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Balanced Fund

Balanced Fund commentary for the quarter ended 31 March 2024.
Published 17 Apr 2024   |   10 min read

Outlook for the fund

As we cross over into the third year since the beginning of the rate hiking cycle, it appears possible that Central Banks could pull off the ‘immaculate disinflation’ – an improbable scenario where inflation is brought down without a meaningful impact on unemployment or growth. In the US, inflation has fallen from its peak of 9.1% to its most recent print of 3.2%, while unemployment remains below 4%. Domestically, it’s a similar story, with unemployment at 3.7% as inflation has fallen from its high of 7.8% to 4.1%.

However, substantial uncertainty remains. The job on inflation is not yet done, with Central Banks looking for further confirmation that inflation is on path to target before moving interest rates to a more neutral setting. And with the lagged impacts of rate hikes often taking years to be fully felt through the economy, it is unclear whether those impacts are still on the horizon. While US unemployment remains low, it has been ticking up from its multi-year lows of 3.4% in early 2023, and we are seeing soft spots in some job data including new hires and quit rates.

In the world’s second largest economy, the collapse in the Chinese property market continues to weigh on its growth, with the Chinese Communist Party so far unable, or unwilling, to stimulate the sector and instill confidence back into the market.

However, equity markets, sitting around their all-time highs, appear to be pricing in a Central Bank success story. Credit markets are aligned, and US bond markets are increasingly coming around, with fewer rate cuts now priced in for 2024.

With valuations pricing in a goldilocks scenario in the context of considerable uncertainty, we have shifted the portfolios back towards a more neutral setting, while taking advantage of cheap portfolio insurance when the opportunity arises, as it did when the VIX Index dipped below 13 during the quarter. We have removed our duration underweight following the rise in bond yields during the quarter. As credit spreads have compressed towards their lowest levels, we have removed our overweight to credit, however simultaneously increased the high yield allocation within credit where valuations are more attractive.

Commentary for the quarter ended 31 March 2024

The Balanced Fund (Wholesale) (the ‘Fund’) rose 5.5% net of fees in the quarter ended 31 March 2024, outperforming its SAA weighted benchmark by 0.6%. The Balanced Fund (Retail) rose 5.3% net of fees in the quarter, also outperforming the benchmark.

There was positive performance across all asset classes in the portfolio over the quarter, with the exception of unlisted property. Global equities, as measured by the MSCI Index ex AU, led returns over the quarter, up 14%. Domestically the ASX 200 rose 5.3%, while our domestic equities portfolio delivered 8.7%. Domestic yields remained relatively flat over the quarter, with the higher yield level delivering 1.04% over the quarter (4.2% annualized), while offshore the higher yield levels were offset by falling US bond prices as strong economic data pushed down the number of rate cuts expected from the Fed over 2024. Despite underperformance in our international equities portfolio, global equities were the largest driver of performance, while outperformance in our domestic equities portfolio drove the relative outperformance of the fund.


Balanced (Wholesale) Fund Performance

As at 31 March 2024*

fund benchmark^
3 months 5.5 4.9
1 year p.a. 11.5 11.5
3 years p.a. 5.6 7.1
5 years p.a. 7.4 7.4
since inception p.a. 7.7 7.6

Source: FE fund info.
^Benchmark: Australian Ethical Balanced Composite. Past performance is not a reliable indicator of future performance.

Inception date: 28/03/2018.



Balanced (Retail) Fund Performance

As at 31 March 2024*

fund benchmark^
3 months 5.3 4.9
1 year p.a. 10.8 11.5
3 years p.a. 4.9 7.1
5 years p.a. 6.6 7.4
10 years p.a. 6.7 7.6
since inception p.a. 6.7 7.4

Source: FE fundinfo.
^Benchmark: Australian Ethical Balanced Composite. Past performance is not a reliable indicator of future performance.

Inception date: 16/10/1989.

Contributors and detractors

Top 3 contributors to Fund return

+15.7%

International Equity – Information Technology

+12.5%

Domestic Equity – Financials

+22.8%

Domestic Equity – Information Technology



Top 3 detractors to Fund return

-2.3%

Unlisted Property

-7.1%

Domestic Equity – Materials

-9.1%

International Equity – Consumer Discretionary

Contributors

  • From an absolute returns perspective the International Equities portfolio was the largest driver of returns, and almost half of that was driven by the Information Technology holdings, up 15.7% over the 3 month period. This was substantially driven by NVIDIA, which was up 90.8% over the quarter. The stock has benefited from the rise of AI and machine learning tools, with the company’s high powered chips in high demand to power the computationally heavy systems. Microsoft was another significant driver, up 17.2% over the quarter, similarly benefiting from bullish AI sentiment, and strong December results.

  • The portfolio’s domestic financials holdings rose 12.5% over the quarter and was the biggest driver of absolute returns domestically, however the portfolio’s underweight position in the sector detracted from relative returns. Suncorp led the returns, up 20.9%, driven by strong investment income, and stable insurance margins with reinsurance costs moderating and pricing increases. Westpac and NAB further drove performance appreciating 14% and 12.8% respectively.

  • The domestic equities Information Technology holdings were another significant contributor to absolute performance as well as relative performance due to both stock selection and sector overweight, with the portfolio’s holdings increasing 22.6% against the benchmark return of 21%. PEXA, Altium and Megaport were the largest contributors, rising 22.2%, 39.9%, 62.9% respectively.

Keyboard demonstrating the growth of information technology

The International Equities portfolio was the largest driver of returns during the quarter, with almost half of that driven by the Information Technology holdings. 


Detractors

  • The unlisted property portfolio was the only negative performing asset class in the portfolio, falling -2.2% over the quarter as valuations continued their slow adjustment to higher base rates, and the post-pandemic headwinds facing commercial property.

  • The Materials sector was the only negative performer within the Domestic Equities portfolio, however the portfolios underweight allocation to the sector, and stock selection, resulted in the strongest contribution to relative performance, with the portfolio returning -5.7% against the benchmarks sector performance of -9.9%.

  • The Consumer Discretionary was the worst performing sector within the International Equity portfolio, declining 9.2%, almost entirely driven by Tesla, which fell 26% over the quarter. The stock has been under pressure as demand for EVs softened in recent periods, and increased competition has come to market. However, the portfolios underweight to the sector, as well as stock selection, resulted in a positive contribution to relative outperformance.    



Tall buildings in the city which are key parts of the energy transition

We made a co-investment in Octopus Energy during the quarter, a software and energy retailing business that is playing a leadership role in the energy transition.

 

Equity markets are sitting around their all-time highs and appear to be pricing in a Central Bank success story. Credit markets are aligned, and US bond markets are increasingly coming around, with fewer rate cuts now priced in for 2024.


Portfolio changes

Additions to the Fund

  • Octopus Energy – Over the period we made a co-investment into Octopus Energy, a software and energy retailing business that is playing a leadership role in the energy transition.
  • High Yield – We increased our allocation to high-yield, taking advantage of the more attractive spreads compared to the tighter spreads in investment-grade credit.

Reductions from the Fund
  • Duration underweight – We removed our international duration underweight in response to rising bond yields during the quarter. This shift came as markets priced in fewer interest rate cuts for 2024 due to robust US employment data and higher-than-consensus CPI figures.

  • Credit – While we increased our allocation to high yield within credit, we have reduced our overall allocation to credit as spreads continued to tighten towards record lows.

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.

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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