High Conviction Fund
FY26 was a very strong year for global equity markets, however the domestic experience was more subdued. Whilst the ASX was propelled higher by the broader Resources complex, driven by rising commodity prices, while the rest of the market lagged. Geopolitical events, persistent inflationary pressures, and the rise of artificial intelligence capabilities, combined to create ongoing volatility for investors. The ASX recorded its first earnings upgrade cycle in four years, however the strength in Resources masked significant cuts for the Industrials segment of the market, one of its worst performances in a decade. ‘Quality’, as a factor, recorded its worst year in decades, with Healthcare and Technology sectors particularly challenged. While small caps modestly outperformed large caps across the 12 months.
The High Conviction Fund (the “Fund”) delivered a return of -3.9% net of fees for the 12 months to June 30, compared to the benchmark, ASX 300, return of +6.2%. The main driver of the performance differential was sector allocations. A broad rally in commodities resulted in significant outperformance in the Materials sector (+52%), while the Energy sector (+12%) also outperformed. The portfolio has minimal exposure to both sectors under our Ethical investment framework that prioritises investments in lower carbon intensive sectors. Conversely, the portfolio’s two key overweight sectors, Healthcare (-36%) and Information Technology (-27%), underperformed the market in FY26. Technology stocks were negatively impacted by fears that artificial intelligence (AI) could displace traditional software companies, while the decline in Healthcare sector returns came as a result of reduced hospital capex spending given the impact of rising rates, and short-term idiosyncratic challenges. We expect both sectors to perform significantly better going forward as investors regain confidence in the outlook for both.
Despite the headwinds in two of the portfolio’s key investment sectors (Healthcare and Technology), the Fund outperformed the ASX 300 Industrials index, which removes the impact of the carbon intensive mining and energy sectors. This was driven by positive stock selection across a number of sectors throughout the year, reflecting the contribution from the team’s fundamental investment approach. Particular success was evident in the Financials sector, where the Fund’s underweight position to the domestic Banks contributed positively, while increased exposure to diversified financials stocks with valuation appeal – including Challenger (CGF), Macquarie Group (MQG) and QBE Insurance (QBE) – delivered strong returns. The Fund also had success in the mid and small-cap space, with Aussie Broadband (ABB), Sims Ltd (SGM), and SiteMinder (SDR) delivering some of the portfolio’s best performance over the year.
The Fund’s top performer in FY26 was Pilbara Minerals (PLS), a low-cost global Tier 1 producer of lithium raw materials used in the construction of batteries for electric vehicles and energy storage systems. PLS returned 276% over the year, driven by a strengthening pricing environment for lithium as demand continued to grow and market supply remained constrained. Australian Ethical have been long-term investors in PLS, which we expect to benefit from the significant long-term demand growth of lithium raw materials as global economies gradually decarbonise their transport and energy networks. Whilst supply shocks may improve the near-term outlook for oil and gas producers, they do not change the climate imperative to phase out fossil fuels. In fact, global instability reinforces important non-climate benefits of renewable energy, including its potential to diversify energy supply and strengthen national energy security. Higher energy costs can also help more efficient products and services which our ethical approach favours, like electric vehicles, public transport, metal recycling and lower carbon building products.
As we look ahead to FY27, we believe the Fund is well placed to deliver strong long term returns. Geopolitical events, inflation levels, and the evolution of AI capabilities will continue to drive short-term market volatility. But the Fund’s diversified sector exposures beyond the index heavy Banks and Resources sectors provides opportunity in FY27 as investors seek returns in more attractively valued areas of the market. Australian Ethical’s fundamental, bottom-up investment approach is well placed to identify and take advantage of these opportunities.
High Conviction (Wholesale) Fund Performance (with performance fee)
As at 30 June 2026*
| Fund | Benchmark^ | |
|---|---|---|
| 3 Months | 5.1% | 4.1% |
| 6 Months | -5.8% | 2.0% |
| 1 Year | -3.9% | 6.2% |
| 3 Years P.A. | 3.4% | 10.6% |
| 5 Years P.A. | - | - |
| 10 Years P.A. | - | - |
| Since Inception P.A. | 1.9% | 7.6% |
^Benchmark is the S&P/ASX 300 Accumulation Index. Past performance is not a reliable indicator of future performance.
Inception date: 01/10/2021.
Contributors and detractors
Top 3 contributors to Fund return
+276.0%
Pilbara Minerals (PLS)
+13.0%
Macquarie Group (MQG)
+13.4%
QBE Insurance (QBE)
Top 3 detractors from Fund return
-50.9%
CSL (CSL)
-54.3%
XERO (XRO)
-66.2%
Cochlear (COH)Contributors
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PLS Group (PLS) outperformed strongly over the year as improving lithium market fundamentals supported a recovery in spodumene prices from cyclical lows. Higher realised prices drove a significant improvement in earnings, margins and cash generation, while improving sentiment toward battery materials increased investor interest in high-quality, low-cost producers. We believe PLS is well positioned to fund future growth and benefit from the favourable long-term outlook for lithium demand.
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Macquarie Group (MCG) delivered a better than expected FY26 result, with EPS growth of ~30%, as earnings grew strongly across its diversified businesses. The Commodities and Global Markets benefited from stronger trading conditions, the Asset Management division posted strong performance fees and Macquarie Capital benefited from asset realisations. Earnings momentum is expected to continue into FY27, supported by the group’s diversified business mix. MQG continues to target through-the-cycle ROE of ≥14%, reflecting the resilience and flexibility of its earnings model.
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QBE Insurance (QBE) has delivered a clear improvement in profitability over the past three financial years. Medium-term guidance targets of mid-single digit Gross Written Premium (GWP) growth and Return on Equity (ROE) >15%, imply sustainability of current earnings quality. This has been enhanced by capital management including a $600 million share buyback. A key driver of earnings performance has been disciplined catastrophe risk management. Notably, QBE has outperformed domestic insurers on catastrophe outcomes in recent periods. We see continued scope for PE multiple expansion, with valuation converging closer to domestic insurance peers.
Detractors
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CSL (CSL) detracted from performance as it rebased its earnings outlook amid regulatory setbacks in China, continued vaccine sentiment fatigue and the impact of generic competition within its Vifor segment. Despite near-term headwinds, we continue to see CSL as a high-quality healthcare franchise with attractive long-term growth prospects, supported by its global leaderships in plasma therapies and vaccines, significant scale advantages and multiple avenues for earnings recovery. The valuation remains compelling and we see meaningful upside to long-term demand trends for its core portfolio of therapies/
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XERO (XRO) underperformed over the year as sentiment toward global software names deteriorated, primarily driven by concerns around AI related disruption. The share price weakness reflects revenue multiple compression to historic lows, rather than a deterioration in operating performance, with Xero continuing to invest in AI functionality and its broader platform ecosystem to support long term growth coupled Having reassessed our exposures in the software space in detail we are comfortable holding Xero as our investment thesis is supported by an attractive valuation and strong underlying fundamentals including solid subscriber growth, revenue expansion and free cash flow generation.
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Cochlear (COH) underperformed following an earnings downgrade driven by slower implant market growth and a mix of headwinds, including weaker hearing aid channel referrals, procedure deferrals and disruption across key developed markets. Despite this, the long-term investment case remains intact given Cochlear’s market leading position, product innovation and favourable demand drivers, with valuation providing upside as growth recovers once these pressures ease.
the long-term investment case remains intact for Cochlear in light of its market leading position, product innovation and favourable demand drivers, with valuation providing upside as growth recovers once these pressures ease.
Portfolio changes
Additions to the Fund
- Mirvac Group (MGR) – MGR owns, develops and manages properties across the Residential, Office & Industrial, and Retail sectors. We think MGR is a potential net beneficiary from the budget changes, with property investor demand likely to shift focus towards new residential developments that retain the ability to access negative gearing. Additionally, MGR offers an attractive dividend yield and is trading at a significant discount to book value at current levels, providing material upside when investor sentiment improves.
Divestments from the Fund
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Graincorp (GNC) – GNC is the leading bulk grain handling company in Australia. FY26 has seen earnings downgraded during the year due to more challenging conditions, with management guiding for Earnings before interest, tax, depreciation and amortization (EBITDA) of $200-240m, ~30% below GNC's "through-the-cycle" earnings of $320m. While the recent 1H26 result reaffirmed guidance, operating conditions remain unpredictable. The medium-term outlook also carries additional risk with the potential for an El Nino weather pattern occurring later in the year that could result in a smaller crop size than in past years due to drier conditions.
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Cochlear (COH) – COH surprised the market with a material downgrade to FY26 earnings guidance, driven by a range of factors including a slowdown in sales in the US and Europe, an acceleration of cost base restructuring, and currency movements. While some of these factors are temporary impacts, we are concerned that the slowdown in sales growth in key markets will likely take some time to recover meaningfully. Therefore, despite the material share price decline following the announcement, we think COH remains at risk of a further share price and P/E multiple de-rating as the market adjusts to a business possessing a lower growth profile than has historically been the case..
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Ramsay Healthcare (RHC) – RHC is the largest private hospital owner and operator in Australia, with additional interests in overseas operations in France and the UK. RHC is in the early stages of a multi-year turnaround and while we think the new management team is doing a credible job at this stage, significant challenges still remain, with labour cost inflation a structural challenge for hospital operators, and the UK business facing difficult operating conditions. We think the path to recovery will take some time for RHC and with the stock trading at historically elevated valuation multiples, we have divested our holding and reinvested the capital into more attractive opportunities.
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Opthea (OPT) – Opthea 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.
We are comfortable holding Xero as our investment thesis is supported by an attractive valuation and strong underlying fundamentals including solid subscriber growth, revenue expansion and free cash flow generation.
Sector allocation
Sector overweights
Communication Services, Consumer Staples, Health Care, Information Technology, Utilities (renewables)
Sector underweights
Consumer Discretionary, Energy, Financials, Materials
Whilst supply shocks may improve the near-term outlook for oil and gas producers, they do not change the climate imperative to phase out fossil fuels.
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 an authorised tax or 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.