MORPHIC ETHICAL EQUITIES FUND LIMITED — Interim / Quarterly Report 2022

Jun 13, 2022

M o r p h i c E t h i c a l E q u i t i e s F u n d

Monthly Report May 2022

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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.

	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.)
	-2.75%	-8.49%	-17.44%	-7.95%	8.82%	7.06%
Index2	-0.82%	-4.81%	-10.40%	0.59%	10.42%	10.22%
	* Past Performance is not an indication of future performance.

ESG in Focus

The European Union (EU) is receiving 40% of its natural gas imports and 25% of its oil from Russia. The EU’s reliance on Russian fossil fuels is estimated to cost the European taxpayers ~€100 billion per year. This dependence has been used as a weapon by President Putin against the EU.

To achieve energy security and cease support for the Russian economy, the EU has committed to reduce gas imports from Russia by two thirds within a year. Recent surveys by the European Commission demonstrate that 85% of Europeans believe the EU should reduce its dependency on Russian oil and gas as soon as possible to support Ukraine.

The Russian invasion has highlighted the need to establish secure energy sources and investing in green hydrogen production is one of the key avenues in achieving this goal. While the energy transition remains a key priority for the EU, the drive for energy independence will require diverse energy sources including international sources of gas to secure supply while its economy continues to invest in decarbonisation.

Portfolio Commentary

If you looked at the markets at the start of May, went away and then looked at them at the end of the month, you would have thought that it was a fairly benign period. The S&P ended basically flat, the Nasdaq was lower by just under 2% while European indices were also pretty well behaved despite the continued Russia/Ukraine crisis.

While the final market outcomes were relatively stable, what really happened was incredible volatility throughout the month with violent swings in both directions. If we isolate the S&P 500, the index initially rallied as the US Federal Reserve (Fed) increased rates 50bps while indicating that a 75bps move was not on the cards (the market took this as a dovish outcome). Then it subsequently dropped over 10% until mid-May when a higher than expected inflation print put the risk of a 75bps move back on the table. The market continues to sell rallies rather than buy dips as it continues to grapple with a plethora of macro concerns. The index flirted with bear market territory of 20% down from its highs only to recover significantly in the final week to finish relatively unchanged.

The Morphic Ethical Equities Fund declined 2.75% net during the month while the MSCI ACWI (AUD) Index declined by 0.82% over the same period.

		Net Tangible Assets (NTA)
NTA	value	before tax3	$ 1.1635
NTA	value	after tax3	$ 1.1889

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Investment Returns since inception [4]
80.00%
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
-10.00%
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The portfolio’s top three contributors First Watch Restaurant Group, Olaplex and Sensata added 93bps to performance while Digital Bridge, Under Armour and Workiva detracted 137bps.

The Fund had 11 portfolio companies reporting quarterly results during the month with generally positive outcomes and commentary. We will be following up with company calls over the coming weeks to keep our finger on the pulse of operating conditions in this uncertain environment.

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Global Responsible Investors

Stock in Focus: Chart Industries (GTLS US, $6.9bn Market Cap)

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Chart Industries (Chart) 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 4 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 and security of energy supply. 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.

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Chart’s hydrogen business includes liquid hydrogen storage and transport trailers. Chart is the market leader in cryogenic liquid hydrogen storage with over 800 tanks in service across aerospace, FCEV fuel stations, forklift fueling and industrial applications. Chart has leading market share in core hydrogen storage and transport equipment and liquefaction in the EU (~40%) and US (~60%). As the hydrogen industry matures, order activity is moving from gaseous to liquid requirements or a combination due to its more compact and energy dense nature. This is a clear opportunity for Chart to help facilitate the energy transition with its market leading technology.

Management has identified its near term hydrogen and helium addressable market as ~$3.1bn, growing to ~$25bn by 2030. It is clear that urgent investment is needed for the EU to secure its energy supply over the near and long term. Companies such as Chart are uniquely positioned to facilitate the EU in reducing their reliance on Russian gas imports as the US enters another investment cycle. Alongside this, Chart will continue to help customers transition to renewable energy sources such as green hydrogen.

We are approaching our first year of ownership in Chart. During that time Management has provided solid market outlooks, continued to expand its operating capabilities via small tuck in acquisitions and provided a very comprehensive Investor Day in early May which covered not only the hydrogen opportunity but also carbon capture, water treatment and a solid earnings growth outlook out to 2025.

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Global Responsible Investors

Top 10 Active Positions

Stocks	Industry	Region	Position Weighting
Celllnex	Communication Services	Europe	4.62%
Sensata	Industrials	North America	4.58%
WillScot Mobile Mini	Industrials	North America	4.54%
Assurant	Financials	North America	4.49%
Flex	Information Technology	North America	4.28%
GXO Logistics	Industrials	North America	4.03%
Graphic Packaging	Materials	North America	4.02%
Option Care Health	Health Care	North America	3.81%
Webster Financial	Financials	North America	3.69%
PTC Inc	Information Technology	North America	3.67%

Risk Measures
Net Exposure5	82.18%
Gross Exposure6	92.02%
VAR7	1.63%
Best Month	8.60%
Worst Month	-8.44%
Average Gain in Up Months	2.40%
Average Loss in Down Months	-2.12%
Annual Volatility	10.84%
Index Volatility	10.50%

Top two alpha contributors[8 ] (bps)

		First Watch Restaurant Group	40 bps
		Olaplex	27 bps
		Sensata	26 bps

Top three alpha detractors[8 ] (bps)

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Workiva -40 bps
Under Armour -45 bps
Digital Bridge -53 bps
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	Key Facts
ASX code / share price		MEC / 1.040
Listing Date		3 May 2017
Profit Reserve9		$ 0.406
Management Fee		1.25%
Performance Fee10		15%
Market Capitalisation		$55m
Shares Outstanding		53,231,448
Dividend per share11		$0.06

Equity Exposure Summary[12] By region

Equity Exposure Summary[12] By sector

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North America 66.2% Industrials 30.3%
Information Technology 19.9%
Western Europe 17.2% Consumer Discretionary 6.7%
Asia Pacific 3.7% Financials 10.6%
Health Care 3.8%
Central Asia 0.0% Morphic Ethical Real Estate 3.4% Morphic Ethical
Equities Fund Equities Fund
Communication Services 5.9%
South & Central America 0.0% Benchmark Benchmark
Consumer Staples 2.3%
Africa / Middle East 0.0% Energy 0.0%
Utilities 0.0%
Eastern Europe 0.0% Materials 4.0%
-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.[12] Exposure Summary charts do not take into account derivative positions.

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Global Responsible Investors