Pendal Monthly Commentary Pendal Australian Shares Portfolio February 2021

Market commentary Portfolio overview Australian equity markets made good gains through the first Australian Shares Portfolio half of February amid one of the strongest reporting seasons Investment The strategy employs a bottom up, for years. strategy fundamental approach to build a diversified portfolio of Australian shares where the However a sharp rise in bond yields towards the month’s end majority of active risk and outperformance saw equity markets sell off. is driven by stock selection. The rise in bond yields reflects a view that the expected pace Investment The objective of the Model Portfolio is to of growth in the US — backed by extraordinary stimulus — will objective outperform the S&P/ASX 300 (TR) Index on force the Fed to increase rates in 2022. That’s sooner than a rolling 3 year period by 3% per annum. they are now indicating and this prospect weighed on Benchmark S&P/ASX 300 (TR) Index equities. Number of stocks 15-35 (32 as at 28 February 2021) The Fed has remained firm in its stance. At this point they Sector limits A-REITS 0-30% are looking to “jawbone” down the market’s expectations of Cash 2-10% rate hikes. Dividend Yield 3.81%# Elsewhere central banks intervened in the bond market to keep yields under control. Income target No target The issue outside the US is that other countries would feel Top 10 holdings the negative effect of higher rates, but don’t have the same tailwinds of growth coming through. Code Name Weight BHP BHP Billiton Limited 11.74% Nevertheless, the S&P/ASX 300 gained 1.48% for the month. CSL CSL Limited 7.06% Reporting season ended as one of the strongest in years, WBC Banking Corporation 6.61% with upgrades for F21 EPS from about 7% to about 14%. ANZ ANZ Banking Group Limited 5.57% This was driven by sharper bounces in earnings from CBA of Australia Ltd 5.46% resource-related stocks and Covid “winners” like retail. TLS Corporation Limited 4.94% Growth sectors such as Technology (-8.0%) and yield- QAN Airways Limited 4.11% sensitive defensives such as Utilities (-8.0%) fared poorly as bond yields rose. NEC Co Ltd 3.93% STO 3.71% Materials (+7.1%) did best, helped by strength in commodity prices as inflation expectations picked up. Iron ore gained XRO Limited 3.66% 10%, Brent crude was up 18.3% and copper moved ahead Source: Pendal as at 28 February 2021 15.5%, prompting outperformance from the miners. Top 5 overweights versus S&P/ASX 300 Financials (+5.2%) were also strong. Code Name Weight In context of the overall market, the biggest shift in BHP BHP Billiton Limited 4.25% consensus expectations came from the banks, where expectation for FY21 EPS growth shifted from flat in NEC Nine Entertainment Co Ltd 3.72% January, to >20% by the end of February. QAN Qantas Airways Limited 3.62% A benign outcome on bad debts is helping capital and TLS Telstra Corporation Limited 3.05% dividends, while higher bond yields are alleviating pressure STO Santos Limited 3.04% on margins. Top 5 underweights versus S&P/ASX 300 Code Name Weight WES Limited (not held) -2.89% WOW Woolworths Group Limited (not held) -2.58% NAB Limited -2.55% RIO Limited (not held) -2.44% CBA Commonwealth Bank of Australia Ltd -2.03% Source: Pendal as at 28 February 2021

#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 5 year Since inception*

Pendal Australian Shares Portfolio 3.38% 4.03% 15.40% 12.13% 7.81% 11.76% 9.65%

S&P/ASX 300 (TR) Index 1.48% 3.16% 11.69% 7.06% 7.53% 10.84% 7.70%

Active return 1.90% 0.88% 3.71% 5.07% 0.28% 0.92% 1.95%

Source: Pendal as at 28 February 2021 *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 NEC Nine Entertainment Co Ltd 0.57% ALX Atlas Arteria -0.35% BHP BHP Billiton Limited 0.45% XRO Xero Limited -0.35% WES Wesfarmers Limited (not held) 0.32% RIO Rio Tinto Limited (not held) -0.30% STO Santos Limited 0.30% EVN Limited -0.29% QAN Qantas Airways Limited 0.29% MND Monadelphous Group Limited -0.15%

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

Value Value Code Name Code Name Added Added NEC Nine Entertainment Co Ltd 1.87% ALX Atlas Arteria -1.16% XRO Xero Limited 1.22% APT Limited (not held) -1.07% MTS Trading Limited 1.14% QAN Qantas Airways Limited -0.61% BHP BHP Billiton Limited 0.83% RIO Rio Tinto Limited (not held) -0.52% SVW Ltd 0.62% WES Wesfarmers Limited (not held) -0.50% Source: Pendal as at 28 February 2021 Underweight positions are in italics.

Stock-specific drivers of monthly performance relative to benchmark Three largest contributors Three largest detractors Overweight Nine Entertainment (NEC, +19.1%) Overweight Atlas Arteria (ALX, -12.3%) NEC continues to benefit from a strong rebound in advertising Higher bond yields weighed on rate-sensitive defensives demand as the economy gears up for a reduction in such as infrastructure. ALX’s report detailed a large impact of movement restrictions. Nine also continues to see strength Covid on traffic volumes. Its French assets are recovering coming through in its digital business, notably Stan. The issue well. They experienced far less impact from the second wave of payments by social media and search engines for news of Covid than the first. At this point we see large potential content in Australia appears to have been resolved. The upside in ALX on the back of undervaluation of its key assets. outcome will be a material uplift in revenue for NEC. Overweight Xero (XRO, -8.8%) Overweight BHP (BHP, +12.8%) Higher yields weighed on tech growth stocks, including our BHP’s results were largely in line to slightly ahead of position in XRO. It seems likely the multi-year tailwind of expectations. Costs were a little higher than expected in iron falling yields has turned into a thematic headwind for growth ore but strength in copper more than offset this. The key stocks. Nevertheless we believe there are opportunities to be feature was a much higher dividend than expected as had here in companies where the fundamentals can support management paid out almost all free cash flow to valuation. This is very much the case with XRO, which has shareholders. This highlights a continued commitment to better visibility on earnings — and lower competitive pressures capital discipline. — than other parts of the Australian tech space. Underweight Wesfarmers (WES, -8.9%) Underweight Rio Tinto (RIO, +15.3%) WES delivered strong results for the period. But it Like BHP, RIO continues to benefit from strength in the iron underperformed like a lot of retail stocks, as the market ore market, which is translating to strong cash flows and rotated away from “Covid winners” towards “Covid laggards.” capital management. We continue to prefer BHP, partly The underweight in WES was beneficial for relative because it also provides the optionality of exposure to the oil performance. price.

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Market outlook The portfolio performed well through reporting season and was able to handle the sharp market rotation at the end of the month, finishing ahead of the index. There may be a period of consolidation as the market digests the back-up in bond yields. But at this point the Fed is showing no signs of wavering in its resolve to hold rates low. Real rates are rising as a result of an improved outlook for the US economy, on the back of massive fiscal stimulus. The Fed seems content to let bond yields rise, concerned only that they do not rise too quickly and choke off the recovery. We remain a long way from the target rates for inflation or employment. At this point the risk of premature tightening seems low. Looking forward we see a great opportunity for equity investors: • We believe the balance of risks are to the upside for equity markets and they will squeeze higher this year. • We think the Australian equity market, a long-time laggard, is well placed given a lower exposure to growth stocks, which are likely to give up market leadership. • We believe our style-neutral approach should work well in this environment, given thematic risks remain elevated. The acceleration of structural trends such as digital adoption and ESG considerations is driving divergence at a stock level. This opportunity can be captured by a process that focuses on idiosyncratic stock risk rather than style or thematic views. Pockets of excess and historically high aggregate valuations are prompting concerns of a market top. But we believe policy makers are tolerant of this in their aim for full employment. In our view policy makers are mindful of several mistakes made in the post-GFC era. The first is inequality, which intensified post-GFC as policymakers kept tight hold on fiscal and monetary policy, while globalisation and the growth of the technology industry kept a lid on real wages. The second is a growing fragility in the world economy produced by global supply chains, just-in-time production and finely tuned corporate balance sheets. The third is policy complacency about the environment and the need to move to clean energy, with little urgency to meet carbon emissions targets. In seeking to avoid repeating these errors, we think we’ll remain in an environment of looser monetary policy and greater spending than many expect. The liquidity and support for corporate earnings that result should drive markets higher. The portfolio has a number of stocks which will benefit in this situation. But as always, we are not betting the farm on a macro view. A number of paths could emerge and we must ensure the portfolio is prepared to navigate a different outcome. Hence we retain our balanced exposure to a number of different types of companies and thematic exposures. Within this, we focus on identifying idiosyncratic factors that give a stock an asymmetry in terms of upside/downside risk.

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