FY25 Reporting season takeaways
The Australian market entered reporting season for the 2025 financial year after a period of stress for global markets, much of it tied to the policies of President Trump. There is also a broader concern domestically about a productivity malaise in Australia
Performance in August was marked by broad dispersion across individual companies and sectors. The Australian market benchmark, the S&P/ASX 200 Index, ended August up 2.6%. Profits fell shy of expectations with Energy and Consumer Discretionary stocks the notable exceptions. Revenue growth was also weaker than expected, arguably a better metric to follow given earnings can be distorted by one-off factors
Source: Bloomberg
Just as important as meeting expectations however was the willingness of management to provide an outlook for FY26. That helps explain a large portion of sector divergence with health care underperformance, for example, explained by CSL’s lower-than-expected guidance for FY26 earnings and reduced optimism about the recovery in its plasma division’s profit margins.
Source: Bloomberg
Our financial sector continued to hold up well despite the only bank to report, Commonwealth Bank, falling 4.3% in August. Quarterly updates from the rest of the Big 4 were better received with the likes of ANZ, Westpac and NAB all rising over 8%. Sector valuations continue to be a point of concern, however, with low single-digit growth in earnings expected over the next three years and all big 4 members trading near recordhigh valuations. One explanation might be the perception that these are a safe haven amidst global uncertainty and trade tensions.
Mining stocks were the notable surprise with stronger iron ore, lithium and gold prices all driving the sector higher. The shuttering of loss-making Chinese lithium production stoked investor confidence that the lithium market had bottomed with more rational pricing to support operators such as Pilbara (up 52.2%) going forward.
Notable highlights
Company August performance
Coles Group (COL)
+15.1%
Key points
• Earnings were mildly below expectations but the bigger victory for investors was the boost to sentiment from its strong start to FY26.
• Management highlighted 4.9% growth for the first seven weeks of FY26 raising the prospect of a material beat on revenue (and earnings).They also highlighted flat growth in the Liquor business which was a stronger result than rival Endeavour in a market that has faced shrinking volumes in recent years.
• Both factors were ahead of expectations with the company still expected to reap further dividends from its automation efforts and grow both earnings and dividends strongly over the next few years.
Chorus (CNU)
+10.9%
• Result was in line with expectations.
• The bigger news was the higher-than-expected dividend.
• This reinforces the stock’s potential for high income generation (6.1% yield in FY26) coupled with steady single-digit growth, an increasingly attractive prospect as expectations had risen for further interest rate cuts by the RBA after its August decision to resume cutting rates
Origin Energy (ORG)
+10.7%
• Both revenue and earnings were 2% over consensus forecasts.
• Growing optimism over its investment in Octopus Energy which has continued to grow strongly, particularly its technology platform Kraken has been a key support for the share price.
• Battery projects coming online in FY26 will be an important support to the company’s energy transition ambitions with higher electricity prices anticipated to support profit growth.
Notable disappointments
Company August performance
James Hardie (JHX)
-24.6%
Key points
• Management had failed to adequately warn the market ahead of its June quarter results.
• It subsequently missed by a wide margin in contrast to peers with earnings 17% below expectations.
• This material surprise coupled with weak guidance for FY26 were the key drivers of the correction. Arguably they also point to building investor backlash against management after pushing through the dilutive Azek acquisition earlier this year.
CSL Ltd (CLS)
-21.4%
Reece Ltd (REH)
-17.9%
• The company beat expectations for FY25 earnings thanks to a lower tax rate.
• However the below-consensus outlook for FY26 coupled with subdued guidance on margin improvement for its Behring division were the decisive factors.
• Additionally, the call to divest its laggard vaccine business, Seqirus, added to investor uncertainty given the timing and questions about how it will be valued.
• Earnings were almost 5% below expectations
• In addition, traction in its US business (the key growth engine) continues to be poor in a higher interest rate environment
• This culminated in downgrades for FY26 expectations and trigged a material selloff.
Conclusion
In conclusion, August marked a more violent reporting season with stocks that disappointed, particularly in their FY26 outlook subject to more violent corrections. This reflects the heightened uncertainty of the current economic environment engendered in part by the policies of the Trump Administration. A flight to quality has seen valuations become more stretched amidst the disappointing results with the Australian market trading at a forward price-to-earnings ratio of 20.9x, over a 30% premium to its 20-year average. Conversely income generation has weakened with the forward dividend yield slumping to 3.2% (pre-franking), a full 1.1% below its long-run average. An improvement in economic fortunes or weaker share prices may be required to see valuations normalise from here.
By Cameron Curko Chief Investment Officer, Private Wealth
p +61 2 9228 2415
e cameron.curko@pitcher.com.au
Fund in focus: Arrowstreet Global Small Cap Fund
Introduction
Arrowstreet Capital is a leading global equity manager based out of Boston that specialises in quantitative investing. This means they specialise in identifying unique signals that help predict stock outperformance such as:
• Momentum: stocks with positive earnings trends continue to see outperformance versus the broader market for a period. Similarly those showing strong price growth also tend to see these trends persist leading to above-market performance. This has been an established part of academic literature1
• Quality: Higher quality businesses with above-average profitability for example tend to outperform.
• Sentiment: Stocks may become “crowded” with excessive speculative interest. Sentiment data can help Arrowstreet sidestep stocks that exhibit these kinds of extremes before their eventual decline.
The Arrowstreet Global Smaller Companies Fund targets the smallest 14% of companies by market value in each country within the MSCI All Country World ex Australia Index. These range from well-developed markets such as the US or Australia to more immature, emerging economies including the likes of India and China.
Why should we invest in global small caps?
1. They typically trade at a premium to global large caps due to their higher growth potential. It is materially easier for a smaller company to grow at a double-digit rate given it is starting from fewer markets and regions versus a more mature business. We have seen this borne out in the post GFC environment with small caps growing profits 1.6% p.a. faster than large cap stocks.
2. They are more inefficiently priced. Large cap stocks tend to be covered by many investment bank analysts whereas smaller companies attract less attention. This gives a greater opportunity to managers with key insights to generate outperformance because there is more scope to build exposure ahead of the market discovering this information.
3. Valuations offer an attractive opportunity relative to large caps Today small cap stocks trade at an 18% discount to large cap valuations. This contrasts to the 15% premium on average in the post global financial crisis (GFC) period and offers an opportunistic entry point to gain exposure.
Global Small Cap Premium/Discount to Large Cap Valuation (Mar-09 to Sep-25)
Source:
1 Jegadeesh, Narasimhan and Titman, Sheridan, ‘Returns to Buying Winers and Selling Losers: Implications for Stock Market Efficiency’ , The Journal of Finance (March 1993), https://www.bauer.uh.edu/rsusmel/phd/jegadeesh-titman93.pdf, (accessed 3 September 2025).
Why this manager?
Arrowstreet Capital has several key features we like to see in this asset class.
1. Data investments: the team commit material capital to stay on the cutting edge of both publiclyavailable and alternative data to maximise the quality of their predictions. Increasingly this includes the use of artificial intelligence to both enhance research quality and other aspects of the investment process.
2. Team investment: the team is amply resourced with dedicated staff to build out its research capability as well as other features of the investment process e.g. minimising trading costs which boosts overall fund value by reducing the amount lost to transacting.
3. Proprietary research: unlike some peers the business retains its research internally and helps preserve its competitive edge for as long as possible. In addition, smaller companies tend to be less well-priced than larger peers due to more limited research coverage. This offers the potential for a bigger edge from quality research
4. Controlling for style risk. In different market environments certain investment styles outperform others as well as the broader market. A key part of their process involves being nimble and changing style biases over time. For example in periods where high growth businesses outperform (2010 to 2021) it may be overweight (teal line above 0) and conversely in 2022-2023 it tilted to be underweight growth (teal line below 0) and overweight value stocks (black line above 0) as these fared relatively better in the higher inflation/interest rate environment. It is rare for traditional stock-pickers to be able to pick these changing market environments consistently.
Arrowstreet correlation with investment style excess returns (Feb-14 to Jun-23)
5. Finally performance is not, for us, a sole factor in picking a manager. It can be useful, however, to assess certain qualities. For example, tracking error, is a measure of how much a manager deviates from their benchmark. The higher the tracking error, the more likely a manager will see “big” numbers both in terms of outperforming but also underperforming their benchmark. As shown below Arrowstreet has delivered much lower tracking error over time, typically 3-4% versus benchmark versus materially higher levels for a popular small cap ETF targeting “quality” names
Rolling 5-year annualised tracking error (Feb-14 to Jun-23)
Quality Small Cap ETF
Source: PPSPW calculations, Manager materials, Bloomberg
While the ETF generated attractive returns versus the benchmark those bouts of variability came at a cost in the long term. Meanwhile Arrowstreet’s ability to pivot between investment styles saw it generate more consistent outperformance and translated into almost an additional 100% over the period highlighted below.
Growth of US$10,000 (Mar-09 to Jun-23)
$100,000
$90,000
$80,000
$70,000
$60,000
$50,000
$40,000
$30,000
$20,000
$10,000
Arrowstreet Composite (net of fees) MSCI World ACWI Small Cap Quality Small Cap ETF (net of fees)
Source: Manager materials, Bloomberg. Returns are in USD
Conclusion
Global small caps have historically delivered on their ability to grow faster than larger businesses. Today they are valued at an attractive discount to the larger end of the market we see as a potential opportunity. The Arrowstreet Smaller Companies Fund offers an ideal way to target this with its quality process and team increasing the likelihood, in our view, of not only capturing the window for outperformance but even of delivering returns over and above its benchmark.
The Australian dollar version of this fund launched in August 2023 and whilst still early days it has continued to showcase consistency with 4.6% p.a. outperformance to July 20252 We retain our conviction in this strategy as a preferred way for investors to gain exposure to global small caps more generally.
By Cameron Curko Chief Investment Officer, Private Wealth
p +61 2 9228 2415 e cameron.curko@pitcher.com.au
2 ‘Arrowstreet Global Smaller Companies Fund Monthly Report: July 2025’ , Macquarie Asset Management (July 2025), https://mim.fgsfulfillment.com/download.aspx?sku=PRRP-AGSCF-ANZ, (accessed 10 August 2025).
Key technical updates
Aged care fee changes (particularly to RAD)
We have seen several material changes to the cost of residential aged care for those entering the system since 1 July 2025. These are part of government reforms designed to improve system sustainability and quality following the final report of the Royal Commission into Aged Care Quality and Safety in 2021.
Accommodation payments
Entry into residential aged care requires agreement on the accommodation price with your facility. This can be paid in the following options:
• A lump sum known as a Refundable Accommodation Deposit (RAD), or
• A lump sum partially subsidised by the government otherwise known as a Refundable Accommodation Contribution (RAC), or
• A non-refundable daily payment called the Daily Accommodation Payment (DAP), or
• A combination of these options.
As of 1 July 2025, the following changes have been implemented:
• aged care facilities are required to retain 2% of the RAD/RAC balance per year. The retention amount must be calculated daily and deduced month for up to 5 years from when the RAD/RAC payment was made.
• The DAP will be indexed to consumer inflation twice per year and will still be calculated based n the outstanding RAD and maximum permissible interest rate at the date of entry.
• The daily accommodation contribution (DAC) for those residents who satisfy means-testing requirements will not be indexed and will continue to be calculated based on their means.
• There is also a lifetime cap for the NCCC where it is no longer payable when:
The resident has been in aged care for over four years; or
The resident has paid $130,000 (indexed) in total NCCC payments.
Ongoing care fees
Ongoing care costs pre- 1 July 2025
A basic daily fee to cover dayto-day costs such as meals and cleaning.
A means-tested care fee which that goes towards personal and clinical care expenses.
Care costs from 1 July 2025
The hotelling supplement contribution (HSC) is introduced in addition to the basic daily fee. This will be payable depending on a resident’s assessable assets and income with a cap of $12.55 per day.
• The means-tested care fee is replaced by the non-clinical care contribution (NCCC)
• The NCCC is means-tested with a cap of $101.61 per day.
• There is also a lifetime cap for the NCCC where it is no longer payable when:
The resident has been in aged care for over four years; or The resident has paid $130,000 (indexed) in total NCCC payments.
Both the HSC and NCCC payments will inherit the same assessable assets and income thresholds as the means-tested care fee.
Case study3
To take a hypothetical, James, a single pensioner, aged 85 enters residential care. This follows the sale of his home to pay a RAD of $550,000. He has a bank account with $700,000 and received a part Age Pension of $19,302 each year.
Since the RAD is an asset for the aged care means test, his assessable assets are $1,250,000.
Furthermore, the lifetime cap on care costs was previously $82,018 (indexed for inflation). However this has expanded to a lifetime cap of $130,000 (also indexed) for NCCC payments or tenure in residential care of 4 years, whichever occurs earlier.
Conclusion
These aged care reforms amount to a step change targeting wealthier Australians to bear more of the system costs on average. While they make aged care more expensive, this is arguably justified by making the system as a whole more sustainable as it adjusts to higher compliance and wage costs brought about by Royal Commission-related reforms and the higher inflation environment of recent years.
Division 296 progress
Division 296 refers to the planned legislation for an additional 15% tax on earnings for superannuation balances above $3m The tax would only apply to the proportion of earnings attributable to the balance above $3m. This is controversial given:
1. Its extension into taxing unrealised gains as well. This has not, historically, been a facet of our tax system and has prompted an outcry given its potential to force asset sales particularly for illiquid holdings such as investment properties in order to pay.
2. In addition the $3m threshold is not indexed to inflation so over time with both wage growth and investment returns, a growing proportion of superannuation balances would be captured by the tax.
Notably the tax would be assessed at an individual level so in the case of a self-managed super fund (SMSF) each member’s balance is assessed based on their share of the overall fund rather than taken against the fund as a whole.
The tax is expected to apply for the 2026 financial year but has not yet been legislated. In addition there are reports that aspects of the tax may be further moderated before it is passed into law4 This could include
3 ‘Aged Care reforms 1 July 2025’ , Challenger (30 January 2025), https://www.challenger.com.au/individual/learn/articles/Aged-carereforms-1-July-2025, (accessed 20 June 2025).
4 P. Coorey,‘Government considers changes to controversial super tax’ , Australian Financial Review (5 September 2025), https://www.afr.com/politics/federal/government-considers-changes-to-controversial-super-tax-20250903-p5mrz4
introducing inflation indexing or removing the targeting of unrealised gains but at this juncture it is still too early to know definitively.
We note that there is still time to assess its impact before 30 June 2026 and If you have any questions we encourage you to reach out to your advisor to discuss.
By Cameron Curko Chief Investment Officer, Private Wealth
p +61 2 9228 2415
e cameron.curko@pitcher.com.au
This view is general advice only and does not take into account your personal circumstances or finances. If you have further questions, we encourage you to consult with your advisor.
