International Shares Fund
Global equity markets delivered a modest gain over the September quarter, although the advance was narrow and came against a more difficult backdrop of sharply higher bond yields, rising oil prices and renewed tensions in the Middle East. The MSCI World Ex-Australia Index rose 1.5%, and the International Shares Fund (Wholesale) (the "Fund") returned 1.7% after fees, slightly ahead of the benchmark, while maintaining its strict adherence to Australian Ethical's investment charter. Strong corporate earnings and continued investment in artificial intelligence ("AI") supported markets.
While AI remained a dominant market theme, the investment debate became more nuanced. Spending on semiconductors, data centres, networking and power infrastructure continued to underpin earnings growth, while investor attention increasingly shifted towards the scale, financing and prospective returns from this investment. Leadership within the AI theme also moved quickly. In mid-September, concerns about the pace of frontier-model development triggered a sharp sell-off in semiconductors and AI infrastructure, and a rotation into software and cybersecurity. Renewed optimism about AI demand then left Technology and Communication Services as the only positive S&P 500 sectors for the month.
The main counterweight to the strong earnings environment was the substantial increase in global bond yields. The US Federal Reserve raised rates by 25 basis points in September, and the US 10-year Treasury yield ended the month near 5.3%, its highest level since 2002. Expectations of tighter monetary policy, persistent inflation, large fiscal deficits and heavy capital demand from the AI investment cycle all pushed long-term yields higher. This weighed most heavily on rate sensitive sectors, such as REITs, and long-duration assets. Brent crude rose 14.4% in September to US$103.53 per barrel amid Middle East conflict, which renewed inflation concerns.
From a style perspective, factor returns swung considerably over the quarter. July saw a sharp reversal in Momentum, as investors questioned whether the pace of AI-related capital spending could be sustained, and cut back the most crowded positions. Factor rotation eased in August, when strong outlooks from the major US semiconductor companies restored some confidence in AI demand. Investor attention then moved to bond markets, where more hawkish signals from central banks drove long-term yields higher. In this environment, Value stocks delivered modest gains, as investors favoured cheaper companies whose valuations are less sensitive to rising interest rates.
Over the quarter the fund slightly outperformed its benchmark by 0.2%, led by positive stock selection within the Financials, Materials and Consumer Staples sectors. At stock level, the fund’s holding in Overseas-Chinese Banking Corporation (up 32%), whilst avoiding Tesla (which fell 16%) and Caterpillar (down 24%), were the strongest contributors to relative performance. This was partially offset by an underweight allocation to the Energy sector, which rose 14.7% for the quarter.
The Fund maintained overweight positions in Waste Management and American Water Works. As populations grow and urbanise, the efficient management of waste and water resources becomes increasingly important. Waste Management helps recover valuable materials through its recycling and resource recovery operations, reducing waste sent to landfill and supporting the circular economy. American Water Works provides drinking water and wastewater services that help protect public health and promote the sustainable management of water resources. Together, these companies provide essential environmental services that support healthier and more sustainable communities.
Outlook for the Fund
Looking ahead, the outlook remains constructive, although there is less room for things to go wrong than there was. Strong earnings and continued AI-related investment are favourable conitions for the matket. Share markets can absorb higher bond yields as long as earnings growth holds up, which makes the durability of earnings a key question to watch. Inflation, bond yields and central bank policy remain the main risks. September showed how quickly geopolitical events can push energy prices higher. Anyfurther escalation in the Middle East could shift market conditions rapidly.
Against this backdrop, elevated dispersion across sectors, regions and factors should continue to favour quantitative investment approaches that emphasise diversification, valuation awareness and disciplined risk management. As higher financing costs test the AI investment cycle, outcomes are likely to differ more between companies with visible earnings and those relying on distant growth.
International Shares (Wholesale) Fund Performance
As at 30 September 2026*
| Fund | Benchmark^ | |
|---|---|---|
| 3 Months | 1.7% | 1.5% |
| 6 Months | 17.5% | 14.2% |
| 1 Year | 11.0% | 9.9% |
| 3 Years P.A. | 17.9% | 18.5% |
| 5 Years P.A. | 11.5% | 12.8% |
| 10 Years P.A. | 12.6% | 14.0% |
| Since Inception P.A. | 11.7% | 12.6% |
^Benchmark is the MSCI World ex Australia Index
Past performance is not a reliable indicator of future performance.
Inception date: 30/06/2015.
Contributors and detractors
Key contributors
+37.1%
Microsoft Corporation (MSFT-US)
+14.7%
Apple Inc. (AAPL-US)
+13.8%
NVIDIA Corporation (NVDA-US)
Key detractors
-29.5%
Applied Materials, Inc. (AMAT-US)
-35.6%
KLA Corporation (KLAC-US)
-24.4%
Lam Research Corporation (LRCX-US)Contributors
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Microsoft Corporation (MSFT-US) returned 37.1% in the September quarter, as its fiscal fourth-quarter result eased concerns about whether its heavy AI spending would pay off. Azure revenue grew 43%, ahead of guidance, and Microsoft 365 Copilot passed 30 million paid seats, up from 20 million in April.
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Apple Inc. (AAPL-US) returned 14.7% in the September quarter, despite a sharp sell-off after its June-quarter result. Apple reported its strongest June quarter on record, with iPhone revenue up 22%.. Market participants continued to view Apple as a defensive holding compared with its large technology peers, and sentiment improved in September when its first foldable iPhone was priced below expectations.
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NVIDIA Corporation (NVDA-US) returned 13.8% in the September quarter, recovering from a sharp sell-off in semiconductor stocks in late July. Its second-quarter result then reassured investors that AI demand remained strong. Revenue more than doubled from a year earlier, and third-quarter revenue guidance of US$108 billion was ahead of consensus. The key surprise was guidance for fiscal 2028: it expects revenue to grow about 70%, well above the roughly 45% analysts had expected. It said demand was closer to 100% but limited by supply. In late September, NVIDIA also announced a record US$150 billion increase to its share buyback programme.
Detractors
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Applied Materials, Inc. (AMAT-US) returned -29.5% in the September quarter, despite continued strong growth in the business. After a strong first half, semiconductor stocks were re-rated lower in July as investors shifted from enthusiasm about AI to demanding evidence of returns. Applied Material's August result delivered record revenue of US$9.12 billion, up 25%, and earnings ahead of expectations, but concerns about margins and the sustainability of growth weighed on the shares.
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KLA Corporation (KLAC-US) returned -35.6% in the September quarter, despite record results. KLA reported record revenue of US$3.66 billion, up 15%, and earnings ahead of expectations, and said it expected growth to accelerate through 2027. However, this guidance was only slightly above analyst estimates, and disappointed market expectations. The shares came under further pressure in mid-September, when leading AI developers called for slower development of the most advanced models.
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Lam Research Corporation (LRCX-US) returned -24.4% in the September quarter, despite record results. Lam Research's July result delivered record revenue of US$6.72 billion, up 30%, and earnings ahead of expectations, and management raised its forecast for 2026 industry spending on chipmaking equipment. However, its share remained under pressure as investors debated the outlook for memory spending and questioned whether the expected growth in 2027 was already reflected in the share price.
NetScout Systems, a provider of network observability, service assurance, cybersecurity and DDoS protection to carriers, enterprises and government agencies, was approved and added to the portfolio as part of the optimisation process..
Portfolio changes
New investments
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NetScout Systems, Inc. (NTCT-US) – NetScout Systems, Inc. provides network observability, service assurance, cybersecurity and DDoS protection solutions to telecommunications carriers, enterprises and government agencies.
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AIXTRON SE (AIXA-DE) – AIXTRON SE develops and manufactures deposition equipment for the semiconductor industry. Its systems are used to produce compound semiconductor materials such as gallium nitride and silicon carbide, which are used in power electronics and optoelectronics.
- Nutanix, Inc. Class A (NTNX-US) – Nutanix, Inc. provides a hybrid multicloud software platform that enables organisations to run applications, data and AI across data centres, edge locations and public clouds.
All company additions recently received ethical approval and were added to the portfolio as part of the optimisation process, which aims to reduce tracking error.
Divestments
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Schroders PLC (SDR-GB) – Schroders Plc is an asset management company, which engages in investment management activities. The holding was sold ahead of the completion of its acquisition by Nuveen on 1 October 2026.
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Veolia Environnement SA (VIE-FR) – Veolia Environnement SA provides water, waste management and energy services to municipal and industrial customers. The holding was sold as part of the optimisation process, which aims to reduce tracking error.
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Royal KPN NV (KPN-NL) – Royal KPN NV provides fixed and mobile telecommunications, broadband, TV and IT services in the Netherlands. The holding was reduced as part of the optimisation process, which aims to reduce tracking error.
At stock level, the Fund’s avoidance of Tesla securities was a contributor to relative performance.
Spending on semiconductors, data centres, networking and power infrastructure continued to underpin earnings growth, while investor attention increasingly shifted towards the scale, financing and prospective returns from this investment.
Sector allocation
Sector overweights
Communication Services, Financials, Industrials, Information Technology, Real Estate
Sector underweights
Consumer Discretionary, Consumer Staples, Energy, Health Care, Materials, Utilities
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.
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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.
Our investment restrictions include thresholds and other tolerances that vary depending on the investment. We apply both qualitative and quantitative analysis when making investment decisions and may invest where we believe the positive aspects outweigh the negative. From time to time, we may use derivatives that provide temporary exposure to a broad market index, such as the S&P/ASX 200. This does not involve direct investment in, or ownership of, the underlying companies. For more information, please read our Ethical Guide.
*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.