Affluence Investor Letter FY2026

Investment performance

Our Fund returns for the 2026 financial year were reasonable, particularly given the more volatile second half of the year following the Iran war. All funds outperformed the ASX200 Accumulation Index after fees and costs.

*Source: Affluence Funds Management, ASX200, RBA.*

The year was very much a tale of two halves. The first seven months of FY26 were strong across a number of our preferred areas. The final five months were more difficult as smaller companies, resource prices and some value strategies gave back part of their earlier gains. Despite that, our view has not changed. We continue to believe that many of the best opportunities are in areas that remain underappreciated, under-owned and attractively priced.

We are not trying to own what everyone else already owns. We are trying to find good managers, good assets and good strategies where the price being offered is still compelling. We believe the combination of attractive starting valuations, strong income generation and patient portfolio construction gives our funds a good foundation for the years ahead.

Market Highlights

War in Iran and oil prices

Geopolitical risk returned to the forefront during FY26, particularly following the conflict involving Iran. The most immediate market impact was felt in oil prices. Any disruption in the Middle East, and particularly around the Strait of Hormuz, can quickly raise the risk premium in energy markets because such a large share of global oil and LNG supply moves through the region.

The oil price is a major cost input to an incredibly wide portion of the economy. Rising prices have restoked inflation pressures, and therefore the direction of interest rates.

Australian inflation and interest rates

While inflation in Australia has moderated from the extreme levels seen earlier in the cycle, the final leg back to the Reserve Bank of Australia’s target range has proven more difficult. Services inflation, wages growth, capacity constraints and higher energy prices have all contributed to a stickier inflation environment than many investors expected.

Interest rates remain one of the most important drivers of asset prices. Lower rates would support sentiment and improve the valuation of long-duration assets such as equities and property. However, if inflation remains too high, the Reserve Bank has limited ability to cut rates quickly. This creates a more balanced environment than the one investors faced a couple of years ago, but not a risk-free one.

We continue to expect that interest rates will remain at higher levels than those experienced in the decade before COVID. That should be good for well-constructed income portfolios, including floating-rate credit, but it also increases the hurdle rate for riskier assets. We continue to prefer investments where the expected return does not rely on interest rates falling sharply or investors being willing to pay ever-higher multiples.

AI capex and disruption

Artificial intelligence remains one of the most important investment themes in global markets. AI has the potential to improve productivity, reduce costs, accelerate software development, enhance research and create entirely new products and services. It is likely to change the way many businesses operate.

At the same time, the scale of spending on AI infrastructure is extraordinary. The largest technology companies are investing enormous sums on data centres, chips, power, cooling and networks. To justify this expenditure, AI products will need to generate very large and durable revenue streams. That may happen, but the market appears to be assuming a very favourable outcome. History suggests that when capital spending booms, the benefits are not always captured by the companies spending the money.

There is also a broader economic question. AI may deliver significant productivity gains, but it may also disrupt employment in many sectors. If AI tools allow companies to do more with fewer people, the benefits to corporate profits could be substantial. But the social and economic consequences may be uneven. That does not make the technology bad, but it does mean investors should be careful about assuming that every AI beneficiary will be an obvious winner.

Given the stratospheric valuations ascribed to many AI related companies, our preference is to gain exposure to the AI theme in a more indirect and valuation-conscious way. Rather than paying extreme prices for the most obvious potential beneficiaries, we are more interested in the inputs required to build and run AI infrastructure. These include energy, resources, infrastructure, selected property and businesses with genuine pricing power. The AI boom may create attractive opportunities, but we believe it also creates risks that should not be ignored.

Affluence LIC Fund

Performance

For FY26 the Affluence LIC Fund returned 7.8%, outperforming the ASX200 Index of 6.1%. The positive performance was unevenly generated, with the first 7 months of the financial year returning 17.6% and the last 5 months -8.3%. This pattern was partly caused by a strong run up in performance to the end of January 2026, and partly due to smaller company indices falling over the past 5 months.

During FY26, the Fund celebrated its 10 year anniversary. Since commencement in 2016, the Fund has delivered investors returns of 10.3% per annum. We have comfortably achieved our aim of delivering a better return than the ASX200 Accumulation Index, with significantly less downside risk.

The largest positive contributors for the 12 month returns were:

Ryder Capital (RYD).
Tribeca Global Natural Resources (TGF).
Lowell Resources Fund (LRT).
Pengana Private Equity (PE1).
Cromwell Property Group (CMW).

Four of the above positions were also the largest positive contributors for 2025 and were discussed in our previous investor letter. The new entrant to top contributors is the Pengana Private Equity Trust (PE1). PE1 is an LIT that provides exposure to global private equity funds and private equity investments. The Trust is managed by GCM Grosvenor who are a very large and experienced participant in private equity. We built a position in PE1 over the last two years as the discount to NAV continued to expand. In April 2025 the discount increased to over 35% as some larger holders of the stock continued to aggressively sell it down. There were two main reasons for why PE1 rallied. Firstly, the manager implemented a formal capital management framework whereby at certain discount to NAV levels excess cash would be applied towards on-market buy backs. The second factor was Space X, which had been one of the largest investments in PE1 for some time. As Space X moved towards a listing, the likely listing price became clear, which was a much higher value than PE1’s purchase price and carrying value. These two factors resulted in PE1 returning over 40% for FY26. We traded the stock as the value increased, and continue to hold a circa 2% position.

The largest negative contributors in FY26 were Bailador Technology Investments (BTI), Lendlease Group (LLC) and Salter Brothers Emerging Companies (SB2). There were different reasons for each of these positions underperforming. However, what they do have in common is that we continue to hold them, and in most cases have added to the positions. We believe there are catalysts for each which should lead to a re-rating, and they all ended the year deeply undervalued.

Discounts to NTA have continued to increase, and as at 30 June 2026 settled above 29% for the first time.

This level of discount represents extraordinary value, in our view. It is reflective of the environment we find ourselves in. The largest companies and those with the with the most exciting stories, are getting the lion’s share of capital. Everything else is being left behind.

While it is frustrating that the sector continues to be underappreciated, we do find it encouraging that we can find excellent value opportunities in a world where so many assets are so overvalued. We are close to being fully invested, as tax loss selling in June provided us with a number of excellent opportunities. We’re also encouraged that we were able to deliver better returns than the ASX200 in FY26, even though the portfolio discount expanded once again.

Affluence LIC Fund positioning

Over the past 6 months our allocation to REITs/Property has increased significantly. This is an outcome of the number of opportunities we are finding in this sector of the market. There are eight stocks in this part of the portfolio all of which are very different from each other. Examples include:

Digico Infrastructure REIT (DGT) which provides exposure to operational and expanding data centres.
Metrics Real Estate Fund (MRE) which owns real estate debt and a curated portfolio of real estate developments.
GDI Property Group (GDI) which is an office landlord with a significant weighting to the Perth CBD.

All of the stocks in this sector of the portfolio are trading at substantial discounts to NAV, with the average for the portfolio being above 40%. Most of these stocks are also paying regular distributions, which means we are being paid to wait for the prices to improve.

The remainder of the portfolio includes a wide range of attractively priced investments, with a strong weighting toward mid to smaller sized LICs. This area of the LIC market provides more opportunity to profit from mispricing and better value in underlying portfolios. Significant portfolio weightings include:

Small caps: Our equity LIC investments have a mid/small/micro cap bias. We believe this sector of the market offers far more compelling valuations.
Private equity: We hold a range of private equity LICs. Discounts to NTA are very elevated. A number of holdings have specific catalysts underway to reduce discounts.
Gold and other resources: The portfolio has exposure to gold miners and other resource investments through several specialist resource LICs. In addition, a number of other LIC holdings have some portfolio exposure to these areas.

Across the portfolio, several investments have specific catalysts that may occur in the next 12 months that have the potential to unlock significant value. These types of investments are highly desirable. If the catalysts materialise, they usually result in discounts narrowing substantially. This can significantly improve overall returns.

We believe the combination of our specialist LIC knowledge, cyclically high discounts and strong underlying value continues to provide a very attractive entry point.

Affluence Income Trust

Performance

The Affluence Income Trust has continued to perform well, providing investors consistent distributions paid monthly. For FY26 the Fund delivered returns of 7.1% compared to the benchmark of 6.8%.

The Trust celebrates its third anniversary in July 2026 and has delivered returns of 7.5% per annum so far. Importantly, every month has delivered a positive return to investors of between 0.41% and 0.74%.

The Reserve Bank of Australia (RBA) official cash rate started the year at 3.85%. It was cut by 0.25% in August 2025 to reach its low point for the cycle at 3.60%. However, inflation re-emerged and the RBA was forced into three 0.25% increases, with the cash rate ending the year at 4.35%. The Affluence Income Trust targets a floating rate return 3% above the RBA cash rate. As the official target rate increases or decreases, our target return changes with it. The Fund has outperformed this target in FY26 and since inception.

As can be seen from the monthly returns above, the Fund has delivered consistently. The Affluence Income Trust was designed with a very specific purpose in mind – to achieve a premium above what investors can earn from cash and term deposits, while not taking excessive risk. Thus, in both risk and returns, it sits somewhere between cash and equities.

Affluence Income Trust Positioning

The Fund invests mostly in a range of unlisted funds chosen by us and managed by some exceptional fixed income specialists. Many can only be directly accessed by wholesale and institutional clients. For most individual investors, it would be very difficult to build such a diversified portfolio of fixed income assets.

At 30 June, the Fund had exposure to over 20 different investments across a wide range of sub-sectors and investment managers. The look through diversification of the portfolio was substantial.

The combination of diversification and our manager selection process allow us to build a portfolio which looks very different to other fixed income funds. We can think of no other fixed income fund that demonstrates all the following features, and manages risk the way we do.

If you’re looking for regular income from an extremely diverse portfolio, our Affluence Income Trust may well fit the bill.

Affluence Investment Fund

Performance

For FY26 the Affluence Investment Fund returned 8.1%. This was behind the funds benchmark (inflation plus 5%) as inflation re-accelerated, however AIF did outperform the ASX200 Index return of 6.1%. The positive performance was unevenly generated, with the first 7 months of the financial year returning 11.8% and the last 5 months -3.3%. This pattern was partly caused by a strong run up in performance to the end of January 2026, and partly due to smaller company indices, resource prices and some value strategies falling out of favour over the past 5 months.

The following summarises the performance of the key sub-portfolios within the Fund:

The Affluence LIC Fund returned approximately 10%, inclusive of fees rebated.
The Australian equity investments (including the allocation to the Affluence Small Company fund) returned 12.8%, well above the ASX200 Index return of 6.1%. This was largely due to our small cap and value bias.
The Global equity investments delivered 14.0%. This was due to the value bias and exposure to emerging markets.
The fixed income portfolio (including the allocation to the Affluence Income Trust) delivered a strong and consistent 9.2%.
The alternatives/market neutral part of the portfolio was disappointing, returning -4.1%. This group of investments is uncorrelated with equity markets and has traditionally been an excellent contributor in falling markets.
The property portfolio performance was well lower than normal, at -1.9%, roughly the same as the ASX A-REIT Index. While this was disappointing, it did give us an opportunity to increase our allocation in this sector at very attractive prices.
Resources and gold returned 49%. We hold two specialist resource managers (Baker Steel Gold Fund and the Terra Capital Natural Resources Fund), who both performed exceptionally well.
Hedging costs reduced returns by around 0.5%.

Affluence Investment Fund Positioning

It is impossible to build a portfolio that can navigate market downturns and then keep up with aggressive market rallies. Investing is always a balance between offence and defence. We aim to strike the right balance to achieve our return target over the medium to long term. In doing this, we seek to limit the downside relative to the major asset markets and then recover those losses more quickly.

At 30 June 2026, the Fund portfolio was as follows.

We have very little exposure to the expensive stocks that have powered global markets higher, such as Nvidia and the Korean/Taiwanese chip producers. Our aim with this Fund is to offer you a portfolio that is differentiated, in a good way. We target undervalued and underappreciated areas of the market, and investment strategies where the underlying manager can demonstrate skill and some form of advantage over the market. This often means we do not own the popular momentum areas of the market, but we continue to believe in the long term this strategy produces strong risk adjusted returns.

In this way, we’re bringing all our best ideas together in a single fund that targets above average long term returns and regular income, while limiting the damage from any market downturns.

Investment performance