Morphic Ethical Fund Posts $7.32M Profit, Declares 1.4c Dividend

Solid Profit Growth and Dividend Resumption

Morphic Ethical Equities Fund Limited (ASX:MEC) has reported a modest but steady 1.34% increase in net profit after tax to $7.32 million for the year ended 30 June 2026. This follows a $5.44 million profit in the prior year, marking the fund’s eighth full financial year since its 2017 ASX listing. The company declared a fully franked quarterly dividend of 1.4 cents per share payable on 15 September 2026, continuing its policy of franked dividends linked to distributable profits and franking credits. The dividend reinvestment plan remains suspended.

Portfolio Outperformance Amid Volatile Market

Morphic’s actively managed ethical portfolio generated a gross return of 29.11% for FY26, comfortably outperforming the MSCI All Countries World Index benchmark return of 16.99% in Australian dollars. Net of management fees and taxes, returns were 27.37% versus 16.99% for the benchmark. This performance was driven largely by the fund’s significant exposure to AI-related companies, which saw exceptional gains during the year despite a sharp sell-off in July 2026. The investment manager highlighted that AI token demand, GPU rental prices, and cloud hyperscaler revenues all continued to grow robustly, underpinning the portfolio’s positioning in AI infrastructure and cloud services.

The fund’s shares closed the financial year at $1.335, up from $1.09 a year earlier, reflecting both portfolio gains and a narrowing discount to the post-tax net tangible asset (NTA) per share of $1.4764. The discount has tightened to a range of 5% to 9% for most of the year, aided by the company’s ongoing share buyback program.

Capital Management and Share Buyback Plans

Capital management remains a key focus for MEC’s board. During FY26, the company repurchased 3.04 million shares at an average price of $1.175, with a further 154,604 shares bought back post-year-end at $1.244. This follows a multi-year buyback program initiated in 2023 to address an unwarranted discount to NTA and enhance shareholder value. At the upcoming Annual General Meeting on 24 November 2026, shareholders will be asked to approve a further buyback of up to 20% of shares outstanding.

Ethical Investment Mandate and Portfolio Composition

The fund maintains a strict ethical screening process, excluding investments in companies involved in coal and uranium mining, oil and gas, tobacco, armaments, gambling, and other environmentally or socially harmful industries. The portfolio is heavily weighted towards global mid and small-cap equities, with 57% exposure to North America and notable holdings in AI infrastructure-related companies such as Nebius, SharonAI, and MasTec. These names contributed significantly to FY26 performance, with Nebius up nearly 400% and SharonAI close to 287% in local terms.

Despite the strong AI sector gains, the portfolio faced headwinds from a dramatic AI stock sell-off in July 2026, driven by technical factors including hedge fund deleveraging and market fatigue. The investment manager noted that many AI-related holdings are now trading below the net present value of signed contracts, presenting potential value opportunities amid ongoing demand for AI compute capacity.

Governance and Outlook

The board, led by Chairman Jack Lowenstein, comprises experienced independent directors including Mark Forstmann and Kirstin Hunter, with governance overseen by an active Audit & Risk Committee. Management fees remained steady at around $550,000 for the year, with no performance fees earned. The company’s auditor, Ernst & Young, issued an unqualified opinion on the financial statements.

Looking ahead, MEC acknowledges ongoing market uncertainties including geopolitical risks, inflation volatility, and equity market valuations at record highs. The fund aims to balance downside protection with growth potential by maintaining a diversified portfolio across geographies and sectors, focusing on structural growth areas with pricing power.