Outlook for the fund

In the face of exceptional political change in 2024 and associated policy paralysis which saw incumbent governments either voted out or substantially weakened across a swathe of democracies, major economies maintained growth and Central Banks were able to dampen inflation. This combination led to exceptional returns from growth assets. 

2025 begins with US exceptionalism evident in two areas – economic performance thanks to substantial fiscal support which has enabled it to maintain solid growth and strong employment, and comparatively contained inflation. In contrast, European growth has remained extremely challenged, particularly in the core countries of Germany and France. This is also the case with China. Overall, the equates to reasonable albeit unbalanced global growth outlook. 

This dichotomy looks to continue, with the new US administration expected to lower both taxes and regulations, as well as have an expansive fiscal policy. Countering this is the possibility of a tariff war. This is almost certainly likely to be bad for growth in China and Europe and will also result in higher inflation. It may be growth positive for the US, but not if the Fed needs to dampen price increases by raising rates. 

While the Wildfire’s in LA only underscore the impacts of climate change, clearly, the incoming US administration also has different views than its predecessor regarding environmental policies, and this will likely affect not only regulations, but also which sectors attract government support. Adding to risk, by historical norms, valuations for risk assets are at the high end of the range, both for equities and for credit spreads. This backdrop of political uncertainty and risky valuations of course creates not only volatility but also potential opportunities if attractive entry points to long term themes that are likely to persist beyond a political cycle can be identified. 

While we are reluctant to chase risk assets higher – particularly in an environment where defensive assets offer attractive real, and absolute returns - we will continue to remain vigilant in adding exposure to risk-correlated assets at points where we see value and diversification. Indeed, the breadth of assets in private markets allows us to seek diversification, and we continue to see attractive opportunities for investments with an environmental focus such as assisting the energy transition and social challenges such as housing. Over 2024 we have added to our private capital capability – making recent investments in data centers that focus on sourcing renewable energy in the US and affordable housing and recycling domestically. 

If we see large macroeconomic surprises in 2025, the most likely sources are outside the US, simply because so much softness in growth is now expected. If Chinese policymakers do finally arrive at a “whatever it takes” moment that the business sector and consumers find compelling, a positive repricing of market expectations will be substantial.  

With such a backdrop, the best approach remains a well-diversified portfolio combined with a variety of alpha sources. The increase in capability and the range of alpha sources added over the year leave us in a strong position to take advantage of the opportunities volatility can offer.  

Portfolio and performance commentary for the 12 months to 31 December 2024

The Balanced Fund (Wholesale) (the ‘Fund’) returned 12.3% net of fees for the year ending 31 December 2024, outperforming its benchmark by +1.2%. Similarly, the Balanced Fund (Retail) return also outperformed the benchmark returning 11.6% net of fees for the year. 

All asset classes (with the exception of property) positively contributed to the Fund’s absolute performance.  International equities led returns over the year, with the broader MSCI World ex Australia Index rising 31%, and the Fund’s own international equities holdings only slightly behind at 29%.  This was in no small part thanks to a strong US dollar, loosening monetary policy by the FOMC, and US exceptionalism (strong productivity, consumer demand, and earnings growth), which saw US equities (which makes up a large portion of international equities) beat all other developed markets. In Australia, the broader domestic equities market lagged most other markets (with the exception of a few European regions), due largely to concerns around slowing global growth, negatively impacting the domestic Materials and Energy Sector.  However, the Fund’s underweight to those sectors meant its domestic equity holdings outperformed the domestic market, returning 16% (compared to the 11% returned by the S&P/ ASX200 Index).   

Fixed income markets were mixed throughout the year as the market continually revised their expectations around the path of the US Federal Reserve’s rate cutting cycle, which kicked off with a larger than expected 50bps rate cut in September 2024.  The broader global bond market returned 2.2% for the year, with the Fund’s global bond holdings returning 4.8%.  This was largely driven by continued credit spread tightening over the year, and the Fund’s overweight to corporate bonds (vs treasuries). 

Over the course of 2024 we have added active international equities to the portfolio, as well as made allocations to global listed property to provide further diversification and a broader range of levers for the overall fund. We have also further invested in our domestic fixed income capabilities, in addition to the private capital capability increase noted above, enhancing our ability to deliver on the fund’s long term CPI+ objectives. 

Balanced (Wholesale) Fund Performance

As at 31 December 2024^*

^Benchmark: Australian Ethical Balanced Composite. Past performance is not a reliable indicator of future performance.

Inception date: 28/03/2018.

Balanced (Retail) Fund Performance

As at 31 December 2024^*

^Benchmark: Australian Ethical Balanced Composite. Past performance is not a reliable indicator of future performance.

Inception date: 16/10/1989.

Contributors and detractors

Contributors

• International equities finished the year on a high, with almost all sectors generating double-digit returns (except Materials).  The Fund’s overweight allocation to the IT sector (+44%) broadly added value (though this was partially offset by security selection), as well an underweight to the Consumer Staples and Energy sector which lagged the broader market.  Notable holdings for the year include the likes of NVIDA (+199%), and Broadcom (131%), as well as Alphabet (+50%), and Tesla (+79%) which rallied toward the end of the year.

• While trailing international markets this year, the S&P/ASX 200 Index still managed to perform above its own 10-year average, returning 11% (vs a 9% historical average).  The Fund’s overweight allocation to IT added value, with notable performers including Nuix (233%), Bravura (+163%), and Technology One (+105%), while the Fund’s underweight to Materials also contributed to outperformance (though this was partially offset by security selection within the sector).

• With the end of year pivot in US interest rates expectations and turmoil in Europe, Domestic Fixed Income marginally outperformed International Fixed Income (despite trailing for most of the year), with the majority of returns coming from coupon income.  The yield on the Australian 10 year government bond was range bound between 3.8% and 4.7%, ending the year higher than when it started, while the short-end remained fairly anchored resulting in the best annual returns for short-dated domestic fixed income in the last decade thanks to higher absolute yields.

Notable holdings for the year include the likes of NVIDA (+199%), and Broadcom (131%), as well as Alphabet (+50%), and Tesla (+79%) which rallied toward the end of the year. 

Detractors

• Domestic Property was the worst performer this year, with Office continuing its downward trend, while Retail and Industrial property stabilising. The Fund’s Domestic Property outperformed the broader unlisted property benchmark reflecting the relative strength of the underlying assets.  Weakness was also contained with the Fund underweighting to Unlisted Property more broadly.

• ·On 1 October 2024, the Fund added a dedicated Global Listed Property allocation, to complement its unlisted Domestic Property holdings.  Due to the short time frame of the Fund’s holding, the broad market sell-off in December (which also impacted Global Listed Property) was the main driver of returns.  Few property sectors were able to avoid the pain given the interest rate nature of the sell-off, except for Data Centre companies, such as Equinix (+6%) and Digital Realty Trust (+6%).

• Defensive Alternatives produced solid returns for the year, beating its Cash + 3% benchmark, primarily from income generated by the Insurance-Linked Securitises sector (+15%), and Domestic Infrastructure Debt (+7% on an annualised basis). However, the Fund only has a c. 2% allocation to Defensive Alternatives, leading it to be a bottom 3 contribution of absolute returns.

Repurpose It: The privately-owned Melbourne-based company providing construction & demolition, and organics resource recovery services to the Victorian market was added to the portfolio.

Over the course of 2024 we have added active international equities to the portfolio, as well as made allocations to global listed property to provide further diversification and a broader range of levers for the overall fund.

Portfolio changes

Additions to the Fund

• Growth Assets (International Equities, GREITs) – The Fund’s Strategic Asset Allocation was updated at the end of the quarter with a +2.5% increase in weighting to growth assets (72.5% in total, from 70%). The change also increased diversification in the fund, predominantly through a reduction in Domestic Equities and an increase in active International Equites (with the recent appointment of several active International Equity strategies). Further, a reduction in Unlisted Property and an allocation to listed global property (given the continued underperformance in unlisted vs listed property) was made. As opportunities present, we expect to increase allocations to broader alternatives over time.
• Repurpose It (Growth Alternatives – Private Equity) – Repurpose It is a Melbourne-based company providing construction & demolition, and organics resource recovery services to the Victorian market. The business is the only accredited recycler of lower-level contaminated soils in Victoria and is regulated by the Environment Protection Authority.  The Fund has co-invested directly into the company, giving it exposure to the circular economy thematic through a market-facing but structurally privileged business in a sector that is facing structural tailwinds with the growing emphasis on recycling and further increases to the landfill levy.

Reductions from the Fund

• Defensive Assets (Domestic and International Fixed Income) – Defensive Assets were also rebalanced to utilise short duration more than previously, in light of the compression of term risk premia.  Allocations to Domestic and International Fixed Income were both lowered, with a greater proportion coming from Domestic, in order to maintain the overall diversification benefits offered by International.

• VisionFund International (VFI) 2024 Bond – In Nov-2024, the Fund’s holdings in the VFI-2024 Bond matured.  VFI is World Vision International’s commercially-oriented microfinance arm, with 28 owned and affiliated microfinance institutions throughout Africa, Eastern Europe and Latin America.