International Shares Fund

Commentary for the 12 months to 30 June 2024.

Published 12 Jul 2024 | 10 min read

Global equity markets performed strongly in FY24, with the MSCI World Ex Australia Index soaring to record highs during the year. Expectations towards the end of the calendar year for interest rates cuts moderated in response to growth and inflation persistence. With inflation improvement slowing, expectations turned to the likelihood that rates could remain at current levels for longer. Despite shifting rate expectations, global equity markets continued to perform strongly due to a combination of resilient economic conditions and earnings momentum in technology/AI related exposures.

From a style perspective, Momentum has been the key driver of equity gains. It remains concentrated in Mega Caps and High Quality. In fact, Momentum has been the best performing factor since 2022, and as a result, momentum crowding and stock concentration are now at multidecade extremes. The strong performance of Momentum has reflected investors’ response to the unknown upside for technology stocks, supporting the cycle.

The Magnificent Seven currently accounts for around 20% of Earnings Per Share (EPS) in the S&P 500, backing just over 30% of S&P500 market cap. Within the Magnificent Seven, there was divergence in performance outcomes. The two biggest beneficiaries of the AI thematic rose the most with NVIDIA increasing more than 190% and Meta rising more than 75%. Conversely, Tesla fell more than 20%, while Apple also lagged the benchmark, only increasing ~9%.

The International Shares Fund (Wholesale) (the ‘Fund’) delivered a second consecutive year of double-digit returns. The financial year net return was 18.2% net of fees, compared to its benchmark which rose 19.9%. The International Shares Fund (Retail) rose 17.8% net of fees for the fiscal year.

At a country level, performance was negatively impacted by stock selection in Japan and Canada. Japan’s benchmark, the Nikkei 225 Index, has been on a tear in 2024, eclipsing the previous high set back in 1989. Japanese equities have been propelled to record highs by solid economic growth and the Bank of Japan raising rates for the first time in 17 years. There have also been notable improvements in corporate governance. Performance was supported by positive stock selection in the UK, Germany and Italy.

At a sector level, stock selection in Industrials and Financials detracted from performance. Within the Healthcare sector, the Fund benefited from its overweight exposure to Novo Nordisk which became the largest company in Europe by market capitalization during the year. Novo Nordisk’s share price has been driven by its weight-loss drug Ozempic which has vast market potential. During the year, Eli Lilly, which also has weight loss and diabetes drugs, was added to the portfolio after gaining Ethical approval. The Fund also benefited from its underweight exposure to Consumer Staples, Materials and Energy over the year, while the overweight position in IT also assisted performance.

During the year, the Fund received proceeds from corporate actions, including VMWare Inc which was acquired by Broadcom, Telenet Group Holding NV which was acquired by Liberty Global, and UnipolSai Assicurazioni S.p.A. and Telefonica Deutschland Holding AG which were consolidated into their respective parent companies.

International Shares (Wholesale) Fund Performance

As at 30 June 2024^*

	fund	benchmark^{^}
3 months	0.4%	0.3%
6 Months	11.6%	14.4%
1 years p.a.	18.2%	19.9%
3 years p.a.	9.2%	11.2%
5 years p.a.	11.5%	13.0%
since inception p.a.	10.8%	11.8%

^Benchmark changed from MSCI Global Climate to MSCI World ex Australia from 1 July 2016. The historical benchmark returns are calculated by linking two indices.

Inception date: 30/06/2015.

Contributors and detractors

Top 3 contributors to Fund return

+191.1%

NVIDIA Corporation (NVD)

+31.5%

Microsoft Corporation (MSF)

+51.8%

Alphabet Inc. Class A (GOO)

Top 3 detractors to Fund return

-24.7%

Tesla, INC (TSL)

-14.7%

Aon Plc Class A (AON)

-9.6%

UnitedHealth Group Incorporated (UNH)

Contributors

NVIDIA (NVD) rose 191% over the year. NVIDIA remains the dominant AI chip maker, maintaining a technological edge. Its rally has been sustained by better-than-expected earnings results and a bullish outlook amid massive demand. NVIDIA has seen continued strong spending from its customers to support their AI/accelerated compute initiatives (both training/inference) and strong demand for its new GPU platforms. Demand is supported by the transition to accelerated computing, proliferation of generative AI applications, strong enterprise penetration and the build-out of sovereign AI.
Microsoft Corporation (MSF) was a strong performer as its AI strategy gained momentum on accelerating adoption. Microsoft’s AI strategy has evolved materially since its OpenAI investment in January 2023, as deployment has progressed from testing to limited rollouts to wider availability. The company now has multiple and tangible avenues to monetise AI including via its Azure AI platform and Copilot. Microsoft is well positioned as desirable partner for Enterprises looking to deploy AI responsibly.
Alphabet Inc. Class A (GOO) rose +46% as it reported strong earnings that beat expectations and conviction in its GenAI strategy increased with material advancements in Bard and Gemini. Alphabet has been evolving the search experience to be AI enabled and hence more personalised, natural and targeted. Revenue growth has accelerated across Search, YouTube Ads and Google Cloud, while there has been meaningful progress in re-engineering the cost structure.

Detractors

Tesla (TSL) shares fell nearly 30% over the year as its earnings results were softer than market expectations. In particular, vehicle sales were materially worse than expected. While Tesla attributed the shortfall, in part, to various disruptions in supply, there were concerns that it was caused by weakening demand. Tesla announced its largest ever layoffs, amounting to more than 10% of its global workforce in a bid to rationalise its cost base. Separately, Tesla announced it would be accelerating the launch of new models, including more affordable vehicles to capture more growth.
Aon Plc's (AON) share price performance lagged the benchmark as it reported lower organic revenue growth relative to peers and worse-than-expect earnings. There have been concerns that competition in commercial lines insurance and reinsurance may pressure revenue growth and operating margins. Management have implemented a restructuring plan, expansion into mid-markets and increased hiring to drive growth.
UnitedHealth Group Incorporated’s (UNH) share price performance lagged the benchmark, largely due to investor worries about rising medical costs and changes in the Medicare business. The Federal government unveiled lower-than-expected 2025 rates for private Medicare plans, however management reassured investors that so far in 2024, healthcare cost patterns aren’t continuing to spike higher. UnitedHealth also suffered from a serious cyberattack of its Change Healthcare unit that disrupted much of the healthcare financial system and had a major impact on UnitedHealth’s own operations. The company is implementing strategies to win back customers to its offerings.

NVIDIA remains the dominant AI chip maker, maintaining a technological edge.

Portfolio changes

Additions to the Fund

Eli Lilly and Company (LLY) – Eli Lilly is a pharmaceutical company which is a key leader in the GLP-1 (diabetes and weight loss drug) market. It was added to the portfolio after gaining Ethical approval during the year.
UnitedHealth Group Incorporated (UNH) – UnitedHealth Group is the largest US healthcare insurance company. It offers a diversified array of health benefit plants through its UnitedHealthcare segment and various health services through its Optum line of business. It was added to the portfolio after gaining Ethical approval.
Roche Holding Ltd Dividend Right Cert. (ROG) – Roche is a healthcare company specializing in pharmaceuticals and diagnostics. The company was added to the portfolio after it gained Ethical approval.

Reductions from the Fund

VMware, Inc. Class A (VMW) – VMware provides cloud infrastructure and business mobility. Its products include Software Defined Data Centres, Hybrid Cloud Computing and End-User Computing. VMware was acquired by Broadcom Inc during the year.
Advanced Micro Devices, Inc. (AMD) – Advanced Micro Devices is a semiconductor business that operates through the following segments: Data Centres, Client, Gaming and Embedded. The holding was reduced as part of the optimization process which aims to reduce tracking error.
Airbnb, Inc. Class A (ABNB) – Airbnb is a US-based business that lists properties across the world.

Tesla shares fell nearly 30% over the year as its earnings results were softer than market expectations.

Momentum has been the best performing factor since 2022, and as a result, momentum crowding and stock concentration are now at multidecade extremes.

Sector allocation

Sector overweights
Cash, Communication Services, Financials, Industrials, Information Technology, Real Estate

Sector underweights
Consumer Discretionary, Consumer Staples, Energy, Health Care, Materials, Utilities (renewables)

Outlook for the Fund

The International Shares Fund invests in a diversified portfolio of global equities which meet our Ethical Criteria. The Fund utilizes a systematic approach to reduce tracking error with the aim of tracking the MSCI World ex-Australia index before fees and expenses over a 3 year period.

While sentiment remains strong, and fundamentals are improving, valuations for global markets appear expensive, although excluding large cap technology stocks, valuations are closer to “neutral” levels. Rate cut hopes combined with earnings momentum in technology/AI related exposures are expected to be supportive to markets, offsetting concerns about fading growth rates and corporate earnings.

Escalating tensions in the Middle East signal a new geopolitical regime, structurally increasing risk in the region. The impact of persistent supply constraints, exacerbated by geopolitical disorder, underscores the importance of energy security amidst the low-carbon transition.

From a style perspective, the outperformance of Momentum over FY24 has led to a higher-for-longer regime (where winners continue “winning”). This has driven significant divergence between winners and losers combined with the rapid increase in AI related investment spending. While the timing of reversals and rotations can be difficult to predict, we do expect to see a broadening out in factor performance, likely triggered by lower rates.

See Fund info

* All data is prepared in accordance with FSC Standard No. 6. Total returns are calculated using the sell (exit) price, net of management fees and gross of tax as if distributions of income have been reinvested at the actual distribution reinvestment price. The actual returns received by an investor will depend on the timing, buy and exit prices of individual transactions. Return of capital and the performance of your investment in the fund are not guaranteed. Past performance is not a reliable indicator of future performance. Figures showing a period of less than one year have not been adjusted to show an annual total return. Figures for periods of greater than one year are on a per annum compound basis. The current benchmark may not have been the benchmark over all periods shown in the above chart and tables. The calculation of the benchmark performance links the performance of previous benchmarks and the current benchmark over the relevant time periods.

Disclaimer

Interests in the Australian Ethical Managed Funds are issued by Australian Ethical Investment Ltd (ABN 47 003 188 930, AFSL 229949), the Responsible Entity of the Australian Ethical Managed Funds.

The information in this summary is of a general nature and is not intended to provide you with financial advice or take into account your personal objectives, financial situation or needs. Before acting on the information, consider its appropriateness to your circumstances and read the Financial Services Guide, relevant product disclosure statement and Target Market Determination available on our website.

You may wish to seek financial advice from an authorised tax or financial adviser before making an investment decision. Past performance is not a reliable indicator of future performance.

This commentary may contain material provided by third parties derived from sources believed to be accurate at its issue date. While such material is published with necessary permission, Australian Ethical accepts no responsibility for the accuracy or completeness of, nor does it endorse any such third party material. To the maximum extent permitted by law, we intend by this notice to exclude liability for this third party material.