Quarterly fund commentary State Street Australian Equity Fund

Market commentary

Global risk assets began 2026 under pressure as escalating tensions in the Middle East pushed energy prices higher, reintroduced inflation risk, and lifted volatility across asset classes. The energy price shock tightened global financial conditions and increased the risk of slower consumption; however, recent experience suggests the U.S. economy can remain resilient even with oil prices near prior-cycle highs, particularly given still-low unemployment and firmer wage dynamics compared with the early 2010s.

During the first quarter, global economic activity remained resilient but moderated toward quarter end as demand and business confidence softened. Services supported growth early in the period, while manufacturing conditions stabilized across several regions and showed relative improvement by quarter end. As geopolitical risks intensified, higher energy and commodity prices raised input costs, weighed on sentiment, and lifted inflation pressures. Labor market conditions softened modestly late in the quarter.

Markets repriced the expected path of policy easing. Central banks generally adopted a cautious stance, prioritizing growth risks over aggressive tightening given that the inflation impulse was energy-driven. The Federal Reserve remained biased toward easing later in the year once energy-related inflation pressures peak. The ECB and BoE were expected to remain restrictive for longer, while the BoJ was anticipated to proceed gradually and remain flexible should growth risks intensify. The RBA stood out as comparatively more hawkish, reflecting Australia’s higher sensitivity to fuel costs and persistent domestic inflation pressures.

Across regions, 2026 growth forecasts have been revised modestly lower, inflation forecasts higher, and labor market outlooks softened, reflecting the interaction of higher energy prices with late-cycle dynamics. In the U.S., weaker consumption and elevated uncertainty led to a slight downgrade to growth. Headline inflation is expected to rise temporarily, while labor market cooling is projected to continue, with unemployment drifting higher as hiring slows and AI-related displacement intensifies. This supports the view that wage pressures are likely to remain contained. In the eurozone and the UK, weaker demand and higher energy costs are expected to slow job creation and gradually lift unemployment, limiting second-round inflation effects but reinforcing the growth drag. Japan’s labor market remains relatively tight, but slower activity is expected to cap wage growth and moderate economic expansion, even as inflation edges higher.

Australia continues to stand out, with restrictive monetary policy and elevated fuel prices expected to lift unemployment more meaningfully as demand destruction risks emerge. In Canada, the labor market is already soft, and higher energy prices add uncertainty rather than support, with unemployment projected to edge higher before stabilizing as inflation eases into 2027.

For Q1 2026, S&P 500 earnings are estimated to have grown 13.2% year over year. If realized, this would mark the sixth consecutive quarter of double-digit earnings growth. Guidance was mixed, with 51 companies issuing negative EPS guidance and 59 issuing positive guidance. The forward 12‑month price-to-earnings ratio stands at 19.8, slightly below the five-year average but above the ten-year average.

Australian equities lagged over the quarter, with the S&P/ASX 300 Index declining 2.04% in AUD terms. Persistent inflation pressures, a restrictive policy backdrop, elevated interest rates, and softening domestic growth constrained risk appetite and limited participation outside the resource complex. Overall, the quarter underscored a clear geopolitical- and energy-driven divergence: commodities and value-oriented exposures were supported, while long-duration growth and more richly valued sectors faced a more challenging environment.

Fund update

The State Street Australian Equity Fund returned 2.56% (net of fees) over the quarter, modestly underperforming the S&P/ASX 300 Index, which declined 2.04%.

The quarter was characterized by pronounced sector dispersion. Energy (+36.1%) and Materials (+10.3%) were resilient, supported by higher commodity prices, while Information Technology ( 27.4%), Health Care ( 16.9%), Real Estate ( 16.6%), and Consumer Discretionary ( 14.9%) were among the weakest sectors. Overall, allocation effects detracted from relative performance, while stock selection contributed positively, partially offsetting the allocation headwind.

At the sector level, relative performance was driven primarily by positioning in Consumer Discretionary and Materials. The Fund’s underweight to Consumer Discretionary contributed positively as the sector sold off sharply. Stock selection within the sector also added value, including underweight positions in Aristocrat and Light & Wonder. In contrast, the underweight to Materials detracted, driven largely by an underweight position in BHP, which performed strongly during the quarter and carries a significant benchmark weight.

From a risk perspective, the Fund continued to exhibit a lower risk and volatility profile relative to the benchmark. Over the past three years, annualized volatility was 8.7%, compared with 10.8% for the S&P/ASX 300. This reflects reduced equity market sensitivity, with an estimated equity beta of 0.66, which has contributed to more defensive performance during market drawdowns.

12 month commentary

In the twelve months to 31 March 2026, the State Street Australian Equity Fund returned 9.8% (net of fees), underperforming the S&P/ASX 300 Index, which returned 11.6%.

At the sector level, the largest positive contributions came from Communication Services (+1.5%) and Information Technology (+1.3%). Outperformance in Communication Services was driven by stock selection, led by an overweight position in Telstra (+0.9%), which delivered a 31.7% return over the period. Information Technology also added value, as the Fund’s minimal exposure relative to the benchmark avoided several underperforming index constituents.

Consumer Discretionary contributed modestly (+0.6%), supported by underweight positions in weaker performing stocks such as Aristocrat Leisure (+0.6%) and JB Hi Fi (+0.3%). Real Estate also contributed (+0.5%), driven by an underweight position in Goodman Group.

These gains were offset primarily by Materials ( 1.8%), reflecting a meaningful underweight to BHP ( 1.4%) and weaker outcomes from Amcor ( 1.0%), partially offset by strong contributions from gold exposures including Newmont (+1.2%) and Perseus (+1.2%). Health Care detracted ( 1.3%); while CSL (+2.5%) contributed positively, this was more than offset by EBOS ( 1.7%) and other holdings. Financials also detracted ( 1.0%), driven by an underweight to major banks, partially offset by an overweight position and strong performance from Helia Group (+1.4%).

Looking ahead, we continue to advocate caution given:

• Elevated valuations, particularly in growth sensitive segments of the market.
• Ongoing policy uncertainty and the potential for renewed trade or protectionist pressures.
• Moderating but potentially sticky inflation, which may constrain the scope for aggressive rate cuts should growth slow.

The case for a defensive positioning remains intact. The Fund continues to emphasize high quality, cash generative businesses with resilient earnings profiles, while retaining flexibility should market leadership broaden.

Notable changes during the quarter:

During Q1 2026, portfolio positioning shifted toward more defensive exposures. The largest increases were in Consumer Staples (+3.6%) and Energy (+2.3%), alongside smaller additions to Communication Services (+1.1%), Industrials (+0.8%), and Utilities (+0.6%). These increases were primarily funded through reductions in Materials ( 2.6%), Financials ( 2.4%), Health Care ( 2.0%), and Real Estate ( 1.4%).

The increase in Consumer Staples was the most significant contributor to the portfolio’s defensive tilt, driven by the initiation and build up of Woolworths and an increased position in Coles. This repositioning raised exposure to non discretionary, cash generative earnings and enhanced the portfolio’s overall resilience.

The higher allocation to Energy was led by increased weights in Yancoal and Whitehaven Coal, reflecting a preference for near term cash generation amid heightened commodity price volatility.

Within Industrials, headline exposure increased modestly, but underlying rotation was meaningful. The portfolio added to Downer (+2.25%) while trimming Service Stream ( 1.24%) and Qantas ( 0.48%), consistent with ongoing re optimisation within the sector.

Reductions on the funding side were most evident in Financials, driven by the exit of Medibank ( 3.33% to zero), partially offset by a sizeable increase in Westpac (+2.08pp to 3.42%), alongside smaller trims to other holdings including QBE. In Materials, reductions in Perenti ( 1.81%) and Newmont ( 1.52%) more than offset additions to larger benchmark constituents such as Rio Tinto (+0.69%) and BHP (+0.42%), resulting in a net sector reduction. Real Estate exposure declined primarily following the sale of Stockland ( 1.95% to zero).

Overall, the quarter’s portfolio adjustments reflected a deliberate tilt toward more defensive, cash flow resilient exposures, alongside reduced cyclicality and selective de risking in areas of higher concentration.