Quality, income, and opportunity in a volatile market

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The first quarter of 2026 delivered a sharp lesson in market volatility, as intense disruptions from AI and the Iran conflict, reshaped investment landscapes. Amidst this choppiness, there are opportunities for active investors. Join Carl McMinn and Michael O’Neill, portfolio manager for IML’s Equity Income and All Industrials Funds, as they dissect the key market movements of Q1 2026. Discover how IML’s large cap funds navigated the turbulence, which sectors proved resilient, and where Michael sees enduring value in quality businesses, robust income streams, and overlooked opportunities.

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Lightly edited transcript – Recorded on 10 April 2026

Carl McMinn: Hello and welcome to Navigating the Noise, a podcast by Natixis Investment Managers, where we bring you insights from our global collective of experts to help you make better investment decisions. I’m Carl McMinn, and today I’m joined by Michael O’Neill, portfolio manager for IML’s Equity Income Fund and ETF EQIN, as well as the All Industrials Fund. We’re here to discuss what’s happened in markets for the first quarter of 2026, as well as how IML’s large cap funds have performed. Mike, welcome back.

Benign start to the year, January, pretty easygoing, and then an intense quarter followed with war and I run big AI disruptions across the boards, it feels like, rather indiscriminately, some rate rises for us here in Australia and tack on reporting season. What are the key themes that stood out to you over the quarter?

Michael O’Neill: Yeah, I agree, Carl. We did start off pretty benign how quickly things have changed. I mean, we have seen high valuations being challenged by AI disruption, and then the Iran conflict really intensified some of the volatility we were seeing in the markets, particularly in March. So a selloff in the high growth software and tech, whereas some stocks that are backed by hard, tangible assets think resources and infrastructure held up much better. For Australia, we were relatively resilient compared to global markets. We were down about 2% in the quarter, and that came mainly from the resources segment, especially energy as the conflict disrupted oil and gas supply through the state of Homos. But we did see lithium and gold continuing their run from 2025 up until March where the rate expectations globally caused gold prices to unwind. And then you’ve seen consumer staples do well, but otherwise the segments were mostly down.

With the prospect of further rate increases, it’s a reminder that valuations are a little bit vulnerable.

Carl: Turning to IML’s large cap funds, I think the Australian share fund was broadly in line with the market over the quarter. But if we look under the bonnet, what’s been happening at a sector level, big quarter for energy stocks, I imagine.

Michael: Yeah, that’s right. The Australian share fund was down 1.9% for the quarter ahead of the benchmark. It was a volatile period. Our equity income fund performed a bit better down about 1.4%, continuing to deliver on the goals of higher income, but also noticeably lower volatility than the index itself. You’re right. At the sector level, energy was the standout, the winner for us in the oil and gas space with holdings benefiting from price spikes on supply disruptions. I think oil prices were up over 50% in March. We were hitting almost 120 US dollars per barrel. Now it’s settled down towards the hundred US dollar mark. We did also see strong contributions from some of our defensive holdings in staples, telecommunications companies, infrastructure. But in fairness, on the other side, we had some weakness in some of our healthcare holdings and some other sectors which are exposed to this narrative around AI disruption such as insurance broking.

And I guess the final theme impacting markets was the Aussie dollar. But overall, I’d say our bias towards quality businesses with strong recurring earnings has helped us navigate a choppy market pretty well.

Carl: On those quality companies, obviously we had a reporting season for February during the quarter. What are the standout stocks? Any big positives? Any sort of ones that maybe disappointed a little bit?

Michael: Definitely a volatile period following reporting season. I’m always reminded that while volatility can feel a bit uncomfortable, does create opportunities, and we saw that play out with individual stocks. So Santos was a clear standout for us. It was up around 32% with the Middle East conflict driving energy prices higher. They also delivered their first LNG cargo from the completed Barossa project and their first oil from Peka in Alaska is expected soon, so that should drive production up. We took a bit off the table because the share price was starting to factor in higher oil prices for longer. Telstra continued to perform well, was up nearly 12%. The defensive nature of its earning streams and also a more rational price environment shining through. And the lottery corporation and BHP were also very strong contributors. The main negative CSL down about 17%, the markets won pretty pessimistic after the CEO transition was announced and they gave a small downgrade, but we definitely think the pendulum swung too far for that stock, and it remains a high quality business with some strong structural growth in plasma to continue.

And the other one that I guess lagged a little bit during the quarter of sold off was Orica, partly due to currency headwinds. We see that as having good underlying prospect. We had been reducing the position into strength. Steadfast is the other one that came under pressure, largely on this broad narrative around AI disruption fears in insurance broking. But given that business has over 95% client retention and operates in a highly regulated environment selling complex insurance products, we think that is largely overblown.

Carl: You mentioned high volatility and opportunities. What have you been buying and selling over the quarter?

Michael: We did trim some of the names that had run hard and had become a larger part of the portfolio. So think about stocks like Brambles, BHP, Telstra, Santos, the Lottery Corp, and also Commonwealth Bank. We also had trimmed Orica early in the quarter, as I mentioned. But on the buy side, probably the two standouts that we were able to add to our positions during the quarter were waste management company CleanAway and Sigma Healthcare that owns the category killer chemist warehouse. We’re able to add to them at fairly attractive prices and both fit our preferences for businesses at the moment with strong moats, recurring demand, less exposure to disruption from AI.

Carl: Turning to income now, and I know you said earlier in the year that healthy dividends have been getting harder and harder to come by. How’s the picture of income changed in the last few months?

Michael: So if you look at the index yield, the story hasn’t really changed that much recently because the yield has been compressed as banks have outperformed the rest of the market, and they’re really pricing in what we view as a Goldilocks scenario. That hasn’t changed in the last few months, but thankfully we don’t have to rely on the banks for yield. We have a better yield on industrial stocks that we view as lower risk. But what did change in March was a kickup in volatility, which allowed us to generate very strong options premium in our equity income fund and benefit from that volatility. And we were able to squeeze out extra option premium on holdings like BHP or even the Lottery Corp, which does help to boost your income and diversify your sources when dividends are tough. And in a more volatile environment, you can do more with less.

You don’t have to overdo it in terms of the options activity.

Carl: Nice. Well, final quarter of the financial year, how are you seeing company health from the meetings you’re having with the board members and CEOs and the C-suite and whatnot? Do you think companies are broadly track to hit their guidance for the year or is there a bit of risk on the table?

Michael: From the meetings we’ve been having, I think overall corporate health looks pretty solid. Now, we’re obviously more exposed to the quality defensive businesses that are less cyclical in nature and would tend to have better pricing power. So maybe there’s a bias given our purview, but most businesses are tracking pretty well. There’s a lot of concern around cost pressures and the flow through of higher energy prices, but it hasn’t hit us quite yet. Looking ahead, I think the war in the Middle East is highly unpredictable and the longer it goes, the bigger the impact on global inflation, supply chains and growth. And what it means is that inflationary pressures are continuing and high valuations is still the area of concern with this ongoing uncertainty and prospect of more volatility. So if you’re positioned in the quality companies with defensive recurring earnings and reasonable valuations, even if we do have a further slowdown, some choppiness, you’re relatively well protected from those key risks being persistent inflation, higher bond yields and AI disruption.

Carl: Perfect. Well, thank you, Mike. It’s a nice way to sign off and thank you to our listeners for joining us. If you’ve enjoyed the episode, please click follow on your favorite podcast platform and tune in again to hear more from our global collective of experts.

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