Morphic Ethical Equities Fund Achieves 27.4% Return in FY26, Surpassing Benchmark with AI and Cyclical Strategy

MEC's Ethical Investment Framework and Sector Exclusions

Morphic Ethical Equities Fund Limited operates under a strict ethical investment framework that directly influences its portfolio composition. The fund excludes investments in companies involved in environmental destruction, coal and uranium mining, oil and gas, intensive animal farming and aquaculture, tobacco and alcohol, armaments, gambling, and rainforest and old growth logging. This exclusionary policy creates a significantly different investable universe compared to broad global benchmarks, which typically include large energy, defense, and agricultural conglomerates that MEC cannot hold.

The fund aims to provide investors with growth opportunities while ensuring capital is not invested in businesses that harm the environment, people, or society. This dual objective—competitive financial returns combined with ethical exclusions—positions MEC within Australia's growing responsible and sustainable investment sector. Listed on the ASX since 3 May 2017, MEC has a multi-year track record across various market cycles. Since inception, the fund's annualized return to June 2026 is 10.3% per annum, compared to 13.2% per annum for its benchmark, as stated in the company update.

June 2026 Quarter Performance: MEC's +24.6% Net Return Amid Broad Market Gains

The June 2026 quarter marked one of the strongest broad market rallies in recent decades, according to the fund's commentary. The S&P 500 and Nasdaq 100 posted their best quarterly results since Q2 2020, with the Nasdaq 100 achieving its second-best quarterly performance in 25 years. Against this backdrop, MEC delivered a +24.6% net return for the quarter, outperforming the MSCI All Countries World Daily Total Return Net Index's +13.6% over the same period. For the FY26 full year, MEC's net return of +27.4% surpassed the benchmark's +17.0% by 7.4 percentage points.

The fund's three-year annualized return is 16.1% per annum versus the benchmark's 18.1%, and the five-year annualized return is 8.9% per annum compared to 12.8% for the benchmark. These figures indicate that while MEC has delivered strong absolute returns and notable outperformance over shorter periods, including the recent quarter and financial year, its longer-term annualized returns have lagged the benchmark over three- and five-year horizons. The company notes that past performance does not guarantee future results, and investors should consider the fund's ethical exclusions, which limit its investable universe relative to broader benchmarks.

AI Infrastructure Holdings Propel MEC's Quarterly Gains

Artificial intelligence remained the dominant investment theme throughout most of the June 2026 quarter, with MEC's AI infrastructure exposure central to its outperformance. The fund's update highlighted AI momentum supported by new model launches, strong cloud revenue growth at major hyperscalers, upward revisions to AI capital expenditure forecasts, and rising GPU rental prices, indicating robust demand for AI products. The Philadelphia Semiconductor Index (SOX) posted double-digit gains each month of the quarter, delivering its best quarterly return (+87.8%) since inception in 1994.

The fund cited Anthropic, a leading frontier AI model company, as an example of rapid AI demand growth. According to a source referenced in the update (Funda), Anthropic's annual recurring revenue is estimated near US$75 billion, up from about US$9 billion at the end of 2025 and approximately US$4 billion one year earlier. To sustain this growth, Anthropic and other hyperscalers must continue investing in critical AI supply chain bottlenecks, including physical infrastructure, power, cooling, and data center capacity. The fund manager believes resolving these bottlenecks will take years at current demand rates, benefiting MEC's holdings with access to latest-generation GPUs or scarce power supply.

SharonAI's 272% Quarterly Surge, Capital Raise, Nvidia Partnership, and Upcoming Australian IPO

The largest contributor to MEC's quarterly performance was SharonAI, which surged 272% during the June 2026 quarter. The company completed a significant, well-supported capital raise during this period. Additionally, SharonAI announced an innovative revenue and financing backstop arrangement with Nvidia, which the fund expects will help secure GPUs, customers, and power to accelerate growth. The entry of Nvidia as a revenue and funding backstop for several MEC holdings is anticipated to further boost their expansion.

The update revealed an Australian IPO for SharonAI is expected in the coming months, a potentially significant event for Australian investors given the company's strong quarterly performance. While the fund did not disclose specific financial details beyond share price gains, MEC holds a position in SharonAI accumulated prior to any listing. The update did not specify the size or cost basis of MEC's SharonAI holding.

Nebius Group's $50 Billion Contracted Backlog and Forgent Power Solutions' Data Center Focus

Nebius Group (ticker: NBIS-US) was the second-largest quarterly contributor, rising 166% during the quarter. The fund noted Nebius has a contracted backlog nearing US$50 billion for 2027–2031, compared to 2025 revenue of US$530 million. The fund views Nebius as a major beneficiary of elevated GPU rental prices given its substantial forward contracted workload relative to current revenue. MEC did not disclose its position size in Nebius.

Forgent Power Solutions (ticker: FPS-US) gained 91% in the quarter. The fund described Forgent as a designer and manufacturer of electrical equipment like transformers and switchgear, serving data centers and the electricity grid. MEC opportunistically established its position following a secondary sell-down during the quarter. This aligns with the fund's broader thesis that physical infrastructure bottlenecks, including power and electrical equipment, represent a multi-year opportunity amid accelerating AI-driven data center expansion. Specific acquisition price and position size were not disclosed.

Key Detractors: GFL Environmental, GDS Holdings, and Albemarle

Not all holdings performed well in June 2026. GFL Environmental (ticker: GFL-US), a North American solid waste and environmental services provider, declined 12%. The fund attributed this to weak performance among quality businesses and negative market reaction to GFL's acquisition of Secure Waste Infrastructure. Despite the decline, the fund considers GFL attractively valued, supported by post-quarter news that the company may explore a take-private deal, with the CEO reportedly open to a US$50 per share offer versus approximately US$40 at update time.

GDS Holdings (ticker: 9698-HK), a leading Chinese data center operator, fell 27%. MEC exited its position during the quarter, citing broad weakness in Chinese equities and deteriorating liquidity, especially on the Hong Kong exchange. Albemarle (ticker: ALB-US), a major lithium producer, dropped 25% due to lithium price sensitivity, oversupply conditions, and a stronger US dollar. MEC also exited Albemarle during the quarter.

June Market Rotation and Hawkish Fed Chair Kevin Warsh Impact

April and May saw a narrow, tech-led rally with only three of eleven S&P 500 sectors positive in May, mostly driven by technology gains. June experienced a notable shift in market leadership, partly due to new US Federal Reserve Chairman Kevin Warsh's unexpectedly hawkish comments. Markets priced in additional rate hikes by year-end rather than cuts, prompting rotation from growth and momentum stocks into cyclical and defensive sectors. Industrials, financials, and healthcare outperformed, while AI stocks lagged amid profit-taking.

The fund noted this rotation affected its June performance. In response, MEC broadened its portfolio beyond AI infrastructure, adding cyclical and value stocks such as LGI Homes (ticker: LGIH-US), Suncrete (ticker: RMIX-US), and Construction Partners (ticker: ROAD-US) to capture US economic strength and potential future rate cuts. These complemented existing positions like QXO and additions to MasTec, Galaxy Digital, and Cipher.

Early July AI Stock Drawdown and Fund's View on Momentum Volatility

After the June quarter, MEC reported a significant early July drawdown in AI and momentum stocks, with the TMT Momentum basket dropping about 20% in the first week—the worst since the early 2000s. The fund manager attributed this to overstretched momentum stocks rather than fundamental AI demand deterioration, while acknowledging uncertainties around token demand sustainability, new GPU cloud capacity, and soaring AI hardware input costs, especially memory prices.

Despite near-term volatility, the fund believes AI stocks will remain volatile but views many concerns as less relevant to its selected holdings, particularly those with access to latest-generation GPUs or scarce power supply. This conviction reflects the manager's disclosed perspective and does not guarantee future outcomes. No specific portfolio adjustments following the drawdown were detailed.

Portfolio Exits in June Quarter: Circle Internet Group, Tradeweb, MonotaRO, and Others

During June 2026, MEC exited several positions including Circle Internet Group (ticker: CRCL-US), Albemarle (ticker: ALB-US), Tradeweb Markets (ticker: TW-US), MonotaRO (ticker: 3064-JP), and GDS Holdings (ticker: 9698-HK). The fund did not provide detailed reasons for each exit beyond individual detractor discussions, nor disclose the financial impact on quarterly returns.

These exits, combined with new US construction and housing-related investments and additions to MasTec, Galaxy Digital, and Cipher, reflect a deliberate strategy to diversify away from a concentrated AI infrastructure focus toward broader cyclical and value exposure. This portfolio evolution responds to the June market rotation without altering the fund's core ethical exclusion principles, which continue to govern all holdings. Position sizes were not disclosed in this update.