MORPHIC ETHICAL EQUITIES FUND LIMITED — Fund Information / Factsheet 2018

Mar 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 February 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	ITD
Morphic Ethical Equities Fund1	0.15%	-0.34%	11.66%	9.46%
Index2	-0.45%	0.18%	11.02%	10.90%

Ethical Investing in Focus

March sees International Women’s Day, which seems to grow every year in its awareness. Last year it was the State Street statue in front of the bull in New York that garnered all the attention. Some in the Funds Management industry see gender diversity issues as peripheral. Morphic, as the manager of the Morphic Ethical Equities Fund, sees them as good investing sense. Bank Of America Merrill Lynch in a study this month shows that high ESG scores on board and gender diversity are correlated with better returns for shareholders and lower risk for investors. So whether it is due to good companies hiring more women, or women making a company better, what is clear is that you invest in the opposite at your peril. This is why Morphic continues to work with the companies we own in Asia, who traditionally have even lower portions of women at senior levels, to encourage them to see it as good business practices.

Portfolio review

The Fund rose 0.15% in February outperforming a falling market. Global markets were down 4.4% in USD terms for the month, but a falling Australian dollar (-4%) offset the Index’ fall (-0.5% in AUD).

It was a wild ride in February with markets down 7.6% at one stage, on fears of rising interest rates, which then led to technical selling after some volatility funds experienced heavy losses. Despite the fall, global markets remain +1% for the year. Europe fell the heaviest over the month (-6.1%), along with Asia (-4.9%). Japan was the best performer (-1.5%). Energy was the worst sector globally (-8.6%) and tech hardware (+1.8%) was the only sector with a positive return for the month.

The Fund was able to outperform against this volatile backdrop. Investors Cloud in Japan was our top performer over the month. The Fund added to its position during the market sell-off and reduced it later in the month after the stock rallied over 40%. We were able to meet with the founder on his recent roadshow trip to Australia and we remain very impressed with the business he has built. Nonetheless, at over 30x P/E, up from 16x when we bought it, the market is “baking in” most of the good news.

Macromill in Japan was the second largest contributor over the month. The market has digested the sell down from Bain with remarkable ease thus far. However, valuation is becoming a concern and the position has now been scaled down.

Our largest detractor was our position in Japanese construction company Hazama Ando. After the company reported soft quarterly results and a weak order book, the stock sold off heavily. We have reduced the size but await a one-on-one in Tokyo to decide whether this is transitory or of longer term concern.

Net Tangible Assets (NTA)
Net tangible asset value before tax4	$ 1.1531
Net tangible asset value after tax4	$ 1.1381

	Key Facts
ASX code / share price		MEC / 1.01
ASX code / option price		MECO / 0.020
Listing Date		3 May 2017
Management Fee		1.25%
Performance Fee3		15%
Market Capitalisation		$ 46m
Shares Outstanding		45,479,227
Options Outstanding		43,402,026
Options Exercise price		$ 1.10
Options Expire		30 November 2018

Outlook

After a highly volatile start, markets did stabilise and rose over the month from the lows. Our view is that markets trade in a wide band as the competing forces of higher interest rates are globally pushing against a tailwind of rising earnings forecasts.

The median 2018 EPS growth for Asia is currently 17%, suggesting earnings are rising at 1.4% per month . If P/E stays constant, a simple calculation suggests markets will rise by 17% this year. Although in the past, this sort of EPS growth and valuation saw Asian markets rise by 24%.

We remain of the view that the tailwind of higher earnings will push markets to new highs later this year. A disorderly bond market is still a risk, although bond investors don’t seem worried about it as bond volatility remains low.

Some hedges are in place, with the Fund long the Yen, as the Yen tends to do well in “risk-off” environments. Reflecting the more constructive stance, the Fund remains fully invested.

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Focussed | Vigilant | Agile

Top 10 Active Positions

Top three alpha contributors[5 ] (bps)

Stocks (Shorts)	Theme	Region	Position Weighting
Alstom	Global Rail	Europe	4.1%
China Everbright Intl	Environmental & Facilities	Asia Pacific	3.1%
Service Corp	US Deathcare	North America	2.6%
Panalpina	Global Freighters	Europe	(2.4%)
Macromill	Global Research	Asia Pacific	2.2%
Open House	Japanese Homebuilders	Asia Pacific	2.1%
IRB Invit Fund	Indian Infrastructure	Central Asia	1.9%
DSV	Global Freighters	Europe	1.8%
Bank of Internet	US Quality Banks	North America	1.7%
Haseko	Japanese Homebuilders	Asia Pacific	1.4%

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Investors Cloud 39 bps
Macromill 38 bps
China Everbright Intl 17 bps
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Top three alpha detractors[5 ] (bps)

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Hazama Ando -24 bps
Ateam -9 bps
IRB Invit Fund -8 bps
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Hedge Positions	Risk Limit Utilisation (%)6
Long Japanese Yen	1.2%
Short Bonds	0.9%

	Risk Measures
Net Exposure7		104%
Gross Exposure8		135%
VAR9		1.12%

Equity Exposure Summary By region

Equity Exposure Summary By sector

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50.2% Financials 21.8%
North America
Information Technology 17.0%
Asia Pacific 28.2% Consumer Discretionary 16.8%
17.4% Industrials 15.4%
Western Europe
Health Care 9.2%
Africa / Middle East 1.2% Morphic Ethical Consumer Staples 6.1% Morphic Ethical
Equities Fund 5.7% Equities Fund
Real Estate
South & Central America 1.2%
Benchmark Materials 4.5% Benchmark
Eastern Europe 0.9% Utilities 1.9%
Telecommunication Services 1.6%
Central Asia 0.8% 0.1%
Energy
0.0% 20.0% 40.0% 60.0% 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 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] 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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Focussed | Vigilant | Agile