Australian Ethical Investment (ASX:AEF) reported improved earnings and stronger operating leverage for the first half of FY2026, supported by funds under management growth, disciplined cost control, and completion of key operational transitions.
Profit growth and dividend increase
Group CEO and Managing Director John McMurdo said the business delivered “another very pleasing 6 months of momentum,” with progress across strategic milestones that management believes will support future growth. McMurdo emphasized Australian Ethical’s positioning as a “pure-play ethical investment management business,” describing the company as “for purpose and for profit” and highlighting that its ethical charter has been embedded since its founding 40 years ago.
The board declared an interim dividend of AUD 0.08 per share, up 60% from the prior corresponding period. Simons said the company has historically been conservative at the interim stage, with the final dividend typically set to align with the full-year payout ratio. He added the board continues to support an overall annual dividend payout ratio of 80%.
Operating leverage and cost-to-income ratio
Management pointed to continued improvements in operating leverage. The underlying cost-to-income (CTI) ratio improved to 68.8% for the half, compared with 71.8% in the first half of FY2025. McMurdo and Simons both noted seasonality in expenses, with Simons expecting some unwinding in the second half. However, he said the company is targeting a sustained improvement in CTI for full-year FY2026 versus FY2025.
Simons said overall expenses rose 3% after adjusting for integration and transformation costs associated with the final phase of the administration transition, and that these underlying profit adjustments “have halved” in the current period.
He also outlined key drivers of cost movements, including increased employee expenses and higher marketing spend as campaigns returned to more typical levels following the prior year’s limited service period.
- Employee expenses: Increased 8%, driven by hiring in ethical research, investments, technology, and senior risk and governance roles, plus inflationary salary and superannuation guarantee (SG) increases and a full-period impact from the Altius team.
- Fund-related expenses: Increased less than 1% despite 18% average fund growth, including a 15% reduction in custody and administration costs following rate card improvements. Simons said savings after the final transition in December were “modest.”
- Platform investment: Included AUD 1.5 million of Charles River implementation costs, with the project described as two-thirds complete.
- Marketing: Increased 26% versus the prior period.
Funds under management and net flows
The company reported total funds under management (FUM) of AUD 14.08 billion at December 31, with McMurdo noting a new milestone of “just over AUD 14 billion” at the end of December. Simons said FUM growth during the year reflected positive organic flows and investment performance.
Organic net inflows were AUD 260 million for the period, “primarily driven by the super net flows,” according to Simons. He said superannuation net flows were disrupted during the half due to the completion of the administration transition, though he added flows were still 19% ahead of the same half in FY2025, when disruption was larger. Rollovers in were up 24%, and SG contributions increased 8%.
Simons also said the company benefited from a lower portion of members in pension phase—7.4% of the fund compared with an industry figure of 24%—which contributed to lower outflows from pension payments. He reported an annualized outflow rate of 7% of fund for superannuation customers.
On institutional activity, Simons reiterated the company’s previously disclosed impact from the redemption of an Australian Unity mandate following the sale of Australian Unity’s banking business to Bank Australia. The AUD 0.25 billion mandate was described as low margin, with Simons saying it reduced annual revenue by around AUD 0.3 million and was being offset through cost savings and efficiency improvements. He also said the company continued to experience anticipated churn in the institutional channel, including AUD 41 million of outflows tied to a client using fixed income funds for seasonal capital management.
Fees and revenue margin
Simons attributed underlying revenue growth of 13% to average fund growth of 18%, partly offset by product mix effects from lower-margin Altius fixed income products and a 1 basis point administration fee reduction effective August 1, 2025. He also noted an insurance administration fee was introduced on the same date, charged only to members who hold insurance.
The revenue margin at December 31, 2025 was 0.91%, and Simons said the company expected the second-half FY2026 revenue margin to remain at that level. In a Q&A exchange, he added the company has “done a lot of heavy lifting on fees” over the past decade, saying fees have been brought down “nearly by half,” while also indicating further “fine-tuning” is possible as the company balances competitiveness and profitability.
Platform upgrades, product plans, and outlook
McMurdo said the company has historically lacked “modern agile systems” and a digital experience to fully optimize growth, but he described the business as now positioned to pursue higher net flows over the next 12 to 18 months after completing the move to a single super administration platform (GROW) and nearing completion of the investment management platform rollout.
He said an initial version of a new member app is planned by the end of the calendar year. McMurdo also described plans to harmonize superannuation and pension investment options to support members transitioning to retirement, and to continue strengthening direct marketing through better use of data.
On the investment side, McMurdo said the company expects to complete the investment management platform upgrade for all asset classes by the end of the calendar year. He also said Australian Ethical expects to launch a new impact-focused product, leveraging capabilities built over the last two years, and cited opportunities to run portfolios for philanthropic clients.
During Q&A, McMurdo described the “middle market” opportunity—NGOs, charities, educational institutions, foundations, and businesses seeking values-aligned capital management—as a market of more than AUD 50 billion in Australia. He said the company saw “green shoots,” noting that in FY2025 it received about AUD 118 million of new money from this segment even before completing its platform and product build.
On governance and regulatory matters, McMurdo said licensing conditions have not had a significant impact on the business and he does not anticipate they will. He characterized the regulator’s requests as limited and “more procedural in nature,” adding the company expects to meet expectations within its existing budget envelope. He also said governance updates—including recommendations from an independent review required by APRA for Australian Ethical Superannuation—are expected to be substantially completed, with costs not expected to be material.
Looking to the second half, McMurdo said he expects continued positive net flows in super, supported by SG growth in the customer base, and reiterated cost seasonality—particularly marketing—toward year-end. He said he expects the full-year FY2026 underlying CTI ratio to improve by at least 1% compared with FY2025’s 71.4%, while anticipating second-half revenue margins to be in line with the first half.
McMurdo also addressed M&A, saying the company does not need further acquisitions to achieve growth but remains interested in complementary opportunities. He said cultural, mission, and purpose fit are key, along with disciplined capital management and confidence in earnings-per-share uplift and enterprise value accretion.
About Australian Ethical Investment (ASX:AEF)
Australian Ethical Investment Ltd is a publicly owned investment manager. The firm launches and manages equity, fixed income, and balanced mutual funds for its clients. It invests in the public equity and fixed income markets across the globe. The firm invests in education, energy, electricity transmission & distribution, government, health & wellbeing, food production, telecommunications, transport, recycling and waste management, sustainable products & materials, Information technology, software and professional services, media, property, recreation financial services.
