Pendal Monthly Commentary Pendal Australian Tax Effective Income Portfolio July 2021

Market commentary Portfolio overview Australian Tax Effective Portfolio

Despite increasing concerns about the Delta variant’s Investment Dual focus: Deliver tax-effective capital & strategy grossed-up income. potential to de-rail economic recovery domestically and Broad hunting ground: Core approach, drawing overseas, the S&P/ASX 300 gained 1.1% in July. ideas from across the market cap spectrum. These fears were apparent in the bond market, where Income focus: Greater exposure to stocks with high grossed-up yield & dividend sustainability. US 10-year treasury yields declined over the month. Investment The objective of the Model Portfolio is to But equity markets held up, supported by liquidity, objective outperform the S&P/ASX300 (TR) Index on a merger & acquisition (M&A) activity and the prospect of a rolling 3 year period by 3% per annum, while delivering a higher gross yield than the market. strong US earnings season. The notion that governments will step in with fiscal support to counter Benchmark S&P/ASX 300 (TR) Index extended lockdowns has encouraged a more sanguine Number of stocks 15-35 (27 as at 31 July 2021) market. Sector limits A-REITS 0-30%, Cash 2-10% # Domestically, NSW extended its lockdown while other Dividend Yield 4.71% states also scrambled to manage outbreaks. This is weighing on the outlooks for domestic cyclicals. But the Top 10 holdings rotation to defensives and other sectors has help buoy Code Name Weight the market. BHP BHP Billiton Limited 11.65% There was a high degree of dispersion at the sector CBA of Ltd 7.89% level. TLS Corporation Limited 7.05% Materials (+7.1%) was the strongest sector. Concerns WBC Banking Corporation 6.81% that Chinese growth may be slowing prompted iron ore CSL CSL Limited 6.63% prices to fall in July. Nevertheless, production updates ANZ ANZ Banking Group Limited 5.68% from major miners emphasised the surge in revenue NEC Co Ltd 4.65% from still-elevated prices and the degree of free cash MTS Trading Limited 4.61% flow and forthcoming dividends. FMG Limited 3.29% Industrials gained 4.1%, courtesy of a takeover bid for NAB Limited 3.20% Sydney Airport (SYD, +34.9%). Source: Pendal as at 31 July 2021

Abundant liquidity is fuelling a steady pipeline of M&A, Top 5 overweights versus S&P/ASX 300 which is providing a degree of support for equity markets. There was also a bid for Code Name Weight (SKI, +23.8%). TLS Telstra Corporation Limited 4.96% NEC Nine Entertainment Co Ltd 4.46% Information technology (-6.4%) was the worst sector, MTS Metcash Trading Limited 4.42% despite lower bond yields. An 18.2% decline for (APT), the biggest stock in the sector, was largely to BHP BHP Billiton Limited 4.31% blame. Performance across the rest of the sector was WBC Westpac Banking Corporation 2.62% mixed, with (XRO) up 2.3%. Energy (-2.3%) also lost ground. This was largely due to Top 5 underweights versus S&P/ASX 300 Santos (STO, -9.0%) on speculation, subsequently Code Name Weight confirmed, that it was looking to merge with WES Limited (not held) -3.23% (OSH, 0.0%). WOW Woolworths Group Limited (not held) -2.29% TCL Group (not held) -1.82% GMG (not held) -1.77%

COL Limited (not held) -1.09% Source: Pendal as at 31 July 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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2 Performance

3 year 5 year Since Inception 1 month 3 month 6 month 1 year (p.a.) (p.a.) (p.a.)*

Pendal Australian Tax Effective Income Portfolio 0.34% 4.61% 15.81% 34.58% 10.20% 10.88% 11.02%

S&P/ASX 300 (TR) Index 1.11% 5.77% 13.86% 29.14% 9.69% 10.13% 10.95%

Active return -0.77% -1.17% 1.95% 5.44% 0.51% 0.75% 0.08%

Source: Pendal as at 31 July 2021 *Since Inception – 14 September 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 BHP BHP Billiton Limited 0.36% NEC Nine Entertainment Co Ltd -0.29% APT Afterpay Limited (not held) 0.25% SYD Sydney Airport (not held) -0.25% MTS Metcash Trading Limited 0.08% STO -0.24% FMG Fortescue Metals Group Limited 0.07% WBC Westpac Banking Corporation -0.17% SEK Seek Limited (not held) 0.07% TAH 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 2.75% EVN Limited -1.43% MTS Metcash Trading Limited 0.98% ALX -0.71% NCM Limited (not held) 0.91% JBH JB Hi-Fi Limited -0.37% BHP BHP Billiton Limited 0.86% AMC Limited -0.35% A2M Limited (not held) 0.86% MIN Mineral Resources Limited (not held) -0.32% Source: Pendal as at 31 July 2021 Underweight positions are in italics. Stock-specific drivers of monthly performance relative to benchmark Three largest contributors Three largest detractors: Overweight BHP (BHP, +10.1%). Overweight Nine Entertainment (NEC, -5.1%) BHP delivered a strong quarterly production update including NEC fell early in the month as the market digested an good operational results right across its portfolio. The announcement that Stan had won local rights to the UEFA implications for cash flow and capital return more than offset Champions League. While this introduces some uncertainty weaker iron ore prices. There has been concern over slowing and the lockdown may have a short-term effect on advertising, growth in China, although any extended impact from Delta is we see NEC as attractively valued with some cyclical tailwinds likely to see more fiscal stimulus. on a medium-term outlook. The stock rebounded late in the month. Underweight Afterpay (APT, -18.2%) Underweight Sydney Airport (SYD, +34.9%) Speculation that Apple would move into the buy-now-pay-later space emphasised increasing competitive intensity as A consortium of pension funds launched a bid for SYD at a players, including large global institutions, jostle for a land 40% premium. This values it at 25x EBITDA versus a grab. Afterpay’s fall in July was erased in August after it came historical trading range of 18-21x. The bid was rejected by the under takeover offer early in the month. board, but there were signals it remains in play at the right price. Overweight Metcash (MTS, +3.0%) Overweight Santos (STO, -9.0%) MTS continued to rise after a well-received result towards the end of June. It delivered revenue growth in food, liquor and STO fell despite a flat oil price as it launched a proposal to hardware divisions. Margins in food were disappointing, but it merge with Oil Search (OSH). The deal makes sound appears to be holding market share gains. Hardware was strategic sense. There are likely to be synergies, though at stronger than expected. Combined with liquor it is now bigger this point there is little detail. It can also help unlock value in than the food business. Management announced a share buy- OSH’s assets. We think the combined entity will be better back, signalling confidence in the outlook. placed to manage longer-term energy transition.

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Market outlook

The portfolio finished behind the index for the month. Several of the domestic cyclical exposures were softer as lockdowns caused uncertainty. The large bid for Sydney Airport also made a material difference since the portfolio does not hold it. Concerns persist over the Covid Delta variant’s potential to derail economic recovery, both domestically and overseas. Nevertheless, equity markets remain resilient. We don’t see this as an unsustainable disconnection between growth concerns and market returns. There are a number of factors providing support, including a strong US earnings season and ample liquidity which is fuelling M&A activity. Concerns over growth have also seen bond yields fall, bolstering returns for growth stocks. The US is bracing for an inevitable rise in cases as Delta takes hold. The main issue is that, unlike in the UK, the rise in new cases is leading to a material increase in headline hospitalisation rates. The link between vaccination and less severe infection is holding. But there are States with low rates of vaccination, leading to a pick-up at the headline levels of hospitalisations as new case surge. We are also mindful that new case numbers are clearly understated, since people are less likely to get tested. Impact on mobility is yet to be seen. At this point there appears to be no appetite in the US for a return to lockdowns. There have been limited signs of more subdued economic activity from this wave. If we see cases in Florida and Missouri start to peak later in August it will suggest a similar pattern to India and the UK. This could trigger a rotation back to cyclicals. The confluence of surging US cases and outbreaks in China exacerbated concern over global growth and weighed on commodities. Commodity prices remains largely hostage to Covid sentiment in the near term. This will be tied to the rate of US new cases and hospitalisations, which are likely to deteriorate for at least 2-3 weeks. The domestic emphasis is on the run rate of vaccinations. This has been accelerated by the shift in recommendation for AstraZeneca. We are now (mid-August) running at 0.9% of the population being vaccinated each day. Peak rates in places such as Israel and the UK ranged from 0.8% to 1.0% per day. Australia could reach the higher end of that range by the end of this month if people continue to take up AZ, where supply is available. Nevertheless we entered reporting season with some wariness around domestic cyclicals, given uncertainty over the economic consequences, policy response and likely cautious tone from a number of these companies. In the US, there are indications supply bottlenecks that caused a spike in short-term inflation may prove more persistent than first thought. For example, the number of ports with capacity issues has increased. Delta’s spread in Asia raises concerns for global supply chains if lockdowns remain in place. In addition survey data indicates US companies have more pricing power than we have seen in decades. The upshot is that inflation concerns remain real, despite the move lower in bond yields in recent months. Along with continued strength in the real US economy, this is bringing forward market expectations of Fed tapering. Overall, uncertainty over Delta has increased, but we believe the market remains well supported. Any prolonged effect of lockdowns is likely to be countered by more fiscal stimulus. Domestic cyclicals are likely to tread water at best until we have greater clarity on re-opening. At that point there will be a sharp rotation if recent history is any guide. The global re-opening trade remains in place for the moment. We think bond yields have probably bottomed, but we don’t expect a sharp sell-off. Without a strong yield thematic at play, the market is likely to focus on earnings outlook as a driver of returns in the near term.

New stocks added and/or stocks sold to zero during the month Buy new position in Orora (ORA) and Downer (DOW)

We are adjusting the portfolio’s exposure to stocks aligned with the lifting of restrictions and economic reopening. When considering this part of the portfolio it’s important to differentiate between stocks mainly focused on the Australian domestic market and those more aligned with overseas market such as the US. The outlook between the two has diverged several times during the Covid era — and again recently. The emergence of the Delta variant and low vaccination rates have prompted lockdowns in Australia while the US continues to roll back restrictions following a large-scale vaccination program. As a result we have reduced positions in ANZ and Tabcorp. Both have done well, helping drive the portfolio’s outperformance over the past 12 months. But we used a recent pull-back as an opportunity to add a new position in Downer.

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DOW designs, build and sustains infrastructure and facilities in Australia and New Zealand. It has experienced a negative impact from the shutdown of leisure, sport and entertainment venues. This has weighed on the stock which is still well below its pre-Covid highs. But more than half its revenue is linked to government, critical infrastructure and defence — which are unaffected by Covid. A key element of the thesis in DOW in the changing nature of the company. It has historically offered exposure to capital-intensive businesses, notably mining services. But in 2019 management embarked on a strategy to divest its mining business to focus on a less capital-intensive “urban services” strategy. This has resulted in the sale of all mining-related businesses except one. Management has indicated the remaining mining services business will either be sold off or wound down. As a result of this strategy — and the acquisition of Spotless in 2019 — mining services has declined from more than 20% of revenue pre-2016 to less than 5% (and falling) today. The change in strategy is important from two perspectives. First, on a medium-term view, DOW is an increasingly capital-light business with a large proportion of customers unaffected by lockdowns and a high degree of recurring revenue. Second, it removes an ESG-related issue — exposure to fossil fuels — which was a headwind to its cost of capital. We expect this can help increase DOW’s valuation multiple over time. In light of both these supportive factors we see DOW as attractive value. ORA is fundamentally a relatively defensive industrial, given it operates in packaging. However it is leveraged to the global re- opening trade. It makes glass bottles and cans for beverages in Australia and distributes a range of packaging formats in the US. About 75 per cent of revenue comes from the US and most of the rest from Australia. It has a diverse exposure to the US economy. Many of its customers were hit hard by Covid, such as food and beverage services. Re-opening and fiscal stimulus is translating to stronger demand for packaging products, confirmed in the company’s recent update. Earnings recovery should be driven by better volumes and margin improvement. The latter is underpinned by a high degree of operating leverage to revenue and a material amount of fixed costs taken out during Covid. The Australian business has been affected by Chinese bans on wine exports, which reduced bottle demand for customers in the wine industry. Management identified several opportunities to replace volumes lost in the wine industry with other businesses in Australia. In particular they have targeted customers that require expensive, imported bottles — which ORA can offer at a very competitive proposition. This is likely to be lower margin, which is why the strategy was previously not pursued. But it would still be profitable and help fill an earnings gap. The recovery in Australian volumes is longer-dated than the recovery in its US business. But there are signs it can recover to a greater degree than that implied by current valuation. There are also opportunities for growth in aluminium cans. Strong demand is reducing competitive risk, providing a good environment for long-term contract renewals with customers. ORA has a strong balance sheet and generates a very attractive cash flow yield — by our estimates 8.7% in FY21 and 8.8% for FY22. The company has been trading below its long-term average P/E and at a material discount to its P/E relative to the market. It also trades at a material valuation to discount to comparable companies globally. We believe there is material scope to close these valuation gaps as the company demonstrates the strength of its recovery, coupled with strong balance sheet and cash flow.

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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 Tax Effective 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.