MORPHIC ETHICAL EQUITIES FUND LIMITED — Interim / Quarterly Report 2019

Nov 12, 2019

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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 2019

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	CYTD	ITD (p.a.)
	-0.50%	0.78%	1.55%	12.46%	6.25%
Index2	0.57%	2.45%	5.17%	21.99%	12.45%
* Past Performance is not	n indication of future erformance

• Past Performance is not an indication of future performance.

Ethical Investing in Focus

In October each year we celebrate Ethical Investment Week. Ethical Investment Week is an opportunity for Australians to learn more about investing in line with their ethics. Morphic’s Head of Research James Tayler discussed five important questions you need to ask your ethical fund manager as a simple checklist.

As an active investor and a signatory of the Principles of Responsible Investment we are committed to engage with the companies in which we invest. In October we released the Morphic Stewardship Report , the first of what will be an annual update on our stewardship activities over the preceding twelve months.

Portfolio review

The Fund fell 0.5% in October, underperforming global markets which rose 0.6% in AUD terms. Global equities rallied +2.6% in USD terms fuelled by the third Fed easing in this cycle; progress on "Phase 1" of the US-China trade deal; and a US reporting season that began stronger than consensus was expecting. In October, Japan (+4.8%) and Emerging Markets (+4.1%) led regional performance while the earnings-stable US market (+2.1%) was the worst performing major region despite strong performance from the US Tech sector.

The largest contributor to performance this month was our position in German forklift manufacturer Jungheinrich. The Company is well positioned for two key structural growth drivers. The replacement cycle driving the switch from diesel to electric forklifts remains strong, as does investment into modern warehouses and related logistics infrastructure to serve the growing e-commerce providers. Acknowledging the cyclicality of industrial demand, we believe this is reflected in the current valuation which remains attractive.

After a strong contribution in the previous month, our position in Service Corp, the largest funeral care provider in the US, was the Fund’s largest detractor. We remain confident that the Company has had a solid quarter and expect the forthcoming and subsequent results to continue to confirm the long-term appeal of what is a stable and moderately growing business.

Net Tangible Assets (NTA)
NTA value before tax3	$ 1.1436
NTA value after tax3	$ 1.1263

Investment Returns since inception[4]

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20.00%
15.00%
10.00%
5.00%
0.00%
-5.00%
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
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Past Performance is not an indication of future performance.

Outlook

Last month we wrote that the market approached “decision time”: go with the weakening trade data or look through and believe the rate cuts will be enough. For now, it appears to have been decided – look through and buy. Reflecting the binary nature of these choices, the Fund carried put options, which dragged on performance, but less than the approach of carrying a large cash weighting.

Despite markets at highs, market positioning isn’t yet bullish and if this is a mid-cycle soft landing, history says markets keep rallying for some time. The Fund has exposure to interest rates and hedges in place that offers exposure to this effect, along with some FX hedging in place.

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Global Responsible Investors

Top 10 Active Positions

Stocks (Shorts)	Industry	Region	Position Weighting
Service Corp	US Deathcare	North America	5.1%
Alstom	Global Rail Equipment	Europe	5.0%
Qantas	Australian Airline	Asia Pacific	(3.6%)
Bank Leumi	Israeli Bank	Middle East	3.3%
Kering	Luxury Retailers	Europe	2.6%
Coca-Cola Amatil	Beverages	Asia Pacific	(2.6%)
Prada	Luxury Retailers	Asia Pacific	(2.5%)
Kion Group	Industrial Equipment	Europe	(2.5%)
Logitech	Information Technology	Europe	2.4%
Jungheinrich	Industrial Equipment	Europe	2.3%

Top three alpha contributors[10 ] (bps)

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Jungheinrich 39 bps
Kering 20 bps
Coca-Cola Amatil 16 bps
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Top three alpha detractors[10 ] (bps)

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Kion Group -68 bps
Service Corp -40 bps
PRADA -34bps
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Equity Exposure Summary By region

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55.5%
North America
Western Europe 20.4%
Asia Pacific 15.8%
Africa / Middle East 4.8% Morphic Ethical
Equities Fund
Central Asia 1.4%
Benchmark
South & Central America 1.3%
Eastern Europe 0.8%
0.0% 20.0% 40.0% 60.0%
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Risk Measures
Net Exposure5	100%
Gross Exposure6	138%
VAR7	1.48%
Upside Capture8	65%
Downside Capture8	83%
Best Month	5.51%
Worst Month	-5.41%
Average Gain in Up Months	1.99%
Average Loss in Down Months	-1.98%
Annual Volatility	8.69%
Index Volatility	9.66%

Hedge Positions	Risk Limit Utilisation (%)9
Short USD vs AUD and CNH	2.5%
Short US Bonds	1.6%
Long S&P 500 Puts	0.2%

	Key Facts
ASX code / share price		MEC / 0.875
Listing Date		3 May 2017
Management Fee		1.25%
Performance Fee11		15%
Market Capitalisation		$ 47m
Shares Outstanding		52,728,519
Dividend per share12		$ 0.02

Equity Exposure Summary By sector

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Information Technology 18.8%
Financials 18.4%
Consumer Discretionary 16.0%
Industrials 11.7%
Health Care 11.4%
Communication Services 8.7% Morphic Ethical
Equities Fund
Materials 5.0%
Consumer Staples 4.4% Benchmark
Real Estate 3.8%
Utilities 2.7%
-0.8%
Energy
-10.0% 0.0% 10.0% 20.0% 30.0%
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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

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Irene Kardasis Marketing & IR Manager Phone: +61 2 9021 7726 Email: ikardasis@morphicasset.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. 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 figures are 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] As a percentage of the Fund’s Value at Risk (VaR) Limit;[9] As a percentage of the Fund’s Value at Risk (VaR) Limit;[10] Attribution; relative returns against the Index excluding the effect of hedges;[11] 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;[12] Annual dividend per share.

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Global Responsible Investors