Emerging Companies Fund
Australian Small Cap Industrials overall were only slightly down for the year to 30 June 2026, despite three RBA rate hikes in the second half of the year. The market’s favoured sectors, however included defense stocks and electrical and mining services contractors, most of which are excluded under our Ethical Charter, and many making multi year highs amidst the Iran War and the AI capex rollout. Of the top fifty best performing companies in the Small Industrials Index over the year, only thirteen names are eligible for investment under our Ethical Charter, but we believe this narrow market leadership is unlikely to persist, particularly as geopolitical issues fade and the AI investment cycle takes on heightened risks (see below).
The Emerging Companies wholesale fund (-14.4%) underperformed the ASX Small Industrials benchmark (-0.9%) over the 12 months to 30 June 2026.Most of the underperformance occurred in the last quarter of the year with several of our financial companies temporarily falling out of favour post the release of the Federal Budget in May (eg: Australian Finance Group, -27.3%) and selected healthcare names (eg: Austco Healthcare, -13.8%) suffering delayed demand for their products in a low confidence environment across healthcare globally.
Cogstate (+58.3%), on the other hand was the Fund’s best contributor for the year, benefiting from continued momentum in its clinical trials business and increasing diversification of its pipeline across multiple therapeutic areas (see below for more detail).
Aroa Biosurgery (+2.6%), a key Fund holding is a strong example of how healthcare innovation can improve patient outcomes. The company develops regenerative healing products used to treat serious wounds caused by trauma, burns, diabetes, surgery and infection, with its technologies having been used more than 7 million times globally and supported by over 100 peer-reviewed studies. In a recent trauma study involving 49 patients and 61 serious wounds1, AROA's Myriad product restored healthy tissue in a median of 22.5 days, typically required only a single application and resulted in no graft failures or deep infections, while patients reported high satisfaction with their treatment. The technology is also being used in specialist burns centres, including the Royal Brisbane and Women's Hospital, helping patients with complex wounds recover with fewer complications and less need for repeat procedures. By supporting faster healing and reducing the burden on healthcare systems through shorter hospital stays and lower treatment costs, Aroa demonstrates how our investment capital can contribute to better health outcomes and improved quality of life for patients. The Fund holds over 5% of issued capital in the company.
On the negative side, while technology stocks have, in the past, added significant outperformance to the Fund, in FY26 it was software that bore the brunt of selling across the market as AI innovation came to the fore. As the AI narrative extends and the tools become part of our everyday lives, the AI business model itself is essentially still unknown. Massive capex, increasingly funded through debt as “hyperscalers” run through their cash flow, Meta announcing the sale of overcapacity, the circular financing that is fueling the rollout, and the evolving price of tokens all point to a certain fragility in the model. Software businesses that have been assumed to be entirely disrupted may yet have a long future as they firstly adopt AI themselves, to use in client workflows, and secondly as markets face the possibility that unconstrained capex can lead to overbuild (like almost every other boom in history). Software company multiples in our view, are likely to rebound if the build out of AI computing power pauses for any reason and having reassessed our software exposures in detail we are comfortable that most of them will stand the test of time in this new world. We continue to hold positions in Siteminder (-7.9%) as it remains critical infrastructure, Gentrack (-72.1%) as contract wins are forecast to resume and EROAD (-35.5%) as the company restructures to improve customer satisfaction and win market share in tracking road user charges.
Despite the Fund’s underperformance for the year the companies held in the portfolio are in good shape. As one measure of portfolio health, over the FY26 year we expect the portfolio to deliver double-digit weighted average sales growth (when they report in August). And while some companies have faced challenges this year our internal valuation for our total portfolio is substantially above where the portfolio is trading today. As markets reward and punish various themes over the short term, we are focused on the medium to long term, detailed fundamentals including cash flow and balance sheet and finding opportunities among those companies that may not be flavour of the month but represent good long-term value.
Emerging Companies (Wholesale) Fund Performance
As at 30 June 2026*
| Fund | Benchmark^ | |
|---|---|---|
| 3 Months | -2.7% | 8.4% |
| 6 Months | -20.1% | -7.1% |
| 1 Year | -14.4% | -0.9% |
| 3 Years P.A. | 1.9% | 6.8% |
| 5 Years P.A. | -2.2% | 0.2% |
| 10 Years P.A. | 8.7% | 5.4% |
| Since Inception P.A. | 9.4% | 6.1% |
^Benchmark: S&P ASX Small Industrials Index. Past performance is not a reliable indicator of future performance.
Inception date: 30/06/2015.
Emerging Companies (Retail) Fund Performance
As at 30 June 2026*
| Fund | Benchmark^ | |
|---|---|---|
| 3 Months | -2.8% | 8.4% |
| 6 Months | -20.3% | -7.1% |
| 1 Year | -14.8% | -0.9% |
| 3 Years P.A. | 1.4% | 6.8% |
| 5 Years P.A. | -2.7% | 0.2% |
| 10 Years P.A. | 8.1% | 5.4% |
| Since Inception P.A. | 8.8% | 6.1% |
^Benchmark: S&P ASX Small Industrials Index. Past performance is not a reliable indicator of future performance.
Inception date: 30/06/2015.
Contributors and detractors
Top 3 contributors to Fund return
+58.3%
Cogstate Ltd (CGU)
+72.1%
Cuscal Limited (CCL)
+36.0%
Reece Limited (REH)
Top 3 detractors from Fund return
-72.1%
Gentrack Group Ltd (GTK)
-35.5%
EROAD Limited (ERD)
-27.3%
Australian Finance Group Ltd. (AFG)Contributors
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Cogstate (CGS) was a strong contributor in FY26, benefiting from continued momentum in its clinical trials business and increasing diversification of its pipeline across multiple therapeutic areas. Growth was supported by expansion beyond its historical Alzheimer’s focus into broader central nervous system and other trials, reducing reliance on any single program and improving revenue visibility. The company also maintains a strong balance sheet with net cash, providing flexibility to invest in product development and pursue new opportunities, underpinning confidence in its medium-term growth outlook.
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Cuscal (CCL) was a strong contributor over the year, driven by solid transaction volume growth and positive operating leverage translating into double‑digit earnings growth. Performance was supported by its highly defensive, volume based payments model and entrenched position as a regulated infrastructure provider to banks and fintech clients. Additional upside came from the strategic acquisitions of Indue and Paymark to extend its scale and expand into New Zealand. We continue to see Cuscal benefiting from structural growth in digital payments and market share gains within the non‑major bank segment.
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Reece (REH) returned over 35% to portfolio returns for the financial year, reflecting an A$365m off‑market buy‑back at cycle lows, an improved earnings outlook following the 1H26 result, operational leverage from US store maturation and product repricing, and, more recently, a sentiment tailwind from expectations of a cyclical recovery in US housing.
Detractors
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Gentrack (GTK) underperformed over the year as delays in large contract wins and elongated sales cycles deferred the revenue growth in the short term. Lower project-related revenue weighed on near‑term earnings and led to a reset in market expectations, although management stated that the underlying sales pipeline remains intact. While execution risk has increased in the near term, we continue to see long term growth supported by utilities billing digitisation and the structural energy transition.
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Australian Finance Group (AFG) – Concerns around the impact of higher interest rates and Budget changes to capital gains tax on residential housing settlements have weighed on AFG’s share price. AFG delivered a strong 1st Half result in February, with earnings up 40%, and is expected to deliver similar earnings growth for the full year. We view any cyclical softness as temporary, given the structural undersupply of housing in Australia. With approximately 1 in 9 mortgages written through its broker network, AFG is well positioned to capture market growth as conditions normalise.
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EROAD (ERD) underperformed over the year as the strategic reset, US business impairment and management team changes weighed on sentiment. We believe the strategy being employed in terms of refocusing on the cash generative NZ business and Australian enterprise sales pipeline, whilst deprioritising the struggling US business as sensible and view the monetisation of the eRUC regulatory opportunity as a growth option. We continue to view ERD’s leadership in NZ’s fleet telematics industry and exposure to regulatory tailwinds as supportive over the medium term.
By supporting faster healing and reducing the burden on healthcare systems through shorter hospital stays and lower treatment costs, Aroa Biosurgery demonstrates how our investment capital can contribute to better health outcomes and improved quality of life for patients.
Portfolio changes
Additions to the Fund
- Arena REIT – Arena owns properties primarily leased to early learning childcare centers. The group has delivered a consistent track record of earnings, dividend and NTA growth. Growth has been supported by an active development pipeline, with ARF approaching completion of its 100th childcare centre development. We added ARF at an attractive >10% discount to NTA, a notable dislocation versus ARF’s historical premium to NTA.
- PYC Therapeutics – We initiated a position in PYC through its recent capital raising. The company is developing novel treatments for Retinitis Pigmentosa and Polycystic Kidney Disease, two chronic conditions with limited effective treatment options. With funding secured through upcoming efficacy readouts, we see PYC as an attractive long‑term investment opportunity.
- Reliance Worldwide – Was added to the fund as market concerns around housing activity and tariffs created a valuation disconnect. We believe the market is underestimating the company's earnings recovery potential, supported by a strong balance sheet, market-leading brands, operational improvement initiatives and leverage to an eventual recovery in global housing and repair-and-remodel activity.
Reductions from the Fund
- Opthea Limited was divested from the portfolio following the company's return from a prolonged trading suspension after its unsuccessful Phase 3 clinical trial outcome. Given the loss of value associated with the failed program, we had previously written our investment down to zero. Following the resumption of trading, we elected to exit the position and realise the remaining residual value available to shareholders.
- Australian Clinical Labs (ACL) – Australian Clinical Labs was divested from the portfolio despite being a quality pathology business with a strong operational footprint. We believe the company faces ongoing headwinds from rising labour costs, increased industry competition and a regulatory environment where government reimbursement growth has failed to keep pace with cost inflation. While management has executed well, these factors are likely to constrain earnings growth and reduce the attractiveness of the investment opportunity relative to alternatives in the portfolio.
- Spark New Zealand Limited – Spark is a leading telecommunications company in New Zealand, providing mobile, broadband, and other telco services to individuals, businesses, and the NZ Government. The company has faced a challenging period, with reduced Government spending and a soft economy impacting demand. With a reset dividend policy, the risk of a downgrade has reduced, however it is likely to take some time for an earnings recovery to occur.
- Pengana Capital Group Ltd. – Pengana Capital is a funds management business that has more recently targeted private credit as its growth area compared to traditional funds management. The delivery timeframe to scale and generation of significant earnings from the private credit business was not evident, hence we divested of the holding.
Reece was a standout contributor to portfolio returns, driven by strong operational momentum and improving sentiment around a US housing recovery.
Sector allocation
Sector overweights
Financials, Health Care, Information Technology, Utilities (renewables)
Sector underweights
Communication Services, Consumer Discretionary, Consumer Staples, Industrials, Materials, Real Estate
The companies held in the portfolio are in good shape… over the FY26 year we expect the portfolio to deliver double-digit weighted average sales growth when they report in August.
1 January 2026 study referenced and linked via the company here.
Interests in 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 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 (PDS) and Target Market Determination (TMD) available on our website. You may wish to seek financial advice from a licensed financial adviser before making an investment decision. Past performance is not a reliable indicator of future performance.
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 portfolio(s) may not have exposure to specific assets which over or underperform over the investment cycle, and so the returns and volatility of the portfolio(s) may be higher or lower than non-ethical, non-sustainable portfolios over all investment time frames.
*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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The information contained in this document is believed to be accurate at the time of compilation.