Pendal Monthly Commentary Pendal Australian Shares Portfolio December 2020

Market commentary Portfolio overview The S&P/ASX 200 rose +1.2% in December, taking the year Australian Shares Portfolio to a +1.4% return. Investment The strategy employs a bottom up, strategy fundamental approach to build a diversified Covid cases continued to rise in the northern hemisphere, portfolio of Australian shares where the prompting further lockdowns. In the US, this has seen job majority of active risk and outperformance growth stall, although strong industrial production is likely to is driven by stock selection. have driven decent GDP growth. There is increasing evidence of pressure on health care systems both there and Investment The objective of the Model Portfolio is to in Europe. objective outperform the S&P/ASX 300 (TR) Index on a rolling 3 year period by 3% per annum. We experienced an outbreak in at the end of Benchmark S&P/ASX 300 (TR) Index December, leading to border closures and local lockdowns. Number of stocks 15-35 (33 as at 31 December 2020) Nevertheless, a combination of optimism over vaccines and Sector limits A-REITS 0-30% the extraordinary degree of monetary and fiscal policy Cash 2-10% support was enough to support the local equity market. Dividend Yield 3.42%# Broader economic and sentiment data is also supportive. Income target No target Retail sales momentum remains good, while the unemployment rate fell from 7% to 6.8% — better than Top 10 holdings consensus expectations. Consumer and business confidence indicators remain strong. Code Name Weight BHP BHP Billiton Limited 10.01% Value style has continued to do well in , helped by strong returns from the miners, which led the 8.8% gain in CSL CSL Limited 8.24% Materials (+8.8%). CBA of Australia Ltd 5.64% Commodity prices rose on a combination of expected TLS Corporation Limited 4.90% normalisation of growth and continued Covid-related impact XRO Limited 4.65% on supply in some markets. A weaker USD is also supportive ANZ ANZ Banking Group Limited 4.45% for commodity prices. WBC Banking Corporation 4.42% That said, this has not been accompanied by a broad-based sell-off in growth-style stocks. JHX Plc 3.67% STO 3.29% The Health Care (-4.7%) sector did drop off, but Technology (+9.5%) was the strongest sector, propelled by a 24.2% gain NEC Co Ltd 3.26% in (APT) as it joined the ASX20. Source: Pendal as at 31 December 2020

Value outperformed growth in the Australian market by a Top 5 overweights versus S&P/ASX 300 wide margin in 4Q, but the valuation differential between the two remains at historical levels. Code Name Weight XRO Xero Limited 3.75% Defensives such as Utilities (-5.4%) underperformed. BHP BHP Billiton Limited 3.45%

NEC Nine Entertainment Co Ltd 3.08% MTS Trading Limited 3.05% TLS Telstra Corporation Limited 3.04%

Top 5 underweights versus S&P/ASX 300 Code Name Weight WES Limited (not held) -3.00% WOW Woolworths Group Limited (not held) -2.61% NAB Limited -2.36% RIO Limited (not held) -2.22% CBA Commonwealth Bank of Australia Ltd -2.01% Source: Pendal as at 31 December 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 5 year Since inception*

Pendal Australian Shares Portfolio 1.49% 15.74% 16.34% 4.89% 7.51% 9.54% 9.46%

S&P/ASX 300 (TR) Index 1.32% 13.79% 13.73% 1.73% 6.86% 8.83% 7.58%

Active return 0.17% 1.95% 2.62% 3.16% 0.65% 0.71% 1.87%

Source: Pendal as at 31 December 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 MTS Metcash Trading Limited 0.43% QAN Airways Limited -0.34% XRO Xero Limited 0.32% APT Afterpay Limited (not held) -0.27% BHP BHP Billiton Limited 0.29% QBE QBE Insurance Group Limited -0.24% FMG Limited 0.13% RIO Rio Tinto Limited (not held) -0.22% COH Cochlear Limited (not held) 0.12% JHX James Hardie Industries Plc -0.13%

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

Value Value Code Name Code Name Added Added XRO Xero Limited 1.86% QAN Qantas Airways Limited -1.55% MTS Metcash Trading Limited 1.13% APT Afterpay Limited (not held) -1.07% EVN Limited 0.88% STO Santos Limited -0.94% NEC Nine Entertainment Co Ltd 0.84% WES Wesfarmers Limited (not held) -0.63% JHX James Hardie Industries Plc 0.70% IAG Insurance Group Australia -0.63% Source: Pendal as at 31 December 2020 Underweight positions are in italics.

Stock-specific drivers of monthly performance relative to benchmark Three largest contributors Three largest detractors Overweight Metcash (MTS, +17.2%) Overweight Qantas (QAN, -9.9%) MTS delivered a well-received half-yearly result. IGA The Sydney Covid outbreak in mid-December saw domestic travel continues to do well, with stronger sales growth than its restrictions and state border closures return, delaying expectations larger competitors. However the bigger surprise was on for the return of domestic travel. There was also some profit-taking the hardware side, where recent acquisitions are doing following QAN’s recent strong run. The medium-term story remains much better than expected. intact in our view. QAN is well positioned in terms of capital and Overweight Xero (XRO, +10.8%) liquidity to endure this delay, while its strategic response to Covid Our preferred tech growth name XRO continued to do well should see it return in a more cost-effective form. in the wake of its earlier result, confirming that underlying Underweight Afterpay (APT, +24.2%) trends remain supportive and government policy has APT’s inclusion in the ASX 20 saw it surge yet again. While the reduced the risk of widespread business closures. Data company has a strong product and continues to execute well, we see suggests Covid has prompted a surge in cloud-based better risk/reward elsewhere in the sector — notably in XRO. Part of accounting subscriptions even in relatively mature this stems from our view that the material competitive risks — and markets such as Australia and NZ. likely increase in sales and marketing costs associated with this — Overweight BHP (BHP, +11.45%) are not reflected in current valuations. The iron ore price rose 20.4% in December. While Overweight QBE Insurance (QBE, -14.7%) stimulus-driven Chinese steel production drove the iron QBE issued a disappointing downgrade, driven in part for greater ore price in 2020, expectation of normalised demand in capital provisions against claims related to the pandemic and the rest of the world has added another leg to this trend. lockdowns. We believe management, led by an interim CEO, have BHP remains well positioned given its exposure here — as been conservative in their stance and there is scope for some of well as to gains in the copper price and potentially an these reserves to be returned. This may take a year or two to play improvement in oil as airline demand returns. out. In the interim, QBE is best positioned among the Australian insurers given its greater scope to offset headwinds via premium increases. As such, we continue to see attractive value in the position.

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Market outlook The portfolio outperformed the index in December, the quarter and the calendar year. The rate of Covid infection continues to deteriorate in the northern hemisphere, leading to lockdowns. Jobs have stalled well below pre-Covid levels in the US as the restrictions hit sectors such as leisure and hospitality. Healthcare systems are under pressure in several countries and regions. A Covid outbreak in NSW prompted localised restrictions and state border closures. Nevertheless, the market remains relatively positive, driven by the twin beacons of vaccines and policy support. Vaccination programs are ramping up at differing rates across many countries. This is giving hope of rolled-back restrictions and demand growth. This is encouraging, but remains a key risk to watch. Any disappointment here could hit markets and the recovery sectors that have recently run hard. Policy remains a key bulwark of market support. Victory in the Georgia run-off hands Democrats control of the Senate — and Congress. This means more fiscal stimulus against the backdrop of already extremely accommodative monetary policy. The current policy settings are extraordinary. In short, we could see stimulus worth near 9 per cent of US annual GDP channelled into the first quarters of 2021. Even if only a fraction gets spent in that period, it means growth and earnings are likely to be a lot higher than consensus expectations. We don’t believe the Georgia win leads to legislation of some of the more radical Democrat policies, given their majority remains thin in both Houses. Market concerns centre on the potential for tax increases. Corporate tax rates are likely to increase, but from 21% to something in the vicinity of 23-25%, rather than the 28% pledged by Biden on the campaign trail. It is important to remember the importance of the Fed’s conceptual shift from expected to actual inflation targeting and its stated desire to see inflation run above 2% for a sustained period. This is likely to require unemployment to drop below 3%, which will take time. To give context to this shift, the Fed indicated that under the current policy framework the rise in rates post-GFC would have been delayed around 2¾ years. The combination of this fiscal stimulus and Fed accommodation means the US economy could grow above 6% through 2021, driving earnings upgrades and supporting valuation. Markets have run hard and a period of consolidation may be in order. The roll-out of vaccinations presents a potential risk of disappointment and must be watched. Nevertheless, we continue to see considerable support on the policy side. We maintain the portfolio’s balanced construction, positioning for performance in a range of scenarios. However in recent times we have been adding to some of the more cyclical exposures as the scale of policy support has looked likely to increase.

New stocks added and/or stocks sold to zero during the month Sell (TCL) to zero. We adjusted the portfolio’s exposure to the rate-sensitive infrastructure sector via the sale of Transurban (TCL). We added TCL to the portfolio in late Q3 2019 as the stock sold off on a capital raising to fund the acquisition of a controlling stake in Sydney’s Westconnex. Through 2020 we maintained the exposure. While its toll roads experienced significant disruption as a result of travel restrictions, TCL’s asset values were supported by falling interest rates and bond yields. It was also leveraged to the roll- back of domestic restrictions as Australia brought Covid under control. The stock has been a positive contributor to relative performance since we added it to the portfolio. But we have seen its valuation become increasingly full — especially compared to the portfolio’s other infrastructure exposure in (ALX). As it stands, we believe the recovery in Australian traffic volumes in now priced in. In addition TCL is likely to require additional capital to fund the next phase of Westconnex, which may present a near-term drag. In contrast, we see more attractive valuation upside in Atlas Arteria, which has been affected by the latest Covid wave in the northern hemisphere. Volumes have fallen — but only by about half the extent of the first lockdown. Infrastructure stimulus is likely to lead to extended investment opportunities from the French government. ALX is therefore our preferred exposure in this space.

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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.