International Shares Fund
Global equity markets posted another positive quarter in September, with the MSCI World Ex Australia Index increasing by 2.3%. The beginning of August saw markets experience turbulence as global equities sold off, the VIX surged to its highest post-pandemic level, and bonds rallied sharply. This was triggered by a long-expected decline in non-farm payrolls, and a subset of Magnificent Seven stocks failing to beat estimates as comfortably as in prior periods. Negative sentiment was shrugged off and Global Equities reached record highs once again as the outlook for rate cuts became clearer. In September, the US Federal Reserve began its monetary easing cycle with a 50bps rate cut.
From a style perspective, quality, momentum and growth have continued to drive markets, although value factors experienced favorable returns in September. US market concentration continues to remain at peak levels, with the Top 10 stocks now accounting for 34% of market cap weight. As observed in recent quarters, there was material divergence in performance within the Magnificent Seven with only Tesla, Meta and Apple posting positive returns over the quarter.
The International Shares Fund (Wholesale) (the ‘Fund’) delivered a net return of 3.5% for the quarter, outperforming its benchmark by 1.2%.
At a country level, the Fund benefited from stock selection within the US and Japan markets, while a slight overweight to Denmark impacted performance as Novo Nordisk’s shares underperformed over the quarter. At a sector level, the Fund’s overweight exposure to Financials and Real Estate assisted performance. The Energy sector continued to underperform on weaker oil prices, which benefited the Fund given its zero exposure to this sector. The Fund’s underweight exposure to Materials negatively impacted performance. The Materials sector rallied following a the PBOC announcing a raft of measures to stimulate the flagging Chinese economy and revive the housing sector.
Outlook for the Fund
The International Shares Fund invests in a diversified portfolio of global equities which meet our Ethical Criteria. The Fund utilises 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.
In the short term, Global Equities are expected to remain fixated on the outcome of the forthcoming US presidential election and rising geopolitical tensions. Trade, immigration and tax policy could all be affected by the presidential and congressional elections. Tensions continue to escalate in both the Middle East and the Russian-Ukraine conflict, which could have implications for energy security and global supply chains. Typically, markets struggle to discount geopolitical risks adequately given their unpredictable nature.
Global Equity markets appear to be pricing in a soft landing in the US as data continues to show a slowdown in growth, rather than a collapse. Despite this, the risk of a downturn is ever present, particularly given the larger than normal lagged impact of monetary tightening in this cycle.
Market PE remains high, particularly in a historical context, and has inched up further in September. Global Equity markets, therefore, remain expensive, driven largely by stretched US valuations. If predictions about Gen AI’s contribution to enhancing productivity come to fruition, then market valuations potentially look more reasonable.
The US Federal Reserve has made it clear that it is now willing to prioritise the labour market over inflation. 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.
International (Wholesale) Fund Performance
As at 30 September 2024~
| fund | benchmark^ | |
|---|---|---|
| 3 months | 3.5% | 2.3% |
| 6 months | 3.9% | 2.6% |
| 1 year p.a. | 23.0% | 23.2% |
| 3 years p.a. | 8.9% | 10.6% |
| 5 years p.a. | 11.3% | 12.5% |
| since inception p.a. | 10.9% | 11.8% |
^ Benchmark: MSCI Global Climate to MSCI World ex Australia from 1 July 2016. The historical benchmark returns are calculated by linking two indices.
Contributors and detractors
Top 3 contributors to Fund return
+6.6%
Apple Inc. (AAP)
+27.3%
Tesla, Inc (TSL)
+9.4%
Meta Platforms Inc. Class A (MET)
Top 3 detractors from Fund return
-12.3%
Alpabet Inc. Class A (GOO)
-7.2%
Microsoft Corporation (MSF)
-21.3%
Novo Nordisk A/S Class B (NOV)Top contributors
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Apple Inc (APPL) rose 6.6% over the quarter. Apple reported strong quarterly earnings and resilient demand for its products, particularly in its services and hardware divisions. The company’s innovations in AI and hardware upgrades added further momentum.
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Tesla Inc (TSL) shares increased more than 27%. The Chinese government doubled an incentive for consumers to trade in older cars for electric models, stoking demand in the world’s largest EV market. Tesla’s shares have also benefited from rising expectations surrounding the launch of its Robotaxi service.
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Meta Platforms Inc (META) shares increased over 9% as the market gained more confidence that its investment in AI is helping to improve its core business. Strong AI-driven ad revenues and the launch of Threads has boosted performance.
Top detractors
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Alphabet Inc. (GOOGL) shares have dropped significantly this quarter, falling by 12.3%. A major factor behind this decline is the ongoing legal battle with the U.S. Department of Justice (DOJ), which has accused Google of abusing its dominant position in the digital advertising market. The DOJ claims Google stifles competition and forces advertisers and publishers to rely on its services. In a rare antitrust move, the U.S. is considering the possibility of breaking up the tech giant.
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Microsoft's (MST) share price underperformed the benchmark in the September quarter. Following a period of significant gains driven by excitement over AI initiatives and strong growth in its cloud services, investor sentiment cooled. The company’s cloud business saw slower growth compared to previous quarters, raising concerns about its ability to maintain the high revenue expansion it had been experiencing. This combination of elevated valuations and signs of decelerating growth in a key business area contributed to the stock’s recent underperformance.
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Novo Nordisk's (NOVO) share price has pulled back by 21.3% this quarter, following a strong rally driven by the success of its diabetes and weight-loss drugs, Ozempic and Wegovy. Growing concerns over increased competition, which could threaten Novo Nordisk’s market dominance, have contributed to the decline. Additionally, the stock has been negatively impacted by the recent release of disappointing Monlunabant data.
Apple reported strong quarterly earnings and resilient demand for its products, particularly in its services and hardware divisions.
Portfolio changes
Additions to the Fund
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ASML Holding NV (ASML) – ASML is the world’s leading supplier of photolithography machines used in the fabrication of microchips. The holding was increased as part of the optimization process which aims to reduce tracking error.
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MercardoLibre, Inc. (MELI) – MercadoLibre operates an online commerce platform with a focus on e-commerce and related services. The holding was increased as part of the optimization process which aims to reduce tracking error.
- O'Reilly Automotive, Inc. (ORLY) – O’Reilly Automotive is a specialty retailer of automotive aftermarket parts, tools, supplies, equipment and accessories in the US. The holding was increased as part of the optimization process which aims to reduce tracking error.
Reductions from the Fund
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Analog Devices, Inc. (ADI) – Analog Devices is a semiconductor company which engages in the combination of analog, digital and software technologies into engineering solutions. It was exited due to Ethical considerations.
- JBG SMITH Properties (JBGS) – JBG Smith Properties is a real estate investment trust, which engages in owning, operating, investing in and developing a portfolio of mixed-use properties. The holding was reduced as part of the optimization process which aims to reduce tracking error.
- Telia Company, AB (TELIA) – Telia provides network access and telecommunication services. The holding was reduced as part of the optimization process which aims to reduce tracking error.
The Chinese government doubled an incentive for consumers to trade in older cars for electric models, stoking demand in the world’s largest EV market.
Global Equity markets appear to be pricing in a soft landing in the US as data continues to show a slowdown in growth, rather than a collapse.
Sector allocation
Sector overweights
Communication Services, Financials, Industrials, Information Technology, Real Estate
Sector underweights
Consumer Discretionary, Consumer Staples, Energy, Health Care, Materials, Utilities (renewables)
*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.
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