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Balanced Fund – Q3 update

General
commentary highlights

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Climate was one of the biggest stories of the quarter with the release of the IPCC report and extreme weather events continuing to occur around the world.

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Greater urgency around the transition to a more sustainable future in support of net-zero goals will increase opportunities and risks for investors.

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Returns from share markets across the world were quite flat over the September quarter, with many of the gains achieved earlier in the quarter reversed in the final month of September.

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Fund commentary

The Balanced Fund finished the quarter up 3.1% (Wholesale Fund 3.3%), outperforming both its benchmark and the median in the Mercer Balanced Growth Universe (retail and wholesale) as at 30 September 2021.

The key driver of these returns was domestic equities. This outperformance was delivered with substantially lower volatility than its benchmark, demonstrating the fund’s core focus on managing risk and well as returns. The Fund’s Sharpe Ratio, which tells us that the Fund took less risk to achieve the same return as the benchmark, was consistently above that of its benchmark.

 

Balanced (Wholesale) Fund Performance as at 30 SEPTEMBER 2021*

 

1 Year
(%)

3 Years
(% pa)

Since inception
(% pa)

Fund

20.6

10.9

11.1

Benchmark

17.3

8.5

9.3

Source: FE fundinfo. Benchmark is the Australian Ethical Balanced Composite and inception date is 28 March 2018. Past performance is not a reliable indicator of future performance.

 

Balanced Fund (Retail) Performance as at 30 SEPTEMBER 2021*

 

1 Year
(%)

3 Years
(% pa)

5 Years
(% pa)

10 Years
(% pa)

Since inception
(% pa)

Fund

19.6

9.9

8.5

9.2

7.0

Benchmark

17.3

8.5

8.9

9.9

7.6

Source: FE fundinfo. Benchmark is the Australian Ethical Balanced Composite and inception date is 16 October 1989. Past performance is not a reliable indicator of future performance.


Relative to peers, both the Wholesale and Retail funds delivered first quartile returns over medium to long-term periods ending 30 September 2021. The performance of both funds ranked either first or second over the following time periods ending 30 September:

  • the Balanced Fund (Retail) ranked in second place over 2 and 3 years relative to the Mercer Retail-Balanced Growth Universe (35 funds)
  • the Balanced (Wholesale) Fund ranked in second place over 2 years and first place over 3 years relative to Mercer Wholesale-Balance Growth Universe (48 funds).

 

Quartile rankings as at 30 SEPTEMBER 2021^

 

1 Year

2 Years

3 Years

5 Years

10 Years

Balanced (Wholesale) Fund

2nd quartile

1st quartile

1st quartile

n/a

n/a

Balanced Fund (Retail)

2nd quartile

1st quartile

1st quartile

1st quartile

1st quartile

Source: MercerInsights as at 30 September 2021. Past performance is not a reliable indicator of future performance.

Asset allocation

Over the quarter the major change in asset allocation was an increase in domestic equities at the expense of fixed interest and international equities.

The Fund was overweight cash and equities and underweight fixed interest, alternatives, and property as at the end of the September quarter. The overweight position in cash is the result of awaiting further drawdowns from committed capital in our alternatives allocation and further equity raises from our property investments.

Contributors

The domestic equities portfolio was the largest driver of returns, up 5.7% against the S&P/ASX 200 index return of 1.7%.

The Materials sectors was the largest contributor to the outperformance. The Fund, which is substantially underweight the Materials sector, provided a sector return of 5.1% against the benchmark return of -9.9%. The portfolio’s lithium holdings had another great quarter, with Pilbara minerals and Orocobre up 41.4% and 34.3% respectively. Broadly, however, the Materials sector fell on concerns of lower demand from China, following the curbing of steel production and energy consumption to meet emission targets, as well as the rapidly growing problems in the property development sector.

The international equities portfolio returned 4.6%, outperforming its benchmark, the MSCI World ex Australia, which returned 4%. Consumer Discretionary, despite a substantial underweight position, was the largest driver of outperformance as the stocks held significantly outperformed the sector. The Financial and Communication Services sectors, where the Fund has overweight positions, also both contributed positively to the outperformance.

The Fixed Income portfolio slightly outperformed the benchmark, returning 0.4% against the benchmark’s return of 0.3%.

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Detractors

Within the Australian shares portfolio, an underweight position to the Financials and Energy sectors detracted from the outperformance. Energy stocks rose on the back of a surge in the prices of oil, gas and coal due to a spike in demand from Europe and China. Stock selection in Industrials also detracted, largely due to not holding Sydney Airport, which surged 42.3% following a series of takeover bids.

Within the international equities portfolio, stock selection in the Healthcare sector was the main detractor over the quarter, with the portfolio’s holdings returning -2.4% against the benchmark return of 5.0%.

Outlook

At the end of the September quarter, markets were again faced with the prospect of incorporating higher yields into valuations. Inflationary pressures continued to emerge, seemingly driven by three forces.

  1. Continued supply chain disruptions and localised shortages primarily from the rolling impacts of COVID. This extends to labour, where reduced mobility appears to be restricting filling the available jobs.
  2. Continued growth in demand as higher vaccination rates allow further re-opening of economies and governments continue to apply fiscal stimulus.
  3. Higher energy and raw material prices, potentially driven by the increasing need to reduce carbon emissions coinciding with unfortunate weather and supply disruptions. Orders from China’s central government officials for energy companies to secure supplies “at all costs” accentuate the risk.

All these have been conspiring to undermine the narrative that current inflation levels are transitory and are pressuring central banks to act, potentially earlier than anticipated. Stepping back from the three sources of inflation, on different time scales they all appear transitory, but with liquidity at historically unprecedented levels it raises the risk of failing to act.

If inflation does prove transitory and risks are resolved then the real return expected from equities is significant. Indeed, the relatively high equity risk premium suggests there is at least some room for bond yields to rise without impacting equity returns as much as feared.

We manage the Balanced Fund very close to its strategic asset allocation (SAA), and we are still building out the exposure to alternative assets and looking for other opportunities to increase diversification within the portfolio.

Fund strategy

The Balanced Fund offers investors an exposure to a broadly diversified portfolio across asset classes, utilising Australian Ethical specialist capabilities in listed equities and domestic fixed income. The Balanced Fund is positioned in a majority of growth assets, in line with its long-term strategic asset allocation.

SEE FUND INFO



*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.

^According to the Mercer Investment Performance Survey of Wholesale-Balanced Growth Universe and the Retail-Balanced Growth Universe as at 30 September 2021. Information sourced from MercerInsights has been obtained from a range of third party sources. While the information is believed to be reliable, Mercer has not sought to verify it independently. As such, Mercer makes no representations or warranties as to the accuracy of the information presented and takes no responsibility or liability (including for indirect, consequential or incidental damages), for any error, omission or inaccuracy in the data supplied by any third party.

This commentary may contain material provided by third parties derived from sources believed to be accurate at its issue date. While such material is published with necessary permission, Australian Ethical accepts no responsibility for the accuracy or completeness of, nor does it endorse any such third party material. To the maximum extent permitted by law, we intend by this notice to exclude liability for this third party material.

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