Multi-Asset

Performance for the quarter was negative, reflecting weaker returns from growth-oriented assets across listed markets as the escalation of the Middle East conflict disrupted commodity markets and led to an inflationary shock and heightened uncertainty around the future pathways for economic growth. Defensive-focused funds, including the Conservative Fund and Moderate Fund performed relatively better given their lower exposure to risk assets. One year returns for the multi-asset funds were positive, ranging between 4.5% and 5.5%.

Prior to the shock, the market context had been improving with earnings growth broadening out, and a clear rotation both at the sector and country level, with markets outside the US performing quite strongly. In particular Japanese equities returned 15% and Emerging Markets 13% in the first two months of the year. However, the month of March saw a broad convergence in returns with all markets struggling in the context of oil prices doubling, and concerns around security of supply for many net energy importers. Early market assumptions that the conflict would be short-lived were revised as the evolving dynamics and the nature of strikes raised the prospect that normal supply could take considerably longer to restore, even if a ceasefire or agreement were reached.

In this environment, bonds were less effective as an anchor, declining in value during this risk off period, as higher oil prices generated an inflationary impulse and prompted a reassessment of interest rate expectations. Domestically, expectations for the Reserve Bank of Australia shifted quickly, with markets moving from pricing 1.5 rate hikes at the start of the year to four hikes for the calendar year, two of which have already been delivered, reflecting higher‑than‑expected inflation and the effects of geopolitical tension.

The biggest contributor to relative underperformance during the quarter was sector positioning across the domestic and global equity sleeves, with underweight exposure to energy and materials and overweight exposure to software and technology relative to the benchmark. Oil shortages drove energy and materials prices up whilst concerns about AI disrupting some software companies resulted in indiscriminate selling across the entire software sector.

Despite these market headwinds, the Growth Alternatives portfolio had a particularly strong quarter, returning 25.2%, comfortably exceeding its benchmark by 22.8%. Growth Alternatives investments are targeted at growth opportunities like unlisted infrastructure, which are lowly correlated to equities and designed to perform well in varying market conditions, thus insulating some of the sell-off in shares.

Outlook for the funds

Looking ahead to the coming quarter, market outcomes are expected to remain highly sensitive to developments in the Middle East and their implications for energy supply, inflation, and monetary policy. While recent volatility has been driven by an acute geopolitical shock, market attention has increasingly focused on whether elevated oil prices persist or begin to reverse. A stabilisation in energy markets would ease inflationary pressures and could support a recovery in risk assets, particularly global and domestic equities. While equity valuations have eased following the recent market correction, they remain elevated relative to historical norms. Rapid advances in AI continue to introduce meaningful disruption risks, increasing uncertainty for many companies, particularly within the software sector. Within this environment, we expect dispersion across regions, asset classes and within sectors to remain high, creating opportunities for selective positioning.

Energy security has reignited as a global imperative and is expected to have a profound impact on energy transition, particularly the acceleration towards electrification. Consistent with this theme, the Australian Ethical Balanced Fund holds investments in clean energy solutions 2.5 times higher than the mainstream benchmark and its listed share investments 76% less carbon intensive (tonnes of carbon dioxide per dollar revenue) than the benchmark.

Against this backdrop, the portfolio remains positioned to manage downside risks while retaining flexibility to participate in a potential rebound should conditions improve. We continue to favour areas offering greater valuation support and structural growth tailwinds, including select Asian equities, companies that could benefit from renewed focus to diversify energy sources such as CATL (the world’s largest battery manufacture) and parts of the Alternatives universe that provide exposure to long term thematics. Portfolio construction will continue to emphasise diversification, capital resilience, and disciplined risk management as we navigate an environment shaped by both geopolitical uncertainty and evolving economic conditions.

Multi-Asset Funds (Wholesale): Performance vs benchmark^*

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*All returns are net of fees for the Wholesale option. Find more information on these funds via the managed funds page including Retail performance. Past performance is not a reliable indicator of future performance.

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^ Benchmark: SAA Weighted Index.  

- Balanced Fund SAA Weighted Benchmark changed from Morningstar Multi-sector Balanced to SAA Weighted Benchmark from 1 Sep 2012. The historical benchmark returns are calculated by linking indices.

- High Growth SAA Weighted Benchmark changed from 75% S&P/ASX 200/25% MSCI World ex Australia to SAA Weighted Benchmark from 1 October 2021. Previously, benchmark changed from S&P ASX 200 to 75% S&P/ASX 200 Industrials/25% MSCI Global Climate from 29 August 2013, then to 75% S&P/ASX 200 Industrials/25% MSCI World ex Australia from 1 July 2016, then to 75% S&P/ASX 200/25% MSCI World ex Australia from 13 August 2019. The historical benchmark returns are calculated by linking indices.

Contributors

• Growth Alternatives & Unlisted Infrastructure – There was meaningful revaluation in the underlying unlisted infrastructure assets common to both of these allocations.
  
  
• Global Listed Infrastructure – This segment delivered meaningful outperformance versus broad equity markets, supported by solid momentum and strong fundamentals. Investor interest in the asset class continued to build as markets navigate a persistently higher‑inflation rate environment, with the asset class offering strong revenue links to inflation.
  
  

Detractors

• Global and Domestic Equity – Detracted from performance for the quarter, as escalating geopolitical tensions in the Middle East pushed oil prices higher and increased market volatility. The resulting uncertainty dampened investor sentiment and contributed to broad equity market softness, with markets reassessing the potential inflation and growth implications of these developments.
  
  
  

The fund increased exposure to the local currency, supported by an improving domestic outlook and a lift in overall sentiment. The AUD also offers comparatively attractive carry versus many developed‑market peers, reducing the incentive to hold short positions and enhancing returns on our hedged foreign exposures.

Portfolio changes

Additions to the Funds

• Australian Dollar – The fund had increased exposure to the local currency, supported by an improving domestic outlook and a lift in overall sentiment. The AUD also offers comparatively attractive carry versus many developed‑market peers, reducing the incentive to hold short positions and enhancing returns on our hedged foreign exposures.

• Alternatives – Over the quarter, the fund deployed capital into a UK water‑utilities asset, Southern Water. The company is one of 16 regulated water providers in the UK, operating with a regulated asset base of £7.5 billion. It services approximately 2.0 million wastewater and 1.2 million water connections across an extensive network spanning 40,000 km of wastewater infrastructure and 14,000 km of water pipelines.

Reductions from the Funds

• Global Fixed Income – Over the period, we reduced our exposure to global fixed income. Markets have so far interpreted the conflict as an inflationary shock rather than a drag on growth, with rising inflation expectations outweighing the typical safe‑haven demand for sovereign bonds. Unconventional policies in the US have also contributed to cautious investor sentiment towards the largest component of this asset class, US government bonds. As a result, the asset class has offered less defensive value than usual, prompting a more cautious allocation stance, and re-enforcing our preference for Australian Bonds.
   
   

Global Listed Infrastructure delivered meaningful outperformance versus broad equity markets, supported by solid momentum and strong fundamentals. Investor interest in the asset class continued to build as markets navigate a persistently higher‑inflation rate environment.

We are particularly concerned about the outlook for US government bonds, an asset which has traditionally received strong inflows in periods of heightened risk… we are concerned about the defensiveness of this asset in the current environment, and we instead favour Australian bonds to provide this hedge.