Capturing Gains, Managing Risks: How Active Decisions Drove Q3 Portfolio Performance

The portfolios delivered strong returns for the September quarter, with every major asset class contributing positively to returns, demonstrating the benefit of broad diversification even as markets rallied. Investors benefited from both rising markets and the active decisions we've made about where and how to invest within each asset class.

Changes Made in the Quarter

During the quarter, we made two important adjustments to enhance portfolio positioning and manage risk more effectively:

• Currency hedging implemented on infrastructure allocation. We added currency hedging to our infrastructure allocation by switching from the unhedged to the hedged version of the Macquarie True Index Global Infrastructure Fund. This helps protect the stable, income-focused returns of infrastructure assets from currency swings. While a falling Australian dollar can cushion returns in downturns, hedging can improve outcomes when the dollar strengthens—especially as markets begin to stabilise.

• Strategic rebalancing executed across all portfolios. Following strong equity performance that pushed growth allocations above target weights, we reduced growth assets by approximately 1.5% to 2% with corresponding increases to fixed interest and cash. We also equalised weightings between Australian and international equities where required. This rebalancing locked in gains from outperforming positions, keep portfolios aligned to strategic asset allocation, and take advantage of better yields    now available in fixed income markets.

Top contributors for Q3

• Gold delivered exceptional returns as the asset continued its remarkable run. The position benefited from ongoing geopolitical uncertainties, persistent central bank buying from emerging markets seeking to diversify reserves, and concerns about currency debasement as governments maintain large fiscal deficits.

• Australian small cap equities significantly outperformed as the sector benefited from improving domestic economic sentiment and investors rotating into quality growth opportunities beyond the large cap names that had dominated recent performance.

• Emerging markets captured strong momentum as China's economic stabilisation combined with improving sentiment toward developing economies drove the rally, vindicating our maintained allocation to this often-overlooked part of global markets.

Top detractors for Q3

• Global small cap equities faced challenges during the quarter. The setback reflects the asset class's historically higher volatility, though the longer-term valuation case for global small caps remains compelling with attractive opportunities trading at reasonable prices.

• Australian government bonds lagged other fixed interest assets as duration positioning was less favourable during the quarter's rate environment.

Looking ahead

The portfolios are well positioned as we move into the final quarter of 2025, with our recent rebalancing having locked in gains from strong equity performance while increasing exposure to fixed interest at more attractive yield levels. We maintain our differentiated positioning in global equities, focusing on areas that offer better value than expensive US large cap technology stocks. The strong performance from Australian small caps this quarter is encouraging, suggesting the market is beginning to look beyond the largest, most expensive names and recognise opportunities in quality businesses at reasonable valuations. Our combination of direct shares and the small companies fund provide exposure to these opportunities while maintaining our quality bias.

Gold remains in the portfolios as insurance against geopolitical and monetary uncertainty, and while we can't predict whether its strong run will continue, the reasons for holding it remain valid. Our overweight to credit in fixed interest continues to generate attractive income, though we're monitoring spread levels carefully as they've compressed to levels that offer less compensation for additional risk. The currency hedging we've implemented on infrastructure preserves the defensive characteristics of these assets while managing potential currency headwinds. Most importantly, the portfolios' diversification across multiple asset classes, regions, and investment styles means we're not dependent on any single outcome, allowing us to navigate whatever the final quarter of 2025 brings with confidence.