High Conviction SMA

FY26 was defined by one of the most pronounced divergences in Australian equity markets in recent history. While the ASX delivered strong overall returns, gains were heavily concentrated in the Resources sector, which benefited from rising commodity prices and robust investor demand. In contrast, much of the Industrials market faced a difficult earnings environment amid ongoing geopolitical uncertainty, persistent inflationary pressures and the rapid evolution of artificial intelligence (AI). The ASX recorded its first earnings upgrade cycle in four years; however, this largely reflected strength in Resources, while Industrials experienced one of their weakest earnings revision cycles in more than a decade. Traditional quality companies were particularly challenged, with Healthcare and Technology among the weakest-performing sectors, while small-cap companies modestly outperformed large caps over the period.

The High Conviction Portfolio (the “Portfolio”) delivered a gross return of -5.5% before 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. Despite there being no operational impact, Technology stocks were negatively impacted by fears that AI could displace traditional software companies, while the decline in Healthcare sector returns came as a result of short-term individual company 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 Portfolio performed broadly in line with 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. The Portfolio’s underweight position to the domestic Banks contributed positively given elevated valuation multiples, while increased exposure to diversified financials stocks with valuation appeal – including Challenger (CGF), Macquarie Group (MQG) and QBE Insurance (QBE) – delivered strong returns. The Portfolio also had positive returns in the mid and small-cap space, with Sims Ltd (SGM) and SiteMinder (SDR) delivering some of the Portfolio’s best performance over the year.

The Portfolio’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.

As we look ahead to FY27, we believe the Portfolio is well placed to deliver strong returns. Geopolitical events, inflation levels, and the evolution of AI capabilities will continue to drive short-term market volatility. But the Portfolio’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 SMA Portfolio Performance (net of fees)

As at 30 June 2026^*

Source: Praemium portal.

^Benchmark changed from S&P/ASX 200 Accum Index to S&P/ASX 300 Accum Index from 30 June 2025. The historical benchmark rturns are calculated by inkking these indices.

*Past performance is not a reliable indicator of future performance.

Inception date: 16/04/2020.

Contributors

• 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
  
  
• Macquarie Group (MQG) 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.
  
  
• Coles (COL) outperformed over FY26 as management executed strongly, with its focus on value, availability and affordability resonating with cost-conscious consumers. The company gained market share from competitors, supported by improved operational execution and enhanced product availability driven by investments in automated distribution centres and customer fulfilment facilities. Earnings quality improved through margin expansion, benefiting from lower stock loss and growing contributions from higher-margin revenue streams such as retail media. In a period of heightened market volatility, Coles' defensive earnings profile and resilient cash flows were also highly valued by investors.
  
  

Detractors

• CSL Limited (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.
  
  
• 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.  Having reassessed our exposures in the software space in detail we are comfortable holding Xero, with our investment thesis supported by an attractive valuation and , strong underlying fundamentals including solid subscriber growth, revenue expansion and free cash flow generation.
  
  
• WEB Travel (WEB) detracted from performance over the year as investor sentiment towards travel-related companies deteriorated due to concerns around weaker near-term travel demand amid heightened geopolitical uncertainty. The shares were further impacted by a company-specific tax matter in Spain, which contributed to a de-rating as the outcome remains unclear. Despite recent share price weakness, we continue to see compelling valuation upside and remain invested, given WEB's strong competitive position, attractive earnings growth profile and undemanding valuation.
  
  

The ASX recorded its first earnings upgrade cycle in four years; however, this largely reflected strength in Resources, while Industrials experienced one of their weakest earnings revision cycles in more than a decade.

Portfolio changes

Additions to the Portfolio

• Mirvac Group (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 Portfolio

• Graincorp (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 to 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.

• Cochlear (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.

• Ramsay Healthcare (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.
   

A broad rally in commodities resulted in significant outperformance in the Materials sector (+52%), while the Energy sector (+12%) also outperformed

Sector allocation

Sector overweights
Health Care, Industrials, Information Technology, Utilities (Renewables)

Sector underweights
Communication Services, Consumer Discretionary, Energy, Materials

Despite the headwinds in two of the portfolio’s key investment sectors (Healthcare and Technology), the Portfolio performed broadly in line with the ASX 300 Industrials index, which removes the impact of the carbon intensive mining and energy sectors.