Balanced Fund
The Balanced Fund (Wholesale) (the ‘Fund’) rose 4.46% net of fees in the quarter ended 30 September 2024, outperforming its SAA benchmark which rose 3.40%. Similarly, the Balanced Fund (Retail) rose 4.28% net of fees in the quarter.
There was positive performance across all asset classes in the portfolio over the quarter, with the exception of unlisted property. Domestic equities led returns over the quarter, with the S&P/ASX 200 Index rising 7.8%, while the Fund’s domestic equities portfolio delivered 9.8%, with stock selection particularly in the healthcare sector a key driver. In international equities, the broader market generated a relatively a muted 2.3% for the quarter, versus the portfolio’s 3.5% return which was assisted by its relative overweights in the real-estate and financial sector.
Both domestic and international fixed income markets rallied, as various major central banks around the world loosened monetary policy with the US Federal Reserve starting it’s easing cycle with an extra-large 50bps in September. Conversely, Australia’s Reserve Bank continues to reiterate the need to, “remain vigilant to upside risks to inflation” with markets only expecting the first rate cut sometime in early CY2025.
On September 25, Australian Ethical received confirmation from Zenith that the Multi-Asset funds had received a ‘Recommended’ rating, up from ‘Approved’. This now means that more financial advisers will recognise and feel comfortable promoting Australian Ethical’s Multi-Asset funds as part of their superannuation and managed fund portfolio mix.
This ratings upgrade reflects the hard work of the broader team, and a step up in Australian Ethical’s investment capability under the leadership of portfolio manager and co-Chief investment Officer, John Woods, and CIO Ludovic Theau.
Outlook for the Fund
Market volatility is ever present, with the first quarter successfully charting a path between slowing macroeconomic data and the rapid unwinding of the “Yen Carry Trade” to deliver a positive result in the end despite some significant drawdowns over the period (The S&P500 fell by more than 5% point-to-point in early August).
As the second quarter gets underway, the prospect of a soft-landing looks more likely with recent inflation data and labour market data in the US remaining robust. Indeed, recent waves of stimulus in China add support for growth globally. However, premium valuations, escalating conflict in the middle east, the potential impacts of climate change present with a relatively late in the season hurricane in the gulf coast and the potential for a divided election outcome in the US remain threats to the current growth environment. The market is of-course never without risk, and that is what typically justifies a higher expected return from equities than fixed income.
Significant challenges often present fertile ground for investment, like the transition driving growth in new industries, upgrading of existing industries and the development of critical minerals. The fund’s focus on solving some of these challenges – driven by the Ethical Charter – and its increasing active investment style sees it well positioned to take advantage of these opportunities as they are presented.
Balanced (Wholesale) Fund Performance
As at 30 September 2024~
| fund | benchmark^ | |
|---|---|---|
| 3 months | 4.5% | 3.4% |
| 6 months | 3.4% | 3.0% |
| 1 year p.a. | 13.7% | 13.7% |
| 3 years p.a. | 3.7% | 5.4% |
| 5 years p.a. | 6.4% | 6.3% |
| since inception p.a. | 7.6% | 7.5% |
^ 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 30 September 2024~
| fund | benchmark^ | |
|---|---|---|
| 3 months | 4.3% | 3.4% |
| 6 months | 3.1% | 3.0% |
| 1 year p.a. | 13.0% | 13.7% |
| 3 years p.a. | 3.0% | 5.4% |
| 5 years p.a. | 5.6% | 6.3% |
| since inception p.a. | 6.7% | 7.4% |
^ Benchmark: Australian Ethical Balanced Composite. Past performance is not a reliable indicator of future performance.
Inception date: 16/10/1989.
Contributors and detractors
Top 3 contributors to fund return
+9.8%
Domestic Equity
+3.5%
International Equity
+3.1%
Domestic Fixed Income
Top detractors from fund return
-3.6%
Unlisted Property
+0.8%
Overlays
+2.0%
Defensive Alternatives
Contributors
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The S&P/ASX200 Index recorded one of its strongest quarterly starts to a financial year since 2010, outperforming international markets. The Fund’s overweight to IT companies such as Nuix (+113%) and Technology One (+28%), as well as Health Care names, like Australian Clinical Labs (+50%) and Resmed (20%) also saw the Fund’s domestic equities outperform the broader domestic market. However, this was buoyed [MS1] by the Fund’s underweight to Materials (which outperformed following the announcement of stimulus measures by China) and Financials (with the exclusion of ANZ and underweight to CBA).
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The MSCI World ex Australia Index had a fairly muted start, with negative returns from the IT and Energy sector weighing on the broader market. The Fund’s overweight to Financials such as BNY (+16%) and American Express (+13%), as well as Real Estate names, like CBRE (+34%) and JLL (27%) saw the Fund’s international equities holdings outperform the broader international market off the back of the US Fed’s first rate cut. However, the Fund’s underweight to other interest rate sensitive sectors like Consumer Staples and Materials subtracted value.
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The broader Domestic Fixed Income market rallied over the quarter, off the back of positive data locally (better than expected Q2 inflation), and a broad (e.g. 50bps Fed and 25bps Bank of England) rate cut with yields on the AU10 year falling over 30bps to finish the quarter at 3.97%.
Our overweight to IT and healthcare companies saw domestic equities outperform the broader domestic market.
Detractors
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While only Unlisted Property delivered negative returns over the quarter, the positive returns produced by other sectors were more muted compared to the strong performance of domestic equities.
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Defensive alternatives produced solid returns, beating its Cash + 3% benchmark, primarily from income generated by the Insurance-Linked Securitises sector (+4.9%), and Domestic Infrastructure Debt (+1.8%). However, the Fund only has a ~2% allocation to Defensive Alternatives, leading to a lower contribution of overall absolute returns.
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Unlisted Property was the worst performer this quarter, with negative revaluations across the Fund’s Health Care and Commercial Property portfolio due to increasing discount rates and price discovery from property transactions in the market. However, the Fund’s overall property portfolio outperformed (was less negative than) the broader unlisted property benchmark reflecting the relative strength of the underlying assets. Weakness was also contained due to the Fund’s underweight to Unlisted Property more broadly.
Portfolio changes
Additions to the Fund
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USDJPY Short (Overlays) – In the overlay strategies, the team continued to search for ways to protect the equity positions which are currently at extended valuations using cost effective tools. The Japanese Yen, which has typically appreciated in periods of “risk-off”, proved an effective tool this quarter. Since the end of the CY2023 the JPY has continued to depreciate to historic lows due to growing interest rate differentials between Japan and the rest of the world. In early FY25Q1 it had fallen below where fundamentals would justify and could potentially reverse quickly; indeed this played out in late July/early August and cushioned losses to equities at that time. The position was exited shortly after when the Bank of Japan raised interest rates for the first time in almost two decades.
- Growth Assets (International Equities, GREITs) – To improve the funds probabilities of meeting its CPI+ objectives, the Fund’s Strategic Asset Allocation was updated at the end of the quarter with a +2.5% weighting to growth assets (72.5% in total, from 70%). The change also aimed to increase total levels of 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, allocations to broader alternatives are expected to increase further.
Reductions from the Fund
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Insurance-Linked Securities (Defensive Alternatives) – Due to forecasts of an above-average hurricane season, and significant returns over the last 18 months, this was reduced for the historically most active part of the North American hurricane season.
- Defensive Assets (Domestic and International Fixed Income) – Defensive Assets were also rebalanced to utilise short duration more than long duration strategies as term risk premiums have compressed significantly. 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 within International.
The prospect of a soft-landing looks more likely with recent inflation data and labour market data in the US remaining robust. Indeed, recent waves of stimulus in China add support for growth globally.
An overweight to financials saw our international equities holdings outperform the broader international market off the back of the US Fed’s first rate cut.
* 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.