Pendal Monthly Commentary Pendal Australian Tax Effective Income Portfolio June 2020

Market commentary Portfolio overview Australian Tax Effective Portfolio The S&P/ASX 300 continued to benefit from positive Investment Dual focus: Deliver tax-effective capital & sentiment around the pace of the economic rebound and the strategy grossed-up income. degree of fiscal and monetary policy support. It gained Broad hunting ground: Core approach, +2.4% in June, to cap a very strong +16.8% return for the drawing ideas from across the market cap quarter. The index is now down -10.6% for the calendar year spectrum. to date. Income focus: Greater exposure to stocks This came despite some wobbles in late June when the with high grossed-up yield & dividend market expressed concern over a rise in US cases as sustainability. restrictions were rolled back. Investment The objective of the Model Portfolio is to objective outperform the S&P/ASX300 (TR) Index on There was strong rotation from growth and defensives to a rolling 3 year period by 3% per annum, value and cyclical stocks during the quarter as confidence while delivering a higher gross yield than around the economy improved. This rotation stalled late in the market. the period. Benchmark S&P/ASX 300 (TR) Index Economic data continued to reflect material blows inflicted Number of stocks 15-35 (30 as at 30 June 2020) by the shutdown, but in most respects it was not as bad as many expected. A rebound in activity and confidence Sector limits A-REITS 0-30%, Cash 2-10% indicators was also sharp. Real Estate (-1.5%) was the weakest sector. Rising Top 10 holdings concerns over the implications of a second wave weighed Code Name Weight on the retail malls in the latter part of June. CSL CSL Limited 8.97% The outcome for Energy was mixed. It was the third-best BHP BHP Billiton Limited 8.48% sector in the quarter (+28.4%) but the worst performer in CBA of Australia Ltd 7.38% June (-2.0%). Supply discipline form OPEC and Russia plus capacity closure in US shale helped a recovery in the oil TLS Corporation Limited 5.81% price – along with improved expectations in demand. This ANZ ANZ Banking Group Limited 4.25% has driven outperformance from the oil/LNG names over WBC Banking Corporation 3.97% several months, however sentiment was tempered in the MTS Trading Limited 3.80% final weeks of June. AMC Limited 3.68% Consumer Discretionary (+5.4%) was the best-performing NEC Co Ltd 3.59% sector in June and the second-best performing over the quarter (+30.8%). Virus suppression in Australia raised QAN Airways Limited 3.34% expectations that restrictions could be rolled back further Source: Pendal as at 30 June 2020 and faster than many expected. Top 5 overweights versus S&P/ASX 300 Recent retail sales data is signalling a strong rebound. This helped retail names such as (WES), JB Hi-Fi Code Name Weight (JBH) and (HVN). The uptick in Victorian MTS Metcash Trading Limited 3.63% cases late in June bears watching in this regard. However at TLS Telstra Corporation Limited 3.58% this point a return to broad-based nation-wide lockdowns looks unlikely. NEC Nine Entertainment Co Ltd 3.47% Consumer Staples (+4.8%) also outperformed in June. JBH JB Hi-Fi Limited 3.03% Woolworths (WOW) and Coles (COL) did relatively well in QAN Qantas Airways Limited 3.00% the back end of the month as risk aversion rose, having lagged the index for a couple of months. Top 5 underweights versus S&P/ASX 300 Health care was the worst performer over the quarter Code Name Weight (+2.3%) although it fared relatively well in June (+3.5%). Trends diverged within the sector. Some companies WES Wesfarmers Limited (not held) -3.05% benefited from Covid-related demand, while restrictions on WOW Woolworths Group Limited (not held) -2.83% elective surgeries had a negative impact on others. NCM Limited (not held) -1.53% Technology was the best-performing sector over the quarter GMG AE (not held) -1.45% (+48.7%). This was due in large part to the unrelenting WPL Limited (not held) -1.24% surge of (APT) which gained another +224%. Source: Pendal as at 30 June 2020 However the backdrop of low bond yields — and little expectation of a material increase in interest rates any time soon — is providing a tailwind to the broader growth sector.

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Performance

1 month 3 month 6 month 1 year 3 year Since inception*

Pendal Australian Tax Effective Income Portfolio 1.31% 15.01% -10.62% -6.81% 4.09% 6.93%

S&P/ASX 300 (TR) Index 2.43% 16.79% -10.55% -7.61% 5.24% 7.56%

Active return -1.13% -1.78% -0.07% 0.80% -1.15% -0.63%

Source: Pendal as at 30 June 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 JBH JB Hi-Fi Limited 0.36% QAN Qantas Airways Limited -0.37% BXB (not held) 0.10% NEC Nine Entertainment Co Ltd -0.35% VEA Viva Energy Group limited 0.10% EVN Limited -0.26% QBE QBE Insurance Group Limited 0.09% WES Wesfarmers Limited (not held) -0.24% WPL Woodside Petroleum Limited (not held) 0.09% TLS Telstra Corporation Limited -0.21%

Top 5 contributors – 1 year Top 5 detractors – 1 year

Value Value Code Name Code Name Added Added

JBH JB Hi-Fi Limited 1.11% QAN Qantas Airways Limited -0.84% CSL CSL Limited 0.90% WES Wesfarmers Limited (not held) -0.82% MTS Metcash Trading Limited 0.81% WOW Woolworths Group Limited (not held) -0.56% EVN Evolution Mining Limited 0.75% STO -0.52% FMG Limited 0.67% NEC Nine Entertainment Co Ltd -0.49%

Source: Pendal as at 30 June 2020 Underweight positions are in italics. Stock specific drivers of monthly performance relative to benchmark

Three largest contributors Three largest detractors: Overweight JB Hi-Fi (JBH, +15.9%) Overweight Qantas (QAN, -5.3%) JB Hi-Fi continued to demonstrate its relative resilience in Qantas raised capital late in the month. While some see this as the face of the economic downturn. Management indicated a sign of liquidity stress, we believe management is using a sales for the second half were 20% higher for JB Hi-Fi window to restructure the business and permanently reduce the Australia — and up +23.5% for The Good Guys — compared cost base. Our thesis — that QAN’s earnings should recover to the prior corresponding period. This more than offset drag sooner than many expect, even as the international business from JB Hi-Fi New Zealand, which was forced to shut during remains idle — remains intact. We expect cash flow will be much the pandemic. As a result, management upgraded FY20 stronger than the market is implying as capex is scaled back profit guidance from its pre-Covid level. during this period. Underweight Brambles (BXB, -6.6%) Overweight Nine Entertainment (NEC, -6.8%) International logistics company Brambles fell on increased Nine Entertainment outperformed in the quarter as sentiment trade tensions between the US and China. We do not hold improved around the pace of economic recovery. This Brambles, preferring Amcor in the defensive industrials supported expectations of a recovery in advertising budgets and space. house listings for its stake in Domain. Some of its digital Overweight Viva Energy (VEA, +10.6%) services such as Stan and 9Now have experienced Covid- related benefit. But second-wave concerns weighed in the final Viva Energy, which operates the Shell-branded petrol two weeks of June and saw NEC give up some of its gains. stations, released a trading update revealing volumes were Overweight Evolution Mining (EVN, -7.1%) recovering much faster than expected as the economy re- opens. Margins were also better than consensus estimates The improvement in sentiment early in June saw some rotation — as was the updated profit guidance. Capital return to out of defensives and stocks which had done well earlier in the shareholders from the sale of the stake in Viva Energy REIT crisis — including gold miners such as Evolution Mining. The — initially delayed by the impact of Covid-19 — now looks set sector rebounded in the latter half of the month on fears of a to resume. second wave of infections. Material risks and uncertainties in the market means Evolution continues to play an important part

in the defensive segment of the portfolio.

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Market outlook The economic rebound as restrictions roll off has generally beaten expectations. Coupled with supportive data and strong policy support, it has driven a rapid bounce in equity markets. While second-wave clusters in China and Germany appear to have been contained, cases continue to rise in the US. This is not causing economic issues at this point. However there are fears we will see a re-run of March/April, with cases leading to stress on hospitals and ICUs and a surge in mortality. This would likely be a material set- back for market sentiment and confidence. As China and Germany have demonstrated, a replay of April — in terms of case-loads, hospitalisations and mortality — is not a foregone conclusion. Today’s situation is different in several important ways: 1. The outbreaks are in areas less densely populated than New York 2. The age profile of new cases is an average of 20 years younger 3. There is substantially more testing. This may mean numbers look worse, but problems are being identified earlier than in April 4. There is more physical distancing and use of face masks (despite well-publicised incidents to the contrary). 5. Knowledge of how to treat the virus is far better. Previous treatment had focused on the lungs, which are now believed to be more symptomatic in nature. Treatment is now focused more on anti-inflammatories, with better outcomes as a result.

If the US is able to successfully deal with this wave without reimposing broad-based restriction or a severe spike in mortality, it should bolster market confidence. Nevertheless, this issue comes with material risk for sentiment and potential consequences for markets in the near term. While we remain watchful on this issue, we do not expect recent weakness to morph into a second sharp drop in markets. Key points: 1. We believe sufficient measures are underway to avoid the resurgence in US cases from triggering material new shutdowns, which would cause a big hit to confidence. However this remains a key risk. 2. The Victorian outbreak should be containable. While delaying borders re-opening it does not represent a significant deterioration in the economic outlook 3. The current case rise will likely cement the need for more policy stimulus in US and Australia 4. Economic momentum is still positive 5. Significant liquidity remains on the sidelines in cash, which can support equity markets

We do expect the current period of consolidation to continue. The rate of improvement in economic data is likely to slow down; the market’s short-term positioning remains bullish; and policy news flow is in a lull to the end of July. At this point it appears the worst-case scenario has been avoided and Australia has been reasonably successful in suppressing Covid-19, paving the way to a resumption in domestic economic activity. However there will be divergence among industries in the degree to which they recover. Some will only partially recover, while others may get back to previous capacity — or better — in relatively quick time. The uncertainty here — and the mis-pricing that results — coupled with the divergence in responses to the crisis at a company level, is driving material opportunity for active management.

New stocks added and/or stocks sold to zero during the month Buy a new position in QBE Insurance (QBE). We have added QBE Insurance to the portfolio. QBE is a global general insurer offering a broad range of commercial lines in Australia, the Americas, UK, Europe and Asia. QBE has underperformed the market by a considerable margin over the past three months. It is trading at a historically low valuation relative to the ASX 300 industrials, due to what we see as overstated concerns on Covid-19. QBE will experience some one-off claims on trade credit, lenders mortgage insurance and workers compensation, but it is not exposed to more problematic lines such as event cancellation and contingency. There is global fear about the potential for insurers to be held liable for lost profits on business interruption. But policies for most insurers, including QBE, require physical damage. For the most part there are also pandemic exclusions.

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One reason for QBE’s underperformance has been the threat from some US states to overturn contractual exclusions and enforce retrospective cover. However the industry is pushing back, highlighting the significant ramifications. This has prompted some States to retract these proposals. Ultimately, this seems like a risk more suited to a government scheme, as already exists in the US for terror, flood, Florida wind and Californian earthquakes. We remain mindful of this issue, but at this point we think the market is over- pricing the risk. QBE has positioned itself for a disruptive episode, having raised capital and de-risked investments. Looking beyond short-term one-offs, underlying performance is likely to improve given a further acceleration in pricing of insurance premiums. As a result of all this, we see QBE as mispriced on current concerns and a good opportunity to add at a very attractive price.

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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 Tax Effective 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.