Volatility, dispersion and a market on sale – as passive funds go into hiding, this could finally be a stock pickers’ game and a chance to prove themselves.
Rock-star fund managers, step up. The momentum market is dead, passive funds are in for a hiding and this is the chance to prove that valuations matter and decades of experience are invaluable.
It should – finally – be a stock pickers’ market.
We have volatility, dispersion and a whole universe of stocks materially cheaper than they were only six weeks ago.
Large cap Australian equities is no longer just about owning the big four banks; global equities is more than just big US tech stocks.
“It feels like an opportunity-rich environment,” Yarra Capital portfolio manager and Australian equities research head Katie Hudson says.
If ever there was a time to get one back on passive funds and get more out of the big superannuation funds that have fled the sector, this should be it.
It doesn’t matter whether you’re talking Australian or global equities, growth, value, large cap or small cap, markets are jumping around and there should be active investment decisions to be made.
Hudson reckons she’s made some active decisions amid the recent sell-off, and so did three other active investors Chanticleer interviewed on Tuesday, a day when markets had a reprieve from the wave of selling showing buying from the likes of her Yarra making a difference.
Their combined calls included buying companies oversold on tariff fears (Breville), growing industrials (Flutter), big US tech stocks trading at cheaper valuations than ever before (Amazon) and steady Australian businesses such as Eagers Automotive.
Put together, these sorts of decisions made in tough markets are active fund managers’ chance to restore their battered reputations.
We like to think of them as rock-star investors, but the truth is a lot of these rock stars and their firms have failed to keep pace with the market in the past 10 years, let alone beat it.
These managers, some of whom love telling ASX-listed company CEOs and directors how to do business, haven’t been great at adapting themselves.
So, we’ve now got an active equities industry that is smaller than it was a decade ago as a result, despite its biggest client (the superannuation sector) more than doubling in size. That pain was exacerbated in 2023 and 2024 when equity markets went on bull runs. Investors could make nearly 25 per cent a year in a passive S&P 500 fund, for next to no fees.
Buying when the market is cheap – and others are fearful – is one way to add value.
“We love when markets are like this, and you get to buy the best companies in the world on sale,” GCQ Funds Management chief investment officer Doug Tynan says.
“No one has been talking about the fact that Google, one of the greatest monopolies in the world, is on 10-times free cash flow, or Amazon’s on the cheapest multiple it’s ever traded on outside of the pandemic.
“Some of the greatest monopolies in the world are at their cheapest prices.”
Tynan reckons he’s bought shares in Alphabet (which owns Google), Amazon, Uber Technologies and WD-40 amid the sell-off in the past week.
He says he spends more time looking for recession-proof businesses rather than worrying about the prospects of a recession.
Andrew Levy at Melbourne’s L1 Capital says they’ve also been selectively buying.
“We’re not rushing in and buying the whole market, but taking a sniper shot approach to stocks that we really like, or we already own and can reinforce that view with bigger positions,” Levy says.
He says L1’s bought more Flutter, for example, the New York listed sports gaming group that owns Australia’s Sportsbet, which would normally trade at 25 or 30 times forward earnings but L1 was able to buy more for about 13-times.
Levy also nominated Rightmove – the UK-based real estate platform that REA Group tried to buy last year. “It is an absolutely dominant business, very well managed,” he says.
“It is a super high-quality franchise, and you can get it for 20-times next year’s P/E, the equivalent leadership models around the world are much more expensive than that.”
Yarra’s Hudson says she’s looking for stocks oversold on tariff fears and nominated ASX-listed Breville Group, the coffee and toasted sandwich machine wholesaler that makes most of its revenue in the United States.
“We’re trying to find companies that are really good businesses that have been sold off hard on short-term worries,” Hudson says.
“Breville looks really interesting from that perspective. It is an absolutely cracking global business, fantastic product portfolio in a very high-growth category of coffee, and they’re rolling out new product, to new markets and taking a ton of market share.”
Chanticleer interviewed the three fund managers at a forum run by Geoff Wilson’s Future Generation in Melbourne on Tuesday, in a room full of non-institutional investors trying to make sense of Donald Trump, tariffs and the market’s heavy sell-off in the past six weeks.
Each fund manager manages money for Future Generation’s listed investment companies or funds, with some of the profits used to fund Australian not-for-profits.
Wilson, who has seen more market routs and down days than most institutional investors still working in Australian markets, was the fourth fund manager.
He said his team had been buying ASX-listed car dealer Eagers Automotive and utilities software microcap Energy One, but we were more interested in his broader view on markets given his tenure and experience.
“I was really scared that last night would have been a wipeout,” he said of Monday night on Wall Street, when the S&P 500 dropped only 0.2 per cent.
“Everyone had all weekend to worry. It looked like it was going to be pretty bad, and the market opened significantly down. But to me, the positive part is where the market finished and really the volatility over the day.
“So am I confident that the market will be higher in 12 months time? Yes.”
To be clear, it was a bit of an easy day for fund managers to talk about being brave and buying in volatile markets. The S&P/ASX 200 jumped 2.3 per cent on strong volume; $10.5 billion in shares were traded, which is about 1½ times a normal Tuesday.
Perhaps the most bullish signal was how broad the gains were; 19 of the ASX’s top 20 stocks finished in positive territory (all except Transurban Group), according to Bell Potter’s Richard Coppleson.
The small caps index was also up 3 per cent.
Does it mean the sell-off is over? Not necessarily – and that was Wilson’s point about looking forward 12 months, rather than worrying about the rest of this week’s moves or next month’s.
None of the investors can be sure where Donald Trump’s tariff plans end up or exactly what their impact will be on the US or global economy.
“Could there be more pain short term? There could be,” Wilson says. “But I’m feeling pretty good about the flush out yesterday.”
But it does show active fund managers trying to prove their worth, which is a good thing.
Because if they’re not trying to make the most of volatile markets, they may as well pack up and hand their clients’ money to BlackRock, State Street or Vanguard. And that would not be good for the ASX, retail shareholders or anyone interested in holding companies and their boards to account.
