MORPHIC ETHICAL EQUITIES FUND LIMITED — Fund Information / Factsheet 2018

Jun 7, 2018

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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 May 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

	1 Month	3 Months	6 Months	1 Year	ITD (p.a.)
Morphic Ethical Equities Fund1	0.33%	1.59%	1.25%	8.87%	10.34%
Index2	-0.11%	1.87%	2.06%	10.03%	11.98%

Ethical Investing in Focus

The Fund has a substantial short position in the Coca-Cola bottler in Australia, Coca-Cola Amatil. Over the course of the month, Morphic has engaged with both the Chairman and the Head of Sustainability.

The Manager has expressed its views that the company is not doing enough to alleviate the effects of sugar on obesity, particularly in the poorer parts of Asia Pacific, where it has operations. Answers explaining their failure have thus far been unsatisfactory. Morphic is working to raise the awareness of this failure and will be updating investors in due course.

Portfolio review

The Fund rose 0.3% in May, ahead of global markets (-0.1%). Global markets fell -0.2% in USD terms, with a small increase in the Australian dollar proving the difference.

May saw markets rise only to then fall back, unable to break definitively in either direction. The politics of Italy dominated the headlines as investors feared the new coalition in Italy would reignite the Euro crisis of 2012.

Unsurprisingly, Europe was the worst performing market over the month (-4.0%). Emerging Markets continued to underperform (-3.8%) and the US market performed the best (2.2%).

The largest contributor for the month was the long-held position in Open House. Open House reported another set of excellent quarterly earnings, beating guidance. More importantly, they issued guidance for the coming year that is substantially ahead of market expectations. The Fund remains holders, but to reduce market risk, the Manager has started shorting Iida Group, which has rallied back since the short was closed in December. The Manager believes Iida remains an inferior business to Open House.

The biggest detractor for the month was the position in Japanese market research company Macromill. Taking into consideration the impact of Yen weakness and a recent acquisition, recently reported quarterly results were unexpectedly weak and management indicated that meeting their full-year guidance will be challenging. The Fund’s risk management framework resulted in a reduction of the position.

Net Tangible Assets (NTA)
Net tangible asset value before tax3	$ 1.1679
Net tangible asset value after tax3	$ 1.1487

	Key Facts
ASX code / share price		MEC / 1.03
ASX code / option price		MECO / 0.009
Listing Date		3 May 2017
Management Fee		1.25%
Performance Fee4		15%
Market Capitalisation		$ 47m
Shares Outstanding		45,479,227
Options Outstanding		43,402,026
Options Exercise price		$ 1.10
Options Expire		30 November 2018

Outlook

The manifestation of market fears has shifted from Trump and Trade, to Italy and whether the European project is under threat. Italian bond yield spreads have surged, raising the cost of funding the country’s debt.

“Markets tend to overestimate the short-term impact and underestimate the long-term impact”. The coming months are likely to be less eventful than priced, but the size of Italy means that Greek-style negotiations are unlikely to end the same way.

The other macroeconomic trend of note since February has been the resurgent USD, driven by higher US interest rate expectations. One side effect has been the weaker performance of emerging markets in USD terms. The confluence of Italian uncertainty and a slight change in tone from the US Federal Reserve has seen US interest rate expectations fall which should be supportive of the Fund’s regional positioning in Asia from here.

The Fund increased its exposure to Japan and Hong Kong over the course of the month. Reflective of the view that outcomes are balanced here, the Fund has minimal foreign exchange hedging currently in place.

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Global Responsible Investors

Top 10 Active Positions

Top three alpha contributors[5 ] (bps)

Stocks (Shorts)	Theme	Region	Position Weighting
Alstom	Global Rail	Europe	4.4%
China Everbright Intl	Environmental & Facilities	Asia Pacific	3.2%
Service Corp	US Deathcare	North America	3.1%
Open House	Japanese Homebuilders	Asia Pacific	3.0%
Haseko	Japanese Homebuilders	Asia Pacific	3.0%
Western Alliance	US Quality Banks	North America	2.7%
Coca-Cola Amatil	Beverages	Asia Pacific	(2.1%)
Eagle Bancorp	US Quality Banks	North America	2.0%
Iress	Software services	Asia Pacific	(1.9%)
New York Community Bancorp	US Quality Banks	North America	(1.9%)

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Open House 29 bps
China Everbright 20 bps
Alstom 15 bps
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Top three alpha detractors[5 ] (bps)

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Macromill -40 bps
Mitsubishi UFJ Leasing -19 bps
Prada -14 bps
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Hedge Positions	Risk Limit Utilisation (%)6
Long EM Puts	0.2%

	Risk Measures
Net Exposure7		100%
Gross Exposure8		136%
VAR9		1.08%

Equity Exposure Summary By region

Equity Exposure Summary By sector

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46.2% Financials 23.0%
North America
Consumer Discretionary 17.4%
Asia Pacific 29.2% Industrials 16.7%
15.3%
18.2% Information Technology
Western Europe
Health Care 8.9%
Africa / Middle East 2.7% Morphic Ethical Real Estate 7.3% Morphic Ethical
Equities Fund 4.6% Equities Fund
Materials
Central Asia 2.0%
Benchmark Consumer Staples 3.5% Benchmark
South & Central America 1.0% Utilities 3.4%
Telecommunication Services 0.4%
0.7%
Eastern Europe -0.5%
Energy
0.0% 20.0% 40.0% 60.0% -10.0% 0.0% 10.0% 20.0% 30.0%
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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 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;[5] Attribution; relative returns against the Index excluding the effect of hedges;[6] As a percentage of the Fund’s Value at Risk (VaR) Limit;[7] Includes Equities and Commodities - longs and shorts are netted;[8] Includes Equities, Commodities and 10 year equivalent Credit and Bonds - longs and shorts are not netted;[9] VAR is Value at Risk based upon the 95[th] percentile with a 1 day holding period using a 1 year look back.

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