InvestmentMarkets and Affluence Funds Management agree structural imbalances are creating rare value for patient investors
A decade of heavy passive fund inflows has reshaped Australia’s equity market, concentrating capital in a handful of large-cap names, leaving many smaller companies and listed investment companies (LICs) behind.
Commenting on the surge of passive capital, InvestmentMarkets CEO Darren Connolly said,“More than $160 billion is now invested in ASX-listed ETFs - up five-fold in 10 years – a trend that we don’t see stopping any time soon. This has led to lower liquidity in other market segments.”
Connolly 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 concurs: .“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.”
Affluence, which manages four multi-manager funds, is seeing LICs trade at average discounts of 25-27 per cent to their net asset values - the steepest since the pandemic. “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.”
He added that the same dynamics are evident across small-cap and micro-cap stocks, where the retreat of super-fund mandates and the surge in benchmark-tracking capital have created what he calls a “once-in-a-cycle dislocation.”
Connolly notes investor behaviour on the InvestmentMarkets platform reflects 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 believes patience and selectivity will be rewarded: “We’re overweight small caps, selective REITs and discounted LICs, and underweight U.S. large-cap tech where we believe valuations have been stretched by AI. 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.”
Both agree that investor behaviour, not just macro conditions, will shape returns in 2026. “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.”
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