MORPHIC ETHICAL EQUITIES FUND LIMITED — Fund Information / Factsheet 2021

Mar 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 February 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.)
	0.94%	11.27%	16.61%	19.61%	9.81%	10.18%
Index2	1.40%	1.44%	7.98%	8.47%	10.53%	11.12%
* Past Performance is	ot an indication of future erformance

• Past Performance is not an indication of future performance.

Ethical Investing in Focus

According to a Deloitte survey, corporations are beginning to consider a broader set of stakeholders which reflects not just economic performance but also societal impact. Approximately 70% of C-suite executives surveyed believe that long term business success requires the integration of Industry 4.0 technologies into their organisations.

Industry 4.0 is the marriage of physical assets and digital technology and with this data in hand, corporations are more productive, more innovative and better equipped to operate in a circular economy which according to the World Economic Forum (WEF) “promotes the elimination of waste and the continual safe use of natural resources, offers an alternative that can yield up to $4.5 trillion in economic benefits to 2030.”

A recent report from the WEF shows how the power of Industry 4.0 can be harnessed to improve the way materials are managed and steer society away from antiquated take-make-waste models towards sustainable, circular solutions.

We consider the shift to circular manufacturing, which requires a connection between physical and digital assets for effective measurement and therefore management, as a nascent yet powerful megatrend which will gain more prominence over the next several years.

Portfolio review

February was a key month in reminding the markets that higher growth will result in higher inflation and global bond yields kicked up as a result. The US 10yr started the month at 1.07%, and with further evidence through reporting season of a tight supply chain and associated inflationary impact on company input costs, the 10yr finished the month above 1.40% and is currently just under 1.60% at time of writing.

The market is undergoing a regime change where over the past few years lower growth and lower rates benefited large cap growth and momentum stocks while now we are transitioning to higher growth (early-stage recovery), higher rates which should see mid/small cap stocks, industrials and financials continue to be relative winners.

The Morphic Ethical Equities Fund increased 0.9% net during the month underperforming the benchmark which increased by 1.4% over the same period.

As at the end of February 2021, the Fund’s profit reserve was 24.5 cents per share[9] .

The portfolio’s top three contributors Tempur Sealy, MIPS and Comerica added 185bps to performance while Anritsu, Health and Happiness (H&H) and Bed Bath & Beyond detracted 155bps. The Fund had 16 portfolio companies reporting quarterly results or trading updates in February with the bulk of reporting season now complete.

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		Net Tangible Assets (NTA)
NTA	value	before tax3	$ 1.3608
NTA	value	after tax3	$ 1.2734

Investment Returns since inception[4]

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50.00%
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May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Mar-19 May-19 Jul-19 Sep-19 Nov-19 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21
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Sensata finished off the year with its first quarter of revenue growth in several quarters as global auto and heavy vehicle markets appear to have bottomed after a very difficult 2020. As content per vehicle continues to increase, Sensata is outperforming its end markets and Q420 was quite stellar with almost 10% outgrowth during the quarter. Management guided to 2021 in line with market expectations despite increased spending on future growth initiatives. While shorter term holders of the stock sold it down 4.5% over the next couple of days, we used the weakness as an opportunity to accumulate a larger position.

Tempur Sealy also delivered a very strong finish to 2020 with full year revenues up 18% and EBITDA up an even more impressive 53.5%. We had been concerned about pull forward as the business did benefit from increased home spending during the year however

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Management expects growth to continue with 15-20% revenue and about 20% EBITDA growth slated for 2021. This will come without much of a growth contribution from Europe, as these economies are slower to recover post Covid and should benefit the business more in 2022. The Board initiated a maiden dividend and increased its buyback authority as FCF is coming in very strong.

Anritsu is one of three players globally providing testing for next generation 5G deployments and while the need for 5G and its rollout has become even more pronounced since the pandemic, activity levels have been constrained somewhat on the back of lockdowns. Management upgraded full year earnings expectations however the outcome has become more Q4 weighted which adds a layer of risk to the result. With the business trading on an undemanding earnings multiple for exposure to the long tailed secular 5G tailwind, we remain convicted holders in the business.

STOCK IN FOCUS: PTC Inc (PTC US, $13.8b Market Cap)

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PTC is a global leader in Computer Aided Design (CAD) and Product Lifecycle Management (PLM) software products and the leader in providing solutions serving the high growth Industrial IoT and Augmented Reality (AR) markets associated with Industry 4.0. The CAD and PLM market is dominated by four global players, including PTC which has demonstrated continued market share gains as it excels in helping customers design, manufacture, operate and service products across multiple industries. While it delivers its solutions via a software stack, the underlying business is really driven by industrial activity and innovation.

PTC has three significant partnerships with industry leaders including Microsoft, Rockwell Automation and Ansys. We consider its partnership with Microsoft as the largest driver of near-term revenue contribution as PTC’s ThingWorx® Industrial Innovation Platform is now available on the Microsoft Azure cloud platform as its preferred cloud platform.

The business has really transformed over the past few years as Management made the hard decision to move from a perpetual licence model to a recurring revenue subscription product offering. This had the result of constraining top line growth and margins in the early days however in FY20 the model inflected with EBIT margin increasing almost 900bps and annual recurring revenue growing double digits despite the impact of the global pandemic.

FY21 has started out well for the business with Q1 revenue and EBIT up 20.5% and almost 65% respectively prompting Management to upgrade guidance quite materially compared with its last full year expectation. Recent acquisitions including OnShape and Arena are expected to drive outsized growth as the combination represents a powerful pure-SaaS solution that's number one in technology, customers and revenue.

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Source: PTC Q121 Earnings Presentation

Its core CAD and PLM business is expected to grow high-single digit to low double-digits over the coming years while the higher growth Augmented Reality group is expected to come in between 25-30% and represent close to a third of the total business in a few years. This should drive operating leverage across its “build it once, sell it many times” software stack with Management anticipating a further 700bps margin expansion over the coming years which subsequently drives 25-30% FCFgrowthfor us as shareholders.

At the time of writing, PTC is trading at $125.50 which represents a forward PE of 28x and EV/EBITDA of 15.4x which we consider solid value for a business growing 30%+ over the next few years and roughly half the multiple as its best comparable Autodesk. As FCF continues to build on the balance sheet (excluding any further M&A) we anticipate the balance sheet to be in a net cash position in two years which provides significant capital allocation optionality for the group.

In the interest of keeping you updated on the performance and positioning of your holding in the Fund, we are hosting an investment update on Tuesday 16th March 2021 at 12pm AEDT, for which you can register here.

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Top 10 Active Positions

Stocks (Shorts)	Industry	Region	Position Weighting	Risk Measures
Sensata Technologies	Industrials	North America	5.5%	Net Exposure5 Gross Exposure6	91.12% 95.96%
PTC	Information Technology	North America	5.2%	VAR7	2.18%
Flex	Information Technology	North America	4.7%	Best Month	8.60%
Tempur Sealy	Consumer Discretionary	North America	4.4%	Worst Month Average Gain in Up Months	-6.49% 2.29%
Option Care Health	Health Care	North America	4.4%	Average Loss in Down Months	-2.13%
Bureau Veritas	Industrials	Europe	3.9%	Annual Volatility	9.83%
Anritsu	Information Technology	Asia Pacific	3.8%	Index Volatility	10.74%
Techtronic Industries	Industrials	Asia Pacific	3.8%
SEB	Consumer Discretionary	Europe	3.5%
Comerica	Financials	North America	3.3%

Top three alpha contributors[8 ] (bps)

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Tempur Sealy 86 bps
MIPS 52 bps
Comerica 47 bps
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Top three alpha detractors[8 ] (bps)

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Anritsu -65 bps
Health and Happiness (H&H) -53 bps
Bed Bath & Beyond -37 bps
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	Key Facts
ASX code / share price		MEC / 1.09
Listing Date		3 May 2017
Profit Reserve9		$ 0.245
Management Fee		1.25%
Performance Fee10		15%
Market Capitalisation		$ 58m
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 51.1% Industrials 25.2%
Information Technology 21.4%
Western Europe 21.9% Consumer Discretionary 17.5%
Asia Pacific 17.9% Financials 9.8%
Communication Services 5.7%
Central Asia 0.0% Morphic Ethical Consumer Staples 4.4% Morphic Ethical
Equities Fund Equities Fund
Health Care 4.4%
South & Central America 0.0% Benchmark Benchmark
Real Estate 2.3%
Africa / Middle East 0.0% Materials 1.2%
Utilities -0.3%
Eastern Europe 0.0% Energy -0.5%
-10.0% 10.0% 30.0% 50.0% 70.0% -5.0% 5.0% 15.0% 25.0% 35.0%
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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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