950
0.95 Pre-Tax NTA per share
MEC share price
0.90
Outlook
May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18
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One of Morphic’s differentiating features is our ability to short companies that we believe have poor ESG practices. We spoke about our short position in Coca-Cola Amatil (CCL) before, and on the last day of November, the firm announced that earnings would not meet market expectations in 2019, whereupon the stock fell 14% on the day. We still don’t believe CCL is adjusting quickly enough to changes in consumer preferences against sugar, and it shows investors how ESG views can be incorporated profitably into their personal values on the short side.

Portfolio review

The Fund fell 0.2%, outperforming global shares over the month by 1.4% in AUD terms. The fall was despite markets rebounding by 1.3% in USD, as the rise in the AUD offset the increase in markets.

The bounce was led by the more cyclically sensitive markets. Asia was up 4.3% in US dollars and Emerging Markets more generally were up 4.1%. Europe (-1.1%) and Japan (+0.4%) were the laggards. In contrast to cyclical regions, the leading sectors were more defensive – Healthcare (5.3%) and Real Estate (+4.8%).

China Water Affairs Group (CWAG) was the Fund’s best contributor over the month, reversing the sharp sell-off in September and October. Company earnings reported at the end of the month suggest business growth remains on track at over 20% a year. CWAG continues to look for ways to monetise legacy non-core assets. It also plans an IPO for its sewerage treatment business to free up capital to focus on water distribution. On nine times next year’s earnings, we think the stock is still cheap and it remains in our top five active positions.

After the shock of October, markets found a floor in a volatile November. Investors may recall the proximate cause for the sell-off in October was higher interest rates and fears the Federal Reserve would raise the interest rate by three or more times in 2018. Both higher rates and expectations of three interest rate hikes have been unwound now. When coupled with the large fall in oil prices, it is difficult to see imminent inflation threats in 2019.

Against this, economic data outside the USA has softened and some lead indicators in the USA, such as unemployment claims are creeping higher. With the Trump-Xi summit seeing the “Trade war” put on hold for the next three months at least, the question for 2019, is whether the Federal Reserve engineers a controlled slowdown in the economy like 1995, or whether it has already overtightened, more like 2007.

The largest detractor for the month was our position in Japanese condominium builder, Haseko. The company continues to post record profits, but our ownership period has been a frustrating experience, due to the company’s refusal to share these benefits with shareholders through adequate dividends and share buybacks. We have made a number of unsuccessful attempts to engage with the management on capital management plans. The falls over the month took the position to our stop loss, where we exited. We will continue to engage with other shareholders on ways to unlock value in the business.

Historical records say pauses in Fed hiking cycles are often good for equities and risk assets – but concerns over whether there have already been too many hikes will be the key focus as we move into 2019.

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Global Responsible Investors

Top 10 Active Positions

Stocks (Shorts)	Theme	Region	Position Weighting
Alstom	Global Rail	Europe	3.9%
China Everbright Intl	Environmental & Facilities	Asia Pacific	3.4%
China Water Affairs	Chinese Water Utilities	Asia Pacific	2.9%
Service Corp	US Deathcare	North America	2.5%
Bank Leumi	Israeli Quality Banks	Middle East	2.4%
Orix Corporation	Japanese Financial Services	Asia Pacific	2.0%
Axos Financial	US Quality Banks	North America	1.5%
Power Grid	Indian Infrastructure	Central Asia	1.4%
Panalpina	Global Freighters Europe	Europe	1.1%
Kuehne + Nagel	Global Freighters Europe	Europe	(1.0%)

Top three alpha contributors[10 ] (bps)

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China Water Affairs 33 bps
China Everbright Intl 16 bps
Service Corp 14 bps
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Top three alpha detractors[10 ] (bps)

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Haseko -13 bps
Qantas Airways -7 bps
Platinum Asset Management -5 bps
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Risk Measures
Net Exposure5	100%
Gross Exposure6	127%
VAR7	1.21%
Upside Capture8	66%
Downside Capture8	78%
Best Month	5.51%
Worst Month	-5.41%
Average Gain in Up Months	1.92%
Average Loss in Down Months	-1.70%
Annual Volatility	8.55%
Index Volatility	8.67%

Hedge Positions	Risk Limit Utilisation (%)9
Long USD vs EUR	0.5%
Long JPY and CNH volatility	0.3%
US 5/30 Steepener	0.3%
Long Soybeans	0.2%

Key Facts

ASX code / share price	MEC / 0.995
Listing Date	3 May 2017
Management Fee	1.25%
Performance Fee11	15%
Market Capitalisation	$ 45m
Shares Outstanding	45,547,427
Dividend per share*	$ 0.02

* Dividend per share includes the final dividend for FY18 payable on 12 December 2018.

Equity Exposure Summary By region

Equity Exposure Summary By sector

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44.8% Financials 22.4%
North America
Industrials 14.8%
Asia Pacific 27.3% Information Technology 12.6%
Western Europe 18.8% Consumer Discretionary 11.5%
Health Care 10.5%
Africa / Middle East 3.8% Morphic Ethical Communication Services 8.0% Morphic Ethical
Equities Fund Equities Fund
Utilities 6.7%
Central Asia 2.9%
Benchmark Consumer Staples 5.7% Benchmark
South & Central America 1.4% Materials 4.6%
Real Estate 3.1%
0.9%
Eastern Europe 0.0%
Energy
0.0% 20.0% 40.0% 60.0% 0.0% 10.0% 20.0% 30.0%
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Global Responsible Investors

Contact us

Morphic Asset Management Pty Ltd Level 3, 139 Macquarie St Sydney 2000 New South Wales Australia www.morphicasset.com

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Irene Kardasis

Business Development Manager Phone: +61 2 9194 6707 Email: ikardasis@morphicasset.com

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 figures are unaudited;[4] The pre-tax net tangible asset value is after the deduction of fees and costs. Fund listing on the ASX 3 May 2017. Past performance is not an indication of future performance;[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] Based on gross returns since Fund’s inception;[8] As a percentage of the Fund’s Value at Risk (VaR) Limit;[9] As a percentage of the Fund’s Value at Risk (VaR) Limit;[10] Attribution; relative returns against the Index excluding the effect of hedges;[11] 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.

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Global Responsible Investors