Domestic active equities

Domestic equities update – 12 months to 30 June 2024

Local share markets have been buoyed by strong returns in the 12 months to 30 June, with the technology and financial sectors contributing most to Australian Ethical’s returns. Our active domestic equity Australian Shares Fund and Emerging Companies Funds have also benefited from investments in the renewable energy segment, while the broader underperformance of resources has been a tail wind for our funds.

Our Emerging Companies Fund (ECF) and Australian Shares Fund (ASF) have posted double digit returns, with ECF outperforming its benchmark – the S&P/ASX Small Industrials Index benchmark. Over the longer term these funds have outperformed their benchmarks with ASF¹ and ECF delivering 12.4% and 12.5% respectively since inception.

Our ethical process means our portfolios look different to mainstream benchmarks – we have higher allocations to information technology and healthcare. Meanwhile, our investments in materials, utilities and energy sectors favour future-focused renewable energy generation over more emissions-heavy companies.

Equities rise, focus on valuation

The strong local equity market returns kicked into gear towards the end of the 2023 calendar year with sentiment improving as the rapid interest rate cut cycle came to a pause.

While we have seen the share price performance gap between large and small capitalised companies – which was historically wide at the end of the September quarter – reduce during the past 12 months, we believe the smaller capitalised end of the market still has some attractive opportunities for us to invest.

Overall, the strong run of equities means there’s heightened valuation risks in local markets, particularly with sticky inflation and uncertainty around central banks’ next move moves on interest rates. The strong valuation discipline we have baked into our investment decision making means we’re alert to the risks of overpaying for companies. 

Stock selection in the technology sector was the stand-out contributor to our performance this year, with triple digit share price returns from software names - Nuix, Gentrack and Bravura.

The all-cap portfolio benefited from its positive tilt towards low carbon companies. The portfolio holds three major Gen-tailers in New Zealand (Contact Energy, Meridian Energy, and Mercury), which performed well in a backdrop of favourable operating conditions. Additionally, the portfolio’s underweight position to Resources and Energy stocks contributed to positive relative performance versus the benchmark, with two index heavy-weights, BHP and Woodside, underperforming the market.

Ethics update

Climate change continues to feature prominently among our strategic stewardship priorities. Failure to achieve effective action on climate change would cripple our ability to achieve our other ethical priorities. As such we have added a Climate Policy Advocacy in recent months as our fifth strategic stewardship pillar, alongside our existing pillars: Turning off financing for unsustainable expansion of fossil fuels, stopping livestock deforestation in Australia, reducing building sector emissions, and advancing alternatives to animal research.

Under this new climate policy advocacy focus area, Australia’s National Determined Contribution (NDC) 2035 will be the first workstream. The NDC is the emissions reduction commitment the Australian government submits every five-years as a Paris Agreement signatory – it provides crucial signalling to markets about the rate of travel toward a lower carbon economy and guides policy making to achieve the NDC. This initiative, coordinated via the Investor Group on Climate Change (IGCC), works with listed companies to exercise corporate Australia’s influence positively to support a science-based climate target for 2035.

Our focus on climate policy advocacy this year builds on the work we have been doing over many years to turn off financing for unsustainable expansion of fossil fuels. This work resulted in Australian Ethical authoring and co-filing climate-focused shareholder resolutions at the 2023 NAB and Westpac annual general meetings. Our NAB resolution received four times the investor support of the prior year’s climate resolution, with more than a quarter of proxies voting in favour. NAB has recently released details of what it will expect of high emitting customers on climate transition consistent with many of our asks. The Westpac resolution, calling for a broader application of policies to shift customers to greener energy sources, received 21.5 per cent of proxies in support, more than double the level of the previous year.

Through our continuing work with the banks and our focus on limiting the financing of fossil fuel expansion, we saw substantial improvement in CBA’s approach to lending to fossil fuels, which has resulted in the inclusion for the first time of CBA in our ethical universe. ANZ continues to remain outside our investable universe, while NAB is now the next lowest ranked of the 4 major banks in our assessment. Given our recent stewardship as described above, this provides positive momentum for us to effect further change at NAB. We will continue to engage for now and revisit NAB’s investible status following its next round of annual disclosures towards the end of this calendar year. Similarly, QBE evidences slow progress relative to our fossil fuel expectations and has been a subject of our ongoing engagement efforts.

During the year we have continued engagement with building materials company Boral, securing a commitment from the company to improving their practices against the CA100+ benchmark lobbying indicators. We subsequently facilitated a meeting between Boral and Influencemap to that end. We have also broadened this discussion through engagement with the Cement Industry Federation.