Pendal Monthly Commentary Pendal Australian Shares Portfolio August 2020

Market commentary Portfolio overview The S&P/ASX 300 Accumulation index added +3.0% in Australian Shares Portfolio August – a period which included the release of annual Investment The strategy employs a bottom up, reports for a large portion of the market. strategy fundamental approach to build a diversified portfolio of Australian shares where the The net result of earnings season is that earnings were down majority of active risk and outperformance -38% for the second half of FY20 and -16% for the full year. is driven by stock selection. Dividends fell 30% as companies took a prudent stance on Investment The objective of the Model Portfolio is to capital management. objective outperform the S&P/ASX 300 (TR) Index on a rolling 3 year period by 3% per annum. This was a worse result that the GFC, where earnings fell - Benchmark S&P/ASX 300 (TR) Index 20% in the second half of FY09. Nevertheless, the market continued to rally through August as investors proved willing Number of stocks 15-35 (34 as at 31 August 2020) to look through the near term impact of Covid-19. Instead, Sector limits A-REITS 0-30% the focus was on how management are going about Cash 2-10% adapting to the new environment. Dividend Yield 3.19%# Whilst Industrials (+3.6%) outperformed, Resources (+0.9%) Income target No target were the laggard as gold miners (-8.3%) retreated from the recent highs. Top 10 holdings The Victorian lockdown continues to drag on the national Code Name Weight economic pulse. The state’s decision to pursue an effective BHP BHP Billiton Limited 9.59% elimination strategy is material – it means stricter restrictions CSL CSL Limited 8.01% for longer, with a greater impact on activity, the economy and CBA of Ltd 5.28% budget deficits - Australia is a negative outlier in terms of global trends in industrial survey improvement as a result. WBC Banking Corporation 4.52% This remains a headwind for the domestic equity market and TLS Corporation Limited 4.49%

specific companies within it. XRO Limited 4.05% Information technology (+15.2%) was the best performing ANZ ANZ Banking Group Limited 4.04% sector. Results from key stock generally did enough to EVN Limited 3.86% satisfy expectations, while a global surge in the technology STO Santos Limited 3.82% sector also provided a tailwind. Consumer discretionary JHX Plc 3.33% (+9.7%) did well as stimulus packages have generally Source: Pendal as at 31 August 2020 supported consumer spending, while Real Estate (+7.6%) also did well on the general view that the worst of the impact Top 5 overweights versus S&P/ASX 300 from COvid-19 has passed. Code Name Weight Utilities (-4.8%) lagged – in some cases due to companies XRO Xero Limited 3.41% proving less defensive than expected. Lower power prices EVN Evolution Mining Limited 3.32% are also proving to be a structural headwind to the gas and electricity providers STO Santos Limited 3.23% BHP BHP Billiton Limited 3.10% Elsewhere Communication Services (-3.8%) and Consumer MTS Trading Limited 2.96% Staples (-0.3%) also lagged.

Top 5 underweights versus S&P/ASX 300 Code Name Weight WES Limited (not held) -3.13% WOW Woolworths Group Limited (not held) -2.93% RIO Limited (not held) -2.11% NAB Limited -1.97% CBA Commonwealth Bank of Australia Ltd -1.74% Source: Pendal as at 31 August 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

Since 1 month 3 month 6 month 1 year 3 Year 5 Year Inception*

Pendal Australian Shares Portfolio 3.66% 4.66% -2.83% -2.49% 6.27% 8.41% 7.62%

S&P/ASX 300 (TR) Index 3.05% 6.19% -4.14% -4.82% 6.24% 7.57% 6.19%

Active return 0.62% -1.53% 1.31% 2.34% 0.03% 0.84% 1.43%

Source: Pendal as at 31 August 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 NEC Co Ltd 0.44% TLS Telstra Corporation Limited -0.43% QAN Airways Limited 0.40% APT Limited (not held) -0.28% XRO Xero Limited 0.29% EVN Evolution Mining Limited -0.27% MND Monadelphous Group Limited 0.25% SAR Saracen Mineral Holdings Ltd -0.20% NCM Limited (not held) 0.20% ALX -0.14% Top 5 contributors – 1 year Top 5 detractors – 1 year

Value Value Code Name Code Name Added Added XRO Xero Limited 1.16% QAN Qantas Airways Limited -1.12% EVN Evolution Mining Limited 0.90% APT Afterpay Limited (not held) -0.76% JHX James Hardie Industries Plc 0.71% WES Wesfarmers Limited (not held) -0.76% CSL CSL Limited 0.64% IAG Insurance Group Australia -0.62% SVW Ltd 0.60% OSH Limited (not held) -0.50% Source: Pendal as at 31 August 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, +22.5%) Overweight Telstra (TLS, -11.4%) NEC continues to see a negative impact on its free to air The impact from Covid-19 on Telstra has been greater than television advertising revenues as companies dial down their expected, due to a combination of higher costs and a loss of advertising spend. However the company has moved swiftly to revenue from international roaming. At the same time, TLS is reduce its cost base, helping offset this effect. Parts of its digital wearing costs associated with the conversion to NBN sooner business such as Stan have seen improving trends through than the market expected. While management have been Covid. The net effect is that NEC’s outlook is much better than cautious in their outlook for the mobile phone market, trends many feared. in pricing are improving, which continues to underpin the Overweight Qantas (QAN, +22.0%) upside case for the stock. Qantas was another company which defied some of the direst Underweight Afterpay (APT, +33.4%) fears around its outlook. It continues to feel the impact of travel APT continued to be the banner stock for growth names on restrictions, but has slashed its cost base to minimise the cash the ASX helped by excitement around recent acquisitions. burn from an idled international business and severely reduced We continue to be cautious on the outlook for margins in the domestic business. At the same time, management are taking the buy now pay later sector – which we see a unsustainably high opportunity to restructure the business to permanently reduce the – as well as the likely increase in customer acquisition costs cost base. as other companies muscle into this market. Overweight Xero (XRO, +12.3%) Overweight Evolution Mining (EVN, -4.5%) Xero benefited from the broader tailwinds around growth stocks – Gold stocks took a breather in August following a strong run. however at the same time its fundamental outlook remains The gold exposure continues to perform an important role in supportive. Government support packages have meant that the portfolio – and the recent upgrade of expected production corporate insolvencies have been far lower than many feared, from EVN’s Red Lake asset in Canada leaves it best placed while at the same time new business formation rates have been fundamentally of the large cap gold miners on the ASX. good. Risks remain, but at this point these are supportive factors for XRO’s net subscriber rates. 3

Market outlook

There were a few interesting themes to take from reporting season. We saw strong performance from companies which have benefited from stimulus and which met already high expectations – such as JB Hi-Fi, James Hardie and Afterpay. However there was also some relief rallies in stocks which have been hit heavily, but where there is a sense that the worst may be over, including Nine Entertainment, Qantas, the REITs and Coca Cola Amatil. Stocks which had been held for defensive qualities – but which did not live up to this billing were sold off. Examples included Telstra, APA Group and . Companies which are facing structural challenges such as low rates (eg Bendigo Bank, Challenger) or lower power prices (eg AGL Energy) also underperformed. Few sectors saw material earnings upgrades. Miners saw the largest ones, but had already done well and tended to lag in August. The largest downgrades were in telcos – which underperformed – but other sectors such as media, gaming and materials saw downgrades, but still outperformed. Essentially, there are two widely divergent views on the broader equity market from this point. The bear case is that equity markets are overvalued and due for a prolonged correction driven by a combination of excess government debt, the ultimately deflationary effects of quantitative easing and the economic damage of risk aversion, bankruptcies and structural employment. The bull case, in contrast, is that we are at the start of a cyclical recovery where sustained expansionary policies and significant surplus capacity, combined with a wave of pent up demand – potentially super charged by the advent of a vaccine – and a lengthy period of low rates continue to boost the equity market. In this vein, it is also important to note that the Australian equity market has lagged global indices – partly driven by a smaller exposure to technology stocks – and has reached nowhere near the same degree of relative valuations. Uncertainty remains high. As well as questions over the pace of recovery, we must also contend with the run up to the US Presidential election and heightened tensions with China. We note that the key factors in supporting equity markets – abundant liquidity, low interest rates, and a better than expected pace of economic recovery, remain in place. However it is not the time to make a heroic call on the outcome. Our approach is to focus on stocks and invest where we can find limited relative downside risk, at the same time as building a balanced portfolio which has some protection against a material deterioration in conditions. Reporting season highlighted the sometimes extreme divergence we are seeing between industries and between companies driven by a combination of cyclical and structural shifts behaviour and demand. This is proving to be constructive environment for active management.

New stocks added and/or stocks sold to zero during the month

No stocks added or sold to zero during 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.