MORPHIC ETHICAL EQUITIES FUND LIMITED — Fund Information / Factsheet 2021

Jul 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.

Monthly Report June 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 Ethical Equities Fund1	1 Month	3 Months	6 Months	1 Year	3 Years (p.a.)	ITD (p.a.)
	4.48%	7.79%	21.43%	34.78%	13.18%	12.04%
Index2	4.46%	8.95%	15.43%	27.72%	13.96%	13.64%
* Past Performance is	ot an indication of future erformance

• Past Performance is not an indication of future performance.

		Net Tangible Assets (NTA)
NTA	value	before tax3	$ 1.4884
NTA	value	after tax3	$ 1.3741

ESG IN FOCUS

The global fashion industry is worth $2.5trn each year and equivalent to 3% of global GDP. Approximately 100bn apparel items are sold every year, up 50% from 2006 (UBS, 2021). The exponential growth in fast fashion consumption has been driven by decades of apparel price deflation.

Investment Returns since inception[4]

Cheaper clothing is made possible by increasingly global supply chains, the use of cheaper synthetic materials and some human rights violations of workers in developing markets. As consumption habits continued to grow, increasing speed to market has facilitated the consumers desire to stay on trend.

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The World Economic Forum found that while people bought 60% more garments in 2014 as they did in 2000, they only kept them for half as long. Garments are made cheaply, quickly and with inherent obsolescence. The majority of clothing ends up in landfill or is burnt within one year of production. The opaque and disjointed nature of the global fast fashion industry means consumer demand and habits will be a key driver for change in the future.

Portfolio Commentary

The Morphic Ethical Equities Fund increased 4.48% net during the month taking full year to end June 2021 returns to 34.78%. Notably with the Aussie dollar being quite strong through the period and the portfolio unhedged, the underlying stock performance was muted quite substantially.

The portfolio’s top three contributors for the month Option Care Health, Bed Bath and Beyond and QTS Realty added 217bps to performance while BankUnited, Comerica and Webster Financial detracted 42bps. The Fund had 2 portfolio companies reporting quarterly results during the month however the next reporting season will begin in earnest from late July.

PVH is the owner of two very iconic brands, Tommy Hilfiger and Calvin Klein. It announced Q122 results which highlighted the business is now moving from navigating the pandemic into an accelerating growth phase with revenues up strongly. COVID has brought forward e-commerce spending by several years in our opinion and we are seeing it in our retail stocks. PVH’s digital revenue grew 95% this quarter and now represents about a quarter of total sales. Tommy and Calvin are taking market share driven by strong consumer demand for its assortments – this is driving pricing power and margin expansion. PVH raised EPS guidance a little over 8% to $6.50 per share with underlying momentum placing it on track to return to >$9.00 EPS within 12-18 months, at which point it would be trading on <12.0x PE.

QTS Realty has been held in this Fund and in a previous life since its $21.00 per share IPO in October 2013. As one of the larger pure play data center companies in the US we have been benefiting from the compounding nature of its earnings and with only half of its addressable footprint built out, the longer-term opportunity remained attractive. Clearly this was apparent to private equity as Blackstone Infrastructure Partners lobbed a $78.00 per share cash bid early in the month. We consider the offer fair in the near term and given the likelihood of a superior offer is quite small we have exited the position at the takeover price.

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Global Responsible Investors

Given we are currently half way through the calendar year and there are so many moving parts as the world begins (and hopefully sustains) its exit from the clutches of COVID-19 we wanted to highlight how we are seeing things and therefore positioned.

Right now it seems every discussion is focused on inflation and whether it is transitory or perhaps more sustained. Inflation is currently very elevated however this is due to low base effects (remember that we are cycling pandemic effects from last year) and from limited supply of goods in demand such as steel, chemicals and used cars. These prices should stop going up and, in many cases, start moving lower (note lumber prices are down >50% from the peak in early May). Inflation is not just coming from soaring commodity prices but also from stronger than expected growth, supply chain bottlenecks, semiconductor shortages, freight and increasingly wages.

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The discussion around inflation makes sense as it is key in driving interest rates and subsequently valuations with runaway inflation boosting the former and impairing the latter. That said, what is more important to monitor is inflation expectations and these are comfortably anchored around 2.0%. You could say the Fed has achieved the desired inflation outcome here however it believes there is still work to do on reaching full employment as there is still >7m fewer people working compared with pre pandemic levels. Only time will tell on what level of inflation we settle at however what we focus on in our businesses is pricing power and the ability of our companies to pass on this inflation in protecting and perhaps expanding margins. The bigger question will be how much of the recent price increases remain permanent if the underlying commodity inflation does prove transitory – could see some outsized margin opportunity here:

Tempur Sealy is currently enjoying double digit average selling price growth driven by product mix and the ability to raise prices. In its last quarterly call, Management highlighted that it raised prices in Q420 and Q221 to offset commodity price inflation with no impact on demand. Tempur Sealy upgraded guidance in its last result and trades on 13.3x PE.

Azek is one of the leaders in the North American composite decking market and while it recycles a significant amount of waste plastic into its products, it is still a net buyer of resins. Management raised end prices in Q420, Q221 and a further increase has been announced and will flow through next quarter. All with no impact on demand as it actually increased its capacity expansion plans by 15% to capture significant inbound interest. Azek also increased earnings guidance in the past quarter and we have added to the position.

Travis Perkins is the largest building product distributor in the UK and actually benefits from inflation as the majority of its sales are based on pass through pricing. It maintains margins on the increased pricing and therefore grows absolute dollars in this environment. Travis recently provided an intra quarter trading update which highlighted earnings to come in significantly ahead of market expectations. The business is currently trading on less than 8.0x EBITDA.

Now with the inflation bogey discussed, what other demand trends are we looking to participate in over the next year:

Consumer who is in great shape with many economists estimating excess savings of over $2tr as direct income support drove the highest growth in disposable income for decades:

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Source: FactSet, St. Louis Federal Reserve, Bloomberg, and Raymond James research

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Global Responsible Investors

We are participating in this with Tempur Sealy, PVH and Azek which were previously mentioned however also benefiting would include:

Bed Bath and Beyond which is going through a transformation under the watchful eye of CEO Mark Tritton. If the strategy is fulfilled, the business will be trading on 3.0x EBITDA with a net cash balance sheet in a couple of years time.

Groupe SEB which is one of the largest small domestic appliance businesses and the largest global cookware provider owning brands such as Tefal and Moulinex. It upgraded full year expectations in its last result and is currently trading on 15.5x PE and just over 8.0x EBITDA.

Auto, Business and Retailer inventories at record lows paving the way for an inventory restocking cycle and probably then some as business owners don’t want to be caught short to this degree again:

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Source: FactSet, Bloomberg, Cox Automotive, and Raymond James research

Sensata is one of the largest providers of mission critical sensors in both automotive and heavy vehicle markets globally. Approximately 60% of the business is tied to the global auto market while the remaining 40% is driven by heavy vehicles and industrial applications. It outgrows its end markets by several hundred basis points and while semiconductor chip shortages are currently impairing auto production, end demand indicators remain strong. Sensata trades on less than 14x forward earnings.

XPO Logistics is the third largest less than truckload (LTL) operator in the US, a leading LTL player in Europe and the second largest contract logistics player globally. It is spinning off its contract logistics business in the third quarter after which we will own a pure play transportation company and a pure play logistics company. All these goods to replenish inventories will require logistics and XPO is a prime beneficiary.

Flex Group is one of the largest contract manufacturers globally primarily serving Healthcare, Automotive, Industrial as well as consumer products. Its facilities will be operating at full capacity to replenish its end markets. It also owns the largest solar tracking business globally which is anticipated to be spun out in an IPO. Flex is trading on 10.0x PE and less than 6.0x EBITDA.

Bureau Veritas is one of the largest testing, inspection and compliance businesses globally. It monitors and maintains transparency in global supply chains, inspects and certifies new capital projects and has recently launched RESTART YOUR BUSINESS WITH BV which checks that all appropriate health, safety and hygiene conditions are in place to support business resumption.

The natural consequence of strong consumer and government demand (fiscal stimulus) and subsequent supply shortages is the need for increased spending on manufacturing, automation and infrastructure.

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Kion is listed in Germany and is the largest warehouse automation solutions provider globally and the second largest forklift truck provider as well. Companies are looking to do more with less and with supply chain automation becoming mission critical for business productivity, Kion is well placed to benefit from this trend. Despite its strong performance over the past several months it remains attractively valued at less than 8x EBITDA.

PTC is one of the largest computer aided design (CAD) and product lifecycle management (PLM) companies globally and is the leader in industrial internet of things, or basically helping the global manufacturing fleet become “smart” with data analytics and digital twins. It is a key beneficiary of increased industrial capex as well as onshoring of production in the US.

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WillScot Mobile Mini is the largest owner and operator of modular office space in North America with c45% market share. It is driven by a number of end markets however non-residential construction; industrial and road infrastructure are some of its larger end exposures. With double digit pricing embedded in the model now coupled with higher fleet utilisation, we see strong growth ahead. Willscot is currently trading on 9.8x next year’s EBITDA.

So we hope this gives some context in how we some of the end demand drivers and how we are looking to participate with strong market leading franchises trading at very attractive multiples.

With all that said there are clearly risks that we are constantly monitoring including:

New variants of Covid (such as Delta) which could impact growth expectations

Currently declining global bond yields which typically precede weaker economic growth periods

Expiring unemployment benefits and declining money supply impacting liquidity (tapering intentions from the Fed)

Supply chain bottlenecks worsening (especially around chip production) and impacting profits

Inflationary impact on input costs and the ability of companies to pass through to the end consumer (ok so far)

A stockmarket which has delivered the 7th best first half calendar gain for global stocks in the past 100yrs (Morgan Stanley)

As such we are comfortable owning and growing with our current portfolio however cognisant of the risks currently presented in the previous bullet points. With this in mind we maintain a strict focus on valuation and subsequent risk reward in our positioning. We are about to enter the June quarter reporting season which will help provide more data points for us to determine how are businesses are performing in this everchanging world and look forward to reporting back to you, our investors, with the progress.

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Global Responsible Investors

Top 10 Active Positions

Stocks (Shorts)	Industry	Region	Position Weighting
Sensata	Industrials	North America	4.86%
Flex	Information Technology	North America	4.38%
Tempur Sealy	Consumer Discretionary	North America	4.12%
Bureau Veritas	Industrials	Europe	4.08%
WillScot Mobile	Industrials	North America	3.99%
Webster Financial	Financials	North America	3.91%
SEB	Consumer Discretionary	Europe	3.66%
Option Care Health	Health Care	North America	3.44%
XPO Logistics	Industrials	North America	3.37%
PTC	Information Technology	North America	3.20%

Risk Measures
Net Exposure5	83.06%
Gross Exposure6	94.54%
VAR7	1.49%
Best Month	8.60%
Worst Month	-6.49%
Average Gain in Up Months	2.37%
Average Loss in Down Months	-1.47%
Annual Volatility	9.55%
Index Volatility	10.50%

Top three alpha contributors[8 ] (bps)

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Option Care Health 97 bps
Bed Bath and Beyond 68 bps
QTS Realty 52 bps
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Top three alpha detractors[8 ] (bps)

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Webster Financial -10 bps
BankUnited -16 bps
Comerica -16bps
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	Key Facts
ASX code / share price		MEC / 1.25
Listing Date		3 May 2017
Profit Reserve9		$ 0.301
Management Fee		1.25%
Performance Fee10		15%
Market Capitalisation		$ 66m
Shares Outstanding		52,953,469
Dividend per share11		$0.025

Equity Exposure Summary By region

Equity Exposure Summary By sector

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North America 52.3% Industrials 31.6%
Information Technology 18.2%
Western Europe 24.2% Consumer Discretionary 13.0%
Asia Pacific 6.6% Financials 10.9%
Materials 2.8%
Central Asia 0.0% Morphic Ethical Health Care 2.7% Morphic Ethical
Equities Fund Equities Fund
Communication Services 2.4%
South & Central America 0.0% Benchmark Benchmark
Consumer Staples 1.9%
Africa / Middle East 0.0% Utilities -0.1%
Energy -0.1%
Eastern Europe 0.0% Real Estate -0.2%
-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