Emerging Companies Fund
Markets hit their 2025 lows during April’s Liberation Day tariff announcements in the United States, but rebounded strongly between April and October amidst solid company profit results and clarity that tariffs were either manageable, or were wound back or delayed. Resilient economic conditions toward year end precipitated above-trend inflation and heralded potential interest rate hikes, which shook the confidence of equity markets in the final quarter. But despite this weakness, markets ended the year with strong gains, especially in the small cap sector.
The Emerging Companies (Wholesale) Fund slightly outperformed its ASX Small Industrials benchmark (8.9%, net of fees, vs. 8.8%), over the 12 months to 31 December 2025 and on a three year basis the fund (11.6% pa, net of fees) is ahead of benchmark (10.8% pa).
The Emerging Companies Fund’s (Fund) holdings in the Financials and Healthcare sectors were the strongest contributors to relative investment performance with non-bank lenders Pepper Money (+79%) and Australian Finance Group (+51%) reporting solid profit results amidst a better competitive environment. Meanwhile, cognitive testing company Cogstate’s (+119%) re-rating with good revenue growth, and medical imaging company turnaround, Mach7 (+54%) all contributed to the Fund’s returns.
The sectoral laggards included Technology company Nuix (-72%) underperforming with an unexpected change in management coupled with uncertainty around future client wins, foreign exchange services company OFX Group (-66%) fell as it contemplates a difficult year for profit in FY26 with heavy investment in a new client platform and utilities software company Gentrack (-36%), which fell as its outlook softened in an aggressive competitive environment for new clients.
Outlook for the Fund
As we enter 2026, valuations of our largest holdings in the Fund remain attractive and we are expecting continued revenue and profit growth from many of them in the upcoming reporting season. Small cap industrial stock returns across the Australian market were as a whole, modest over the 2025 calander year, leaving room for further gains if market confidence can push through the near term weaker sentiment. In what is generally a good sign for equities, the capital raising environment is robust with 2025 being the stongest outcome for four years and M&A activity also picked up with foreign buyers and private equity taking advantage of lower domestic valuations. Our experienced team is focussed on identifying individual stock ideas that are undervalued on a medium term basis, and we continue to find good opportunities to invest, with a number of new positions in the fund over the last quarter.
Emerging Companies (Wholesale) Fund Performance
As at 31 December 2025*
| fund | benchmark^ | |
|---|---|---|
| 3 months | -5.1% | -4.0% |
| 6 months | 7.2% | 6.7% |
| 1 year | 8.9% | 8.8% |
| 3 years p.a. | 11.6% | 10.8% |
| 5 years p.a. | 3.6% | 3.9% |
| since inception p.a. | 12.3% | 7.1% |
Source: FE fundinfo.
^Benchmark: S&P ASX Small Industrials Index.
*Past performance is not a reliable indicator of future performance. Fund returns are net of fees.
Inception date: 30/06/2015.
Emerging Companies (Retail) Fund Performance
As at 31 December 2025*
| fund | benchmark^ | |
|---|---|---|
| 3 months | -5.4% | -4.0% |
| 6 MONTHS | 6.9% | 6.7% |
| 1 year | 8.3% | 8.8% |
| 3 years p.a. | 11.1% | 10.8% |
| 5 years p.a. | 3.1% | 3.9% |
| since inception p.a. | 11.6% | 7.1% |
Source: FE Fundinfo
^Benchmark: S&P ASX Small Industrials Index. Past performance is not a reliable indicator of future performance. Fund returns are net of fees.
Inception date: 30/06/2015.
Contributors and detractors
Top 3 contributors to Fund return
+78.6%
Pepper Money (PPM)
+118.8%
Cogstate Ltd. (CGS)
+79.3%
Domain Holdings Australia Ltd. (DHG)
Top 3 detractors from Fund return
-71.6%
Nuix Ltd (NXL)
-65.7%
OFX Group Ltd. (OFX)
-100.0%
Opthea Limited (OPT)Contributors
- Pepper Money Ltd (PPM-AU) has delivered strong loan growth over the past 12 months across both mortgages and asset finance. A significant portion of asset finance relates to lower-risk salary sacrifice car loans, supporting a stable credit profile. Loan losses are expected to remain low. Strong lending growth has enabled Pepper to sell portions of its loan book to third parties. These transactions generate an upfront profit on sale and ongoing servicing fee income, reinforcing Pepper’s capital-light business model. In June, Pepper paid a special dividend, highlighting its strong cash generation and disciplined capital management.
- Cogstate Ltd (CGS-AU) performed strongly during the year as the company reported FY25 revenue growth of 26% and nearly doubled profit before tax. Although CGS later flagged softer 1H FY26 expectations, leading to the share price falling, it has partially recovered on the back of a robust pipeline and strategic initiatives, including the Medidata partnership and planned AI-driven product launches. Further support has come from the introduction of a fully franked maiden dividend, insider share purchases, and a buyback.
- Domain Holdings Australia Ltd (DHG-AU) was acquired by CoStar for $4.43 per share, a significant premium to the pre-bid price in August 2025 following approval of the transaction by shareholders.
Detractors
- Nuix (NXL-AU) experienced significant share price volatility during the year following slippage on the timing of signing enterprise deals and the unexpected departure of the CEO. We view the current valuation as attractive with a pathway to restoring double digit annual contract value growth over the medium term. The acquisition of Linkurious, a French graph‑data analytics business, is complementary to Nuix’s offering and provides additional cross‑sell opportunities.
- OFX Group Ltd (OFX-AU) faced a difficult trading environment in FY25, with market volatility weighing on operating performance. Earnings are expected to be significantly lower in FY26 as OFX invests heavily in rolling out its new client platform for corporate clients. This strategic investment aims to enhance client experience and broaden service capabilities. The migration of existing clients onto the new platform should drive non-FX revenue growth, helping diversify OFX’s revenue streams beyond traditional foreign exchange services.
- Opthea Limited (OPT-AU) shares were placed in suspension due to the release of OPT’s phase three clinical trial data that showed OPT’s Wet Age-related Macular Degeneration drugs failed to meet the primary end points in both clinical trials. We are very disappointed in this outcome for both our investors and patients. WAMD remains one of the leading causes of blindness and we were very hopeful on the treatment outcomes.
Reece Limited was added to the portfolio as the share price has materially rebased to reflect the current challenging environment. Reece is a high-quality business with a strong brand and market position in Australia, and a growing presence in the US.
Portfolio changes
Additions to the Fund
- Paragon Care Limited (PGC) is is a leading distributor of medical equipment and consumables across Australasia, serving hospitals, clinics, and pharmacies. In the Australian market, it also operates as a pharmacy wholesaler and distributor. We initiated a position based on our view that improving margins and acquisitive growth, combined with an attractive valuation, present a compelling recovery opportunity.
- Reece Limited (REH) was added to the portfolio as the share price has materially rebased to reflect the current challenging environment. Reece is a high-quality business with a strong brand and market position in Australia, and a growing presence in the US. The Company has a strong management team with a long-term track record and a majority share ownership position, a strong balance sheet and good cash generation. We expect upside to emerge over the medium to long term.
- NobleOak Life Ltd. (NOL) is a fast‑growing provider of life insurance products, with around 13% market share in new business. The company is trading at a material discount to its actuarial value, despite strong momentum across policy growth and profitability. We initiated a position to capture upside from both earnings growth and potential valuation normalisation as the business continues to scale.
- Integral Diagnostics Ltd (IDX) – Following the Integral Diagnostics/Capitol Health merger, we exited our position on valuation grounds. However, the recent pullback in IDX’s share price has created an opportunity to re-establish a position within the fund, allowing us to capitalise on the positive tailwinds from MRI deregulation.
- Epiminder (EPI) is bringing to market an approved implantable brain monitoring device that improves how epilepsy is diagnosed and managed, targeting a large unmet patient need.
We participated in the recent IPO with funding supporting expansion in the United States and further product development, creating strong growth potential as doctors increasingly adopt the technology.
Additions/reductions are for the most recent quarter
Sector allocation
Sector overweights
Cash, Financials, Health Care, Information Technology, Utilities (renewables)
Sector underweights
Communication Services, Consumer Discretionary, Consumer Staples, Industrials, Materials, Real Estate
Small cap industrial stock returns across the Australian market were as a whole, modest over the 2025 calander year, leaving room for further gains if market confidence can push through the near term weaker sentiment.
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.
The information is of a general nature and is not intended to provide you with financial advice or take into account your personal objectives, financial situation or needs. Before acting on the information, consider its appropriateness to your circumstances and read the Financial Services Guide, relevant product disclosure statement (PDS) and Target Market Determination (TMD) available on our website. You may wish to seek financial advice from an authorised tax or financial adviser before making an investment decision. Past performance is not a reliable indicator of future performance.
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.
*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.
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.
The information contained in this document is believed to be accurate at the time of compilation.