Quarterly commentary State Street Australian Equity Fund

Market commentary

Global economic activity in third quarter remained resilient, driven by strong service sector growth despite a slight slowdown in September, while manufacturing showed signs of recovery. Labour markets were soft across the world and notably so in the US. Inflation remained elevated but broadly stable across major economies, with regional divergence. The US experienced renewed price pressures from tariffs, whereas Europe and several emerging economies saw ongoing disinflation. Asian equities rose during the period. Asian bonds declined slightly in USD unhedged terms and rose on USD hedged basis.

Global equities advanced in the third quarter, propelled by the broadening of the artificial intelligence (AI) investment boom and the Federal Reserve’s first rate cut of the year. The MSCI World Index posted a robust gain of 6.2% for the period, reflecting sustained risk appetite among investors. AI-related themes continued to dominate market sentiment, with strong earnings and significant capital flows into AI infrastructure and semiconductor companies. Conversely, defensive sectors encountered mounting macroeconomic and policy headwinds. Rising input costs—driven by tariffs and labour pressures—began to weigh on Consumer Staples, while ongoing adverse policy developments clouded the outlook for the health care sector. Notably, the highest beta quintile outperformed the lowest by a substantial 13% margin.

Domestically, the S&P/ASX 300 Index extended its previous-quarter rally, rising another 5% in Q3 2025 and mirroring strong offshore performance. Sector leadership broadened to mining, driven by an aggressive rotation out of financials (Financials +1.3% vs. Metals & Mining +26%). Within cyclical sectors, Consumer Discretionary was the standout performer, up 8% for the quarter. Defensive sectors continued to lag, with Health Care (-9.7%) and Consumer Staples (-1.4%) underperforming both quarterly and year-to-date. High-beta stocks significantly outperformed low-beta stocks, with the top quintile returning 32% versus just 1.2% for the lowest quintile.

Fund update

The State Street Australian Equity Fund returned 4.5% (net of fees) over the quarter, slightly lagging the S&P/ASX 300 index return of 5%. 

Gold and miners were among the best performing sectors in Australia over the quarter. Gold equity was driven by record breaking gold price where miners (especially those exposed to base metal and rare earth) were given a boost from a mudslide at one of the world’s largest copper producers in Indonesia.  The Fund benefited from our positioning in gold stocks and selection within miners also helped. The rotation out of Financials and I.T. sectors (where the Fund underweight) also contributed positively to relative return this quarter. 

On the negative side, our stock selection was negative within Health Care sector; largely driven by higher than usual price movement during the August reporting season. Underweight positioning in higher-risk Consumer Discretionary was also a detractor to relative return. 

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 8.9% against the index’s 11.3%. Part of the risk reduction can be attributed to the lower equity market sensitivity of the fund, with an equity market beta of 75% 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

In the last twelve months to 30-Sep-2025, the State Street Australian Equity Fund returned 11.2% (net of fees), ahead of the S&P/ASX 300 index return of 10.8%.
 Global risk assets continued to defy expectations, supported by solid economic data releases despite persistent policy uncertainties. Key drivers included earnings growth fueled by AI infrastructure spending and resilient consumer demand. Domestically, the S&P/ASX 300 Index mirrored global trends. Earlier in the year, Financials and Technology sectors led gains, and the rally has recently broadened to include miners and more speculative segments of the market.

At the sector level, stock selection was strong and positive within miners with no holding in BHP and lithium miners while overweight gold stocks. Selection was also strong in Consumer staples (overweight Coles versus Woolworth). Within other defensive sectors, selection was positive in Communication Services (overweight Telstra) offsetting negative impact from weak selection in Healthcare sector. Less allocation to cyclical Discretionary and weak selection in Energy (holding petrol stations) also detracted from outperformance over the last twelve months.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, well positioned to potentially benefit from any rotation back into defensives.

Notable changes during the quarter:

During Q3-2025, the main sectoral changes in the portfolio were increased positioning in Real Estate (+1.4%) and Materials (+2.1%), funding these sector allocations from Health Care (-2.8%) and Consumer Discretionary (-1.2%).

Within the Real Estate sector, we increased our position in Charter Hall Retail REIT and initiated a new holding in 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 support strong distributions in the near term.

Within the Materials sector, we increased our holding in mining contractor Perenti. We have a positive view on this name for over a year; supported by its attractive valuation and improving investor sentiment. The recent uptick in its Catalyst score has reinforced our conviction. We also added to our existing positions in gold producers, Newmont Corporation and Perseus Mining. Gold has been one of the best-performing asset classes this year, boosting earnings and free cash flow for gold equities; many of which have yet to fully reflect current spot gold prices. Continued upward earnings revisions and improving short-interest scores, driven by the unwinding of short positions, further support our positive stance on these stocks. 

In terms of portfolio selling, significant funding was sourced from G8 Education, AGL Energy, and McMillan Shakespeare as our quantitative approach weighs the relative trade-off between different investment opportunities. Deteriorating stock sentiment was a key factor behind the decisions to reduce G8 Education and AGL Energy, while a weaker quality score prompted the cut in McMillan Shakespeare.

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, seek to preserve capital and focus on investing in companies with strong long-term fundamentals.