Balanced Fund
The Balanced Fund (Wholesale) (the ‘Fund’) returned 4.8% net of fees in the quarter ended 31 March 2023, outperforming its benchmark by 0.4%. The Balanced Fund (Retail) rose 4.6% net of fees, outperforming its benchmark by 0.2%.
Absolute and relative performance were driven by the international equities portfolio, which rose 10.8% against the benchmark return of 9.2%. Despite the ongoing conflict in Ukraine, persistent inflation and the collapse of three banks in the US and Credit Suisse in Europe, equity markets rallied through the quarter.
The rebound, in part driven by falling bond yields, was led by a recovery in tech stocks. The tech-heavy NASDAQ composite index was up 16.8% over the quarter (having fallen by 33.1% in the 2022 calendar year), benefiting the portfolio’s overweight to the sector. Our domestic equities portfolio also contributed positively to our absolute and relative returns, appreciating 4.1% against the S&P/ASX 200 benchmark return of 3.5%.
The rebound in equities contrasted with the story being told in bond markets, with the banking crisis signaling to bond investors an increased risk of recession. Our domestic fixed income portfolio rose 4.7% as the Australian Government bond yield fell 30bps to 4.3% at the end of March. Our global fixed income portfolio rose 2.4% as the US 10Y fell from 3.88% at the beginning of the quarter to end the quarter at 3.49%.
Balanced (Wholesale) Fund Performance
As at 31 March 2023*
| fund | benchmark^ | |
|---|---|---|
| 3 months | 4.8% | 4.4% |
| 1 year p.a. | -0.6% | 2.1% |
| 3 years p.a. | 8.5% | 8.9% |
| 5 years p.a. | 7.0% | 6.9% |
| since inception p.a. | 6.9% | 6.9% |
^Benchmark: Australian Ethical Balanced Composite. Past performance is not a reliable indicator of future performance.
Inception date: 28/03/2018. Source: FE fund info.
Balanced (Retail) Fund Performance
As at 31 March 2023*
| fund | benchmark^ | |
|---|---|---|
| 3 months | 4.6% | 4.4% |
| 1 year p.a. | -1.3% | 2.1% |
| 3 years p.a. | 7.7% | 8.9% |
| 5 years p.a. | 6.0% | 6.9% |
| 10 years p.a. | 7.1% | 8.0% |
| since inception p.a. | 6.6% | 7.3% |
^Benchmark: Australian Ethical Balanced Composite. Past performance is not a reliable indicator of future performance.
Inception date: 16/10/1989. Source: FE fund info.
Contributors and detractors
Top contributors to Fund return
Top detractors to Fund return
Contributors
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The rebound in Technology stocks over the quarter drove the majority of the global market return, with the sector holdings in our portfolio rising 20.1%, benefiting our large overweight position to the sector of 32.1% against the benchmark weighting of 21.2%. Some of the largest contributors included Apple (up 28.6%), Microsoft (up 21.9%) and NVIDIA (up 92.5%).
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Our domestic Healthcare names were one of the strongest performing sectors on both an absolute and relative basis. The outperformance was primarily driven by stock selection, with our Healthcare names appreciating 6.4% over the quarter against the benchmarks sector names which rose 3.7% over the quarter. Our overweight position in Healthcare of 13.3% against the benchmarks 9.8% further supported the portfolios outperformance. Some of our top performers include Cochlear, up 16.7%, Sonic Healthcare, up 17.7% and Fisher & Paykel, up 18.1%.
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Our underweight position to the international equities Energy sector, which we do not invest in due to non-compliance with the Australian Ethical Charter, benefited from a decline of 2.3% in the sector. Despite a revival in the oil price towards the end of March, Brent Crude Oil finished 5.1% lower to $79.8 a barrel at the end of the quarter, continuing its decline from its peak of $127.89 in April of 2022.
Detractors
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Our Financials stocks were the largest detractor within the domestic equities portfolio, falling 1.3% over the quarter. Westpac and NAB were the two largest contributors to the negative performance, declining 7.2% and 7.8% respectively. The sector was negatively impacted by news of the collapse of a number of US banks including Silicon Valley Bank, and Credit Suisse in Europe, driving concerns of fragility in the global financial sector. Domestically, the main drivers include slowing housing credit growth, the peak of net interest income margins and the potential for bad debts to increase as higher interest rates impact households. Despite the absolute negative performance our underweight to financials drove a positive relative performance.
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Our Real Estate holdings were the largest detractor within the international equities portfolio, declining 0.9%, with the sector facing multiple headwinds including valuations and rising financing costs following the steep rise in interest rates over the last 12-months, as well as elevated occupancy rates following the disruption caused by COVID-19.
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Our underweight to the Materials sector in the domestic equities portfolio was the largest driver of negative relative performance, despite positive performance of 7.7%, in-line with the benchmark. Our domestic equities portfolio holds 8.6% in Materials names, relative to 25.2% of the benchmark, due to many of the names not aligning with the Australian Ethical charter. BHP, our largest underweight in the sector comprising 11.1% of the overall benchmark, returned 6.5% over the quarter. The resources sector benefited from continued strengthening in the price of metals, particularly iron ore, on the expected growth in demand following China’s re-opening.
Our domestic Healthcare names were one of the strongest performing sectors on both an absolute and relative basis.
Portfolio changes
Additions to the Fund
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Catastrophe bonds – We added to our existing catastrophe bonds exposure. Catastrophe bonds, which are a form of insurance in the event of a natural disaster, are currently attractively priced, and are well diversifying given returns are typically uncorrelated with other markets.
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Global credit – We continue to grow our allocation to global credit. Our overweight to global credit is driven by attractive spreads over benchmark rates, and are expected to outperform over the long-term.
Reductions from the Fund
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Lendlease – We sold our holdings in Lendlease shares after review by our Ethics Research Team. The decision to divest was made due to its Mt Gilead housing development in south-west Sydney that impacts one of the last healthy koala colonies in NSW.
Our Real Estate holdings were the largest detractor within the international equities portfolio.
We will be looking for additional ways to manage risk in our portfolios, including adding more diversifying exposures through alternative assets to assist performance in many scenarios.
Outlook for the Fund
Markets remained volatile through the first quarter, particularly fixed income. Over the quarter, the market grappled with whether the central bank hiking cycle had come to an end as cracks emerged in the global banking system. The MOVE index, which measures expected volatility in fixed income markets, has been more elevated than during the depths of covid. In fact, market expectations are now for interest rate reductions before the year is out.
What underlies this expectation is deteriorating economic conditions – albeit recent data such as strong Australian employment paints a more positive picture. With recent inflation data no longer surprising to the upside as well, we see an opportunity for volatility to decline across asset classes; this could be supportive for risk assets in the short term.
While a period of calm is welcome, we are cognizant that significant risk remain – the war in the Ukraine continues, new waves of COVID remain and banking crises are just a difficult to spot as a crocodile, even if you’re on guard! We will be looking for additional ways to manage risk in our portfolios, including adding more diversifying exposures through alternative assets to assist performance in many scenarios.
*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.
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