Significant event notice

30 October 2023

Product Disclosure Changes - Managed Funds

We’re letting you know that we’ve made changes to our product disclosures to help you better understand what it means to invest with Australian Ethical. We’ve updated our Product Disclosure Statements (PDS/s) on our website including the Additional Information Booklet and the new Guide to Our Ethical Investment Process (Ethical Guide) which also form part of the PDS for each of the Australian Ethical Managed Funds. You can find these documents at www.australianethical.com.au/managed-funds/documents/. 

The changes include:

• further information on our ethical investment process with the issue of the Ethical Guide;
• updates to our risk disclosure;
• changes to our investment objectives and time horizons;
• changes to asset allocations;
• updates to our tax disclosure; and
• updates to our fees and costs.

We’ve provided the detail of the changes made below. 

On 15 September 2023 we updated and reissued the PDSs for the following Australian Ethical Managed Funds:

On 29 September 2023, we updated the Australian Ethical High Conviction Fund PDS which is offered as both an Exchange Traded Managed Fund via a broker and as a Managed Fund directly through Australian Ethical.

This also includes the ‘Managed Funds Additional Information Booklet’ and the Ethical Guide.

Explaining our ethical investment process

We’ve updated our disclosure to help explain Australian Ethical’s investment process and the potential risks of ethical and sustainable investing; this includes the incorporation of our new Ethical Guide. For further details, refer to the copy attached to this Notice which is also available at https://www.australianethical.com.au/managed-funds/documents/. The Ethical Guide outlines the ethical aspects of our investment process, with a focus on the Ethical Criteria we apply to potential investments. The Ethical Guide sets out important information about Australian Ethical’s consideration of environmental, social, and ethical factors including labour standards in the selection, retention, and realisation of investments and how exceptions apply (such as where a business may change after we invest, or we may become aware of new information about the company or issuer which was not identified in our previous research).

Our ethical evaluation process and Ethical Criteria are important because we implement the investment strategies for the Australian Ethical Managed Funds by targeting investments which are consistent with both:

1. our Ethical Criteria, and
2. the investment strategy and objectives of each Fund.

Investors should read the applicable PDS and Additional Information Booklet for information about the investment strategy and objective of a Fund.

We’ve also specified the potential risks of investing with Australian Ethical within our disclosure documentation, noting that each of our product’s investment universes will generally be more limited than non-ethically, non-sustainably invested peers and the returns and volatility may be higher or lower than these peers over equivalent periods.

Being transparent about investment risks

We have expanded Section 4: Risks of managed investment schemes across all PDSs to include a number of additional risks:

1. Risk of investing ethically and sustainably
   You should be aware that investing ethically and sustainably means that the investment universe will generally be more limited than non-ethical, non-sustainable portfolios in similar asset classes. This means that the Fund may not have exposure to specific assets which over or underperform over the investment cycle. It follows that the returns and volatility of the Fund may be higher or lower than its nonethical non-sustainably invested peers over all investment terms.
2. Manager risk
   Some of our investments are managed by external investment managers including through pooled managed funds, limited partnerships or mandates. These go through an ethical review process. Whilst we expect that the strategy and investment process for the externally managed investment will lead to investments which are consistent with our Ethical Criteria, there may be certain circumstances where we hold investments that are inconsistent with our Ethical Criteria. If through our periodic ethical review process, which is generally every two years, we assess that an externally managed investment is inconsistent with the Ethical Criteria, we may divest or choose to engage with the external investment manager or underlying investment company to attempt to address the concern. There are no fixed maximum periods for the divestment process or for engagement to address the concern. More information on our externally managed investments is set out in our Ethical Guide.
3. Sector risk
   This risk refers to the potential impact on the Fund due to fluctuations and uncertainties in specific sectors—for instance, if the Fund is heavily invested in the technology sector, the Fund may suffer losses if there is a significant downturn in the tech industry.
4. Credit risk
   This is the risk of default or non-payment by the issuers of debt securities, such as a corporate bond issuer failing to repay the principal and interest—an example would be if a company goes bankrupt and fails to fulfill its debt obligations.
5. Alternative asset risk
   This risk is associated with investing in non-traditional assets like unlisted real estate securities or commodities, which can have specific risks such as illiquidity, complex valuation methods, or limited market transparency - such as an investment in a private equity firm that faces difficulty in selling its assets at fair prices due to limited buyer interest.
6. Cyber security risk
   This risk relates to the potential for unauthorised access, data breaches, or disruptions in the Fund’s systems, which could result in financial losses or compromised investor information, as seen in cases of hacking or malware attacks on financial institutions.
7. Regulatory risk
   This risk arises from changes in regulations or laws that impact the Fund—for instance, if a new regulatory requirement limits the Fund’s investment options or imposes higher compliance costs, it may affect the Fund’s performance or operations.
8. Climate change
   Risks, including physical risks from extreme weather events, transition risks from shifting policies and technologies, market risks driven by changing demand and investor sentiments, and legal and reputational risks. These risks can impact the value and performance of investments in the Fund.

Please refer to Section 4: Risks of managed investment schemes on page 4 of each PDS for more details on the risks.

Changes to Investment Objectives

The investment objective of each fund outlines the desired return each fund aims to achieve and varies based on the investment mix and level of risk of the fund. These objectives don’t predict how much money your investments will make, but they can give you an idea of the expected return of your investments. Following a review of investment market assumptions and the investment objectives of our funds, we have made several updates as tabled below.

The addition of inflation linked objectives for the multi-asset funds is aimed at providing greater clarity to investors of the target returns of the funds by providing investors with a measurable target to assess any returns against. The changes to the equities and fixed-interest funds seek to do the same by providing clear benchmarks for investors to assess returns against.

Change to recommended minimum investment timeframe

The minimum investment timeframe is the recommended amount of time that you should be invested in a fund to meet the investment objective. Effective 15 September 2023, we have increased the recommended minimum investment timeframe for the Australian Ethical Balanced Fund from 5 years to 8 years. The longer investment timeframe provides a more accurate assessment of the period that the fund is likely to achieve its investment objective.

Change to asset allocation ranges

An asset allocation range is the disclosed range that each fund may hold investments within a specific class. Following a comprehensive review of the investment strategies for the Australian Ethical multi-asset funds, there were some changes made to the strategic asset allocation ranges effective 15 September 2023. These changes were aimed at improving investment outcomes for investors by increasing our ability to meet the investment objective for each fund.

Australian Ethical Balanced Fund

Australian Ethical High Growth Fund

Changes to tax related disclosure 

We have included additional disclosure on the tax implication of managed investment schemes. Please refer to Section 5 of the Additional Information Booklet for more information.

Changes to fees and costs 

We’ve reviewed the fees and costs associated with our funds, as follows. We report our investment performance after fees, and you can see a breakdown of all the fees and costs in your Periodic Statement. 

Management fee reduction 

Management fees are the fees that an investor incurs by investing in Australian Ethical; these cover all ordinary fees, costs, charges, expenses and outgoings. Effective 29 September 2023 we are reducing the Management Fee for the Australian Ethical High Conviction Fund from 0.80% pa to 0.69% pa. All other fees and costs for this Fund remain unchanged.

Indirect costs

Indirect costs form part of management fees and costs and include fees and expenses arising from any investment which qualifies as an interposed vehicle and certain ‘over-the-counter’ derivatives costs. We have reviewed our indirect costs estimate for the last financial year. Tabled below are the changes to estimated indirect costs based on data as at 30 June 2023. There is no change to the estimated indirect costs for any other managed funds listed at the top of this update.

The increase in estimated indirect costs is a result of an increased allocation to Alternative assets, which incurs higher investment costs. Alternative investments can provide greater diversification and more consistent returns when added to a portfolio of traditional assets.

Please refer to Section 6: Fees and costs of the Australian Ethical Balanced Fund PDS and the Australian Ethical High Growth Fund PDS for more information. 

Buy/Sell spreads  

The Buy/Sell spread is a fee to recover transaction costs incurred in relation to the purchase and sale of the assets of a fund and is used to adjust the unit price. It is an additional cost to you and is incurred when you buy or sell a unit. We will use a Buy/Sell spread to recover transaction costs from you so that other members are not paying for the cost of your transaction. It is not a fee paid to us. The Buy/Sell spread for the Australian Ethical Balanced Fund increased effective 3 July 2023. This increase is a result of a general increase in underlying transacting costs. The updated Buy/Sell spreads were included in the PDS that was reissued on 15 September 2023. 

Here to help

If you have questions about these changes, please call us on 1800 021 227, Monday to Friday 8:30am to 5:30pm AEST.