Pendal Monthly Commentary Pendal Australian Shares Portfolio April 2021 Market commentary Portfolio overview The S&P/ASX 300 gained 3.7% in April. Overall equities Australian Shares Portfolio gains remained solid, but there was a reversal in trend of Investment The strategy employs a bottom up, previous months as growth stocks tended to outperform. strategy fundamental approach to build a diversified portfolio of Australian shares where the This is likely linked to falling bond yields. Central banks majority of active risk and outperformance successfully jawboned the market away from the view that the is driven by stock selection. strong growth pulse would see tapering and rate hikes ahead Investment The objective of the Model Portfolio is to of schedule. objective outperform the S&P/ASX 300 (TR) Index on a rolling 3 year period by 3% per annum. The economic recovery in the US is huge, fuelled by stimulus, Benchmark S&P/ASX 300 (TR) Index re-opening, pent-up demand and the fact that the most recent surge in Covid cases did not lead to major stress on health Number of stocks 15-35 (32 as at 30 April 2021) systems. Sector limits A-REITS 0-30% Cash 2-10% Earnings upgrades in the US reporting season have been # strong. Dividend Yield 3.73% Income target No target This growth is feeding inflationary expectations, reflected at the moment in the prices of commodities. As a result we expect yields will continue to climb higher in coming months. Top 10 holdings This is likely to see rotation away from growth and back to Code Name Weight value and cyclicals. BHP BHP Billiton Limited 10.63% Technology (+9.8%) was the best-performing sector for the CSL CSL Limited 6.80% month. There were strong gains for the WAAAX stocks. WBC Westpac Banking Corporation 6.46% ANZ ANZ Banking Group Limited 5.70% Materials (+7.5%) also outperformed. A strong iron ore price CBA Commonwealth Bank of Australia Ltd 5.56% helped BHP, Rio Tinto and Fortescue. TLS Telstra Corporation Limited 5.07% Gold also bucked the recent trend as defensives gained favour, with solid gains for Newcrest and Northern Star. XRO Xero Limited 4.58% QAN Qantas Airways Limited 3.79% Energy (-4.7%) was the weakest sector despite a steady oil JHX James Hardie Industries Plc 3.75% price. NEC Nine Entertainment Co Ltd 3.46% The deteriorating situation in India played a role here. The Source: Pendal as at 30 April 2021 global recovery may be more spread out with the divergence in health situations in different parts of the world. Top 5 overweights versus S&P/ASX 300 Consumer Staples (-2.4%) also underperformed. Code Name Weight BHP BHP Billiton Limited 3.75% Supermarkets are starting to cycle the strong sales numbers from 2020. This is a broader trend for retail. We are starting to XRO Xero Limited 3.75% see some distinction between companies managing this QAN Qantas Airways Limited 3.34% decline in sales growth well and those facing more NEC Nine Entertainment Co Ltd 3.25% challenges. TLS Telstra Corporation Limited 3.10% Top 5 underweights versus S&P/ASX 300 Code Name Weight WES Wesfarmers Limited (not held) -3.00% NAB National Australia Bank Limited -2.64% WOW Woolworths Group Limited (not held) -2.43% RIO Rio Tinto Limited (not held) -2.20% CBA Commonwealth Bank of Australia Ltd -2.17% Source: Pendal as at 30 April 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 ndividual 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 rice 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 1 month 3 month 6 month 1 year 3 year 5 year Since inception* Pendal Australian Shares Portfolio 3.88% 10.85% 24.50% 35.79% 10.28% 12.44% 10.67% S&P/ASX 300 (TR) Index 3.70% 7.64% 20.62% 31.58% 9.69% 10.39% 8.55% Active return 0.18% 3.21% 3.88% 4.21% 0.59% 2.05% 2.12% Source: Pendal as at 30 April 2021 *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 Code Name Value added Code Name Value added XRO Xero Limited 0.28% QAN Qantas Airways Limited -0.23% MND Monadelphous Group Limited 0.20% MTS Metcash Trading Limited -0.23% WOW Woolworths Group Limited (not held) 0.20% STO Santos Limited -0.15% VEA Viva Energy Group limited 0.16% APT Afterpay Limited (not held) -0.15% EVN Evolution Mining Limited 0.13% JBH JB Hi-Fi Limited -0.14% Top 5 contributors – 1 year Top 5 detractors – 1 year Code Name Value added Code Name Value added NEC Nine Entertainment Co Ltd 1.85% EVN Evolution Mining Limited -1.25% XRO Xero Limited 1.43% APT Afterpay Limited (not held) -1.10% JHX James Hardie Industries Plc 1.33% ALX Atlas Arteria -0.96% A2M The A2 Milk Company Limited (not held) 0.81% CSL CSL Limited -0.77% WOW Woolworths Group Limited (not held) 0.55% NAB National Australia Bank Limited -0.71% Source: Pendal as at 30 April 2021 Underweight positions are in italics. Stock specific drivers of monthly performance relative to benchmark Three largest contributors Three largest detractors Overweight Xero (XRO, +11.9%) Overweight QANTAS (QAN, -2.8%) XRO is among our preferred technology growth names. Its Rapid deterioration in India’s Covid situation has weighed visibility on earnings and competitive positioning gives valuation on travel stocks including Qantas. QAN delivered a positive support in our view. Xero benefited from the growth rotation in update mid-month. But the market focused on the variation April. On the company front recent acquisitions in Europe should in Covid situations across the world which means help with its push onto the Continent. Its development of a international travel may take longer to ramp up. broader SME platform beyond the accounting function offers an Nevertheless the domestic outlook remains good, additional avenue of growth. particularly given QAN’s stronger competitive position. Overweight Monadelphous (MND, +22.6%) Overweight Metcash (MTS, -3.5%) MND surged after reaching an out-of-court settlement with Rio Comments from COL that they are seeing supportive trends Tinto over liability for the Cape Lambert fire. This had been an in a return to CBD and major centre shopping weighed on overhang since Rio launched legal actions against MND in MTS, which has benefited from the trend to local shopping August last year. The settlement is confidential, but at IGAs. We are yet to see conclusive data. We think recent management have said the amount is covered by insurance. investment in shopping formats and price mean MTS will be able to hang on to some of its gains. The revamped Underweight Woolworths (WOW, -3.8%) hardware strategy also offers an avenue of growth. WOW released a trading update that was better than the market Overweight Santos (STO, -1.7%) expected. But it still illustrated the base effect of cycling very strong sales this time last year. Coles also released an update STO issued a supportive production update which that suggested shopping trends that hurt COL disproportionately emphasised the work management has done to offset were reversing. This remains to be seen, but it was enough to macro challenges. Nevertheless the energy sector lagged close some of the valuation discount between COL and WOW. the market in April as the deteriorating situation in India and other emerging markets raised doubt about global demand. 3 Market outlook The portfolio was able to deal with the sudden rotation in market drivers reasonably well. Some of re-opening stocks that helped drive recent outperformance — such as Qantas (QAN), JB Hi-Fi (JBH) and Nine (NEC) — finished behind the index in April. But this was offset by growth exposures such as Xero (XRO) and Domain (DHG) and exposure to gold miners. We have entered something of a consolidation phase in recent weeks. This is not surprising given the market’s strong run. But we still see plenty of support for equity markets looking forward. The surge in stimulus is feeding through to very strong economic data in the US and substantial earnings revisions. There is a narrative of “peak growth”, which may be a contributing factor in the market’s recent pause for breathe. But we see a strong economic pulse extending for some time yet, given the scale of investment in areas such as renewable energy and re-shoring supply chains. Growth rates will necessarily slow from current levels but we think they will remain elevated. This is driving strength in earnings which is reducing valuation ratios. Price/earnings ratios for the US and Australia remain towards the top end of historical ranges, but are less extended than a few months ago. We are mindful that interest rates are far lower now (and likely to remain so) than in past episodes of high-aggregate valuations.