MORPHIC ETHICAL EQUITIES FUND LIMITED — Fund Information / Factsheet 2021

Nov 11, 2021

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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 October 2021

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 EthicalEquities Fund1	1 Month	3 Months	6 Months	1 Year	3 Years(p.a.)	ITD (p.a.)
	-0.05%	2.63%	9.92%	32.40%	15.52%	11.83%
Index2	1.08%	1.08%	10.05%	28.35%	15.22%	13.53%
* Past Performance is	ot an indication of future performance

• Past Performance is not an indication of future performance.

		Net Tangible Assets (NTA)
NTA	value	before tax3	$ 1.5038
NTA	value	after tax3	$ 1.3792

Portfolio Commentary

With the October newsletter release timing very closely with the September quarter earnings season we will devote the space this month to run through the majority of our company results to provide you with an insight into how our businesses are performing in these extraordinary times. We will look to resume the ESG in Focus and Stock Focus in the next edition.

Investment Returns since inception[4]

The Morphic Ethical Equities Fund declined 0.05% net in October as it did seem that good news leading into reporting season was generally priced in as earnings beats were less rewarded than earnings misses, which were dealt with quite harshly by the market. Underlying stock performance of almost +3.5% was more than offset by the stronger Aussie dollar during the month. The MSCI All Countries World Index (AUD) returned 1.08% during the month.

80.00%

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The portfolio’s top three contributors for the month Cerence, Option Care Health and WillScot Mobile Mini added 151bps to performance while LivePerson , Bed Bath and Beyond and Tempur Sealy detracted 70bps . From the last two weeks of October to the time of writing we have had the majority of our businesses report results and we will provide highlights here:

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We started the season with our regional US Banks, Comerica and Webster reporting results ahead of expectations as credit quality remained very strong, net interest margins stablised and glimmers of loan growth begin to emerge. It seems now that most of the credit reserve releases are complete and with significant excess liquidity on their balance sheets, the potential leverage to improving loan demand is quite pronounced.

Chart Industries is a global leader in mission critical equipment for processing, storage and delivery of industrial gases which we highlighted in our August newsletter. It had been a top 10 position in July however we trimmed it meaningfully post a strong share price performance and concerns around margins given the substantial run up in steel and aluminium prices we have seen. We had been looking (hoping) for a poor result and it actually came in worse than expected as cost inflation ripped into margins. Management is aggressively pursuing additional pricing actions to recoup margins while robust demand (especially in hydrogen) continues unabated. We added back to the position as the share price retreated post results and it is now back close to all-time highs.

Kion Group reported a very strong set of results despite supply chain bottlenecks increasing lead times for industrial trucks from 8-12 weeks out to at least 6 months. Its order book for both industrial trucks and warehouse automation continues to build and with demand signals remaining solid it expects orders to come in at the top end of guidance. We have added to the position post result and have been underpinned by an increase to its 2023 revenue targets at its Capital Markets Day held subsequent to its results.

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Bureau Veritas continues to impress with organic revenues now 3% ahead of pre pandemic levels as strong industrial, building and infrastructure activity continues to drive results. Management maintained full year guidance however took time in outlining its “Green Line” of expertise in renewables, supply chain traceability and e-mobility. The stock has been strong over the past year and while we have trimmed some of the position, we view it as a long-term core holding.

Sensata was impacted by the semiconductor chip shortage in the global automotive market however it was still able to deliver quarterly results above expectations. Management estimates that it will generate more than $220m in revenues this year in electrification, driven by electrification trends, infrastructure requirements and the proliferation of IoT in stationary and mobile equipment. Despite the global auto market remaining weak over the next quarter or two, it is set up to participate when its end markets rebound next year.

Advantest operates in a global duopoly (c 50% market share) in system on chip (SoC) testing with US based Teradyne. It reported very strong order growth and increased full year order guidance to now come in at ¥565bn compared with previous expectations of ¥400bn. That said, it only increased revenues by around 4% implying continued supply chain issues curtailing deliveries. It will benefit from strong chip demand and greater complexity of chips for the foreseeable future and this demand is not transitory.

Anritsu operates in a global oligopoly in the 5G testing and certification market (alongside long time holding Keysight). Anritsu was the only company to report numbers below expectations for the quarter as semiconductor chip and component constraints impacted its ability to sell systems – the stock was down high single digit % on the day. With a solid backlog, 5G adoption tailwind and the prospect of an improving supply chain, management maintained full year revenue and earnings expectations.

Flex Group is one of the largest contract manufacturers globally primarily serving healthcare, automotive, industrial as well as consumer products. Reported revenue came in slightly below the midpoint of guidance as supply chains challenged automotive production, similar to Sensata. Bookings remain very strong with channel replenishment needs driving demand. It recently bought Anord Mardix which is a leader in data center power and infrastructure which should drive further growth next year. Management lowered revenue guidance to account for the supply chain bottlenecks however maintained EPS guidance as better margins and its stock buyback limited the impact to the bottom line. It was down post result but is now beginning to regain the lost ground.

GXO Logistics reported its maiden result post its spinoff from XPO Logistics in August this year. As the second largest contract logistics players globally, it is benefiting from increased activity in ecommerce outsourcing from both existing and new clients. It beat earnings expectations handily and won new contracts in the third quarter alone worth $1bn of aggregate lifetime value taking total wins year to date up to $4.3bn. It is increasingly confident in delivering 8-12% revenue growth in 2022 with greater expansion in EBITDA. The stock has re-rated over 40% post spin and we have trimmed it to a core level holding at its current valuation.

XPO Logistics reported strong quarterly earnings and upgraded full year expectations however the beat was driven by its freight brokerage business as it’s less than truckload (LTL) operations came in below expectations. In probably one of the tightest trucking markets for some time, expectations were high however some internal execution issues (which it is now addressing) tainted the headline result. It remains one of the cheapest transportation businesses in the market and with proper operational execution we see material upside.

Tempur Sealy delivered results in line with expectations with sales up 20% despite supply chain challenges resulting in backlogs increasing by $100m. Management upgraded full year EPS to $3.25 midpoint as it benefits from continued strong demand drivers. It will be rolling out a new line of Sealy products in North America including a line of eco-friendly mattresses, a new product lineup Internationally for its Tempur-Pedic mattresses as well as expanding on its manufacturing footprint in the US. Management indicated that these initiatives coupled with its recently completed Dreams acquisition in the UK will result in double digit sales and earnings growth for 2022 and beyond. Tempur Sealy remains a large position in the fund.

PTC has a September year end so this was its full year result. It delivered Q4 revenues above market expectations with EPS some 62% ahead. Guidance for next year was pretty much in line with expectations however management indicated that it is looking to speed up the transition to a “Software as a Service” model (SaaS) given the majority of its traditional customer base still manage workloads “on premise”. This will take some lifting and shifting as it transitions customers to the cloud however the revenue and cash flow benefits will be quite pronounced over the coming years. We had trimmed the position into the result and have bought it back following share price weakness.

Cellnex generally provides very predictable results with organic growth typically in the 5%+ range. This quarter was well above that with implied organic growth in the third quarter of 6.5% driven by increased colocation and acceleration of its build-to-suit programs (likely some timing benefit here). Adjusted EBITDA grew 70% with margins expanding 280bps to 75.9%. Growth is being driven by past deal closures with Management also announcing its French Hivory deal had been approved as well. We had trimmed the stock a few months ago as it reflected our estimate of fair value however we have been adding it back on weakness as we remain attracted to the European tower outsourcing and 5G tailwind thematics.

Travis Perkins is the largest distributor of building products in the UK and has recently restructured its business to become a pure play in this space. Management had marginally upgraded in is first half result to reflect higher property profits however provided a more material increase to expectations in its third quarter trading update. It now expects at least £340m EBIT as its Merchanting business benefits from higher pricing. With the UK government’s commitment to decarbonisation, infrastructure and house building, management expects the RMI market to remain strong for some time to come.

Assurant reported a solid quarter which was ahead of the market as its Global Lifestyle segment and lower corporate expenses provided the beats. Connected Living, Global Automotive and Multi Family Housing platforms are expected to continue to grow strongly. The sale of Preneed has been completed with $900m of the net $1.2bn proceeds earmarked for a share buyback over the next 12 months. Management re-affirmed full year EPS growth of 10-14%, however now at the top end of the range despite increased investments in its mobile phone protection and service business as the 5G trade in cycle starts to accelerate.

Option Care Health had already pre-announced its Q3 results which were nicely ahead of our forecasts at the time and took the opportunity in the official release to upgrade its EBITDA guide for the full year. With patient referrals gaining momentum, supply of immunoglobulin continuing to improve and labour conditions manageable, we see a continuation of high single digit revenue and mid-teens earnings growth for the foreseeable future. With a strong cash flow profile and de-leveraging balance sheet, we also see further upside from accretive M&A over the coming quarters adding to shareholder value.

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Willscot Mobile Mini benefits from double digit embedded pricing growth in its model and the third quarter result continued this trend with pricing up 20% in its North American modular office fleet. We note that deliveries were up strongly this quarter which portends well for future utilisation absorption as the fleet is still less than 70% utilised (strong leverage on existing base). The company held its inaugural Investor Day on Nov 8th in which management highlighted longer term growth targets and a very strong cash generation profile which will be used to fund tuck in acquisitions and a proactive share buyback program which we estimate at >25% of its current market cap over the next 3 years.

Digital Bridge is a US based Real Estate Investment Trust (REIT) which is now 100% focused on buying, building, operating and investing in digital assets. It has undergone a substantial transformation over the past 18 months as it sold non-core assets and re-deployed this capital into digital assets including towers, data centers, fiber and small cells. This marked its first quarter as a pure play digital REIT reporting >$40bn of assets under management in digital infrastructure. Now that the transformation is complete, management is moving to an acceleration phase with the potential to be one of the fastest growing digital REITs in the world. We had initiated a position a few months ago and had been adding on weakness. Post result the share price has been pretty solid and it is sitting just outside the top 10.

We understand there is a significant amount of information here around our company results and if you made it this far, we appreciate your diligence. We hope that this extensive coverage of our recent reporting season was of value to you and demonstrates why we remain highly convicted in our positions.

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Top 10 Active Positions

Stocks	Industry	Region	PositionWeighting
Sensata	Industrials	North America	4.98%
Tempur Sealy	ConsumerDiscretionary	North America	4.77%
XPO Logistics	Industrials	North America	4.66%
Option CareHealth	Health Care	North America	4.47%
WebsterFinancial	Financials	North America	4.35%
Bureau Veritas	Industrials	Europe	4.21%
PVH Corp	ConsumerDiscretionary	North America	4.18%
Flex	InformationTechnology	North America	4.09%
WillScotMobile Mini	Industrials	North America	3.84%
PTC Inc.	InformationTechnology	North America	3.65%

Risk Measures
Net Exposure5	87.57%
Gross Exposure6	93.40%
VAR7	1.49%
Best Month	8.60%
Worst Month	-6.49%
Average Gain in Up Months	2.35%
Average Loss in Down Months	-1.57%
Annual Volatility	9.72%
Index Volatility	10.36%

Top three alpha contributors[8 ] (bps)

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----- Start of picture text ----- Cerence 59 bpsOption Care Health 49 bpsWillScot Mobile Mini 42 bps----- End of picture text -----

Top three alpha detractors[8 ] (bps)

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----- Start of picture text ----- Tempur Sealy -20 bpsBed Bath and Beyond -22 bpsLivePerson -28 bps----- End of picture text -----

	Key Facts
ASX code / share price		MEC / 1.365
Listing Date		3 May 2017
Profit Reserve9		$ 0.386
Management Fee		1.25%
Performance Fee10		15%
Market Capitalisation		$ 72m
Shares Outstanding		53,050,432
Dividend per share11		$0.06

Equity Exposure Summary By region

Equity Exposure Summary By sector

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----- Start of picture text ----- North America 71.1% Industrials 37.1%Information Technology 24.4%Western Europe 17.9% Consumer Discretionary 11.3%Asia Pacific 4.5% Financials 9.3%Health Care 4.5%Central Asia 0.0% Morphic Ethical Real Estate 3.1% Morphic EthicalEquities Fund Equities FundCommunication Services 2.4%South & Central America 0.0% Benchmark BenchmarkConsumer Staples 1.3%Africa / Middle East 0.0% Energy 0.0%Utilities 0.0%Eastern Europe 0.0% Materials 0.0%-10.0% 10.0% 30.0% 50.0% 70.0% -5.0% 5.0% 15.0% 25.0% 35.0%----- End of picture text -----

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Contact us

Morphic Asset Management Pty Ltd Level 11, 179 Elizabeth St Sydney 2000 New South Wales Australia www.morphicasset.com

Investor Relations Phone: +61 2 9021 7701 Email: info@ellerstoncapital.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.

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 estimated and unaudited;[4] Performance is net of investment management fees, before dividends, company admin costs and taxes. 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] Attribution; relative returns against the Index excluding the effect of hedges;[9] The reserve is made up of amounts transferred from current and retained earnings that are preserved for future dividend payments. The payment of franked dividends depends on the rate the Fund realises taxable profits and generates franking credits;[10] The Performance Fee is payable annually in respect of the Fund’s outperformance of the Index. Performance Fees are only payable when the Fund achieves positive absolute performance and is subject to a high water mark;[11] Annual dividend per share.

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