MORPHIC ETHICAL EQUITIES FUND LIMITED — Fund Information / Factsheet 2018

Oct 8, 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 September 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	Investment returns	Investment returns	Investment returns
Morphic Ethical Equities Fund1	1 Month	3 Months	6 Months 1	Year ITD (
	-1.14%	2.42%	2.80% 1	1.87% 9.3
Index2	0.39%	6.48%	11.14% 1	9.04% 15.4

Ethical Investing in Focus

Morphic is pleased to announce that the Global Opportunities Fund and the Morphic Ethical Equities Fund have been nominated in the AsiaHedge awards for best Global Equity fund and New Fund of the year respectively.

Morphic’s recently launched Fund, the Trium Morphic ESG L/S Fund, has been nominated in the category of Award for Innovation (Funds), in the 2018 Sustainable and ESG Investment Awards. Client feedback through the year has been that the fund fills an important role in expanding ESG investing to alternative investments, so it is gratifying to see this recognised.

Morphic is supporting the RIAA’s 2018 conference on 31 October & 1 November in Melbourne which focuses on rediscovering purpose in finance. Please come and see us if you are attending.

Portfolio review

The Fund fell 1.1% in September, trailing global markets for the month (0.4%). Global markets were up 0.3% in USD terms, with a small fall in the Australian dollar providing the difference.

Global equities had a mixed month, with fears of Emerging Markets contagion offsetting the positives from stronger US macro data. Japan (+2.3%) outperformed while the US (+0.3%) and Europe (+0.3%) performed in line with global markets. Emerging markets were the laggard. Year to date, the US (+9.1%) remains the best performing region, while Emerging Markets (-9.5%) are down the most.

The largest detractor for the month was our position in Indian Bank which was stopped out towards the end of the month. A continuous weakening rupee and the government’s announcement proposing to merge three public sector banks in an attempt to consolidate the banking sector in India came as a negative surprise to the market. All previous commentary from the government had said that consolidation would be determined by the banks themselves, not imposed. Indian financials were weak in general as the Reserve Bank of India has started a crackdown on governance issues related to private sector banks.

On the positive side, the Fund’s largest contributor was the position in China Everbright International following our participation in the company’s rights issue. The share price tumbled in the first half of August following the announcement of this rights issue where the company raised HK$10bn. The company can easily fund any future growth prospects going forward, and this removes any funding risk for the foreseeable future. We re-entered the stock following the announcement and have been able to capitalise on the subsequent share price rise seen during September.

		Net Tangible Assets (NTA)
NTA	value	before tax3	$ 1.1762
NTA	value	after tax3	$ 1.1570

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

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1.2000
1.1500 $ 1.1762
1.1000
1.0500
$ 1.0300
1.0000 Pre-tax NTA per share
MEC share price
0.9500
Outlook
May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18
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The good news for markets is that seasonally, markets move into the time of year that is traditionally associated with the highest returns for equity investors. The bad news is that increasing US interest rates are showing little signs of abating as the US Federal Reserve sees a tight labour market and good growth. As such, we expect continued downward pressure on Emerging Markets’ currencies –i.e. upwards pressure on the US dollar – to carry on.

The divergence between a strong oil price, higher commodities, higher expected growth, yet weaker Emerging Markets (which normally do better into this backdrop) does not exactly follow what we thought would be a 1998/99 US-led growth playbook, as commodities were falling back then.

For now, hedges that increase the Fund’s exposure to the US Dollar strength remain in place, whilst retaining a long bias to equity markets. The US market closing at all-time highs, not lows, suggests that calls for an overall bear market remain premature.

Global Responsible Investors

Top 10 Active Positions

Stocks (Shorts)	Theme	Region	Position Weighting
Alstom	Global Rail	Europe	3.3%
China Everbright Intl	Environmental & Facilities	Asia Pacific	3.2%
Service Corp	US Deathcare	North America	3.2%
Open House	Japanese Homebuilders	Asia Pacific	3.0%
China Water Affairs	Chinese Water Utilities	Asia Pacific	2.7%
Bank Leumi	Israeli Quality Banks	Middle East	2.3%
Iida	Japanese Homebuilders	Asia Pacific	(2.0%)
Haseko	Japanese Homebuilders	Asia Pacific	1.7%
Rural Electrification	Indian Infrastructure	Central Asia	1.7%
Power Grid	Indian Infrastructure	Central Asia	1.4%

Risk Measures
Net Exposure5	104%
Gross Exposure6	123%
VAR7	1.10%
Upside Capture8	66%
Downside Capture8	77%
Best Month	5.51%
Worst Month	-2.78%
Average Gain in Up Months	1.92%
Average Loss in Down Months	-1.34%
Annual Volatility	7.45%
Index Volatility	6.93%

Hedge Positions	Risk Limit Utilisation (%)9
Short Bonds	0.6%
Short AUD vs USD	0.6%

Top three alpha contributors[10 ] (bps)

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China Everbright Intl 24 bps
Service Corp 21 bps
Alstom 12 bps
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Top three alpha detractors[10 ] (bps)

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Indian Bank -57 bps
Open House -41 bps
Rural Electrification -37 bps
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	Key Facts
ASX code / share price		MEC / 1.030
ASX code / option price		MECO / 0.001
Listing Date		3 May 2017
Management Fee		1.25%
Performance Fee11		15%
Market Capitalisation		$ 47m
Shares Outstanding		45,524,927
Options Outstanding		43,382,026
Options Exercise price		$ 1.10
Options Expire		30 November 2018

Equity Exposure Summary By region

Equity Exposure Summary By sector

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50.7% Financials 20.9%
North America
Industrials 14.0%
Asia Pacific 24.5% Information Technology 13.8%
Western Europe 16.5% Consumer Discretionary 12.1%
Health Care 10.8%
Central Asia 3.8% Morphic Ethical Communication Services 7.7% Morphic Ethical
Equities Fund Equities Fund
Utilities 6.0%
Africa / Middle East 3.1%
Benchmark Consumer Staples 6.0% Benchmark
South & Central America 0.8% Real Estate 4.8%
Materials 4.3%
0.6%
Eastern Europe -0.2%
Energy
0.0% 20.0% 40.0% 60.0% -10.0% 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