The two firms agreed structural imbalances are creating a “multi-billion opportunity” for active investors.
A decade of heavy passive fund inflows has concentrated capital in large-cap stocks, leaving smaller companies and listed investment companies (LICs) trading at deep discounts and providing rare value.
InvestmentMarkets CEO Darren Connolly said more than $160 billion is now invested in ASX-listed ETFs – up five-fold in 10 years – which has led to lower liquidity in other market segments.
Commenting on the surge of passive capital, he added: “Against this backdrop, being contrarian, and investing where the weight of money isn’t, may be a productive strategy.”
Affluence Funds Management founder and portfolio manager Daryl Wilson said there’s never been a better time for active investors to consider small caps and LICs.
“Institutional money has largely exited, sentiment is weak, and yet the fundamentals are sound. History shows that when the fair valuation gap is this wide, the long-term returns can be exceptional.”
According to Affluence, which manages four multi-manager funds, LICs are currently trading at average discounts of 25-27 per cent to their net asset values, marking the sharpest dislocation since the pandemic period.
“You’re effectively buying a dollar of assets for 75 cents,” Wilson said. “Even if the NAV discount never closes, the underlying portfolio can still compound at attractive rates. If it does close, investors enjoy an additional benefit,” Wilson said.
He added that the same dynamics are evident across small-cap and micro-cap stocks, where the retreat of superannuation fund mandates and the surge in benchmark-tracking capital have created what he calls a “once-in-a-cycle dislocation”.
“We’re overweight small caps, selective REITs and discounted LICs, and underweight US large-cap tech where we believe valuations have been stretched by AI,” he said.
Connolly noted investor behaviour on the InvestmentMarkets platform is mirroring this shift.
“We’re seeing self-directed investors pair low-cost ETFs for their core exposure with specialist managers for alpha and income. It’s a simple strategy but the specialist satellites are where value now resides.”
Wilson has faith patience and selectivity will be rewarded.
“The market eventually re-prices excessive optimism and pessimism. Investing early in undervalued assets takes nerve, but we expect it to pay off over a three-year horizon.”
Connolly believes 2026 may usher in a renewed focus on value.
“If 2025 was the year of private credit and chasing yield, 2026 could well be the year of rediscovering value,” Connolly said. “Investors who look beyond the noise might well find attractive opportunities hiding in plain sight.”
The pair are not the only ones seeing value in small-caps as ETF Shares’ Tuckwell said he expects Aussie small caps to remain the area of greatest interest. This is particularly the case for critical minerals miners given their role in new technology and the global push to build supply chains independent of China.
He said investor focus is shifting away from the “usual suspects.”
“Stretched valuations on large companies, most obviously CommBank (CBA), and structural challenges for heavyweights like CSL (battling downgrades) and WiseTech (WTC) (now facing an ASIC/AFP investigation) have significantly dimmed their appeal,” he told InvestorDaily.
Previously viewed as a “dumping ground,” smaller companies are also benefiting from an M&A wave and the critical minerals boom, according to Tuckwell.
