Pendal Monthly Commentary Pendal Australian Specialised Retirement Income Portfolio December 2020

Market commentary Portfolio overview Australian Specialised Retirement Income Portfolio The S&P/ASX 200 rose +1.2% in December, taking the Dual focus: Deliver tax-effective capital & year to a +1.4% return. Investment strategy grossed-up income. Covid cases continued to rise in the northern Broad hunting ground: Core approach, drawing ideas from across the market cap spectrum. hemisphere, prompting further lockdowns. In the US, this Income focus: Greater exposure to stocks with has seen job growth stall, although strong industrial high grossed-up yield & dividend sustainability. production is likely to have driven decent GDP growth. Higher turnover: Takes advantage of lack of tax There is increasing evidence of pressure on health care implications to pursue shorter-term opportunities systems both there and in Europe. Investment The objective of the Model Portfolio is to We experienced an outbreak in Sydney at the end of objective outperform the S&P/ASX 300 (TR) Index on a December, leading to border closures and local rolling 3 year period by 3% per annum. lockdowns. Benchmark S&P/ASX 300 (TR) Index Nevertheless, a combination of optimism over vaccines Number of stocks 15-35 (33 as at 31 December 2020) and the extraordinary degree of monetary and fiscal Sector limits A-REITS 0-30%, Cash 2-10% policy support was enough to support the local equity Dividend Yield 3.62%# market. Broader economic and sentiment data is also supportive. Top 10 holdings Retail sales momentum remains good, while the Code Name Weight unemployment rate fell from 7% to 6.8% — better than BHP BHP Billiton Limited 10.10% consensus expectations. Consumer and business CSL CSL Limited 7.65% confidence indicators remain strong. CBA of Australia Ltd 6.23% TLS Corporation Limited 4.79% Value style has continued to do well in Australia, helped ANZ ANZ Banking Group Limited 4.42% by strong returns from the miners, which led the 8.8% NEC Co Ltd 4.11% gain in Materials (+8.8%). WBC Banking Corporation 4.11% Commodity prices rose on a combination of expected MTS Metcash Trading Limited 3.74% normalisation of growth and continued Covid-related FMG Limited 3.65% impact on supply in some markets. A weaker USD is QAN Airways Limited 3.53% also supportive for commodity prices. Source: Pendal as at 31 December 2020

That said, this has not been accompanied by a broad- Top 5 overweights versus S&P/ASX 300 based sell-off in growth-style stocks. Code Name Weight The Health Care (-4.7%) sector did drop off, but NEC Nine Entertainment Co Ltd 3.94% Technology (+9.5%) was the strongest sector, propelled MTS Metcash Trading Limited 3.56% by a 24.2% gain in (APT) as it joined the BHP BHP Billiton Limited 3.54% ASX20. QAN Qantas Airways Limited 3.05% Value outperformed growth in the Australian market by a TLS Telstra Corporation Limited 2.93% wide margin in 4Q, but the valuation differential between the two remains at historical levels. Top 5 underweights versus S&P/ASX 300 Defensives such as Utilities (-5.4%) underperformed. Code Name Weight WES Limited (not held) -3.00% WOW Woolworths Group Limited (not held) -2.61% NAB Limited -1.98% GMG AE (not held) -1.67% APT Afterpay Limited (not held) -1.45% Source: Pendal as at 31 December 2020

#The Portfolio’s dividend yield represents the weighted average 12-month forward-looking dividend yield of the portfolio holdings (excluding cash), as at the date of the Factsheet. Each individual security’s dividend yield is calculated using market consensus Dividend Per Share (DPS) before tax and franking credits, collated by Pendal and divided by the closing market price of the security as at the date of the Factsheet. The portfolio dividend yield therefore is only an estimate, and does not reflect the actual returns of the Fund, which will be affected by market movements in the price of individual securities, the returns on other assets such as cash holdings and variances of individual security's actual dividends from the forecasted DPS.

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Performance

1 month 3 month 6 month 1 year 3 year Since inception* Pendal Australian Specialised Retirement 2.03% 16.44% 17.07% 4.64% 7.42% 8.91% Income Portfolio

S&P/ASX 300 (TR) Index 1.32% 13.79% 13.73% 1.73% 6.86% 8.34%

Active return 0.71% 2.65% 3.34% 2.91% 0.56% 0.57%

Source: Pendal as at 31 December 2020 *Since Inception – 20 August 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 MTS Metcash Trading Limited 0.50% QAN Qantas Airways Limited -0.38% FMG Fortescue Metals Group Limited 0.35% APT Afterpay Limited (not held) -0.27% BHP BHP Billiton Limited 0.33% TLS Telstra Corporation Limited -0.13% XRO Limited 0.20% WOW Woolworths Group Limited (not held) -0.12% COH (not held) 0.12% QBE QBE Insurance Group Limited -0.12% Top 5 contributors – 1 year Top 5 detractors – 1 year

Value Value Code Name Code Name Added Added MTS Metcash Trading Limited 1.62% QAN Qantas Airways Limited -1.63% XRO Xero Limited 1.18% APT Afterpay Limited (not held) -1.07% FMG Fortescue Metals Group Limited 1.03% IAG Insurance Group Australia -0.80% NEC Nine Entertainment Co Ltd 1.02% WES Wesfarmers Limited (not held) -0.63% EVN Limited 0.76% STO -0.61% Source: Pendal as at 31 December 2020 Underweight positions are in italics.

Stock-specific drivers of monthly performance relative to benchmark

Three largest contributors Three largest detractors: Overweight Metcash (MTS, +17.2%) Overweight Qantas (QAN, -9.9%) MTS delivered a well-received half-yearly result. IGA The Sydney Covid outbreak in mid-December saw domestic continues to do well, with stronger sales growth than its travel restrictions and state border closures return, delaying larger competitors. However the bigger surprise was on expectations for the return of domestic travel. There was also the hardware side, where recent acquisitions are doing some profit-taking following QAN’s recent strong run. The much better than expected. medium-term story remains intact in our view. QAN is well Overweight Fortescue Metals (FMG, +28.52%) positioned in terms of capital and liquidity to endure this delay, The iron ore price rose 20.4% in December. While while its strategic response to Covid should see it return in a more stimulus-driven Chinese steel production drove the iron cost-effective form. ore price in 2020, expectation of normalised demand in Underweight Afterpay (APT, +24.2%) the rest of the world has added another leg to this trend. APT’s inclusion in the ASX 20 saw it surge yet again. While the We continue to see FMG as well positioned to capitalise company has a strong product and continues to execute well, we on this in terms of operational performance and capital see better risk/reward elsewhere in the sector — notably in XRO. allocation. The stock is currently on 7.4% dividend yield. Part of this stems from our view that the material competitive risks Overweight BHP (BHP, +11.45%) — and likely increase in sales and marketing costs associated with this — are not reflected in current valuations. Like FMG, BHP did well on the back of a strong iron ore price. It remains well positioned given its exposure here, Overweight Telstra (TLS, -2.9%) as well as to gains in the copper price and — potentially — Telstra gave back a little of the strong gains it made in November an improvement in oil as airline demand returns. following a structural reorganisation. There is little in the way of material newsflow at a company level. But the more defensive parts of the market generally underperformed.

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Market outlook The rate of Covid infection continues to deteriorate in the northern hemisphere, leading to lockdowns. Jobs have stalled well below pre-Covid levels in the US as the restrictions hit sectors such as leisure and hospitality. Healthcare systems are under pressure in several countries and regions. A Covid outbreak in NSW prompted localised restrictions and state border closures. Nevertheless, the market remains relatively positive, driven by the twin beacons of vaccines and policy support. Vaccination programs are ramping up at differing rates across many countries. This is giving hope of rolled-back restrictions and demand growth. This is encouraging, but remains a key risk to watch. Any disappointment here could hit markets and the recovery sectors that have recently run hard. Policy remains a key bulwark of market support. Victory in the Georgia run-off hands Democrats control of the Senate — and Congress. This means more fiscal stimulus against the backdrop of already extremely accommodative monetary policy. The current policy settings are extraordinary. In short, we could see stimulus worth near 9 per cent of US annual GDP channelled into the first quarters of 2021. Even if only a fraction gets spent in that period, it means growth and earnings are likely to be a lot higher than consensus expectations. We don’t believe the Georgia win leads to legislation of some of the more radical Democrat policies, given their majority remains thin in both Houses. Market concerns centre on the potential for tax increases. Corporate tax rates are likely to increase, but from 21% to something in the vicinity of 23-25%, rather than the 28% pledged by Biden on the campaign trail. It is important to remember the importance of the Fed’s conceptual shift from expected to actual inflation targeting and its stated desire to see inflation run above 2% for a sustained period. This is likely to require unemployment to drop below 3%, which will take time. To give context to this shift, the Fed indicated that under the current policy framework the rise in rates post-GFC would have been delayed around 2 ¾ years. The combination of this fiscal stimulus and Fed accommodation means the US economy could grow above 6% through 2021, driving earnings upgrades and supporting valuation. Markets have run hard and a period of consolidation may be in order. The roll-out of vaccinations presents a potential risk of disappointment and must be watched. Nevertheless, we continue to see considerable support on the policy side. We maintain the portfolio’s balanced construction, positioning for performance in a range of scenarios. However in recent times we have been adding to some of the more cyclical exposures as the scale of policy support has looked likely to increase.

New stocks added and/or stocks sold to zero during the month No new stocks added or stocks sold to zero during the month.

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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 Specialised Retirement Income 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.