Cyclical Stocks Boost Ethical Fund

by Nathan Hughes – Portfolio Manager


The Perpetual Ethical SRI Fund returned 42.5% for the full fiscal year to 30 June, outperforming the benchmark by 14.0% thanks in part to new investment opportunities thrown up by extraordinary market volatility.


The June quarter was another strong quarter for Australian equity markets, with the benchmark S&P/ASX 300 Accumulation Index rising 8.5%.

The return of 28.5% for the financial year was one of the strongest performances for some time, as earnings expectations recovered from depressed levels at the onset of the COVID-19 pandemic in 2020. Commodity prices were particularly strong for the quarter. Iron ore, seemingly defying gravity, added another 30%.

The strength was broad based, across base metals, soft commodities and energy.

The Perpetual Ethical SRI Fund returned 8.1% for the quarter, underperforming the benchmark by 0.3%. For the full fiscal year, the fund returned 42.5%, outperforming the benchmark by 14.0%.

The results for the year are a credit to our analyst team who worked tirelessly throughout 2020 to assess the impacts from COVID on our portfolio companies, while also looking for new investment opportunities thrown up by extraordinary market volatility.

Whilst we as a team are pleased with this outcome, investing is a long-term pursuit. We remain focused on generating continued outperformance, and fiscal year 2021 is now firmly in the rear-view mirror.

The composition of the portfolio has not changed dramatically over the quarter. Positions in cyclical stocks, such as those in the building products and real estate sectors, were trimmed after strong performance meant these companies had approached fair value.

Consumer discretionary was also reduced slightly. Proceeds from sales were reinvested into existing holdings, such as Medibank, Ferguson and IAG. Our small holding in IRESS was sold, as rumoured corporate activity pushed the price to a level that more than captured the potential upside we had envisaged when initiating a position only a quarter ago.

This was our only software stock. The portfolio also has very modest exposures to health care and natural resources, on valuation grounds.

Looking back at the year that was, many stocks contributed meaningfully to performance, including Fletcher Building, Nick Scali, AUB Group, Ferguson, ANZ and National Australia Bank.

Each of these stocks remain within the portfolio today. On the negative front, not owning large bulk miners such as BHP and Fortescue were the most significant headwinds to relative performance. As touched on in the introduction, iron ore prices have been very robust. Analysts are consistently chasing their tails to upgrade earnings expectations.

Against this backdrop our investment in Deterra Royalties has been a frustrating one, and it detracted from performance over the year. Deterra is a newly formed royalty company, with almost the entirety of value attributable to one high quality asset: a royalty on production at the BHP operated Mining Area C (MAC).

The asset is low in the cost curve, operated by a global leader, and we believe offers decades of production with scope for expansion. The scheduled ramp up in volumes is also progressing to plan.

Moreover, the product mix at MAC is desirable in a world scrutinising the emissions intensity of heavy manufacturing processes. Valuation of Deterra is undoubtedly sensitive to long-run iron ore pricing assumptions.

However, persistent short-term strength in pricing, coupled with a weaker Australian dollar, is a bonus that we anticipate will flow through to shareholders as attractive fully franked dividends.

We continue to believe this is an attractive asset and as such it remains a meaningful position in the portfolio.


The Perpetual Wholesale Ethical SRI Fund is a specialist Australian equity strategy that invests in a diversified selection of socially responsible companies. The Fund aims to provide long-term capital growth and regular income, and to outperform the S&P/ASX 300 Accumulation Index (before fees and taxes) over rolling three-year periods.