International Shares Fund

Global equity markets experienced a volatile March quarter, with earlier optimism giving way to a sharp repricing of risk assets as geopolitical tensions and inflation concerns re-emerged. The MSCI World ex Australia Index fell by -6.22%, reflecting broad-based weakness across global equities. The International Shares Fund (Wholesale) (the “Fund”) returned -8.29%, closely tracking its benchmark while maintaining strict adherence to Australian Ethical’s investment charter.

Markets were increasingly shaped by a confluence of factors: the escalation of conflict in the Middle East, renewed uncertainty over the path of inflation, and a material rotation within technology stocks.

Early-year expectations of imminent US Federal Reserve rate cuts were challenged as higher energy prices—driven by Middle East‑related disruptions—reintroduced inflationary pressure. Sustained oil price strength led investors to reassess the likelihood, timing and extent of policy easing. As a result, bond yields rose and equity valuations compressed, particularly across growth‑oriented segments of the market.

Within equities, style leadership reversed dramatically. Momentum—particularly earnings and price momentum—was among the weakest performing factors globally, while Low Volatility, Low Beta and Value characteristics regained favour. This factor rotation was most visible in technology, where the quarter became defined by what market commentary labelled a “SaaS‑pocalypse”. Software stocks sold off sharply on concerns around intensifying generative AI competition, margin pressure, and the durability of long-duration growth assumptions in a higher‑for‑longer rate environment. In contrast, hardware and semiconductor stocks proved more resilient, supported by AI‑related capital expenditure and stronger earnings visibility across parts of the supply chain. The divergence within technology highlighted the importance of differentiating between business models, balance sheet strength, and exposure to real economy investment rather than purely intangible growth.

From a portfolio perspective, the Fund did not benefit from the strong performance of the Energy sector, as we do not invest in oil and gas companies under our Ethical Charter. Stock selection in Industrials sector also negatively impacted performance due to our underweight exposure to Defence stocks on Ethical grounds. Meanwhile, stock selection in Communication Services and the Consumer Discretionary sectors positively contributed to performance, as the Fund does not have exposure to Tesla or Amazon, which underperformed over the quarter. The market dislocation reinforced the diversification benefits embedded in the portfolio construction process with the Information Technology sector having a neutral impact on performance as the underperformance of our Software & Services sub-sector was offset by the outperformance within our Semiconductor and Hardware sub-sectors.

Outlook for the Fund

Looking ahead, markets are likely to remain highly sensitive to developments in the Middle East and their implications for energy supply, inflation and monetary policy. Central banks—particularly the US Federal Reserve—are navigating an increasingly narrow path between containing inflation and supporting growth. While rate cut expectations have been pushed out, the medium‑term outlook remains supported by broadening earnings growth, easing financial conditions once policy clarity improves, and continued investment in technology‑driven productivity.

Equity valuations have adjusted lower, particularly in growth‑oriented segments, increasing dispersion across sectors and regions. This environment is conducive to systematic strategies that emphasise disciplined risk management, valuation awareness and diversification across factors. While near‑term volatility may persist, especially if geopolitical risks remain elevated, the portfolio remains positioned to participate in a broadening of market leadership as macro uncertainty stabilises and earnings fundamentals reassert their influence.

International Shares (Wholesale) Fund Performance

As at 31 March 2026^*

^Benchmark is the MSCI World ex Australia Index

Past performance is not a reliable indicator of future performance.

Inception date: 30/06/2015.

Contributors

• Applied Materials (AMAT) returned 29.6% through the March quarter as investors responded to a more bullish AI-driven demand outlook following the company’s February earnings update, where management emphasized accelerating investment in AI computing and rising spend on leading‑edge logic, high‑bandwidth memory (HBM), and advanced packaging—areas where AMAT is a key process‑equipment supplier. Results also supported the “quality of earnings” narrative, with strength in Dynamic Random‑Access Memory (DRAM)-related tools and continued momentum in the higher‑recurrence services/spares business, helping confidence in both cyclical upside and more resilient profitability.

• Avnet (AVT) returned 25.3% through the March quarter as investors leaned into evidence that the electronicsdistribution cycle was improving: the company’s late‑January update reported results ahead of its own guidance, highlighted better operating leverage and ongoing inventory reduction/working‑capital discipline, and pointed to a steadier demand backdrop with improving momentum in Western regions and a less‑severe seasonal slowdown in Asia than typically expected.

• Lam Research (LRCX) returned 21.6% through the March quarter as the market leaned into an AI‑driven wafer‑fab equipment upcycle, with Lam’s January earnings update reinforcing that demand for leading‑edge foundry/logic, HBM‑related DRAM and advanced packaging is accelerating and increasingly “structural” rather than purely cyclical. Investor confidence was further supported by better‑than‑expected results and upbeat forward commentary, alongside evidence of continued share/positioning benefits from rising etch and deposition intensity at new architectures (e.g., gate‑all‑around and more complex packaging).

Detractors

• Microsoft (MSFT) shares fell 25.4% in the March quarter as investors increasingly questioned whether the company’s accelerating AI infrastructure buildout would translate into near‑term returns, with management commentary highlighting strong cloud/AI demand but the market focusing on margin sensitivity and a more demanding “Return on Investment (ROI) proof” bar. At the same time, sentiment was pressured by software‑model disruption concerns—that generative AI and agentic workflows could compress traditional seat‑based pricing, shift value capture, and intensify competition—despite Microsoft pushing a clearer paid Copilot monetisation strategy to address investor feedback.

• NVIDIA (NVDA) shares declined 8.9% in the March quarter despite another strong earnings result that reaffirmed its leadership in AI infrastructure. Management highlighted accelerating agentic AI demand, continued platform momentum, and a clear next generation product roadmap. However, performance was dampened by a more cautious market backdrop, including concerns over the durability of AI capital expenditure, elevated valuations, and heightened Middle East geopolitical risk that drove energy prices higher and weighed on technology sentiment.

• Alphabet (GOOGL) shares fell 10.5% in the March quarter as the stock balanced a clearly improving fundamental story against a heavier “risk discount” on mega‑cap AI names: sentiment was supported by the company’s February results highlighting accelerating momentum in Search and Google Cloud, with management pointing to AI as an “expansionary” driver of usage and emphasizing growing enterprise demand for its AI infrastructure and Gemini-led solutions. However, the share price was tempered by investor focus on rising AI investment intensity (capex) and what that implies for near‑term free cash flow, alongside ongoing regulatory/antitrust overhangs that kept headline risk elevated even as operating trends improved.

Terna S.p.A., Italy’s national high‑voltage electricity grid operator, responsible for transmitting power and balancing supply and demand in real time (dispatching) to keep the system reliable and secure, achieved ethical approval and the holding was initiated as part of the optimisation process which aims to reduce tracking error.

Portfolio changes

Additions to the Fund 

The following holdings were all initiated as part of the optimization process which aims to reduce tracking error.

• Terna S.p.A. (TRN-IT) – Terna S.p.A. is Italy’s national high‑voltage electricity grid operator, responsible for transmitting power and balancing supply and demand in real time (dispatching) to keep the system reliable and secure. This company recently achieved ethical approval.

• Taylor Wimpey plc (TW-GB) – Taylor Wimpey plc is one of the UK’s leading homebuilders, investing in land and developing new homes and communities through its network of regional UK businesses, with a smaller operation in Spain, and managing the process end‑to‑end from initial land investment through to completion and after‑sales care.

• EDP Renovaveis SA (EDPR-PT) – EDP Renováveis, S.A. is a global renewable energy company that develops, builds, operates, and maintains power generation assets—primarily wind and solar—across multiple regions including Europe and the Americas. This company recently achieved ethical approval.

Reductions from the Fund

The following holdings were all divested as part of the optimization process which aims to reduce tracking error.

• Tryg A/S (TRYG-DK) – Tryg A/S is a leading Nordic non‑life (P&C) insurer, offering insurance to private and business customers across Denmark, Norway and Sweden.

• Trend Micro Incorporated (4704-JP) – Trend Micro is a global cybersecurity firm providing software and services that protect cloud, network, and endpoint environments, anchored by its Trend Vision One security platform.
  
  
• Wolters Kluwer N.V. (WKL-NL) – Wolters Kluwer N.V. is a global provider of professional information, software, and services, helping customers in areas such as healthcare, tax & accounting, legal & regulatory, financial and corporate compliance, and corporate performance/ESG make better decisions and manage complex regulatory requirements.
   

Stock selection in Communication Services and the Consumer Discretionary sectors positively contributed to performance, as the Fund does not have exposure to Tesla or Amazon which underperformed over the quarter.

The quarter became defined by what market commentary labelled a “SaaSpocalypse” … software stocks sold off sharply on concerns around intensifying generative AI competition, margin pressure, and the durability of long-duration growth assumptions in a higher for longer rate environment.

Sector allocation

Sector overweights
Cash, Communication Services, Financials, Industrials, Information Technology, Real Estate, Utilities (renewables)

Sector underweights
Consumer Discretionary, Consumer Staples, Energy, Health Care, Materials