Pendal Monthly Commentary Pendal Australian Shares Portfolio November 2019

Market commentary Portfolio overview Australian Shares Portfolio Australian equities made solid gains in November, with the Investment The strategy employs a bottom up, S&P/ASX 300 Accumulation index ending up +3.2%. strategy fundamental approach to build a diversified portfolio of Australian shares where the The market’s gains were relatively broad-based, with every majority of active risk and outperformance sector bar Financials and Utilities ending the month ahead. is driven by stock selection. Banks weighed on the financial sector, with Commonwealth Investment The objective of the Model Portfolio is to Bank (CBA, +2.7%) the only one of the Big Four to make gains. objective outperform the S&P/ASX 300 (TR) Index on a rolling 3 year period by 3% per annum. (WBC) dropped -10.5% over the month, as civil Benchmark S&P/ASX 300 (TR) Index proceedings were brought by AUSTRAC. The regulator Number of stocks 15-35 (31 as at 30 November 2019) accused the bank of a raft of failures in oversight and reporting on international fund transfers under obligations to anti-money Sector limits A-REITS 0-30% laundering and counter-terrorism financing laws. It appears Cash 2-10% likely there will be material financial implications in the form of a Income target No target fine, potential capital charge, and the need to invest in system improvements. The bank has taken a decisive step with the Top 10 holdings removal of the CEO and acceleration of the Chairman’s Code Name Weight retirement. CSL CSL Limited 9.14% Health Care (+9.6%) and Information Technology (+11.1%) BHP BHP Billiton Limited 7.14% were the two best-performing sectors. Health Care was the biggest contributor to the headline index's gain as CSL (CSL, CBA of Australia Ltd 5.72% +10.72%) — currently the second largest stock in the index — TLS Corporation Limited 5.63% continued its strong run. QAN Airways Limited 5.01% Most technology companies did well. The largest by index STO 4.76% weight, (CPU), was up +11.9%. (XRO), ANZ ANZ Banking Group Limited 4.69% the next biggest, was up 17.81%. WBC Westpac Banking Corporation 4.28% Elsewhere James Hardie (JHX, +17.0%) was the standout from Materials (+5.5%) after delivering a strong half-year result. Profit MQG Limited 3.44% was up 17% and there was an upgraded outlook for the full AMC Limited 3.32% financial year. Source: Pendal as at 30 November 2019

Caltex Australia (CTX, +26.7%) helped lift the Energy sector (+7.5%). The company upgraded earnings for the half year, an Top 5 overweights versus S&P/ASX 300 early call which suggests a high degree of management Code Name Weight confidence given the volatility in petrol prices. It also announced QAN Qantas Airways Limited 4.43% plans to spin out a REIT. Subsequently, it transpired that the world’s biggest petrol retailer, Canada’s Alimentation Couche- STO Santos Limited 3.99% Tard, had made a takeover off in October. TLS Telstra Corporation Limited 3.18% MTS Trading Limited 2.63% NEC Co Ltd 2.58%

Top 5 underweights versus S&P/ASX 300 Code Name Weight WOW Woolworths Group Limited (not held) -2.78% WES Limited (not held) -2.56% NAB Limited -2.05% RIO Limited (not held) -1.91% CBA Commonwealth Bank of Australia Ltd -1.85% Source: Pendal as at 30 November 2019

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Performance

Since 1 month 3 month 6 month 1 year 2 Year 3 Year Inception*

Pendal Australian Shares Portfolio 4.39% 6.45% 9.34% 25.55% 11.46% 13.51% 11.12%

S&P/ASX 300 (TR) Index 3.18% 4.75% 9.25% 26.04% 11.69% 12.67% 9.59%

Active return 1.21% 1.70% 0.09% -0.49% -0.23% 0.84% 1.53%

Source: Pendal as at 30 November 2019 *Since Inception – 15 June 2015 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

QAN Qantas Airways Limited 0.44% NEC Nine Entertainment Co Ltd -0.21% JHX Plc 0.28% ALX -0.18% XRO Xero Limited 0.27% EVN Limited -0.13% NAB National Australia Bank Limited 0.23% STO Santos Limited -0.13% TLS Telstra Corporation Limited 0.22% A2M Ltd (not held) -0.09% Top 5 contributors – 1 year Top 5 detractors – 1 year

Value Value Code Name Code Name Added Added

XRO Xero Limited 0.98% VUK Virgin Money UK Plc (not held) -0.95% CSL CSL Limited 0.90% ANZ ANZ Banking Group Limited -0.61% STO Santos Limited 0.89% WHC Whitehaven Coal Limited -0.61% JHX James Hardie Industries Plc 0.72% FLT Limited (not held) -0.49% ALL Limited 0.38% S32 Limited (not held) -0.47% Source: Pendal as at 30 November 2019 Underweight positions are in italics. Stock specific drivers of monthly performance relative to benchmark Three largest contributors Three largest detractors Overweight Qantas (QAN, +13.9%) Overweight Nine Entertainment (NEC, -4.08%) QAN announced new long-term margin targets at its investor day, NEC fell over the month, after management downgraded the aiming to lift the domestic margin from 12% to 18% in 2024. This outlook for FY20 at the AGM as TV advertising revenue would be considered a stretch by many. However these targets remained weaker-than-expected. While the TV market is are consistent with margins in other markets with a stable currently softer than most expected, the merger with Fairfax industry structure. Even if these targets are not achieved, there is Media last year does leave NEC less exposed to this issue than a sense that efforts to do so will still lead to material margin was previously the case. Meanwhile, other parts of the improvement. business continue to track well. Overweight James Hardie (JHX, +16.99%) Overweight Atlas Arteria (ALX, -3.23%) JHX delivered a strong half-year result. Profit was up 17% and ALX has been weak as French industrial action and adverse there was an upgraded outlook for the full financial year. While weather have had a distortive effect on traffic, leading to a the outlook for the Australian housing market remained muted, softer period compared to the previous year. Late in the month management expected to continue winning more share. At the it announced a capital raising to buy out Macquarie Group’s same time JHX continues to benefit from modest growth in the stake in the ADELAC asset. This cleans up the management US housing market. structure and opens the way to better capital return for shareholders. Overweight Xero (XRO, +17.81%) Overweight Evolution Mining (EVN, -5.33%) Xero (XRO, +17.8%) was amongst the best performers in technology, after delivering a well-received result. XRO now An improvement in risk sentiment did weigh on the gold mining boasts 2.06m subscribers, after 478,000 new additions over the stocks, including the portfolio’s position in EVN. This detraction year. Highlights included an additional 73,000 new subscribers in was offset to a partial extent by the underweight in Newcrest the UK in 1H FY20, which suggests XRO’s strategy of focusing Mining (NCM). on the one-off opportunity afforded by a shift to mandatory online tax for businesses is playing out.

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Market outlook

• The portfolio delivered a strong month both in absolute terms and relative to the index. Recent outperformance has been driven by a combination of different kinds of stocks. There has been strong gains in some of the portfolio's industrial cyclicals such as Qantas (QAN) and James Hardie (JHX), as the market has gained confidence in the longer term outlook despite some concerns around near-term demand. Telstra (TLS), a relatively defensive yield stock, has also done well. At the same time, some of the growth names have also done well, notably CSL (CSL) and Xero (XRO).

• The performance of the growth stocks in the portfolio has been particularly interesting. As an investment style growth has outperformed value globally by a significant margin over the last few years, driven by a regime of falling interest rates and abundant liquidity. It has done particularly well for much of the last year, as expectations around the outlook for rate cuts in the US have shifted.

• However there has been something of a rotation away from growth stocks to value at a global level in the last couple of months. This can be tied to bond yields retreating from their lows of mid-August when the outlook for global economic growth hit something of a nadir. However in Australia this rotation has not been as apparent. Performance has been mixed among growth stocks, with CSL and XRO in particular continuing the recent run of performance.

• The thematic effect of the bifurcation between growth and value has been as strong as anything we have seen for many years and has been a challenge for active managers. Growth style investors have generally done well. But the risk here is that it’s difficult to consistently time the rotation between thematic tailwinds. Value-based investors have generally had a difficult period for an extended time. • For us, this emphasises the importance of a core, or style-neutral, approach. Given the strength of the recent growth tailwinds it has been a challenge at times in the last 12 months to immunise the portfolio against the thematic risks and allow stock specific risk to dominate. However the strength coming through in some of the more cyclical stocks in recent months demonstrates that we have been able to build and maintain these positions, while also gaining exposure to the growth thematic via the careful selection of individual growth names.

New stocks added and/or stocks sold to zero during the month Buy new position in Oil Search (OSH) Oil Search (OSH) is an oil and gas exploration and development company established in in 1929. It has several assets and exploration licences, most in PNG, with a stake in the PNG LNG Project being its most significant. The price of LNG is indexed to oil, rendering OSH one of the few ways to gain oil exposure on the ASX. Given our more constructive view on oil prices — and OSH’s higher leverage to that trend — we are diversifying our existing oil position with the addition of OSH. The oil price has been volatile in recent months, driven largely by concerns over the state of global economic growth, which is linked in turn to issues such as US-China trade. There have also been supply-side concerns such as the drone attack on the Abqaiq and Khurais oil processing installations in Saudi Arabia. As we stand today, we believe the risks in oil are tilted to the upside. The outlook for trade is far from certain, however indications that the US and China are nearing agreement on “Phase 1” of a trade deal — and the motivation that both have to conclude a deal in order to focus on domestic issues — should help underpin sentiment on global growth. On the supply side there have been signs recently that US shale production will slow in response to weaker oil prices in the last 12 months. A material deceleration in global growth remains a risk to oil prices, however at this point we believe that the efforts of policy makers to underpin growth, coupled with an improvement in sentiment on trade, help mitigate this issue. We have an existing exposure to oil via the position in Santos (STO). OSH has underperformed STO by a considerable margin over the last 12 months, as a change in PNG’s government raised political risk around the terms for the Papua LNG project. After a period of wrangling and negotiation, the agreement has recently been ratified. Political risk remains — particularly around the timing on approval to push forward on a third LNG production train at the PNG LNG project — but for now it has fallen. OSH has rebounded from its lows on this news, but still trades at attractive long term value. The oil price implied in its valuation is US$58 per barrel versus US$60 for STO.

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This monthly commentary has been prepared by Pendal Institutional Limited ABN 17 126 390 627, AFSL 316455 (Pendal) for the exclusive use of advisers. 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.