First Sentier Ex-20 Australian Share Model Portfolio Quarterly Factsheet 31 December 2019 For Adviser use only

Portfolio Description Monthly return (%) A portfolio of 20-50 stocks that is benchmarked against the S&P/ASX 300 Portfolio Benchmark Accumulation ex the S&P/ASX Top 20 Index. As a result, the Portfolio will not 10.0% hold the larger financials and resource companies that dominate the S&P/ASX Top 20 Index, focussing instead on the small to medium sized companies in 5.0% its benchmark. Up to 10% can be held in cash with a minimum of 1%. 0.0%

Investment Strategy -5.0% We believe stronger returns are achieved by investing in growing companies that generate consistent returns and reinvest above their cost of capital. -10.0% Indepth industry, stock and valuation analysis is the foundation of our process. -15.0% By tapping into the broader opportunity set of the S&P/ASX 300, the Portfolio

is able to diversify away from the larger financials and resources companies

03/2019 06/2019 06/2018 09/2018 12/2018 09/2019 12/2019 that dominate the S&P/ASX 20 Index and focus on medium to small cap, 03/2018 quality Australian companies with strong balance sheets, earnings growth and Top 10 holdings high or improving returns on invested capital. Stock Investment Objective * To provide higher long-term capital growth with some income by investing in the broader set of Australian companies in the S&P/ASX 300, but outside the Charter Hall Group S&P/ASX 20 Index. The Portfolio aims to outperform the S&P/ASX 300 James Hardie Accumulation Index ex the S&P/ASX Top 20 Index over rolling three year Northern Star Resources periods before fees/taxes. REA Group Key Investment Personnel and Experience (Industry / Firm) Dushko Bajic Head of Australian Equities, Growth (1996 / 2014) WiseTech Global David Wilson Deputy Head (1987 / 2015) Christian Guerra Head of Research (1996 / 2016) Sorted alphabetically

Product Overview Risk Characteristics Inception date 23 March 2018 Period 1yr SI Benchmark S&P/ASX 300 ex 20 Accumulation Index Portfolio standard deviation (%) 10.2 14.1 Target Asset Allocation ** Australian shares 95-99% / Cash 1-5% Benchmark standard deviation (%) 8.5 10.4 Number of stock holdings Typically 20-50 Tracking error (%) 4.7 6.6 Minimum investment As per platform provider Portfolio Sharpe ratio 3.1 1.1 Managed account fee (p.a.)*** 0.75% Information ratio 1.2 0.7 Beta 1.1 1.2 Performance summary (%)

Period 3mth 6mth 1yr SI Net return 4.8 8.1 33.1 16.7 Benchmark return 1.8 6.5 27.5 12.0 Excess net return 3.0 1.6 5.6 4.6

* Investment objective is not a forecast and returns are not guaranteed. ** The target asset allocation should only be used as a guide. The portfolio managers aim to maintain each portfolio within target investment allocation ranges, however, the actual asset allocation may vary from the target investment allocation. *** Additional fees and charges may apply. Please consult your platform provider.

First Sentier Ex-20 Australian Share Model Portfolio

Growth of AUD 10,000 Investment Since Inception

Portfolio Benchmark $14,000

$13,000

$12,000

$11,000

$10,000

$9,000

06/2018 09/2018 12/2018 03/2019 06/2019 09/2019 12/2019 03/2018

Top 5 attributors to performance (3 months) Top 5 detractors to performance (3 months) Sector Weight Sector Weight Materials 2.02% Information Technology -0.57% Consumer Staples 1.18% Financials -0.37% Consumer Discretionary 0.85% Energy -0.16% Health Care 0.33% Communication Services -0.16% Industrials 0.13% Utilities 0.02%

Performance returns are calculated net of management fees and transaction costs. Performance returns for periods greater than one year are annualised. Past performance is not a reliable indicator of future performance. Data source: First Sentier Investors 2019 Data as at: 31 December 2019

Market review

Bouts of “risk-off” sentiment affected ’s equity market over the final quarter of the year. Reinvigorated concerns of a weakening global economy, a result of deteriorating data releases, initially led equities markedly lower in early October. However, investors were then reminded of the prospect, and benefits of, lower interest rates that helped drive a recovery through until early December. Investor pessimism then returned with a disappointing third-quarter GDP growth release for Australia and volatile geopolitical newsflow. The demand for risk assets dropped towards the end of the month with the market falling into negative territory for December and muting returns over the full quarter. All-in-all, the S&P/ASX 300 ex S&P/ASX “Top” 20 Accumulation Index still managed to post a +1.8% gain over the three months to end December.

Despite the uncertain political and macroeconomic environment towards year-end, the broader Australian share market and the “ex-20” index both enjoyed their strongest calendar year returns since 2009 with the ex-20 leaping 27.5% over the last 12 months. High quality franchise businesses that are quickly establishing themselves as industry leaders – even on the global stage – helped market achieve this impressive result.

Although rising oil prices helped to propel Energy (+6.1%) to top sectoral performance over the quarter, the major catalyst was Caltex Australia’s +29.0% jump with the receipt of a revised non-binding indicative offer from the multinational convenience store giant Alimentation Couche-Tard (ACT). ACT submitted a revised bid offer of A$34.50/share, a 15.8% premium to the prior day’s closing price, but the increased offer was once again judged as being insufficient by the Caltex board.

It was also a solid quarter for the Health Care sector given its +6.1% return. The strongest performer was medical device manufacturer, Fisher & Paykel Healthcare, which leapt +32.3% over the quarter having upgraded its revenue and earnings guidance in mid-October on receiving regulatory clearance to sell its F&P Vitera mask in the United States. The Vitera is the company’s new full face mask used in the treatment of obstructive sleep apnea. Private healthcare provider (RHC) also generated double-digit returns (+11.8%) following positive comments at its AGM in November. Management spoke favourably about its acquisition of Capio, a European healthcare services company, and confirmed FY20 guidance of core EPS growth of 2-4%.

Consumer Staples was the worst performing sector, dropping -2.1% over the quarter as the majority of constituents experienced weakness. The future resignation of (-12.5%) CEO, Michael Clarke, surprised the market in late October with the share price dropping more than 10% on the day – although the reaction was quickly reversed. However, weakness returned in December as data trends indicated TWE’s sales continue to lag in the US market despite higher promotional activity. The continued run of weak wine import data from also placed downward pressure on the stock.

The Communication Services sector (-1.6%) also suffered a weak quarter with a number of constituents falling deeply into negative territory. Data releases indicate the telecommunications industry is experiencing a slowing of handset sales as consumers are holding onto their phones for longer as they wait for 5G-enabled devices – this probably contributed to the negative returns to telcos, (-17.8%) and TPG Telecom (-3.0%). However the sector laggard was media company, Southern Cross Media, which tumbled -32.8% to five-year lows after reporting an 8.5% hit to revenue - attributed to 'weak' advertising markets across both radio and television segments.

Portfolio performance First Sentier Ex-20 Australian Share Model Portfolio

Even though the benchmark (the S&P/ASX 300 ex S&P/ASX “Top” 20 Accumulation Index) enjoyed another quarter of solid growth, the Australian ex Top 20 model portfolio managed to exceed the index by around 3%. This strong quarterly performance contributed to the portfolio’s impressive since inception results. The major contributors to the quarterly outperformance were the portfolio’s overweight positions in:- Xero(+28.4%)and a2 Milk (+17.6%). The zero weight to (-17.3%) also added value.

Cloud based software developer, Xero (XRO), announced revenue up 32% over the prior half as last year’s subscriber numbers surged 30%. These results demonstrate the pace of the software’s adoption across each of its geographic regions and helped the company deliver strong revenue growth and positive free cash flow over the year. Milk products and infant formula company, a2M Milk (a2M), leapt in November after management provided positive sales guidance and upgraded FY20 EBITDA margin expectations. The solid performance of its Australian operations and the growing momentum of its China-based channels helped drive this pleasing outlook. Investor sentiment was also buoyed by news of A2M’s renegotiated supply contract with Synlait. The two-year extension included an increase in volumes and revised pricing terms. Newcrest (NCM) suffered with other gold companies as investors feared that the gold rally accompanying the US/China trade wars may be reversing given the ongoing progress towards the negotiation of a “substantial phase one deal”. Investors reacted negatively to the announcement of Australia’s largest listed gold miner, Newcrest Mining (NCM), that it was proceeding with a A$685m gold mine expansion in western NSW. There are concerns that the operational complexities associated with the mine might involve greater capex than forecast and that this might be more damaging to the company’s financial strength if the gold price starts to depreciate.

Detractors over the quarter included the portfolio’s overweight positions in underperforming stocks such as Wisetech Global (-32.7%), (-38.4%) and Touch (-18.4%). A short-seller research report published in October pushed the global logistics software provider, WiseTech Global (WTC), sharply lower as the hedge fund alleged WTC had been overstating profits, its organic growth and the performance of its European business. WTC has since provided a rebuttal to the report that initially appeared to help allay investor concerns. We also thoroughly analysed the claims made by the short-seller report and concluded they lack any merit. Our own industry research continues to reach conclusions at odds with the report’s allegations. Over December, however, WTC suffered further price weakness, in spite of broker upgrades and a small acquisition in . Lottery games distributor Jumbo Interactive, JIN, struggled after reporting an FY20 earnings miss driven by higher costs (being increased staffing and marketing efforts as well as costs associated with a recently announced acquisition in the UK). We continue to be attracted to the earnings upside given the growing popularity of its lotteries and the recent repricing and reformatting of the Powerball lottery. Downbeat newsflow helped push ‘buy-now-pay-later’ company, Afterpay Touch (APT), lower with reports of rising competition, and its impact on market share and margin growth in the US. Although the number of companies offering buy-now-pay-later services has increased, APT has established itself as the market leader through its differentiated product offering and ingenious marketing strategy. This has helped drive impressive customer and merchant growth since its launch.

Portfolio activity

We increased the allocation to materials stocks over the quarter, adding to a number of existing miners in the portfolio given our belief that steel demand in China will remain healthy through 2020 and the potential for a number of gold miners to ramp up production from existing and recently acquired sites.

We funded those purchases primarily by lightening our holdings in some of the wealth platforms and selling out of Australia’s flag carrier and largest airline, (QAN). While inflows into some of the newer investment platform operators continue to look attractive, we have some concerns over the rising competitive pressures across the industry and falls in the RBA cash rate undermining short-term profitability. For QAN, the September quarter trading update pointed to weakness in the domestic market and to the cost of global tensions. Meanwhile QAN have been adding capacity to compete with Virgin on domestic flights and this, combined with the weaker domestic demand, is unlikely to support the earnings growth that we had been expecting. Earnings from its international business have also been hit by both global trade uncertainty (and its subsequent impact on growth and corporate travel) and the civil unrest in .

Market outlook

The returns experienced in the 2019 calendar year proved that the fundamentals of company valuations, being earnings and discount rates, remain the key driver of equity markets despite broader geopolitical uncertainty. Record-breaking lows in official interest rates helped global equity markets achieve impressive returns over the calendar year and push valuation metrics such as Price/Earnings multiples appreciably higher. The price action experience in equity markets was somewhat similar to that of bonds, with lower interest rates translating into low yields and high valuations (with more than US$12 trillion in negative-yielding bonds). The extent of further interest rate cuts may be tempered, however, given the expected turn in global growth this year.

While the prospect of rising interest rates seems relatively distant into the future, the recovering labour and property markets show an improvement in Australia’s economic outlook despite both wage and inflation growth remaining hidden. Company earnings will likely benefit when these items reappear in the economy, which will help stabilise equity P/E multiples. Overall, a recovery in the business cycle is expected in the first half of 2020 by most economists and may support equity market returns. There is also growing consensus that the global economy has bottomed, suggesting a more positive influence from offshore as well. The portfolio continues to focus on stocks that can run their own race – strong franchises that are growing earnings and able to generate superior returns on capital – largely independent of macro variables. First Sentier Ex-20 Australian Share Model Portfolio

Portfolio Beta measures the portfolio's sensitivity to benchmark movements. Mathematically, it is the covariance of the portfolio vs the benchmark divided by the variance of the benchmark. The covariance and variance are ex ante calculations based on current weights and historic patterns of return over the past five years. www.firstsentierinvestors.com.au For further information

Head of Business Development Australia and Key Account Manager - VIC/TAS Harry Moore +61 3 8618 5532 Nicholas Everitt +61 3 8628 5668 Head of Investment Sales and Key Accounts Business Development Manager - VIC/TAS Chris King +61 2 9303 2018 Jack Heinz +61 3 9675 6102 Key Account Manager - NSW Key Account Manager - QLD Angela Vincent +61 2 9117 1068 Quin Smith +61 4 5509 5505 Paul Sleiman +61 2 9303 3489 Key Account Manager - WA/SA/NT

Nathan Robinson +61 4 0327 2440

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