Quarterly Fund commentary State Street Australian Equity Fund

Market commentary

Global equity markets ended 2025 on a strong note, with Q4 extending the year’s gains despite a challenging macroeconomic backdrop. Investors navigated a series of headwinds – including a record U.S. government shutdown, diverging central bank policies, and signs of cooling economic growth – yet risk assets proved resilient. Major central banks took different paths: the U.S. Federal Reserve and Bank of England cut rates to support growth, while the Bank of Japan hiked for the first time in decades. Easing inflation allowed for a more supportive monetary environment, and by year-end, market gains broadened across sectors and regions. Notably, value stocks staged a comeback late in the year, and international markets outperformed the U.S., underscoring the benefits of diversification. Gold stocks continued their march upwards (+15.2%), following strong investor sentiment for the underlying precious metal, whilst Health Care names reversed their earlier weakness and led global sector performance with a robust (+10.6%). The other defensive sectors underperformed the MSCI World Index, with Utilities (+1.4%) and Consumer Staples (+0.1%) flat and Real Estate (-2.4%) negative.

In Australia, the Q4 landscape was more challenging, with the S&P/ASX 300 Index declining -1.1%. The domestic market diverged from global trends in several key areas. Most notably, Health Care (-9.5%), Information Technology (-23.7%), and Consumer Discretionary (-11.5%) all posted significant losses, sharply underperforming their global counterparts. The underperformance in Health Care and IT was particularly pronounced, reflecting stock-specific headwinds and the ASX 300’s more concentrated sector exposures. Financials (-1.9%) and Communication Services (-6.6%) also lagged, while Real Estate (-1.8%) and Consumer Staples (-1.3%) were modestly negative. Utilities (-2.9%) and Energy (+1.4%) were mixed, with Utilities notably weaker than global peers. In contrast, Gold (+14.7%) and Materials ex-Gold (+11.8%) were the clear domestic standouts, mirroring global strength in precious and industrial metals.

Overall, Q4 highlighted a growing divergence between global and Australian equity markets. While global investors benefited from a broadening rally led by Health Care, Financials, and Miners, the ASX 300 was weighed down by sharp declines in Health Care, IT, and Consumer Discretionary. The domestic market’s heavy exposure to resources provided some offset, with Gold and Materials ex-Gold delivering strong gains. These differences underscore the importance of sector composition and local factors in driving quarterly performance, and reinforce the value of global diversification for Australian investors.

Fund update

The State Street Australian Equity Fund returned 0.09% over the quarter, outperforming the S&P/ASX 300 index return of -1.05%.

Q4 relative results were led by Information Technology and Consumer Discretionary, where our underweight positions in these sectors drove meaningful allocation tailwind. In addition, Health Care added positively through stock selection, with defensive names (e.g., Ansell, Regis) offsetting declines in larger benchmark constituents. Industrials also supported performance, with core holdings (e.g., Aurizon, Downer, Ventia) delivering solid returns and steady contribution.

The largest detractors of Q4 performance came from Consumer Staples and Metals & Mining ex Gold. In Staples, widespread weakness in supermarket and food exposed names weighed on selection, and benchmark heavies detracted from allocation. In Mining ex Gold, base metals and bulk commodity names lagged the strong gold cohort; our exposure here detracted despite the broader Materials tailwind from precious metals.

Shifting our focus towards risk metrics, the fund has exhibited a consistent lower risk and volatility profile than the S&P/ASX 300 index, with an annualised volatility of 9.4% against the index’s 10.6%. Part of the risk reduction can be attributed to the lower equity market sensitivity of the fund, with an equity market beta of 70% against the S&P/ASX 300 index. This has contributed to better fund performance during market down days, as seen during market sell-offs earlier this year.

12 month commentary

The Fund delivered a strong absolute return of 12.8% for the year ending 31-Dec-2025, outperforming the ASX 300 by 2.35%. Outperformance was driven by a combination of sector allocation and stock selection, with the most material contributions coming from Industrials, Information Technology, and Communication Services. Industrials were the standout, with the Fund’s overweight and strong stock selection (notably in names like Ventia, Service Stream, Brambles and Aurizon) adding 1.84% to relative return. Information Technology also contributed significantly, as the Fund’s positioning in the sector (avoidance of major benchmark laggards) added 1.17%. Communication Services provided a further 0.89% to relative performance, supported by stock selection, particularly in Telstra and related holdings.

Financials and Gold also made positive contributions. In Financials, the stock selection further supported returns, with outperformance coming from being overweight selected insurers that outperformed (Helia Group and Medibank) and underweight the riskier banks that underperformed (Macquarie and CBA). Gold exposure continued to add value, with the Fund’s allocation and selection in the sector contributing 0.67% to relative performance, reflecting ongoing strength in the gold price and robust performance from key holdings.

Looking forward, we continue to advocate for caution amid a backdrop of:

• Elevated valuations, particularly in growth sectors.
• The US administration’s stance on global trades and protectionism pose potential risks.
• Inflation, which, while moderating, can remain sticky and limit central banks’ ability to aggressively cut rates should the economy slow further.

The case for defensive strategies remains intact, particularly if market volatility returns. The Fund remains positioned in high-quality, cash-generative businesses with resilient earnings profiles, ready to benefit from any rotation back into defensives.

Notable changes during the quarter:

During Q4-2025, the main sectoral changes in the portfolio were increased positioning in Real Estate (+5.3%) and Industrials (+2.3%), funding these sector allocations from Financials (-2.0%) and Consumer Staples (-1.8%).

Within the Real Estate sector, we continue to increase our positions in Charter Hall Retail REIT and Region Group. Investor sentiment toward these names has steadily improved over the past year. Both REITs have curated portfolios of well-performing neighborhood assets, anchored by long-term leases with non-discretionary retailers. Recent results continue to highlight the resilience of their portfolios, with signs of an upward shift in earnings trajectory. Strengthening underlying earnings and improved debt profiles (as they focus on reducing debts) provide a solid foundation to sustain strong distributions in the near term.

The Fund’s exposure to Industrials was driven by higher weights in several key holdings, including Virgin Australia (+1.4%), Worley (+1.0) and Qantas Airways (+0.3%). The stock allocations to airlines can be attributed to a combination of Value and Quality, where both Virgin Australia and Qantas consistently maintain good valuation and quality scores. On a P/E NTM basis, Virgin Australia is trading on a valuation multiple of 6.5x and Qantas on 8.4x, both of which are cheaper than the benchmark’s 18.2x.

In terms of portfolio selling, significant funding was sourced from Amcor, Sonic Healthcare, and Inghams Group as our quantitative approach weighs the relative trade-off between different investment opportunities. Deteriorating stock sentiment was a common factor behind the decisions to reduce our positions in all three names, with a weaker quality score in Inghams Group supporting the call.

Our positioning remains concentrated on investment in companies with lower economic sensitivities and higher long-term sustainability in earnings. The goal is to sail through the uncertain market conditions ahead, preserve capital and focus on investing in companies with strong long-term fundamentals.