Commentary

The Australian share market was characterised by one of the largest divergences in individual stock returns seen in recent years. Returns were heavily concentrated in resource and commodity-related companies as rising commodity prices, geopolitical uncertainty and energy security concerns drove strong performance from the Materials sector. In contrast, much of the broader Industrials sector experienced a far more challenging environment, with three consecutive 25bp rate hikes in 2026 adding pressure to rate-sensitive and growth sectors, which lagged despite their generally resilient underlying business performance.

Technology and Artificial Intelligence were prominent themes but they played out very differently in Australia than in the United States. In the US, AI enthusiasm drew significant capital into large-cap technology companies, pushing valuations higher and contributing to the S&P 500's outperformance relative to other markets, particularly in the first half. In Australia, the dynamic ran in the opposite direction. The rapid advance of AI raised fears of disruption, particularly for software businesses. This dynamic weighed heavily on the sector throughout the year, as markets began pricing in the risk of AI displacement well before any meaningful earnings impact had appeared. This dynamic resulted in sell-offs in several of our software stocks despite their strong balance sheets and clear AI strategies, including Siteminder, Xero and PEXA. We are starting to see some reversion in the sector however, with Siteminder for instance posting a 43% return in the June quarter.

Our portfolios naturally look different to the broader market, shaped by our Ethical Charter over the last 40 years. This isn’t adjusted to reflect short-term market movements. We are more exposed to technology, healthcare and businesses we believe have resilient, long-term operating models and we have limited involvement in commodity-driven industries and cyclical plays. During FY26, those differences were challenged by the unusually narrow market leadership. However, over the longer-term we believe they position the portfolio to benefit from structural growth, innovation and the transition to a lower-carbon economy.

Markets tend to move around underlying value as sentiment shifts. When price disconnects from fundamentals – as it has in selective pockets of the market in our view – that creates opportunity. We have been deploying capital with conviction into areas where market the dynamics described above have created opportunities. At the end of June, the portfolio held minimal cash, reflecting the active deployment of capital at what we believe are attractive valuations. Our disciplined stock selection focuses on businesses trading at attractive valuations, supported by strong balance sheets and durable long‑term earnings profiles. We believe this positioning provides a solid foundation as sector leadership broadens and returns increasingly reflect underlying company fundamentals rather than macro‑driven rotations.






The Healthcare and Technology sectors detracted from performance. The healthcare sector, which the Fund is overweight, detracted from relative performance as investors remained cautious on the growth and margin outlook for large cap healthcare companies. In the technology sector, PEXA weighed on performance following the release of an independent review by NSW's Ipart on conveyancing fees, with the draft determination proposing reductions to fees and the prospect of ongoing regulatory oversight. Avoidance of energy stocks was a key contributor to positive performance relative to benchmark as this sector fell heavily in the June quarter, while stock selection in both the Financials and Communications sectors were also positive contributors. We maintain strong conviction in portfolio holdings, given deep familiarity with management teams, balance sheets, and long-term business models. This is reflective in the reduced cash levels across our funds enabling active deployment into opportunities created by dislocations. We have been deploying capital with conviction into areas where market the dynamics described above have created opportunities.
The stark divergence between Resources and Industrials created an unusually narrow market leadership and was a defining feature of the year for active investors. Illustrating the bifurcation in markets, the S&P/ASX 300 Materials Index rose 54%, while the S&P/ASX 300 Industrials Index declined 7.5%. This 61.5 percentage point performance gap represents one of the most pronounced periods of sector dispersion in recent years and was a defining feature of the investment environment.

Our limited investment in fossil fuels, defence and many of the carbon-intensive resource companies that rose during the period led to headwinds for relative returns. Although the Fund finished on a stronger footing, outperforming the broader market during the final month as investor interest began to broaden, the late improvement was not enough to offset the significant headwinds throughout the year. The Australian Shares Fund declined 9.6% compared to the benchmark which rose 6.9%. The main driver of the performance differential was sector allocations.