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Pendal Monthly Commentary Pendal Australian Tax Effective Income Portfolio February 2020

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Pendal Monthly Commentary Pendal Australian Tax Effective Income Portfolio February 2020 Pendal Monthly Commentary Pendal Australian Tax Effective Income Portfolio February 2020 Market commentary Portfolio overview Australian Tax Effective Portfolio Australian equities fell by -7.8% in February (as measured by the S&P/ASX 300 Accumulation index) amid growing concerns Investment Dual focus: Deliver tax-effective capital & of COVID-19 becoming a pandemic. Resources (-13.2%) were strategy grossed-up income. hit the hardest, while Industrials (-6.4%) held up relatively Broad hunting ground: Core approach, drawing ideas from across the market cap better. spectrum. Information Technology (-16.2%) fell the furthest. Link (LNK, Income focus: Greater exposure to stocks -31.0%) played a role in this, however the WAAAX stocks also with high grossed-up yield & dividend sustainability. underperformed. Afterpay (APT) gave up -14.0%, Xero (XRO) -13.9% and Wisetech (WTC) -39.7%. WTC delivered another Investment The objective of the Model Portfolio is to half of profit growth but slashed its full-year earnings guidance objective outperform the S&P/ASX300 (TR) Index on a rolling 3 year period by 3% per annum, as the effect of Chinese production closures fed into global while delivering a higher gross yield than supply chains and logistics. WTC was down -55.9% from its the market. high point in September 2019. Benchmark S&P/ASX 300 (TR) Index Elsewhere, cyclical sectors such as Energy (-17.4%), Consumer Number of stocks 15-35 (27 as at 29 February 2020) Discretionary (-8.7%) and Materials (-11.7%) underperformed. Sector limits A-REITS 0-30%, Cash 2-10% The traditional defensives of Utilities (-4.0%) and Real Estate (-4.5%) held up best, while still losing ground. Top 10 holdings Only eight stocks in the ASX 100 held their ground and Code Name Weight recorded a gain over the month including Cleanaway Waste Management (CWY, +11.3%), Gold miners Evolution Mining CSL CSL Limited 9.89% (EVN, +10.6%) and Northern Star Resources (NST, +6.8%). CBA Commonwealth Bank of Australia Ltd 9.27% A2 Milk (A2M, +6.3%) was also resilient. CWY defied market BHP BHP Billiton Limited 7.41% concerns to post a 6.8% increase in underlying EBIT and 15.2% TLS Telstra Corporation Limited 6.68% gain in underlying NPAT. Similarly, A2M reported a great set of ANZ ANZ Banking Group Limited 5.53% results, with EPS growing by +22% to 25.3c, beating market consensus. WBC Westpac Banking Corporation 4.74% QAN Qantas Airways Limited 4.52% Rio Tinto (RIO, -11.6%) was among the weakest in the ASX MQG Macquarie Group Limited 4.45% 100. It delivered in line with the market’s expectation in terms of earnings, however the dividend was lower than many expected. STO Santos Limited 4.06% It also disappointed some segments of the market who were TCL Transurban Group 3.38% looking for another special dividend. Source: Pendal as at 29 February 2020 Bluescope Steel (BSL, -16.6%) delivered a good half but, like so Top 5 overweights versus S&P/ASX 300 many other companies, now faces an increasingly uncertain outlook for the next half given the effect of COVID-19. BSL Code Name Weight faces headwinds in terms of volumes given a reduction in TLS Telstra Corporation Limited 4.37% production activity in China — but also on steel spreads as the QAN Qantas Airways Limited 4.05% price of coal and iron ore has held up relatively well in relation to STO Santos Limited 3.38% the steel price. MTS Metcash Trading Limited 3.25% Flight Centre (FLT, -17.0%) was another that delivered a NEC Nine Entertainment Co Ltd 3.12% reasonable half given a soft domestic environment, with revenue growth of 11%. However this was swamped by the cautious outlook, with management indicating the full-year Top 5 underweights versus S&P/ASX 300 effect from COVID-19 could be up to $200 million. Code Name Weight WOW Woolworths Group Limited (not held) -2.88% WES Wesfarmers Limited (not held) -2.60% WPL Woodside Petroleum Limited (not held) -1.47% GMG AE Goodman Group (not held) -1.35% NCM Newcrest Mining Limited (not held) -1.13% Source: Pendal as at 29 February 2020 pendalgroup.com 2 Performance Since 1 month 3 month 6 month 1 year 2 Year 3 Year Inception* Pendal Australian Tax Effective Income Portfolio -7.20% -5.24% 0.44% 8.58% 6.03% 7.92% 9.35% S&P/ASX 300 (TR) Index -7.76% -5.22% -0.71% 8.75% 7.76% 8.61% 10.06% Active return 0.57% -0.03% 1.15% -0.17% -1.73% -0.69% -0.71% Source: Pendal as at 29 February 2020 *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 EVN Evolution Mining Limited 0.19% STO Santos Limited -0.52% WPL Woodside Petroleum Limited (not held) 0.16% NEC Nine Entertainment Co Ltd -0.27% CSL CSL Limited 0.15% QAN Qantas Airways Limited -0.26% ALX Atlas Arteria 0.13% BHP BHP Billiton Limited -0.14% VEA Viva Energy Group limited 0.11% GMG AE Goodman Group (not held) -0.10% Top 5 contributors – 1 year Top 5 detractors – 1 year Value Value Code Name Code Name Added Added JBH JB Hi-Fi Limited 0.93% WHC Whitehaven Coal Limited (not held) -0.68% CSL CSL Limited 0.92% S32 South32 Limited (not held) -0.67% WPL Woodside Petroleum Limited (not held) 0.54% WOW Woolworths Group Limited (not held) -0.65% JHX James Hardie Industries Plc 0.39% ANZ ANZ Banking Group Limited -0.39% ALL Aristocrat Leisure Limited 0.34% WES Wesfarmers Limited (not held) -0.39% Source: Pendal as at 29 February 2020 Underweight positions are in italics. Stock specific drivers of monthly performance relative to benchmark Three largest contributors Three largest detractors: Overweight Evolution Mining (EVN, +10.6%) Overweight Santos (STO, -20.7%) The sharp increase in uncertainty and risk aversion related to Concern over the effect of the virus on demand were the economic effects of the spread of COVID-19 saw some subsequently compounded by news that Russia and the support for gold. While there has been some volatility in gold Saudis had walked away from their previous agreement to cut — with some selling given its liquidity relative to other assets — production. The underweight in Woodside, the largest oil/LNG the Australian gold miners are in a sweet spot given moves in stock in the index, helped performance but was offset by currency and input costs. positions in Santos (STO) and Oil Search (OSH). Santos has Underweight Woodside Petroleum (WPL, -17.5%) less exposure to the oil price than other energy stocks in the index, given its domestic gas exposure and inflation-linked Concern over the effect of the virus on demand were contracts. subsequently compounded by news that Russia and the Saudis had walked away from a previous agreement to cut Overweight Qantas (QAN, -13.7%) production. The underweight in Woodside, the largest oil/LNG The impact of the virus on demand, exacerbated by travel stock in the index, helped performance but was offset by the restrictions, has had a heavy impact on the near-term outlook positions in Santos (STO) and Oil Search (OSH). for QAN. Our modelling suggests QAN is well positioned Overweight CSL (CSL, -0.8%) within its industry and is capable of weathering a period in which international travel is cut to zero and domestic travel CSL continued its strong relative run, holding up well against materially cut. At the moment it forms part of the “quick a weaker market. It is seen as relatively less sensitive to the recovery insurance” in the portfolio — any improvement in effects of economic disruption to contain the virus given the sentiment could see a sharp rebound. essential nature of demand for its product. We remain watchful for any effect on blood collection coming out of the Overweight Nine Entertainment (NEC, -15.5%) current period, but are not seeing any issues growing at the NEC’s stock bounced on its half-yearly report. While revenue moment. was down 2% on the prior corresponding period this was better than the market expected. Nevertheless, NEC was hit along with most cyclicals as the markets sold off over fears of the economic effects of COVID-19. There is a risk here to NEC, if a prolonged downturn leads to reduced advertising spend or stalls the housing recovery. We are mindful of this risk and will be monitoring trends closely. 3 Market outlook From a market perspective the key question is the scale of the economic price to be paid to resolve the COVID-19 issue. It is apparent from observation of countries such as China, Singapore and South Korea (versus Italy for example) that substantial government intervention in social activity is required to limit the spread of COVID-19 and ensure medical infrastructure is not overwhelmed. Measures such as mandatory 14-day isolation for overseas travelers and the banning of non-essential gatherings in Australia are dramatic examples of the necessary steps. These steps — and others overseas — give some confidence that the worst outcome of a global pandemic can be avoided. However they will also have a severe effect on the economy, especially small business. We are seeing widespread closures of stores, gyms, similar businesses and public areas. As the possible scale of the economic impact is digested, its duration remains the key uncertainty.
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