Keystone Positive Change Investment Trust : Interim Financial Report to 31 March 2023

Interim Management Report

Over the past six months, the Company's NAV total return was 14.6%, and the share price total return was 9.7%. In comparison, the benchmark MSCI All Country World Index returned 6.6% (in sterling terms). Our focus, however, continues to be on the long term, and we believe a period of five years is the appropriate time horizon over which to judge our performance.

Focusing on Picking Winners

While rising interest rates and an end to the boom period might cause angst for some investors, we believe it is becoming a better time to be stock pickers. When capital is plentiful, the advantages that usually belong to well-run businesses are eroded because even weaker companies can stay in the game by raising cheap capital and pursuing unsustainable growth strategies. However, as capital becomes constrained, competitive advantages become more important. Investors are less willing to finance businesses that grow users, production, or other metrics but have little prospect of turning a profit over a reasonable time horizon. For weaker companies, the only way to survive is to cut costs, downsize, and abandon their growth-at-all-cost strategy. Their market share will be picked up by companies with the right business model and strong competitive advantages.

Our investment philosophy focuses on companies with attractive long-term growth prospects, strong competitive advantages, and whose products and services are helping to create a more prosperous and sustainable world. Our high-conviction approach means we seek to pick out winners rather than just gaining exposure to particular sectors or themes. In an era of constrained capital, we believe this approach will be advantageous and that the Company's holdings should benefit accordingly.

MercadoLibre - Latin America's largest ecommerce platform - is a good example. We reviewed the investment case in 2022 and were impressed by the company's competitive advantage, underpinned by its investments in logistics and payment, and its expansion into financial services. We added to the Company's holding in MercadoLibre on the back of this research. Since then, as capital became more constrained, competitors started to pull back. For instance, Shopee (owned by Singapore-based SEA Ltd), which had expanded aggressively by offering generous discounts and incentives, pulled out of four Latin American countries and increased pricing in Brazil. MercadoLibre was able to take advantage of a more rational competitive environment to gain market share. In 2022, its revenues grew by 49%, and operating profits more than doubled. MercadoLibre was the top contributor to performance over the past six months.

A similar dynamic could develop in the electric vehicle (EV) market. Over the past few years, EV start-ups raised billions of dollars to fund production expansion, even if each car they made was sold at a significant loss. However, as access to funding started to dry up, many EV companies had to

lay off workers and cut back their growth plans.

A wave of consolidation is likely in the coming years. We believe your portfolio holding Tesla will benefit in this environment. After attending the company's Investor Day in March, we reviewed the Tesla investment case. We found that Tesla has managed to consistently reduce its production costs due to its vertical integration and emphasis on manufacturing efficiency. This cost advantage underpins Tesla's industry-leading margin. Thus far, Tesla is one of the few profitable EV companies. During a period when investors focus on profit, Tesla should benefit.

The emphasis on competitive advantage has been a consistent part of our investment philosophy. This does not preclude us from investing in earlier- stage businesses. In those instances, we remain focused on picking out likely future winners rather than simply gaining exposure to exciting trends. Strong management teams, technological advantages, or superior and hard-to-replicate business models are a must. Of course, investing in earlier-stage companies carries greater risks, which we manage at a portfolio level by having a range of companies at different stages of maturity. However, as competitive advantages become more important and valuation of earlier-stage companies returns to a more palatable level, we believe the risk-reward balance is becoming more favourable to our approach. We remain alert to both private company and small-cap investment opportunities.

Portfolio Update

Over the past six months, we made three new investments: Remitly, Autodesk, and HDFC. Remitly is a leader in providing mobile-based remittance services for migrant workers. According to the World Bank, annual global remittance flow to low- and middle-income countries exceeds $600 billion. In the past, customers had to visit agents working for companies such as Western Union or Moneygram to send money. Layers of middlemen take a cut in the process, and the average cost of sending remittances through the offline channel is around 7%. Remitly offers an alternative where customers can send remittances via the Remitly mobile app. Money can be sent directly to receivers' bank accounts and mobile wallets or picked up in person. Mobile remittance is much cheaper - Remitly's average take rate is 2% - and faster, providing the senders with greater peace of mind. The UN Sustainable Development Goal has set the target of reducing the costs of remittance to below 3% by 2030. We first looked at Remitly more than a year ago and have since met the management team numerous times. We have also spoken with a former employee, competitors, and industry experts as part of our research process. We have been impressed by the management team and execution.

In the long term, scale and partnerships should reinforce Remitly's advantage. The valuation had come back significantly, from a market capitalisation of $7 billion when we first looked at the company to $2 billion at the time of investment. Even factoring in a slowdown in growth as the company scales, the investment return should be attractive.

Autodesk is well-known for its design software for the Architecture, Engineering, and Construction (AEC) market. Construction is one of the least digitalised industries, which results in delayed projects and wasted materials. Autodesk is looking to change this. For example, Autodesk Construction Cloud helps to optimise workflow for project owners and contractors, leading to increased efficiency and reduced waste. For design software, the company is using artificial intelligence to improve performance. Architects can use its services to identify materials that have lowered embodied carbon or to run advanced simulations to design more energy- efficient buildings. Autodesk's entrenched position in design software provides competitive advantage, which we believe will help the company expand

to adjacent markets such as construction and manufacturing. We have long admired this high- quality business, but the valuation was demanding. Its share price declined in 2022 as part of the sell-off of growth stocks, and we used the opportunity to take a holding.

HDFC is an Indian financial services business focused on providing home financing. It is a well-run business with an excellent long-term underwriting track record. We have owned HDFC in the open- ended Positive Change Fund for many years and were able to take a holding after completion of a protracted process required to hold Indian securities.

During the period, we made material additions to Shopify and Nu Holdings. Shopify provides various services, including digital storefronts, payment, and fulfilment, that help merchants sell online. Its share price has returned to the pre-pandemic level despite revenues more than tripling over the past three years. The steep share price decline in 2022

prompted several reviews, including surveying merchants and analysing the fulfilment opportunity. The findings supported the investment case - merchants remained highly satisfied with Shopify, and there were no clear alternatives. While the pandemic might have pulled forward some demand in the short term, we remain convinced that ecommerce penetration will continue to rise over the long term.

Nu Holdings is Latin America's leading digital bank, with over 60 million active customers. The company is helping to widen access to financial services in a region where incumbent banks have historically under-served a large part of society. We participated in Nu Holdings' IPO in December 2021, and the company has been performing well since then.

In 2022, active customers increased by 49%,

and revenues increased by 182%. The company is well-capitalised, with deposits significantly higher than its loan book. We added to the Company's holding on the back of strong fundamental progress.

Two holdings left the portfolio over the past six months. Abiomed, one of the largest contributors to performance over the period, was acquired by Johnson & Johnson in December 2022. We also sold Berkeley Lights, a maker of single-cell sequencing equipment. While the company has impressive technology, its execution on commercialisation has been disappointing. The company has pivoted its business model but with little success so far.

We decided to sell Berkeley Lights and redeploy the proceeds elsewhere. In addition to those exits, we made modest reductions to Alnylam, ASML, Deere, Dexcom, Moderna, and TSMC. All these companies have performed well over the long term, and we decided to redeploy some capital to the newer holdings and additions mentioned previously.

Banking Exposure

The collapse of Silicon Valley Bank and Signature Bank in March 2023 caused considerable uncertainty in the financial markets. While the Company does not invest in either bank, we felt it was prudent to examine the potential second-order

impact on the Company's holdings. The Company's overall exposure to the Financials sector (11.2%) is lower than the benchmark (14.9%). We reassessed the three banks in the Company's portfolio: Bank Rakyat Indonesia, HDFC, and Nu Holdings. Bank Rakyat Indonesia is Indonesia's largest microfinance provider. It has a good long-term underwriting track record, is well-capitalised, and enjoys the support of the Indonesian government, given its importance in improving its population's financial access. HDFC has a diverse funding base, a strong balance sheet, and good underwriting history. Nu Holdings, as previously discussed, is making strong fundamental progress and is well-capitalised. We are comfortable with the investment case for all three banks.

Beyond the banking exposure, we also analysed loss-making businesses and those with higher levels of debt. For loss-making businesses, the vast majority are in net cash positions and are well-placed even if funding dries up. For businesses with higher levels of debt, their debt is either well-matched against future cash flow (in the case of Ørsted) or covered by assets (in the case of Deere). The overall level of gearing for portfolio holdings is low, with an average net debt-to-equity ratio of 0.1, compared to 0.5 for the benchmark.

Positive Conversations

We recently released the latest Positive Conversations Report, which focuses on portfolio

companies' business practices and our engagement activities in 2022. Last year, we had 102 engagements with 39 portfolio companies. 69% of engagements were at an executive level, covering a range of topics, including emissions disclosures, biodiversity, financial inclusion, supply chains, and corporate governance. In addition to Positive Conversations, we will be publishing our annual Impact Report in the summer. This details how portfolio companies are contributing to a more sustainable world through their products and services.