REVIEWING THE PERFORMANCE OF THE 2026 BENCHMARK

REVIEW OF BENCHMARK PERFORMANCE and the 2027 Benchmark

The benchmark for 2026 was a 395-stock equally weighted portfolio. The benchmark is split 61% Australian and 39% International. Importantly, since the benchmark is equally weighted, it biases against the size and maybe the success factors compared to traditional indices. To make up for this lowering in quality, the benchmark is curated to focus on profitable companies. Another customisation is to spread the benchmark so as not to be too reliant on the resources sector, which dominates the Australian index compared to the international indices. The addition of the international stocks is quality and growth-biased to counter the lower quality Australian segment. As a long-term quality investor, I am satisfied with the composition of the index as an appropriate benchmark to compare myself against. Finally, as I have covered many times before, it is equally weighted because I don’t think benchmarks should make stock calls, and including the international stocks would reduce the Australian weight to be insignificant. Running a customised benchmark, it allows me to analyse the contributors to the benchmark performance to understand what has been driving it. Overall, I expect the index to generate a return around the equity market longer term returns of 8-10% pa, maybe in a more smoothed way compared to market-weighted indices. The aim is for me to outperform those returns. The benchmark for 2026 returned 9.1% and has done 10.4%pa for the last four years. The interesting changes in the 2026 performance, compared to what we have seen in the last few years, have been predominantly in two areas. Firstly, the international segment significantly outperformed the Australian segment, a reversal over the last couple of years. Secondly, that Australian performance can be divided between the resource sector influenced stocks, about 17% of the Australian component of the benchmark and 10% of the total, which significantly outperformed the Australian benchmark and the rest. The back-solved remainder of the Australian benchmark, the non-resource significantly underperformed the Australian and International benchmark. Traditionally, strong resource performance is sometimes an indicator of the end of the cycle, as higher commodity prices send inflation higher and start the monetary tightening cycle that ends the liquidity cycle and negatively impacts the earnings growth cycle. If that happens, and it is not definite by a long way, the impact on share prices is usually very rapid and negative. I have no plans at present to increase cash, but I am aware of the danger. The Australian resources influence stock returns were 53%, the international stocks 14%, and the Australian sector 1.4%. If we back out the resources from the Australian sector, we get the non-resources return of -9%. My portfolio is heavily biased toward sustainable quality returns and does not skew heavily toward resources, although I hold some. My underweight in resource-influenced stocks has had a big impact this year, looking through the returns at a high level. Historically, and in recent years, we have, for the most part, seen large swings in returns on equity for resource stocks with no confidence where they will ultimately settle. That points to a question mark around the sustainable returns, that is, sustainable growth and quality, which is what I am after. Note the significant rise in the international segment’s standard deviation. That means that the composition of returns was very dispersed, with a large difference between winners and losers. This outcome can also be seen in the difference between average and median returns. You had to own at least some of these winners to be competitive. The winners in this case were largely in supplying the AI capex buildout. For 2027, I do not plan any significant changes to the benchmark; about 1% of the benchmark disappeared from corporate activity and will be replaced, and I will add a few more stocks to take the total to 400 stocks. The benchmark is doing its job, imo. The only other oddity was that CTD has been suspended for some time; the portfolio does not hold CTD, but the benchmark does. Many institutional holders have written down the value of CTD and have arbitrarily decided to reduce the value by 50% for 2026 and as the starting value for 2027. One stock does not have a significant impact on the benchmark due to the equal weighting. In summary, 2026 can be described as a year in which international stocks came back, and an old-fashioned resources rally occurred in the Australian market. The non-resource Australian stocks were particularly weak, showing a widespread derating. At a high level, this is probably due to a high starting valuation and funds flowing into the commodity momentum trade, compounding the issue. There was also a significant scare for many growth and quality stocks from the advances of AI and what that may ultimately mean for profit streams. The great Growth and Quality sell-off indeed. This issue will be covered in depth in the portfolio review in July. However, I can already see that international would likely be a positive for my portfolio, Australian growth a large negative and Australian resources, where I have nearly no exposure and has done well, a negative. I will leave the question of whether resources are set to become quality growth stocks to the full review. 

 Losers are defined as negative returns. 

Removes  GOR IFL SLC JLG PTM NSR RUL IFM

Additions SRG EOS DRO ELS GDG JDO DGT VGN IPX