The first quarter of 2026 tested markets in ways few anticipated. Geopolitical conflict in the Middle East, a resumption of interest rate increases in Australia, and a sharp equity selloff in March combined to produce one of the most volatile quarters since 2022. Against that backdrop, Empire’s three core managed investment portfolios demonstrated the value of diversification and disciplined portfolio construction.
The Balanced Income portfolio returned -0.49 per cent for the quarter, the Balanced Growth portfolio returned -0.62 per cent, and the Growth portfolio returned -2.48 per cent, all net of fees and costs. While negative quarterly returns are never welcome, these results compare favourably to broader equity markets — the ASX 200 fell 1.61 per cent and global equities (unhedged) fell 6.12 per cent over the same period. Listed property was hit hardest, with Australian Real Estate Investment Trusts declining 16.63 per cent for the quarter.
Over one year and three years, however, the picture remains encouraging. All three portfolios continue to deliver positive returns above their respective CPI-plus benchmarks since inception, which is what they are designed to do over a full market cycle.
Our Investment Philosophy in Practice
Empire’s approach centres on four pillars: diversification across strategies, managers, and asset classes; customised strategies tailored to client needs; risk-adjusted returns; and evidence-based active portfolio management. Quarters like the one just passed are precisely why these principles exist. While these guideposts always help us stay focus, they are designed for, and most useful in, moments of stress.
Each portfolio responded to the quarter’s challenges in a manner consistent with its design. The Balanced Income mode, with its structural overweight to Australian equities and higher-yielding credit strategies, limited losses through the stability of the credit sleeve. The Balanced Growth model, our most diversified offering, uniquely featuring infrastructure and alternative assets, saw infrastructure allocations hold up materially better than equity markets. The Growth model, built to accept shorter-term volatility in pursuit of long-term compounding, experienced the sharpest drawdown but also delivered notable value from active management within the international equity sleeve.
Q1 2026
The quarter began with cautious optimism. January saw Australian equities rise modestly and commodity prices strengthen, while global markets grappled with elevated valuations and a rotation away from US technology stocks. The RBA hiked rates by 25 basis points to 3.85 per cent at its February meeting, its first increase since 2023, citing hotter-than-expected December quarter inflation, with headline CPI running at 3.8 per cent.
February turned sharply more volatile. On 28 February, US and Israeli forces launched coordinated airstrikes on Iranian military installations. Iran responded by effectively closing the Strait of Hormuz through which roughly 20 per cent of the world’s seaborne oil transits. Brent crude surged above US$100 per barrel, triggering a broad risk-off move across global markets.
March delivered the worst of the damage. The ASX 200 fell approximately 7.15 per cent for the month, its weakest result since June 2022, with technology and financials bearing the brunt while energy and gold miners outperformed. The RBA hiked rates again on 17 March, lifting the cash rate to 4.10 per cent in a tight 5–4 split decision, as persistent domestic inflation was compounded by the energy shock.
Performance Across Portfolio Types
The Balanced Income portfolio’s -0.49 per cent quarterly return reflected its defensive construction at work. The credit sleeve was the anchor. Daintree Core Income and Daintree High Income barely moved, while Ares Global Credit also held firm, delivering exactly the income stability this allocation is designed for. Within Australian equities, the Vanguard High Yield ETF’s value-oriented tilt limited losses and delivered a positive 5.8 per cent for the quarter, comfortably ahead of the broader market. GQG Partners Global Quality Value was one of the few positive results across any asset class in March, returning 2.45 per cent for the month. Property was the primary detractor, as listed real estate bore the brunt of rate-sensitive selling.
The Balanced Growth portfolio’s -0.62 per cent result demonstrated why genuine diversification matters. Infrastructure was a relative bright spot: Ausbil Global Essential Infrastructure returned 11.4 per cent and Vanguard Global Infrastructure returned 10.6 per cent for the quarter, providing the real-asset resilience this allocation is specifically built for in inflationary environments. GQG Partners Global Equity delivered a positive 5.1 per cent for the quarter and a positive 1.10 per cent in the worst month of March, a remarkable margin of outperformance in a dislocated market. MAN AHL Alpha returned 5.2 per cent, reinforcing the case for non-correlated return streams alongside traditional assets. Gold contributed 2.5 per cent for the quarter despite its late-quarter pullback from January highs. This portfolio’s defining characteristic, a genuine breadth of diversification across infrastructure, alternatives, and real assets, demonstrated clear value when concentrated equity exposure was punished.
The Growth portfolio’s -2.48 per cent quarterly return reflected the reality of holding a majority in growth assets during a risk-off quarter. However, the headline number masks meaningful value from active management. GQG Partners Global Equity returned 5.1 per cent for the quarter while the international equity index fell 6.2 per cent, a remarkable margin. Vinva Global Alpha Extension also comfortably beat the benchmark, demonstrating the stock-selection edge that justifies this portfolio’s emphasis on high active share strategies. MFS Global New Discovery felt the effects of the broader small-cap selloff. L1 Capital Catalyst returned a positive 1.8 per cent for the quarter. Perth Mint Gold contributed 2.5 per cent. The Growth portfolio is built to accept shorter-term volatility in pursuit of superior long-term compounding, and the continued outperformance of the active managers at its core is the signal worth watching.
Why This Approach Works – Especially Now
Quarters like this one remind us why Empire’s portfolios are built the way they are. When markets were calm and momentum dominated, questions were sometimes asked about whether diversification into infrastructure, alternatives, and defensive assets was worth the cost. March provided the answer.
Infrastructure delivered strong positive returns while equities fell sharply. Credit strategies held firm while government bonds sold off. Active managers with contrarian positioning, like GQG, delivered positive returns in a month where almost everything else fell. Gold, despite its own volatility, contributed positively for the quarter. These are not coincidences, they are the direct result of deliberate portfolio construction decisions made well before the crisis arrived.
Empire’s investment beliefs are clear: genuine portfolio diversification is the primary tool available to manage risk, and diversification should be achieved by investing across different asset classes and within asset classes by accessing a range of managers and strategies. The first quarter of 2026 is a case study in why this matters.
Looking Forward
Uncertainty remains elevated. The situation in the Middle East continues to evolve, energy prices remain above pre-conflict levels, and the RBA has signalled that further rate decisions will depend on how inflation responds to the energy shock. Markets are likely to remain volatile in the near term.
Your portfolios are positioned for precisely these conditions. The businesses owned through your fund managers have competitive advantages and financial strength to navigate disruption. The diversification built into each portfolio, across asset classes, strategies, and managers, means that no single event or market dislocation defines your outcome. And the active managers at the core of each portfolio have demonstrated their ability to add value in exactly the kind of environment we are experiencing.
Over one year, the Balanced Income portfolio has returned 7.79 per cent, Balanced Growth 8.22 per cent, and Growth 8.03 per cent. Over three years, the returns are 7.44 per cent, 8.09 per cent, and 8.72 per cent per annum respectively. These are the numbers that matter. Not any single quarter. They reflect the compounding benefit of patience, discipline, and sound portfolio construction.
Thank you for your continued confidence in Empire. If you’d like to discuss your portfolio or have questions about how current events affect your investments, please contact us.
