Pendal Monthly Commentary Pendal Australian Specialised Retirement Income Portfolio September 2020

Market commentary Portfolio overview Australian Specialised Retirement Income Portfolio The S&P/ASX 300 lost momentum in September, falling - Dual focus: Deliver tax-effective capital & 3.6%, and leaving returns just about flat (-0.1%) for the Investment strategy grossed-up income. quarter. Broad hunting ground: Core approach, drawing ideas from across the market cap spectrum. While the market was content to look through an August Income focus: Greater exposure to stocks with reporting season which demonstrated the heavy impact of high grossed-up yield & dividend sustainability. Covid-19 across a number of sectors, concern over rising Higher turnover: Takes advantage of lack of tax cases in the northern hemisphere and a delayed US fiscal implications to pursue shorter-term package weighed on sentiment in September. opportunities Technology (+13.0%) was the best performing index over Investment The objective of the Model Portfolio is to the quarter, helped by further indications of a prolonged objective outperform the S&P/ASX 300 (TR) Index on a rolling 3 year period by 3% per annum. period of low rates and yields which have helped boost valuations. That said, it gave back some gains and was Benchmark S&P/ASX 300 (TR) Index among the weakest sectors in September (-6.4%), in part Number of stocks 15-35 (34 as at 30 September 2020) due to Paypal’s decision to move into buy-now-pay-later Sector limits A-REITS 0-30%, Cash 2-10% dragging on the stocks focused on that space. Dividend Yield 3.51%# There is a sense that some of the domestic industries hardest hit by Covid may have seen the worst. Some Top 10 holdings domestic cyclicals have been rallying as a result, helping 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 9.87% than the index. CSL CSL Limited 8.52% CBA of Australia Ltd 5.62% Energy was the worst performing sector over both the month (-10.7%) and the quarter (-13.5%) as fresh concerns TLS Corporation Limited 4.77% over the trajectory of economic rebound weighed on the oil WBC Banking Corporation 4.57% price. ANZ ANZ Banking Group Limited 3.91% EVN Limited 3.74% Financials were also major underperformers over the month NEC Co Ltd 3.60% (-6.1%) and the quarter (-5.8%). The outlook for bad and doubtful debts is tracking towards the more benign end of MTS Trading Limited 3.56% expectations for the banks. However the low rate QAN Airways Limited 3.43% environment remains a structural headwind for margins. Source: Pendal as at 30 September 2020 That said, there appears to be some valuation upside from current levels for the banks, which should be supported by Top 5 overweights versus S&P/ASX 300 the resumption of dividends. Code Name Weight BHP BHP Billiton Limited 3.61% NEC Nine Entertainment Co Ltd 3.45% MTS Metcash Trading Limited 3.39% EVN Evolution Mining Limited 3.16% QAN Qantas Airways Limited 2.98%

Top 5 underweights versus S&P/ASX 300 Code Name Weight WES Limited (not held) -3.01% WOW Woolworths Group Limited (not held) -2.75% GMG AE (not held) -1.78% NAB Limited -1.72% NCM Limited (not held) -1.52% 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.

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Performance

1 month 3 month 6 month 1 year 3 Year Since Inception* Pendal Australian Specialised -2.96% 0.54% 16.27% -7.84% 4.49% 6.16% Retirement Income Portfolio

S&P/ASX 300 (TR) Index -3.59% -0.06% 16.73% -9.96% 4.94% 6.05%

Active return 0.63% 0.59% -0.45% 2.12% -0.44% 0.11%

Source: Pendal as at 30 September 2020 *Since Inception – 20 August 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 0.31% STO -0.28% EVN Evolution Mining Limited 0.21% ORI Limited (not held) -0.09% QAN Qantas Airways Limited 0.18% MND Monadelphous Group Limited -0.08% JHX Plc 0.17% SHL Limited (not held) -0.08% ALL Aristocrat Leisure Limited 0.14% TCL Group -0.07% Top 5 contributors – 1 year Top 5 detractors – 1 year

Value Value Code Name Code Name Added Added EVN Evolution Mining Limited 1.10% QAN Qantas Airways Limited -1.13% XRO Limited 0.94% IAG Insurance Group Australia -0.76% FMG Limited 0.91% WES Wesfarmers Limited (not held) -0.64% MTS Metcash Trading Limited 0.75% STO Santos Limited -0.63% JHX James Hardie Industries Plc 0.61% APT Limited (not held) -0.58% 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 Nine Entertainment (NEC, +6.4%) Overweight Santos (STO, -13.9%) NEC continued to do well on the back of improved sentiment The second wave of coronavirus in the northern hemisphere, on the outlook for advertising demand. The company has coupled with the ongoing impasse over a fiscal package from moved swiftly to reduce its cost base, helping offset this the US has led to concerns over the pace of the economic effect. Parts of its digital business such as Stan have seen recovery. This has weighed in the price of oil and, in turn, on improving trends through Covid. The net effect is that NEC’s the domestic energy sector. We retain STO as part of the outlook is much better than many feared. recovery-lined part of the portfolio and see it as fundamentally Overweight Evolution Mining (EVN, +3.6%) the best-placed of the Australian LNG stocks in the current environment. Gold miners outperformed in September as broader sentiment turned more negative. Gold continues to play an important Overweight Orica (ORI, -11.2%) role in the portfolio, protecting against a material market Concerns over the pace of economic recovery have been downturn – but also serving as a hedge against the possibility weighing on ORI, given implications for demand for of negative real rates that may result from current policy commercial explosives. The portfolio sold out of ORI during settings. Evolution continues to deliver the best free cash flow the month and rotated to other stocks where we have greater per ounce of production in the Australian gold mining sector. conviction around the rebound potential. Overweight Qantas (QAN, +2.8%) Overweight Monadelphous (MND, -9.1%) Qantas continued to make headway in the wake of results Weaker sentiment around global growth weighed on mining which defied some of the direst fears around its outlook. It services company Mondadelphous, which gave back some of continues to feel the impact of travel restrictions, but has the strong gains it made in the previous month. We continue slashed its cost base to minimise the cash burn from an idled to see a significant opportunity linked to the capex required by international business and severely reduced domestic large miners and, in this vein, MND continued to win new work business. At the same time, management are taking the during the month. opportunity to restructure the business to permanently reduce the cost base.

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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. This is one factor in the portfolio’s exposure to gold miners – as real assets such as gold, commodities and property tend to do well in period of negative real rates. We remain mindful of the resurgence of Covid cases in the US and, more recently, in Europe. The second wave in the US has thus far not stalled the economic recovery and the hospitalization and mortality rates remain far below the levels of the first wave. Likewise, in Europe, there has not been any material impact on economic activity so far. In the US the rate of the rebound is slowing as household income falls. However at this point it seems that accrued savings from the previous months – when the savings rate spiked – is helping offset the effect of previous support rolling off. The impasse over the next stimulus package remains and it appears increasingly unlikely that an agreement will be reached prior to the Presidential election, with Senate Republicans focused instead on nomination of a new Supreme Court Justice. At this point the notion of a Democrat sweep of the White House and Senate – supported by current bookmaker odds – and therefore a larger package post-election is doing enough to calm market fears on this front. We maintain the portfolio’s balanced construction. While policy support is rendering the possibility of a double dip recession less likely, there is still the risk of a market downturn and hence we retain the portfolio’s protection in the form of companies with defensive earnings and the exposure to gold. At the same time, there is a sense that perhaps the worst has passed for some domestic cyclicals – we have seen the portfolio’s positions in Qantas and Nine Entertainment start performing over the last two months. There are still stocks that are trading well below pre-Covid highs and are in decent shape and aligned with the recovery. We have been adding here selectively in recent weeks.

New stocks added and/or stocks sold to zero during the month Sell to zero in Orica (ORI) and establish new position in (ALD) and Coca Cola Amatil (CCL) We have adjusted the portfolio’s exposure to recovery-linked stocks via the sale of chemical company Orica (ORI) and rotation into fuel company Ampol (ALD) and beverage bottler and distributor Coca Cola Amatil. We continue to emphasise the heightened uncertainty over how quickly the economy can recover. The return of restrictions in Victoria – and more cautious consumer behaviour in NSW – emphasises this. As a result, we retain our balanced portfolio construction, with several defensive positions to protect it in the case of economic deterioration. Nevertheless we are also looking to benefit from stocks which have fallen out of favour, but where sentiment can turn quickly as circumstances change. There has been steady news flow on vaccines and confidence in this area is growing. In the meantime, it looks as though economies will need to cope with a degree of restriction. Better understanding of the virus, methods of treatment and testing can help manage a certain base load of Covid cases, without returning to the scale of lockdowns seen earlier in the year. Under this scenario – and especially if we see developments on a vaccine - we see material upside to the current valuation of companies within our “recovery” segment, which we believe will be reflected once the market gains confidence in the gradual normalisation of economic activity. Sell Orica to zero. We added ORI to the portfolio originally on the opportunity offered by the combination of addressing production issues, finalising contract prices and the potential to gain share among mining customers. Covid-19 resulted in a material disruption to demand for ORI’s ammonium nitrate products. We have been watching how this issue develops and now believe that the investment case is being deferred - if not impaired - by the disappointing rate at which mining and construction activity is recovering in a number of ORI’s key markets. The biggest impacts are in the Americas, Africa and Europe. Most all of these markets are recovering slowly but remain considerably below the pre-Covid levels of demand. In South America ORI’s larger exposures are in Peru, Chile, Columbia and Brazil - all substantial mining centres but which have experienced some of the highest COVID disruptions globally. In Central and North America, demand remains below pre-Covid levels, impacted by a weak coal market in the US and Covid-related restriction in Canada and Mexico. Similarly in Africa and parts of Europe both mining and construction activities remain depressed, albeit recovering slowly.

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Australian demand overall is strong with sales in iron ore and gold mining sectors offsetting patchy weakness in East Coast coal. The Burrup recommissioning and ramp up has gone well and continues to operate strongly. The performance in other parts of Asia is approximately in line with Pre-Covid levels. Nevertheless, we expect that the next result will show volumes at the bottom of the implied range for 2020 and we expect 2021 guidance will be incrementally lower than the market has been expecting as the recovery from COVID in some geographies takes longer than first thought. As a result, we are rotating to Ampol (ALD). Buy Ampol. Like ORI, ALD’s stock price is still around 30% below where it at the start of 2020. However we have greater conviction in ALD’s ability to recover sooner as the market starts to gain confidence in an economic rebound. Covid-19 has also resulted in a material hit to demand for fuel, which remains below pre-Covid levels and has weighed on ALD. However recent updates from management confirm that the industry has remained rational in pricing, preserving strong margins. States that have fully re-opened have delivered a strong recovery in volumes, suggesting that the remaining states should also follow that path as restrictions ease. At the same time, its supply chain infrastructure business continues to perform well. ALD’s refining business remains challenged by low margins. However there has been recognition of the strategic national importance of ALD’s refining and storage capability – and the Federal government has indicated that they will move to support this business, alleviating this headwind. We see the combination of sentiment and valuation at lows, coupled with good operational performance, leverage to an economic rebound, and the reduction in a key headwind, as an attractive opportunity to invest. There is also the potential optionality of a takeover at current levels, with Alimentation Couche-Tard’s unsuccessful approach earlier in the year offering confirmation of the corporate appeal of ALD’s assets. Buy Coca Cola Amatil. The portfolio is adding a new position in CCL, a stock which has seen sales hit by the impact of Covid-19 but which our research suggests is more resilient that the market expects and is positioned to do well as economic momentum improves. CCL bottles and distributes a broad range of alcoholic and non-alcoholic beverages in Australia, New Zealand, Indonesia, PNG and Fiji. By division in 2019, Australian beverages was just under 58% of earnings, the rest of Asia Pacific ~35% and Alcohol & Coffee the remainder. Within Australia, volumes are split evenly between supermarket sales and “on-the-go” which includes restaurants (both licenced premises and quick-service restaurants), convenience stores and petrol stations. However margins in on-the-go are almost twice that in supermarkets, which means it ultimately drives about two thirds of the Group’s earnings. Historically, CCL has been considered a relatively defensive stock, albeit one facing revenue headwinds in Australia and questions over its ability to deliver on the promise of growth in Indonesia. However CCL was not defensive in the face of the idiosyncratic effect of Covid-19. Travel restrictions, work-from-home, restaurant and event closures and ongoing social distancing have had a severe impact on CCL’s high margin on-the-go segment. Indonesia, which was 7.5% of Group earnings in 2019 has also seen a severe impact. The net impact has been a -19.4% fall in EBITDA for the first half of 2020. The stock’s performance reflects this as well as a valuation de-rating; it is still down -30% from its pre-Covid highs and has not participated in the market’s rebound.

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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 Specialised Retirement 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.