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Pendal Monthly Commentary Pendal Australian Shares Portfolio September 2020

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Pendal Monthly Commentary Pendal Australian Shares Portfolio September 2020 Pendal Monthly Commentary Pendal Australian Shares Portfolio September 2020 Market commentary Portfolio overview The S&P/ASX 300 lost momentum in September, falling - Australian Shares Portfolio 3.6%, and leaving returns just about flat (-0.1%) for the Investment The strategy employs a bottom up, quarter. strategy fundamental approach to build a diversified portfolio of Australian shares where the While the market was content to look through an August majority of active risk and outperformance reporting season which demonstrated the heavy impact of is driven by stock selection. Covid-19 across a number of sectors, concern over rising cases in the northern hemisphere and a delayed US fiscal Investment The objective of the Model Portfolio is to package weighed on sentiment in September. objective outperform the S&P/ASX 300 (TR) Index on a rolling 3 year period by 3% per annum. Technology (+13.0%) was the best performing index over the Benchmark S&P/ASX 300 (TR) Index quarter, helped by further indications of a prolonged period of low rates and yields which have helped boost valuations. Number of stocks 15-35 (35 as at 30 September 2020) That said, it gave back some gains and was among the Sector limits A-REITS 0-30% weakest sectors in September (-6.4%), in part due to Cash 2-10% Paypal’s decision to move into buy-now-pay-later dragging Dividend Yield 3.17%# on the stocks focused on that space. Income target No target There is a sense that some of the domestic industries hardest hit by Covid may have seen the worst. Some domestic cyclicals have been rallying as a result, helping Top 10 holdings Consumer Discretionary (+10.1%) outperform over the Code Name Weight quarter. It fell -2.4% in September, but still held up better BHP BHP Billiton Limited 9.25% than the index. CSL CSL Limited 9.25% Energy was the worst performing sector over both the month CBA Commonwealth Bank of Australia Ltd 5.05% (-10.7%) and the quarter (-13.5%) as fresh concerns over the trajectory of economic rebound weighed on the oil price. WBC Westpac Banking Corporation 4.47% TLS Telstra Corporation Limited 4.44% Financials were also major underperformers over the month (-6.1%) and the quarter (-5.8%). The outlook for bad and XRO Xero Limited 4.16% doubtful debts is tracking towards the more benign end of EVN Evolution Mining Limited 4.12% expectations for the banks. However the low rate ANZ ANZ Banking Group Limited 3.91% environment remains a structural headwind for margins. That said, there appears to be some valuation upside from current JHX James Hardie Industries Plc 3.68% levels for the banks, which should be supported by the STO Santos Limited 3.38% resumption of dividends. Source: Pendal as at 30 September 2020 Top 5 overweights versus S&P/ASX 300 Code Name Weight EVN Evolution Mining Limited 3.53% XRO Xero Limited 3.46% BHP BHP Billiton Limited 2.99% MTS Metcash Trading Limited 2.88% NEC Nine Entertainment Co Ltd 2.87% Top 5 underweights versus S&P/ASX 300 Code Name Weight WES Wesfarmers Limited (not held) -3.01% WOW Woolworths Group Limited (not held) -2.75% NAB National Australia Bank Limited -2.36% RIO Rio Tinto Limited (not held) -2.09% GMG AE Goodman Group (not held) -1.78% Source: Pendal as at 30 September 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. pendalgroup.com 2 Performance Since 1 month 3 month 6 month 1 year 3 Year 5 Year Inception* Pendal Australian Shares Portfolio -2.73% 0.52% 16.83% -6.59% 5.20% 8.14% 6.94% S&P/ASX 300 (TR) Index -3.59% -0.06% 16.73% -9.96% 4.94% 7.41% 5.36% Active return 0.87% 0.58% 0.11% 3.38% 0.26% 0.73% 1.58% Source: Pendal as at 30 September 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 JHX James Hardie Industries Plc 0.28% STO Santos Limited -0.33% NEC Nine Entertainment Co Ltd 0.26% QBE QBE Insurance Group Limited -0.20% EVN Evolution Mining Limited 0.24% TCL Transurban Group -0.09% QAN Qantas Airways Limited 0.16% SHL Sonic Healthcare Limited (not held) -0.08% ALL Aristocrat Leisure Limited 0.15% NAB National Australia Bank Limited -0.07% Top 5 contributors – 1 year Top 5 detractors – 1 year Value Value Code Name Code Name Added Added XRO Xero Limited 1.28% QAN Qantas Airways Limited -1.04% EVN Evolution Mining Limited 1.27% STO Santos Limited -0.91% JHX James Hardie Industries Plc 0.80% WES Wesfarmers Limited (not held) -0.64% CSL CSL Limited 0.75% APT Afterpay Limited (not held) -0.59% WPL Woodside Petroleum Limited (not held) 0.55% IAG Insurance Group Australia -0.57% Source: Pendal as at 30 September 2020 Underweight positions are in italics. Stock specific drivers of monthly performance relative to benchmark Three largest contributors Three largest detractors Overweight James Hardie (JHX, +7.5%) Overweight Santos (STO, -13.9%) JHX continues to benefit from strength in the US housing market, The second wave of coronavirus in the northern hemisphere, which is feeling the tailwind of both a cyclical rebound from Covid coupled with the ongoing impasse over a fiscal package from as well as the structural issue of under-construction in recent the US has led to concerns over the pace of the economic years. At the same time, JHX’s strategy to reclaim market share recovery. This has weighed in the price of oil and, in turn, on appears to be working. The current margin benefit from low pulp the domestic energy sector. We retain STO as part of the prices is likely to fade, however there appears to be enough recovery-lined part of the portfolio and see it as fundamentally additional factors to support its valuation. the best-placed of the Australian LNG stocks in the current Overweight Nine Entertainment (NEC, +6.4%) environment. NEC continued to do well on the back of improved sentiment on Overweight QBE Insurance (QBE, -19.9%) the outlook for advertising demand. The company has moved The UK High Court announced its decision in a test case on swiftly to reduce its cost base, helping offset this effect. Parts of the liability for QBE to cover for business interruption from its digital business such as Stan have seen improving trends Covid-19 under its policies. It found in QBE’s favour in two of through Covid. The net effect is that NEC’s outlook is much better the three policies under review. This means than QBE will than many feared. have some liability, which saw the stock reaction. However it Overweight Evolution Mining (EVN, +3.6%) is also likely to mean that total costs for this issue are less likely to exceed the amount that QBE had already Gold miners outperformed in September as broader sentiment provisioned. turned more negative. Gold continues to play an important role in the portfolio, protecting against a material market downturn – but Underweight Transurban Group (TCL, +4.8%) also serving as a hedge against the possibility of negative real The portfolio holds Transurban, but at less than index weight, rates that may result from current policy settings. Evolution preferring Atlas Arteria within the transport infrastructure continues to deliver the best free cash flow per ounce of sector. An increase in expectations of easing restrictions in production in the Australian gold mining sector. Victoria helped TCL in September, given the material impact that the lockdown is having on traffic volumes. 3 Market outlook The Australian Federal budget was stimulatory, as expected. On balance, the size of the total package was probably a touch larger than consensus was looking for. The scale of measures, which will drive the budget deficit close to 12%, demonstrates the willingness of policy makers to underpin the economy. This is a material shift in mindset away from the fiscal prudence and balanced budgets that Western governments have generally adopted over the last three to four decades. It is an important factor at play in the determining the ultimate economic impact of Covid 19 and the speed of the recovery. Both government and central bank rhetoric – in Australia and in many countries overseas – is emphasizing the determination to limit the structural economic and social damage from the virus and shutdowns. The outcome is likely to be loose monetary policy for some time – alongside large scale stimulus from the government. At this point the constraint on fiscal stimulus is either rampant inflation of loss of confidence in government credit. Neither issue is in play at the moment. Over time, we think there is a chance of a period of negative real interest rates, as inflation expectations rise while nominal rates are kept low.
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