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INVESTMENTS  |  FUND COMMENTARY 

Balanced Fund

The Balanced Fund (Wholesale) fell 4.8% over the quarter, underperforming its SAA weighted benchmark by 2.2% and impacted by an extremely challenging environment. The Fund continues to outperform over the medium to long term.


26 April 2022



From an absolute return perspective, the negative performance was driven by the international equities portfolio which fell 9.3% over the quarter as markets reacted to increasing inflation and the Russian invasion of Ukraine. While equity market downturns are typically associated with a decline in bond yields and the AUD, high inflation and soaring commodity prices saw a breakdown in the defensiveness of the AUD and fixed income, impacting our unhedged international equities and fixed income exposures. Over the quarter the Australian Government 10-year bond yield rose 116bps to 2.8% leading to a 6% decline in our fixed income portfolio.

From a relative performance perspective, it was our domestic equities exposure which drove the underperformance, returning -4.5% against the benchmarks S&P ASX 200 return of 2.2%. This was largely driven by an underweight position to the materials sector, where many of the stocks do not meet our ethical criteria, and which rallied on the back of high commodity prices. An overweight to the information technology sector also detracted, with the sector being particularly impacted in a rising yields environment.


Balanced (Wholesale) Fund Performance

As at 31 March 2022*

3 months
Fund: -4.8%
Benchmark: -2.6%

1 year p.a.
Fund: 6.4%
Benchmark: 7.8%

3 years p.a.
Fund: 8.8%
Benchmark: 7.9%

Since inception p.a.
Fund: 8.9%
Benchmark: 8.1%

*Source: FE fundinfo. Benchmark is the 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 2022*

3 months
Fund: -5.0%
Benchmark: -2.6%

1 year p.a.
Fund: 5.7%
Benchmark: 7.8%

3 years p.a.
Fund: 7.9%
Benchmark: 7.9%

5 years p.a.
Fund: 7.5%
Benchmark: 7.6%

Since inception p.a.
Fund: 6.8%
Benchmark: 7.4%

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

Inception date: 16/10/1989.


Contributors over the past quarter

Our property portfolio performed strongly over the quarter, returning 5.7%, with all our property investments outperforming the MSCI/Mercer Australia Core Wholesale Monthly PFI, led by our healthcare property investments. The sector has benefited from increased institutional interest in Australian healthcare property on the back of supportive demographic and health spend trends, and the sector demonstrating its defensive characteristics through the Covid pandemic.

Our alternatives portfolio was another positive performer, returning 3.6% over the quarter, with many of our venture investments receiving meaningful valuation uplifts as the portfolio continues to mature.

Within the domestic equities portfolio, consumer discretionary was one of the few sectors which contributed to the portfolio’s relative performance. While the sector returns were negative for both the portfolio and the benchmark, an underweight to the sector, in particular our underweight position in Wesfarmers (-13.6%) and Aristocrat (-15.8%), benefited our relative performance.


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Detractors over the past quarter

From an absolute returns perspective, the international equities portfolio was the largest detractor declining 9.3% over the quarter. While almost all sectors declined over the quarter, the information technology sector was the largest driver of negative returns, declining 13.8%. The negative returns were shared broadly across the sector with less than 10% of companies in the sector seeing positive returns. Microsoft in particular was the largest detractor, declining 11% and comprising 4.3% of the international equities portfolio.

From a relative performance perspective, the domestic equities portfolio drove most of the underperformance primarily through an underweight position to the materials sector and an overweight position to the information technology sector. In the case of the materials sector, while we do hold a small number of stocks in the sector, the Fund is significantly underweight as most of the companies do not meet our ethical criteria, resulting in the portfolio being 16% underweight the benchmark. This underweight position was a significant detractor from the relative performance as the sector significantly outperformed on the back of surging commodity prices.

Our 10% overweight position in the information technology sector was another major detractor, with the sector declining 13.7% over the quarter. Within the sector, Xero was the largest detractor from performance declining 27.4%, while our overweight in Appen was the largest detractor from relative performance declining 37.5%. The information technology sector led the negative returns in both the domestic and international equity markets, with long duration assets suffering from increasing bond yields.

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Portfolio changes during the past quarter

Our alternative investment managers have continued to deploy capital into innovative early-stage companies, including a precision fermentation company to unlock a next generation food system, and a new ocular imaging and measurement medical instrument.

We have also been adding to our position in the Australian Ethical High Conviction Fund to diversify our domestic equities portfolio. The portfolio’s overweight to financials helped provide protection through a rising yield environment.


Outlook for the Balanced Fund

The last quarter has been an extremely challenging environment for the Balanced Fund. The shift by the market to focus more on commodity-linked stocks in response to the war in Ukraine happened at the same time as traditionally defensive and diversifying elements of the portfolio (fixed income and foreign currency) added to losses. And while bond yields are now back well above pre-Covid levels, we continue to look for more ways to diversify our portfolio and expect high levels of diversification will be effective insulation from any further volatility.

The recent crisis in Ukraine has shifted the focus of energy policy from climate change to energy independence and cost. We maintain our consistent focus on renewables and decarbonisation, and do not hold any fossil fuel companies. We believe in the long term these investments aligned with decarbonisation will deliver the most sustainable and competitive returns as the world moves towards net zero and anticipate increasing alignment with country declarations and the latest scientific findings, including the recently released IPCC 2022 reports.

Analogies have been drawn between the recent spike in energy prices and the 1970s energy crisis which was an extremely challenging market for bond investors – but unlike the 1960s and 70s, so far the spike in energy prices has not been sustained. While oil reached a spot price $120 in early March, it has recently receded to $95 and forward prices are lower still – a shift higher in longer term forward energy prices would be one sign that inflation will not be transitory and that government bonds still have further to fall.

As we discussed last quarter, the outlook for government bonds which offer no avenue to mitigate losses from rising inflation or higher central bank rates is challenging. While the recent move higher in yields restores some of their defensive qualities, the market continues to price a return to more stable inflation conditions in the medium to long term. This still leaves government bonds vulnerable to any shocks that suggest that inflation will remain high for longer – economists are currently expecting that inflation will peak this year, but if this was to extend further into FY23/24 it would undoubtedly drive further losses in bond portfolios.

While inflation has been rising, the resilience of equities in part suggests that despite rising energy costs and supply chain disruption, economic growth has continued. Forecasts for GDP growth globally remain positive, and unemployment levels remain historically low in many developed market countries. However, along with an escalation or broadening of hostilities in Ukraine, the other major risk to growth is central banks raising rates too quickly and stifling growth. There is a view central banks made this mistake in 1994; surely not too long ago to be a forgotten lesson yet.

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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.

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*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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