Christmas has come early for the bank’s shareholders with the decision to slightly increase the 2024 dividend – despite a single-digit decline in the net profit and cash earnings.
Beating the market benchmark is never easy, with 72 per cent of Australian actively managed global equity general funds trailing the S&P World Index in the six months to June 30, 2024. Domestic equity funds performed slightly better, albeit against a significantly lower bar set by the S&P/ASX 200 Index.
Ethical investment opportunities abound after rollercoaster 2022
“In the first nine months of 2022 we saw markets deliver a total return of -10 per cent in Australia, and that was a tough environment for all investors,” says Mike Murray, head of domestic equities at Australian Ethical. “But it was also tough for true-to-label ethical investors because what we saw was the heavy environmental footprint resources sector outperforming.”
Pure play heavy industrial companies shot up the index, while smaller cap healthcare and information technology companies that have “a big positive impact on the world” underperformed significantly in a higher interest rate environment.
Still, Murray is now spending less of his time trying to figure out what the next inflation number might be and “a lot more time with the individual companies” to ensure they’re resilient to what could be a sustained higher inflation environment – whether they have pricing power, too much debt that they’re now going to have to pay a higher interest rate on, or, in the case of smaller companies, if they need to pivot from growth to free cashflow generation.
While Murray “doesn’t want to get carried away with short-term market moves”, the bounce in the late months of 2022 was a remarkable turnaround, though it’s too soon to say whether it will be sustained.
“The positive is that we’ve seen multiples correct to some extent; if we look at PE ratios in Australia, they’ve come down from about 20 times to around 15x in aggregate, and we think that’s a reasonably attractive level. But obviously within that there’s things like the resources sector that trade on low PE ratios and are pulling that overall multiple down.”
“If we have seen a peak in inflation expectations – and we are starting to see some moderation in some components of inflation – that could support the market further. But at the same time we don’t see interest rates going back to where they were before, and we’re probably entering a period of slower economic growth… But we think we’re positioned quite defensively.”
Lithium miners have been a boon for performance; Australian Ethical bought Pilgrim Minerals at 70 cents – it promptly fell to 15 cents, Murray says, but is currently trading over $4, making the team “no stranger to volatility”. Insurance companies like IAG and Suncorp have also held up well despite the extreme weather of 2022, and have been “quite a defensive play” for Australian Ethical.
Murray notes that small cap companies were generally sold off quite aggressively, and that’s where the domestic equities team has found “some of its best long-term opportunities through time”; small cap software company valuations have come back to “very, very attractive levels”, and that’s also bringing acquisition activity into the sector.
“We’re hopeful for a little less volatility (in 2023), but we also know that volatility creates a lot of opportunities for fundamental, long-term investors. So I think markets have corrected to more normal levels; we should expect more normal levels of return going forward. There probably will be more volatility as the market tries to figure out where inflation ends up, but the focus for us is more on the bottom up – finding the companies within the sharemarket that are going to do the right thing by shareholders through time.”
