Multi-asset (global)

Multi-Asset Update – 12 months to 30 June 2024

The performance of large-capitalised technology companies was a feature of global share markets in the 12 months to 30 June, and so was rising equity market valuations.

This strong momentum in equities also came with heightened risks thanks to pockets of escalating geopolitical tensions, democratically induced leadership changes, and sticky inflation creating uncertainty around central back decisions.

Our Multi-Asset fund has participated in the strong equity market rally, which kicked off towards the end of the 2023 calendar year when the expectation for interest rate cuts were built into the risk-free rate. However, the fund underperformed compared to its benchmark due to below-market returns on equity holdings, especially in Australian large-cap stocks. Being underweight in financials coupled with stock specific detraction within materials, and healthcare holdings hurt performance. 

On a risk-adjusted basis within the Morningstar Australia Multi-Sector Growth category¹, we are among the top decile funds since inception and over 5-year period ending in June 2024. This highlights our focus upon diversification, avoiding large drawdowns and the power of compounding returns in the delivery of long-term objectives.

Risks abound

Interest rate markets challenged central bankers by predicting near-term rate cuts towards the end of 2023, but with inflation improvement slowing, the possibility of rate increases could jeopardise growth. While we believe further global rate hikes are unlikely, they are also possible, particularly in Australia.

This uncertainty comes at a tricky time for markets, with valuations of risk assets stretched and elections in France, the UK, and especially the US adding uncertainty. Bond markets are factoring in potential tariffs and deficits, increasing volatility.

Furthermore, 2024 election outcomes have underscored a general increase in electorate unhappiness, with change being the operative word. Major Western democracies face anxiety over populist movements, whether from the Left, like the UK's Labour Party, or the Right, epitomized by Donald Trump's MAGA movement. Populist figures are poised to attract more support amid sluggish global economic activity, rising living costs, and widening socioeconomic gaps.

In the ever-evolving environment of 2024, adaptability is paramount. We continue to maintain a strong focus on valuation across all our portfolios, reluctant to chase momentum. Our risk focus means we favour protecting investors from potential drawdowns while selectively participating in further upside scenarios. 

Renewables focus

Our ethical portfolios are different to mainstream funds, which means our funds can perform in opposing cycles in the short term. While weaker demand for Australian commodities like iron ore from China served as a tailwind for our portfolios towards the end of 2023 and into 2024, escalating tensions in the Middle East have resulted in surging crude oil prices from December lows which presents a headwind for us.

The long-term trend remains true, investment in renewables is overtaking fossil fuels², 90% of the world’s economies remain focused on achieving net zero by 2050, based on 195 countries that have signed up to the Paris Agreement.

We are also aware the global elections this year could profoundly influence ESG (Environmental, Social, and Governance) policies, especially in climate change mitigation.

The recent COP28 underscored the pressing nature of the climate crisis, emphasising the critical juncture at which we stand. While government spending may face headwinds, transition to cleaner energy will remain a pressing need and opportunity for growth.

Our focus within infrastructure debt, transition commodities and technology have been important allocations in the portfolio. The recent underperformance in resources gave us an opportunity to add metals positively exposed to the energy transition like lithium and copper to the portfolio at more attractive valuation at the start of 2024.

We take a broad approach to investing for the energy transition, including capital in VC (venture capital) through Main Sequence, late-stage private equity through a new investment in UK private equity investment Octopus Energy. Active management within sectors focused upon the future economy will remain a key theme for our portfolios.

Ethics update

We recently approved investment in European Union Emissions Trading System (EU ETS) allowances and futures – this represents the first carbon credit approval for Australian Ethical to date. Carbon at a reasonable price is one of the ways we can effectively hedge against commodity-price driven inflation because of its strong link to European gas prices.

We have continued to broaden of our ethical universe globally, with around 100 first time assessments completed during the year. The international healthcare, consumer and materials sectors were an area of focus for our ethics team during this period. Eli Lilly, AstraZeneca, Merck & Co, Abbvie and Roche were among the healthcare names added to our investing universe. We also added international materials sector companies including US-headquartered Steel Dynamics and Nucor – both utilising low carbon powered steel recycling technologies.   

During the year we added 26 signatories to our statement of support of non-animal research models, a key initiative under our strategic stewardship pillar – advancing alternatives to animal research. During the year we were in the top 5 (rank 3; scoring 34 out of 42) in a reporting ranking 80 financial institutions globally on actions to address animal welfare and support plant-based transition.