MORPHIC ETHICAL EQUITIES FUND LIMITED — Fund Information / Factsheet 2021

Sep 13, 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.

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.

Monthly Report August 2021

	Investment returns*	Investment returns*	Investment returns*	Investment returns*	Investment returns*	Investment returns*	Investment returns*
Morphic Ethical Equities Fund1	1 Month	3 Months	6 Months	1 Year	3 Years (p.a.)	ITD (p.a.)
	6.08%	11.27%	17.98%	37.57%	14.22%	13.18%
Index2	3.09%	10.75%	20.55%	30.17%	13.94%	14.61%
* 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	$ 1.5556
NTA	value	after tax3	$ 1.4153

ESG IN FOCUS

Similar to the popular Ben Graham quote “in the short run, the market is a voting machine but in the longer run, it is a weighing machine”, weather can vary day to day, week to week, while over the long term the averages of these observations give us a good picture of what is going on in our climate. We believe there is strong evidence that it is clearly changing and impacting our ecosystems.

Investment Returns since inception[4]

There are two ice sheets on Earth today that cover most of Greenland and Antarctica which together, contain more than 99% of the freshwater ice on Earth and cover roughly the same area as the United States and Mexico combined. We recently came across a headline none of us wanted to see – “Rain Fell On The Peak Of Greenland's Ice Sheet For The First Time In Recorded History” which is a prime example of what is going on in our climate, and that is one of increasing global temperatures.

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Researchers have observed that increases in greenhouse gas (GHG) concentrations were unequivocally caused by human activities and that each of the last four decades has been successively warmer than any decade that preceded it since the 1850’s. The research also concluded that it was very likely that human influence has contributed to the observed surface melting of the Greenland Ice Sheet over the past two decades (although less so for the Antarctic ice sheet) as human induced warming added about 1˚C to pre-industrial global temperature levels by 2017.

Portfolio Commentary

The Morphic Ethical Equities Fund increased 6.08% net during the month comparing well to the MSCI All Countries World Index (AUD) which expanded 3.09% over the same period. The market narrative continues to be concentrated on the Delta variant impact on growth, inflationary and supply chain impacts and, as always, the Fed.

The portfolio’s top three contributors for the month Option Care Health, Chart Industries and GXO Logistics added 234bps to performance while PTC, Groupe SEB and Bed, Bath & Beyond detracted 32bps . The Fund had 11 portfolio companies reporting quarterly results during the month which pretty much rounded out our reporting season. A couple more recent releases were:

TKH Group is a leader in 3D machine vision technology, next generation tyre manufacturing systems and subsea high voltage cables for renewable energy (especially offshore wind farms). The business generated 5.8% organic revenue and >22% earnings growth which was well ahead of expectations. On the back of its strong order book (+50% yoy), Management indicated full year normalised NPAT should come in between €106-€112m or over 35% above market consensus at the time. The stock has performed strongly post result however we still see good upside ahead.

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Azek basically operates in a duopoly with Trex in the US composite decking market with close to 75% combined share. Revenue of $327m was up 46% yoy and well ahead of the $295m expected by the street. Adjusted EBITDA was also well ahead of expectations and guidance. Management raised full year guidance (this was its Q3 result) and now expects revenues to expand 28-30% with similar EBITDA growth. It is significantly expanding capacity to service strong end markets and will also benefit next year from the full year impact of recent pricing actions as it expects to exit this year with mid-teens pricing growth.

STOCK IN FOCUS: Chart Industries (GTLS US, $7.0bn Market Cap)

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Chart Industries is a global leader and independent global manufacturer of highly engineered equipment servicing multiple applications in the Clean Energy and Industrial Gas markets. Chart is a leading provider of technology, equipment and services related to liquefied natural gas, hydrogen, biogas and carbon capture applications. Its equipment is also used in the food and beverage, medical and life sciences and water treatment industries, among other sectors. Its portfolio of products and services are used in every phase of the liquid gas supply chain including industrial engineering, in field service/repair and more recently an expanded leasing business.

The business is structured into four main product categories and is exposed to every energy transition fuel (with the exception of wind and solar) thereby rendering the business agnostic to the successful application or fuel molecule (hydrogen, biogas, ammonia etc) that will be paramount in addressing the urgent need to reduce global greenhouse gas (GHG) emissions. Its Specialty division will drive the lion’s share of growth over the coming decade with growth coming from strong end markets as well as M&A.

Chart recently purchased AdEdge which is a leader in water treatment processes and products that support clean power (electrolysis), clean water (drinking), clean food (ozonated water to wash produce) and clean industrials (ultra pure water for semiconductors). On the back of the purchase, Management updated its potential 2030 revenue opportunity highlighting a dramatic increase in its water TAM to $5bn taking total TAM to just over $39bn.

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Source: Chart Industries

As you can see, hydrogen features as the bulk of the optionality within its Specialty division and we have seen numerous hydrogen project announcements globally over the past several months. The Hydrogen Council report which was released several months ago highlighted that over 30 countries have released hydrogen roadmaps with >200 hydrogen projects announced worldwide. Approximately 85% of global projects are originating in Europe, Asia, and Australia, with activity in the Americas, the Middle East and North Africa accelerating as well. It was expected that if all projects came to fruition, spending would exceed $300bn through 2030 – this has already been increased to >$500bn. The global shift to decarbonise our energy ecosystem which is manifested in the Paris Agreement (which the US has re-entered) has strong government financial and regulatory support and therefore one of the strongest secular tailwinds we have seen for some time.

We have recently seen Reliance Industries (RIL) announce that it will “aggressively pursue” its target of bringing down the cost of green hydrogen following on from its Green Energy Giga Complex update in its June AGM where it outlined plans for its green hydrogen electrolyser factory. Air Products (listed in the US and large customer of Chart) announced in June a multi-billion dollar plan to build a landmark new net-zero hydrogen energy complex in Edmonton, Alberta and set the stage for Air Products to operate the most competitive and lowest-carbon-intensity hydrogen network in the world. Closer to home, Dalrymple Bay Infrastructure (DBI AU) announced in August that it was studying the potential for a green hydrogen production, storage and export facility at Hay Point in Queensland. There are many many more we could highlight but the key takeaway here is that the hydrogen thematic is global, early stage and Chart is the dominate player in the space.

Chart is a relatively new entrant into the Fund as we initiated our position in mid-June and added to the position after its second quarter results in late July taking it into a top 10 position in the portfolio. Since then, the stock has done materially better in the near term than we imagined and given our strict risk management processes centred around risk/reward vis a vis our estimate of intrinsic value, we have trimmed the positioned materially. That said, given the incredibly strong secular clean energy thematic driving the business, we believe the stock will be part of the Fund at various weightings, potentially over the next decade.

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Global Responsible Investors

Top 10 Active Positions

Stocks (Shorts)	Industry	Region	Position Weighting
Sensata	Industrials	North America	5.31%
Flex	Information Technology	North America	4.46%
Tempur Sealy	Consumer Discretionary	North America	4.38%
XPO Logistics	Industrials	North America	4.22%
WillScot Mobile	Industrials	North America	4.16%
Webster Financial	Financials	North America	3.98%
Advantest	Information Technology	Japan	3.86%
Bureau Veritas	Industrials	Europe	3.80%
PTC	Information Technology	North America	3.75%
Travis Perkins	Industrials	United Kingdom	3.69%

Risk Measures
Net Exposure5	83.55%
Gross Exposure6	95.34%
VAR7	1.47%
Best Month	8.60%
Worst Month	-6.49%
Average Gain in Up Months	2.43%
Average Loss in Down Months	-1.47%
Annual Volatility	9.68%
Index Volatility	10.37%

Top three alpha contributors[8 ] (bps)

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Option Care Health 103 bps
GXO Logistics 72 bps
Chart Industries 60 bps
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Top three alpha detractors[8 ] (bps)

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Bed Bath and Beyond -9 bps
PTC -10 bps
SEB -13bps
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	Key Facts
ASX code / share price		MEC / 1.29
Listing Date		3 May 2017
Profit Reserve9		$ 0.386
Management Fee		1.25%
Performance Fee10		15%
Market Capitalisation		$ 68m
Shares Outstanding		53,050,432
Dividend per share11		$0.025

Equity Exposure Summary By region

Equity Exposure Summary By sector

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North America 63.4% Industrials 33.3%
Information Technology 24.6%
Western Europe 18.9% Consumer Discretionary 12.1%
Asia Pacific 7.2% Financials 11.2%
Health Care 3.3%
Central Asia 0.0% Morphic Ethical Real Estate 2.3% Morphic Ethical
Equities Fund Equities Fund
Communication Services 1.4%
South & Central America 0.0% Benchmark Benchmark
Materials 1.3%
Africa / Middle East 0.0% Energy 0.0%
Utilities 0.0%
Eastern Europe 0.0% Consumer Staples 0.0%
-10.0% 10.0% 30.0% 50.0% 70.0% -5.0% 5.0% 15.0% 25.0% 35.0%
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Global Responsible Investors

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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Global Responsible Investors