MORPHIC ETHICAL EQUITIES FUND LIMITED — Fund Information / Factsheet 2018

Feb 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 January 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	ITD
Morphic Ethical Equities Fund1	2.05%	2.15%	9.30%
Index2	2.04%	3.61%	11.40%

Ethical Investing in Focus

This month sees the launch of our Morphic ESG Long/Short Hedge fund, developed in partnership with our European distribution partners, Trium, to be sold to European clients. The innovative fund will be one of the world’s first ESG compliant hedge funds and offers a version of the Morphic funds into Europe in a European compliant fund. If you are interested please contact us to see if you are eligible to invest (open to wholesale Australian investors only at this stage).

Whilst Morphic focuses its investing efforts on investing clients’ money into suitable shares, one interesting piece of news flow over the month that we thought worth bringing to your attention was some evidence that adding a focus on environment, social and governance issues added value to bond investors as well. We see this as further evidence that ESG has a positive effect on both investors returns, no matter the asset class.

Portfolio review

The Fund rose 2.05% in January, slightly outperforming the benchmark.

Global markets were up 5.6% in USD terms for the month, but offsetting this the Australian dollar rose strongly, up 3% again last month. This was the third strongest start to a year in over 30 years. Emerging Markets were the strongest region, up 8.3%, continuing their trend from 2017. USA (+5.6%) was in line, with Japan (+4.6%) the slight laggard. Banks (+8.3%) and other cyclicals led, with utilities (-0.6%) suffering from rising interest rates. All returns above are in USD terms to allow comparisons.

Our long-held position in Bank of Internet was the largest contributor as it benefitted from both the buying of banks and good stock specific news. The company’s results for 2017 showed the business continues to improve, with margins remaining high and charge-offs low. Even after this move, the stock has not rerated to where it was before a series of short-selling ‘hit pieces’ published over the last few years, suggesting further upside. We have trimmed but remain holders.

Cosmos, the short leg of our Japanese drugstore pairs trade composed of long Kusuri No Aoki and short Cosmos was the second largest contributor. Cosmos reported results suggesting falling profitability in its key markets and future capital expenditure. After Cosmos fell heavily on the announcement, we closed the position. Our largest detractor for the month was our short position in Prada. The stock rose strongly on the back of a general rally in Asian stocks combined with the hope that sales and margins improve in line with reported peers. We cut our position and will await to see how trading conditions evolve.

Outlook

Whilst as a general rule we keep the performance report to what happens in the relevant month, the post-month end moves in markets do warrant some comment. We have written a blog for investors outlining our views of what is taking place and our thoughts on how we manage through this.

In December, we wrote that it would be “interesting” to observe how bonds react to improving data. January saw them start to price in the better real world and it seems bonds got their answer – moving to 2.9% or 50bps in a month was too much.

The real world and its “shadows” that are financial markets have a close relationship over long periods of time. In a world of fewer active managers, one cost is lower diversity of buyers. The financial world is more “brittle” than it was before. Whether this is what regulators intended is another matter. We saw this in August 2015 and in 2010. We would argue this is the same again. But the real world is robust for now and we remain of the view that markets will adjust to reflect the real world, not the other way around.

	Key Facts
ASX code / share price		MEC / 1.08
ASX code / option price		MECO / 0.023
Listing Date		3 May 2017
Management Fee		1.25%
Performance Fee3		15%
Market Capitalisation Shares Outstanding		$ 49m 45,479,227
Options Outstanding		43,402,026
Options Exercise price		$ 1.10
Options Expire		30 November 2018

		Net Tangible Assets (NTA)
Net	tangible	asset value before tax4	$ 1.1530
Net	tangible	asset value after tax4	$ 1.1380

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	2.9%
Wells Fargo	US Quality Banks	North America	(2.8%)
Macromill	Global Research	Asia Pacific	2.8%
Service Corp	US Deathcare	North America	2.7%
Hazama Ando	Engineering & Construction	Asia Pacific	2.7%
Western Alliance	US Quality Banks	North America	2.6%
Panalpina	Global Freighters	Europe	(2.4%)
Ateam	Japanese E-Commerce	Asia Pacific	2.0%
Bank of the Ozarks	US Quality Banks	North America	2.0%

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Bank of Internet 20 bps
Cosmos Pharmaceutical 19 bps
Open House 7 bps
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Top three alpha detractors[5 ] (bps)

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Prada -9 bps
Kusuri No Aoki -9 bps
Haseko -9 bps
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Hedge Positions	Risk Limit Utilisation (%)6
Short Bonds	0.6%
Long AUD	0.5%
Long Japanese Yen	0.4%

	Risk Measures
Net Exposure7		102%
Gross Exposure8		126%
VAR9		0.98%

Equity Exposure Summary By region

Equity Exposure Summary By sector

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48.9% Financials 18.2%
North America
Information Technology 17.9%
Asia Pacific 28.7% Consumer Discretionary 17.6%
18.9% Industrials 17.4%
Western Europe
Health Care 9.2%
Africa / Middle East 1.1% Morphic Ethical Consumer Staples 6.2% Morphic Ethical
Equities Fund 5.0% Equities Fund
Real Estate
South & Central America 1.1%
Benchmark Materials 4.5% Benchmark
Eastern Europe 0.7% Telecommunication Services 2.4%
Utilities 1.9%
Central Asia 0.7% -0.1%
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 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