Balanced Fund
The Balanced Fund (Wholesale) (the ‘Fund’) fell 1.2% net of fees in the quarter ended 30 September 2023, underperforming its benchmark which fell 0.6%. The Balanced Fund (Retail) fell 1.3% net of fees in the quarter, also underperforming the benchmark. This was driven by decline in values across traditional asset classes. Both domestic and international equity markets fell, with our equity portfolios respectively returning -2.2% against the S&P/ASX 200 return of -0.8%, and -0.4% against the MSCI World ex Australia Index return of -0.43%. With the rise in bond yields, our domestic and international fixed income exposures also fell -0.3% and -2.1% respectively.
Underpinning these declines was move higher in the yield curve, with the US 10-year government bond yield increasing 76bps, exceeding 15 year highs. With inflation remaining stubbornly above the Feds target of 2-3%, unemployment still below 4% and the oil price on the rise again, markets are repositioning for rates to remain relatively high compared to recent history in the longer term.
Balanced (Wholesale) Fund Performance
As at 30 September 2023~
| fund | benchmark$ | |
|---|---|---|
| 3 months | -1.2% | -0.6% |
| 6 months | 1.4% | 1.1% |
| 1 year p.a. | 9.1% | 10.1% |
| 3 years p.a. | 5.8% | 6.5% |
| 5 years p.a. | 6.0% | 5.7% |
| since inception p.a. | 6.6% | 6.5% |
$ Benchmark: Australian Ethical Balanced Composite. Past performance is not a reliable indicator of future performance.
Inception date: 28/03/2018. Source: FE fund info.
Balanced (Retail) Fund Performance
As at 30 September 2023~
| fund | benchmark$ | |
|---|---|---|
| 3 months | -1.3% | 1.5% |
| 6 months | 1.1% | 1.1% |
| 1 year p.a. | 8.4% | 10.1% |
| 3 years p.a. | 5.0% | 6.5% |
| 5 years p.a. | 5.2% | 5.7% |
| 10 years p.a. | 6.2% | 7.1% |
| since inception p.a. | 6.5% | 7.2% |
$ Benchmark: Australian Ethical Balanced Composite. Past performance is not a reliable indicator of future performance.
Inception date: 16/10/1989. Source: FE fund info.
Contributors and detractors
Top 3 contributors to fund return
+3.3%
International Equities - Communication Services
+1.5%
Domestic Equities – Financials
+2.3%
Defensive Alternatives
Top detractors to fund return
0.0%
Energy
-11.2%
Domestic Equities – Healthcare
-2.1%
International Fixed Income
Contributors
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Our international holdings in the Communication Services sector was the largest contributor to performance over the quarter, rising 3.3%. The sector performance was specifically driven by our holding in Alphabet, which rose 12.8%. The stock performed well after better than expected earnings and revenue growth, following a rebound in advertising dollars and further demand for Google Cloud Services as adoption of AI tools increased.
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Our domestic financial holdings rose 1.5% over the quarter. The higher interest rate environment would tend to be favourable for the sector, in particular lenders, though this has been somewhat offset by strong competition for borrowers, including cash back offers, and higher cost of living putting upwards pressure on arrears. However with lenders starting to end these offers, there are signs that competition is beginning to wane, and the continued resilience of the economy makes the possibility of recession increasingly unlikely. NAB was the largest driver of performance within our Financials holdings, rising 10.2% over the quarter. The stock performance was supported by a positive August update, with cash earnings up 5.8% over the prior corresponding period, and the announcement of a $1.5b share buy-back scheme, noting that net interest margins also declined.
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Our Defensive Alternatives Fund was the best returning asset class, returning 2.4% in the quarter. Strong performance continued to be driven predominantly by our catastrophe bond exposure. Despite the above normal hurricane activity in the Atlantic Hurricane season this year, and Hurricane Idalia (Cat 3/4) making landfall, its path went through a less densely populated area of Florida, with catastrophe bonds unlikely to be impacted. Our microfinance exposure also had a good quarter driven by the successful IPO of a portfolio company in India.
Our international holdings in the Communication Services sector was the largest contributor to performance over the quarter, rising 3.3%.
Detractors
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Our zero weighting to the energy sector in the domestic and international equity portfolios, due to energy stocks not meeting our ethical criteria, was the largest detractor to relative performance1. Domestically energy stocks returned 10.7% and internationally 14.9%, as Brent crude oil rose from around US$75 at the end of June, to finish the quarter at US$92 following falling inventories and continued cuts to supply from OPEC.
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Healthcare was the weakest sector in the domestic market during the quarter (-8.6%) and, given it’s one of our key overweight positions in the portfolio, was the biggest detractor from performance. Healius and Australian Clinical Labs continue to struggle in the short-term with lower GP volumes post Covid, but we expect this to improve over the next 12-24 months. Despite the short-term impact on performance this quarter, we continue to believe the Healthcare sector is an attractive sector to invest in and will continue to spend a lot of time focusing on opportunities in this sector.
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The rise in bond yields saw the international bonds market, as measured by the Bloomberg Global Aggregate Index, fall 2.1% over the quarter. The US 10-year Government bond rose 76bps to end the quarter at 4.57%. The rise in bond yields was largely due to markets removing expectations of rate cuts heading into the end of calendar year 2023 and in early 2024. Inflation has stubbornly remained above the target of 2-3%, while unemployment of below 4% shows signs of the economy remaining resilient. Meanwhile the recent rise in oil prices will put further pressure on inflation.
Portfolio changes
Additions to the Fund
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Defensive Equity Options (Puts) – In the last quarter we continued to build a small exposure to protect 5-10% of equities exposure in negative environments.
We continue to diversify the portfolio to make it more resilient in an increasingly volatile environment.
Healthcare was the weakest sector in the domestic market during the quarter (-8.6%) and, given it’s one of our key overweight positions in the portfolio, was the biggest detractor from performance.
Outlook for the Fund
Risks have continued to build through the quarter – with the focus shifting from just bringing inflation under control, to much the more existential geopolitical. Considering the portfolio from the perspective of our Strategic Asset Allocation model, the signposts suggest that the probabilities for negative scenarios over the next decade, such as elevated conflict, and resource scarcity due to an adverse outcome from climate change, have increased. In the short-term the prospects for market shocks are significant – the rapid rise in long-term rates alone will add stress to the system.
Balancing this, is an increase in expected returns through more attractive valuations, particularly in defensive assets, allowing us to take less financial risk to achieve our objectives. Inflation Linked bonds, which offer a government backed return premium to inflation have reached decade highs. This is transferring through to other asset classes – with fixed income, credit and equity assets now offering a significant premium to inflation and thus improving the probability we will meet our inflation-plus objectives in more constructive economic environments.
We continue to diversify the portfolio to make it more resilient in an increasingly volatile environment and have recently committed additional capital to our defensive alternatives fund, to finance loans to support infrastructure for the energy transition. We also see opportunity in active strategies particularly in small cap focused strategies with recent market volatility resulting in a dispersion of returns, which can favor stock pickers.
~ 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.
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