Australian Ethical produced great performance for the 2019-20 financial year despite the volatility created by COVID-19. Our Chief Investment Officer David Macri explains why our funds outperformed.
The first six months of 2020 were characterised by one of the largest health and economic crises in recent history. Global markets started the year in positive territory, but towards the end of February share markets began one of the fastest declines in history. As the COVID-19 pandemic unfolded governments were forced to shut down huge swathes of the economy overnight. Between 19 February and 23 March global markets declined 33% and in Australia the stock market fell 36%.
However, as it became clear governments and central banks were willing to commit to unprecedented levels of economic stimulus, optimism was quick to return to stock markets. From late March to the end of June we saw one of the sharpest stock market rises in history, with the US up 40% and Australian stocks up close to 30%. Despite what was one of the most disruptive shocks to the global economy in recent history, global stock markets ended the six-month period to 30 June 2020 down just 5.1%. In the US the S&P 500 was down 3.1%, and in Australia the ASX 200 was down 10.4%.
We are by no means out of the woods. The short-term trajectory of the virus and its economic consequences are hard to predict. However, we are maintaining a long-term outlook, looking past the current crisis and through to some kind of ‘new normal’. No one has a lot of conviction about near-term earnings because nobody knows how long the recovery will take. We’re focused on our investment process and the underlying value of stocks and securities.
Resilient portfolios, strong outperformance
Our MySuper Balanced option ranked third in the SuperRatings SR50 Balanced Index over the 12 months ending 30 June 2020, delivering a 2.4% return.* It was also one of only 15 balanced super options to finish the year in positive territory. Chant West ranked our Balanced option second in its review of ‘growth’ funds (that is, MySuper options with 61%-80% growth assets) over the 12 months ending 30 June 2020.
As at 30 June 2020 our Australian Shares super option was ranked second over the 1 year period, and first over 5, 7, and 10 year periods, according to SuperRatings.#
We saw similarly great results in Australian Ethical’s managed funds for the 12 months ending 30 June 2020. During that period the Australian Shares Fund (retail) returned 2% (outperforming its benchmark by 9.8%) and the Emerging Companies Fund (retail) returned 13.2% (outperforming its benchmark by 20.6%).
We were also very excited that our Australian Shares Fund won the 2020 Financial Standard Australian Equities High Performance award and ESG award. While our funds have often earned recognition in the ESG and ethical investing sector, we were very proud to see our great performance recognised against the broader market.
Part of the reason we have outperformed is due to our unique portfolio construction process that leads to portfolios that look very different to the market. We have a skew towards smaller companies, an area where we have consistently outperformed.
Our sector positioning is also very different to the market. As a result of the Australian Ethical Charter, we are underweight in the energy sector (which was significantly impacted by the collapse in the oil price in March) and the banking sector, which fell by 28.3% over the 12 months to 30 June 2020. We are also overweight in the IT and healthcare sectors, which were less affected by the virus and in some cases benefited, resulting in significant outperformance relative to more cyclical sectors.
Our property exposure is another area driving our performance, delivering a 10% return against the benchmark’s decline of 2% for the 12 months to 30 June 2020. This was again influenced by our sector exposures, where we are overweight in office and healthcare and underweight retail, which has been facing headwinds long before COVID-19 introduced further difficulties for the sector.
Top performing stocks
Some of our top performers were those that were positioned to form part of the solution to the crisis, either by addressing the health impacts or through technology that supported the dramatic shift in how we live and work.
Macquarie Telecom was one of our standout performers over the year, up 90% over the past six months. The business has benefited from the surge in demand for data centre capacity as many businesses have been forced to accelerate their transition to the cloud, following a huge increase in the number of people working from home.
Fisher & Paykel Healthcare was another strong performer, up 60% in the past six months with its products increasingly being used in the fight against COVID-19. As well as supplying humidification technology used in invasive and non-invasive ventilation, Fisher & Paykel’s Optiflow is increasingly being used as a first line treatment for people presenting with COVID-19.
Workplace management software company Damstra was one of our strongest performers in the Emerging Companies Fund, up 24% over the six months to 30 June 2020. Since the addition of the stock to our portfolio in September 2019, Damstra has beaten prospectus revenue and earnings targets. The company’s technology is in demand in the current environment because it manages and protects employees and contractors – including offering fever detection and facial recognition.
Capital raisings and investment updates
In the six months to 30 June 2020, ASX-listed companies raised more than $25 billion in equity (excluding share purchase plans and dividend reinvestment plans). The capital raisings have far exceeded those seen on other global exchanges, largely due to temporary relief measures introduced by the ASX at the end of March. This allowed companies to address short-term liquidity issues that were being caused by large overnight falls in revenue or to take advantage of growth opportunities. Our funds have participated in over 25 of these capital raisings, investing around $60 million with roughly half invested in the healthcare and technology sectors.
In January Calvary Adelaide Hospital opened its doors for the first time. The hospital is South Australia’s largest private hospital and offers the only 24/7 private emergency department in South Australia. We are one of the cornerstone investors in the hospital through our investment in the Dexus Wholesale Healthcare Property Fund.
In March we became one of the early investors in Specialist Disability Accommodation through our investment in the Australian Unity SDA fund. The fund provides accommodation that is tailored to the needs of individuals who are living with a disability. There is an enormous undersupply of suitable and high-quality disability accommodation in Australia. We think that investing in the sector while it is still in its early stages will help attract much needed investment.
Note: Past performance is not a reliable indicator of future performance. Ratings or investment returns are only one factor you should consider when deciding how to invest your super. Remember, superannuation is generally a long-term investment. For details on the risks and fees of investing, please refer to the Financial Services Guide and the relevant Product Disclosure Statement.
*SuperRatings Fund Crediting Rate Survey - SR50 MySuper Index as at 30 June 2020, 5 year return is 6.47% and 7 year return is 7.32%.
#SuperRatings Fund Crediting Rate Survey – Australian Shares Index delivering returns of 3.21%, 8.87%, 10.68% and 10.47% respectively. SuperRatings does not issue, sell, guarantee or underwrite this product. Go to www.superratings.com.au for details of its ratings criteria.