Skip to main content


Balanced Fund 

It was another strong 12 months for the Balanced Fund (Wholesale), which returned 14.0% over calendar year 2021, outperforming its benchmark by 0.6% and continuing its track record of outperformance over the medium to long term.

December 2021

The Fund finished the quarter positively, returning 2.3% over the 3-months to December, though slightly underperforming its SAA weighted benchmark. The underperformance was driven by underperformance in the international equities portfolio. Despite this, from an absolute return perspective, the international equities portfolio drove much of the performance, appreciating 6.3% over the 3-months.

The positive performance led to a very strong finish to the 2021 calendar year, with the portfolio returning 14.0%, leading to outperformance of 0.6% against the benchmark. While the international equities portfolio drove much of the performance, as well as some of the relative outperformance, the majority of the outperformance over the 12-months came from the domestic equities portfolio, which returned 20.5% against the S&P/ASX 200 benchmark return of 17.2%.

The Fund’s Sharpe Ratio, which is a measure of risk-adjusted returns, was in-line with, or above that of the benchmark across the 1, 2, 3, 5, 7, 10-year and since inception time periods, demonstrating our focus on delivering high returns while ensuring the portfolio maintains an appropriate risk profile.

BALANCED FUND (Wholesale) Fund Performance
As at 31 December 2021* FUND (WHOLESALE) BENCHMARK
3 MONTHS 2.3% 2.7%
1 YEAR P.A. 14.0% 13.4%
3 YEARS P.A. 13.5% 11.3%

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

As at 31 December 2021* FUND (RETAIL) BENCHMARK
3 MONTHS 2.1% 2.7%
1 YEAR P.A. 13.2% 13.4%
3 YEARS P.A. 12.6% 11.3%
5 YEARS P.A. 8.9% 8.7%
10 YEARS P.A. 9.3% 10.0%

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


Within the property portfolio our healthcare property investment was the largest contributor over the quarter. The portfolio received an uplift in valuations, as the healthcare property sector continues to attract investor interest, having demonstrated its resilience and defensive characteristics through the pandemic. 

From an absolute return perspective, the international equities portfolio was the largest contributor over the 3-month period, up 6.2%, and 12-month period, up 31.1%. This was largely driven by the US, where the S&P 500 rose 11.3%. The tech-heavy index benefited from the continued strong performance in the information technology sector, which comprises 23% of the MSCI World ex AU Index, and 27% of the international equities portfolio. Most notably Microsoft, which comprises approximately 4.8% of the portfolio, was up 18.7% over the 3-month period, a continuation of its strong performance over 2021, ending the year up 61.4%.

In the domestic equities portfolio, our materials sector holdings in lithium stocks Pilbara Minerals and recently formed Allkem performed strongly, with the lithium price continuing to climb further from its late 2020 lows. Sentiment around the sector remained very positive as investors anticipate strong demand to come from the growing electric vehicle market. This was also reflected in our 12-month performance, with the lithium holdings providing one of the largest contributions to both relative and absolute performance within the domestic equities portfolio. Notably Pilbara Minerals, our largest lithium holding, appreciated 268% during 2021.  




Fixed Income was the greatest detractor from an absolute return perspective, contracting 1.5% over the quarter, and 3.0% over the 12-months. Globally CPI numbers continued to remain elevated, with US CPI YoY growth rising to 6.9% as of November and Australian September YoY CPI growth of 3% sitting at the top end of the RBA’s 2-3% target range, though trimmed mean inflation was at 2.1%. While some uncertainty remains around whether the increases in prices will be transitory, bond markets continue to anticipate central banks will bring forward their shift away from accommodative policies. In the first 9-months of 2021 the Australian 10-year government bond yield rose from 0.97% to 1.49%, and in the final quarter rose a further 18bps to 1.67%.

While the materials sector in the domestic equities portfolio contributed to the portfolio’s absolute performance, an underweight allocation to the sector was a detractor from relative performance as the sector rallied on the back of continued recovery in the global economy and a boom in commodity prices. This is not the case over the 12-months however, where the materials sector was a significant contributor to relative performance given the strength of the performance of our lithium holdings.

Over the 12-month period, financials were the largest detractor of relative performance within the domestic equities portfolio, through a combination of an underweight position and not holding CBA due to it not meeting our ethical criteria, and Macquarie Group, which has only recently been approved. Notably financials were still the largest contributor to absolute performance. With the share prices of many of the financials stocks having been hit particularly hard in 2020, the sector stood to benefit significantly from the recovery in the domestic and global economy.


Portfolio changes

We made a number of new investments in 2021, including Main Sequence Ventures CSIRO Innovation Fund 2, the official venture capital arm of the CSIRO. With some significant early successes already under its belt, it represents a unique opportunity in the Australian venture capital landscape. The Fund focuses on deep technology businesses around five thematics:

  • Humanity scale healthcare

  • Feeding 10 billion people

  • Exponential machines

  • Space and transport

  • New society

In December we also finalised an investment into Generation Investment Management’s Sustainable Solutions Fund IV. Generation is a well-established and well-aligned growth stage private equity manager with an excellent track record across its growth equity strategies. Our investment provides an exciting opportunity as the portfolio’s first entry into the private equity market. The Fund primarily targets growth stage private businesses in North America and Europe across three thematics:

  • People health

  • Planetary health

  • Financial inclusion

Outlook for the fund

A dominant theme currently driving markets is real rates+, which is particularly important for government bonds. One way higher real rates may be offset is through falling inflation expectations, and last quarter we saw short-term inflation expectations1 fall from decade highs.

Indeed, volatility in inflation expectations contributed to much of the market volatility last quarter. However, with inflationary pressures evident and real rates likely to rise as economic growth increases, the expectation remains that returns from the long duration defensive assets in our portfolio will be muted. As such, we’re continuing to search for new defensive assets that can still help us preserve capital in declining equity markets but have less exposure to rising real rates.

The impact of real rates is pervasive across asset classes, and we expect their increase to be a headwind to equity returns – at least compared to recent strong returns. However, if real rates are responding to higher-than-expected growth, equities stand to benefit through higher-than-expected earnings. The risk premium for equities compared to bonds is relatively high versus history and supports continued positive returns. We are most concerned for equities that are particularly sensitive to rates, such as highly geared companies and companies with little cash flow generation in the short-term. This extends to our property investments where historically higher gearing levels have been common, and we are keeping a close eye on those levels across our portfolio.

One area we continue to see opportunity is more idiosyncratic equity investments in the portfolio. These investments, which are primarily obtained through our private equity and venture capital investments, are driven more by individual outcomes than the market cycle. While parts of those markets are showing signs of excess valuation, we are still finding areas which we believe can deliver significant and diversifying returns to the portfolio over the long term.


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.


1As measured by financial markets (2-year break evens)

*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.

Q4 Updates >