Hawaiian endemic tree Acacia koa is a model for heteroblasty with bipinnately compound leaves and phyllodes. Previous studies suggested three hypotheses for their functional differentiation: an advantage of leaves for early growth or shade tolerance, and an advantage of phyllodes for drought tolerance. We tested the ability of these hypotheses to explain differences between leaf types for potted plants in 104 physiological and morphological traits, including gas exchange, structure and composition, hydraulic conductance, and responses to varying light, intercellular CO2, vapour pressure deficit (VPD) and drought. Leaf types were similar in numerous traits including stomatal pore area per leaf area, leaf area-based gas exchange rates and cuticular conductance. Each hypothesis was directly supported by key differences in function. Leaves had higher mass-based gas exchange rates, while the water storage tissue in phyllodes contributed to greater capacitance per area; phyllodes also showed stronger stomatal closure at high VPD, and higher maximum hydraulic conductance per area, with stronger decline during desiccation and recovery with rehydration. While no single hypothesis completely explained the differences between leaf types, together the three hypotheses explained 91% of differences. These findings indicate that the heteroblasty confers multiple benefits, realized across different developmental stages and environmental contexts.