Pendal Monthly Commentary Pendal Australian Shares Portfolio May 2020

Market commentary Portfolio overview Australian Shares Portfolio The S&P/ASX 300 gained +4.6% in May as the rebound from Investment The strategy employs a bottom up, the lows of late March continued. strategy fundamental approach to build a diversified portfolio of Australian shares where the As governments roll back movement restrictions, a faster-than- majority of active risk and outperformance expected pick-up in economic activity is supporting a swift is driven by stock selection. rebound in market. This is reinforced by a swathe of fiscal and monetary policy stimulus measures. Investment The objective of the Model Portfolio is to objective outperform the S&P/ASX 300 (TR) Index on However, material risks remain. It remains to be seen whether a rolling 3 year period by 3% per annum. easing restrictions will result in a significant second wave of Benchmark S&P/ASX 300 (TR) Index coronavirus infections. There are questions over the degree to which economies will recover quickly — and what will happen as Number of stocks 15-35 (35 as at 31 May 2020) policy support begin to roll off. There is also geopolitical risk as Sector limits A-REITS 0-30% tensions increase between China and both the US and Cash 2-10% Australia. Income target No target The equity market seems to be disregarding earnings, on the basis that everyone knows the current period will be woeful, Top 10 holdings while one year forward is impossible to predict. As a result, the delta on economic news flow is driving returns — and this Code Name Weight remains better than expected. CSL CSL Limited 8.50% We started to see a material rotation from defensives and BHP BHP Billiton Limited 7.32% growth stocks towards previous laggards in the value and CBA of Australia Ltd 5.16% cyclical sectors late in the month. This is important. It reflects improving sentiment and increased breadth in the market TLS Corporation Limited 4.86% recovery. EVN Limited 4.45% Technology (+14.3%) saw the largest gains, driven largely by WBC Banking Corporation 3.90% . We believe some key risks are not reflected in Afterpay’s valuation — particularly around a likely increase in STO 3.78% costs to attract new customers. As a result we retain a ALX 3.53% preference for among the tech growth stocks. AMC Limited 3.29% Communication Services (+8.5%) also outperformed, helped by Telstra (+6.2%) and the online classified stocks. SVW Ltd 3.19% Source: Pendal as at 31 May 2020 Materials (+8.4%) saw the tailwinds of strong gold and iron ore prices, as well as a rebound in activity helping James Hardie Top 5 overweights versus S&P/ASX 300 and Amcor. Code Name Weight Health care (-5.1%) was the weakest sector, due mainly to a EVN Evolution Mining Limited 3.81% drag from CSL (-10.7%), the index’s largest stock. STO Santos Limited 3.19% Consumer staples (-0.5%) also went backwards. Supermarkets underperformed as sentiment improved and recent strength in ALX Atlas Arteria 3.18% sales shows signs of receding. This was not the case for the SVW Seven Group Holdings Ltd 3.05% portfolio’s holding in (+8.4%), however. MTS Metcash Trading Limited 2.87%

Top 5 underweights versus S&P/ASX 300 Code Name Weight WOW Woolworths Group Limited (not held) -2.89% WES Limited (not held) -2.85% CBA Commonwealth Bank of Australia Ltd -1.82% NAB Limited -1.63% GMG AE (not held) -1.53% Source: Pendal as at 31 May 2020

pendalgroup.com 2 Performance

1 month 3 month 6 month 1 year 3 year Since inception*

Pendal Australian Shares Portfolio 4.85% -7.16% -12.48% -4.31% 5.92% 7.03%

S&P/ASX 300 (TR) Index 4.58% -9.73% -14.44% -6.52% 4.47% 5.23%

Active return 0.26% 2.57% 1.96% 2.21% 1.45% 1.81%

Source: Pendal as at 31 May 2020 *Since Inception – 15 June 2015 Performance returns are pre-fee. Investors should contact their platform provider for applicable fee rates. Past performance is not a reliable indicator of future performance

Top 5 contributors – monthly Top 5 detractors – monthly

Value Value Code Name Code Name added added

EVN Evolution Mining Limited 0.50% CSL CSL Limited -0.22% JHX Plc 0.27% APT Afterpay Limited (not held) -0.20% WOW Woolworths Group Limited (not held) 0.17% GMG AE Goodman Group (not held) -0.17% VEA Group limited 0.14% SAR Saracen Mineral Holdings Ltd -0.09% STO Santos Limited 0.12% NCM Limited (not held) -0.09%

Top 5 contributors – 1 year Top 5 detractors – 1 year

Value Value Code Name Code Name added added

EVN Evolution Mining Limited 1.56% QAN Airways Limited -0.61% CSL CSL Limited 0.98% NEC Co Ltd -0.54% XRO Xero Limited 0.83% WOW Woolworths Group Limited (not held) -0.54% JHX James Hardie Industries Plc 0.74% OSH Limited (not held) -0.49% WPL Limited (not held) 0.51% WES Wesfarmers Limited (not held) -0.47% Source: Pendal as at 31 May 2020 Underweight positions are in italics.

Stock-specific drivers of monthly performance relative to benchmark Three largest contributors Three largest detractors Overweight Evolution Mining (EVN, +19.4%) Overweight CSL (CSL, -10.7%) Gold continued to climb higher in May. In some ways this is CSL has been a strong outperformer during COVID-19 but it serving as an each-way bet. It is a hedge on central bank policy gave back some gains in May. There was a rotation to some and the potential longer-term risks that come with massively laggards in the market. But there was also some concern over expanded balance sheets. However if the policy response has the impact that disruption to plasma collection will have for not been enough and we start to see widespread bankruptcies, CSL. This will be a lagged effect — with several options to help it is also a hedge in a risk-off environment. offset — however it is a risk that bears watching in the short term. Overweight James Hardie (JHX, +15.7%) Underweight Afterpay (APT, +52.0%) Recent data suggests US housing demand has remained more resilient through this period than many had expected. This was Afterpay is up more than 400% from its low point in late March, reflected in JHX’s annual results. Management indicated having fallen 78% from the peak. We continue to prefer other volumes had held up relatively well. Existing trends of improved positons within the tech growth cohort. Several material risks, cost and efficiencies and a gradual increase in market share including increased costs and regulatory risk, are not reflected also remain intact. in APT’s current valuation. Underweight Woolworths (WOW, -1.2%) Underweight Goodman Group (GMG, +16.9%) Some consumer staple names underperformed in May amid a Goodman Group continued to display resilience within the REIT rotation to more cyclical exposures. For Coles (COL) and sector. It confirmed FY20 earnings growth guidance at +11%, Woolworths this was exacerbated by indications that a surge in with only 3% of tenants seeking rent abatements and solid sales in recent months had receded. However Metcash (MTS) tenant demand across the majority of its markets. We continue sales remained relatively strong and it outperformed in the to see better relative value elsewhere in the sector. month. 3 Market outlook The portfolio made solid gains in May, finishing ahead of the index. A combination of stocks drove returns. Gold continued to do well, helping Evolution Mining. Signs of a better-than-expected rebound in activity also saw James Hardie, Viva Energy and Santos among the best performers. There are two forces at contention in the market. The economic data is awful — although in some respects not as bad as many had expected. On the other hand there is the immense scale of the policy response, coupled with optimism in the initial phase of economic re-opening. At this point, the latter is winning and markets continue to rise. One key point very recently has been the rotation from growth to value, cyclicals and other laggards. This is an important feature. It demonstrates a greater breadth in the market recovery, which had previously been dominated by a few sectors and stocks. The market is optimistic at the pace of recovery as restrictions are rolled back. But we don’t yet know the level to which it will recover in the near term. It still seems unlikely we will return quickly to 100% of previous aggregate economic capacity. Different industries will walk different paths. Some such as tourism and entertainment may only return to 80% or less of previous capacity. However other industries will quickly return to 100% or even beyond. There seems to be resurgence in car traffic, for example, as people remain wary of public transport. This has implications for car sales, manufacturing, steel and infrastructure. We are spending a lot of time reviewing the outlook for different industries and marrying that up with valuation. Just because an industry is slower to recover does not mean there isn’t opportunity. An industry which may recover to 80% — but is priced for recovery to 60% — can be an interesting prospect. We are very optimistic about the opportunities emerging in this environment. Uncertainty creates mis-pricing, which creates opportunity. We have heightened uncertainty at three levels:

• Economic: How quickly does the economy recover and to what level? What are the risks of disappointment?

• Industry: How prolonged is the cyclical effect? What structural changes have emerged or accelerated? How is the structure changing?

• Company: What is management’s strategy to deal with this environment? Is it credible and effective? We are mindful of the potential for investors to latch onto obvious themes. Despite a recent surge overall market positioning remains very bearish in expectation of a material pullback. Ironically, this can make a major sell-off less likely. It is important to look at the economy and at companies while also thinking about how the market is positioned. We stick by our view that there are a range of possible scenarios on the health and economic fronts and second-order effects that are not yet visible. It is not the time to be taking a binary view of the environment. We continue to use our scenario framework, positioning for the likelier scenarios with protection in the case of better or worse outcomes. We see this phase as very company-specific. The market will discover which companies are well placed, which are not — and to what degree the latter have been affected. There will be a high degree of differentiation between — and within — industries. This environment plays to our strengths.

New stocks added and/or stocks sold to zero during the month Sell to zero in (DXS) and buy a new position in (MGR). We have adjusted the portfolio’s defensive segment, switching between listed property companies Dexus (DXS) and Mirvac (MGR). Dexus was an attractive position in the earlier days of COVID-19 with its high exposure to office space (85% of its portfolio) and a tenant base of finance, legal and government organisations that could continue conducting businesses via home-working arrangements. However we now see an opportunity to shift into Mirvac (MGR). Mirvac has a more diverse portfolio. Its office exposure is smaller than DXS, but higher quality — its weighted average lease expiry (WALE) is 6.6 years, versus four years for DXS. Most of its office portfolio is newer than DXS — meaning it is fit for purpose and has lower maintenance capex. MGR also has a residential division. This has been a key area of focus given concerns over the effect of COVID-19 containment measures in the housing market. Residential housing is likely to be a natural area for government stimulus to help underpin a recovery, given the relatively swift multiplier effect it has on employment. At this point, MGR remains on track for 2,500 settlements in FY20. Default rates are running at less than 2%. MGR also has a retail portfolio geared toward supermarkets, food and other necessities, rather than discretionaries such as apparel. MGR has a strong balance sheet, with gearing at 21% and ample liquidity of $980 million. It is trading below the value of its net tangible assets (NTA). Should this discount persist it could become a takeover target.

4 In recent weeks we have gained a far better picture of how the COVID-19 health crisis has unfolded. Containment measures have been effective in bringing infections under control, while monetary and fiscal policy support for the economy has been relatively swift and of unprecedented scale. Uncertainty remains elevated and risks remain — notably the possibility of a second round of infections as restrictions are rolled back. Nevertheless, a clearer picture of how the scenario is unfolding — along with compelling valuation — provides the opportunity to adjust our defensive exposure via the more diverse exposure of MGR.

Buy a new position in Saracen Gold (SAR) The portfolio has added to its defensive segment via the addition of Saracen Gold (SAR). Gold miner SAR owns and operates two mines: Carosue Dam and Thunderbox. As of last year it also has a 50 per cent stake in Super Pit with joint venture partner Northern Star (NST). All three assets are in Western Australia. SAR has long been regarded as a well-run, cash-generative operator among small-and-mid-sized gold miners. However the deal to purchase half the Super Pit operation from Canadian-listed multi-national Barrick Gold provides a material uplift to the company’s production profile. Super Pit’s shift from overseas management as part of a large portfolio to a smaller, more focused domestic operator provides material growth opportunities. This proposition was enhanced by news that the previous JV partner — US-listed Newmont Mining — would sell its stake to another local miner Northern Star (NST). This structure provides the opportunity to invest capex, reduce cost, increase production and materially extend the life of the Super Pit mine beyond previous expectations. The portfolio has an existing exposure to gold via Evolution Mining (EVN). We continue to like EVN but see virtue in diversifying the gold exposure. EVN is a larger company with six mines in three NSW States and one in Canada. This helps diversify its operational risks. However multiple jurisdictions also increase the risks of COVID-19 related disruption. SAR’s structure is simpler. All three mines are within 300km of Kalgoorlie, which provides synergies. At this point we remain comfortable that coronavirus-related operational disruption to West Australian mines remains limited. We therefore see SAR’s addition as complementary to the existing position in EVN. While the expansion of production profile and opportunity to improve the Super Pit asset is an important part of our thesis, the gold price is also key to the stock’s outlook. Despite already having a strong run, the macro backdrop remains supportive for the gold price. While the massive expansion in central bank balance sheets has been a necessary step in stabilising financial markets, it poses longer-term risks such as a weaker US dollar. At this point gold is regarded as a hedge against this. At the same time, gold should do well if we move into a more risk-off scenario as the economic impact of coronavirus becomes apparent. In this context gold miners also serve as part of the portfolio’s more defensive “Recession Protection” segment.

Sell GPT Group (GPT) to zero and add a new position in QBE Insurance (QBE) The portfolio has adjusted its property exposure, selling out of the position in GPT Group (GPT) and rotating a portion into a recently established positioned in Mirvac Group (MGR). GPT Group is a diversified listed property trust with a portfolio of retail, office and logistics assets. It has outperformed the market since the index trough in late March. However as we have gained clarity around the manner in which commercial rents for stressed businesses will be dealt with, we see rising uncertainty in its retail division. This renders MGR as the preferred option. A material segment of GPT retail portfolio is discretionary malls. While these malls have historically been highly productive compared to other parts of the sector, retail sales across their portfolio fell 27% in March. We also expect sales to be soft in April and May. GPT has confirmed that 36% of its retail tenants are small-to-medium enterprises (SMEs). As such the majority will seek some form of rent relief under the Mandatory Code of conduct, which will impact rental incomes. While we expect GPT’s earnings to improve over time, other investment opportunities such as MGR have more immediate re-rating catalysts. We have also added QBE Insurance (QBE), a global general insurer offering a broad range of commercial lines in Australia, the Americas, UK, Europe and Asia. QBE has underperformed the market in recent weeks. It is now trading at a record low price/earnings relative to the ASX 300 industrials due to overstated concerns on COVID-19. QBE will experience some one-off claims on trade credit, lenders mortgage insurance and workers compensation. But it is not exposed to more problematic lines such as event cancellation and contingency. There is global fear about the potential for insurers to be liable for lost profits on business interruption. But policies for most insurers, including QBE, require physical damage. For the most part there are also pandemic exclusions. One reason for QBE’s underperformance has been the threat from some US states to overturn contractual exclusions and enforce retrospective cover. However the industry is pushing back, highlighting the significant ramifications. This has prompted some States to retract these proposals. Ultimately, this seems like a risk more suited to a government scheme, as already exists in the US for terror, flood, Florida wind and Californian earthquakes. We remain mindful of the issue, but at this point we think the market is over-pricing this risk. QBE has positioned itself for a disruptive episode, having raised capital and de-risked investments. Looking beyond short-term one-offs, underlying performance is likely to improve given a further acceleration in pricing of insurance premiums. As a result of all this, we see QBE as mispriced on current concerns and a good opportunity to add at a very attractive price. 5

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This monthly commentary has been prepared by Pendal Institutional Limited ABN 17 126 390 627, AFSL 316455 (Pendal) and the information contained within is current as at the date of this monthly commentary. It is not to be published, or otherwise made available to any person other than the party to whom it is provided. This monthly commentary relates to the Pendal Australian Shares Portfolio, a portfolio developed by Pendal. The portfolio composition for any individual investor may vary and the performance information shown may differ from the performance of an investor portfolio due to differences in portfolio construction or fees. Performance figures are shown gross of fees and are calculated by tracking the value of a notional portfolio. Past performance is not a reliable indicator of future performance. This monthly commentary is for general information purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their or their clients’ individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation. The information in this commentary may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information in this commentary is complete and correct, to the maximum extent permitted by law neither Pendal nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information.