Category: Letter to Investors

Optimism Dies Hard

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In this Letter to Investors, we look at:

How share market breadth is back, with small caps posting a stellar August
The extreme valuation differential between small and large caps that suggests smalls are strongly placed to outperform in the next 5-10 years
The outlook for small caps for the next 12-18 months based on four scenarios (which scenario is most likely, and which is best for small caps)
How small caps are one of the most attractively valued asset classes anywhere in the world today, and
Why all this makes us confident that our Funds are poised to deliver 15%+ average returns in the coming years

Ophir Fund Performance – August 2025

Before we dive into the Letter, you’ll find a detailed monthly update on each of the Ophir Funds below.

The Ophir Opportunities Fund returned +10.3% net of fees in August, outperforming its benchmark which returned +8.4%, and has delivered investors +24.0% p.a. after fees since inception (August 2012).

The Ophir High Conviction Fund (ASX:OPH) investment portfolio returned +6.3% after fees in August, underperforming its benchmark which returned +7.0%, and has delivered investors +14.8% p.a. after fees since inception (August 2015). The ASX listing returned -1.9% for the month.

The Ophir Global Opportunities Fund* returned +4.9% net of fees in August, outperforming its benchmark which returned +2.1%, and has delivered investors +18.8% p.a. after fees since inception (October 2018).

The Ophir Global High Conviction Fund* returned +4.1% net of fees in August, outperforming its benchmark which returned +2.1%, and has delivered investors +14.7% p.a. after fees since inception (September 2020).

*Refers to Class A units.

Welcome to the party, pal!” – John McClane

It’s Christmas Eve 1988 in Los Angeles.

Terrorist Hans Gruber and his band of German thugs have just crashed Nakatomi Plaza’s Christmas party and are looking to rob the joint.

What Hans didn’t count on, though, is that NYPD cop John McClane is making a surprise visit to the Plaza to reconcile with his estranged wife Holly who is attending the party.

After tossing a terrorist out of a window onto an unsuspecting LAPD cop car below, McClane yells his classic line to the startled driver: “Welcome to the party, pal”.

Source: Die Hard (1988).

It was, of course, action hero Bruce Willis as McClane who delivered the line in the cult classic and holiday favourite, Die Hard. Suddenly, Arnie’s Terminator quip of “I’ll be back” had some competition for best 80s action movie one-liner

August reminded us that, despite the laundry list of macro risks, investors’ optimism too “dies hard”.

During the month, investors couldn’t be held back, and even small-cap investors got a “welcome to the party” this month.

August saw the market add more gains to the rally from April’s post Liberation Day share market low.

The S&P 500 in August was up +2.0%. U.S. small caps put on a whopping +7.0%, boosted by Fed Chair Powell opening the door to a September rate cut.

Following in the footsteps of its U.S. big brother, ASX large and small caps put on a very similar +2.7% and +8.5% respectively (ASX100 and ASX Small Ords).

Small caps to trounce large?

Share market “breadth is back baby” I can hear John McClane say.

Regular readers will know we’ve been highlighting how the epic small-cap-market underperformance over the last 4-5 years has made small-cap valuations globally versus large the cheapest in a generation (25+ years).

The mega-cap tech companies have body slammed the rest of the market for much of the last decade.

The chart below shows the different size (large/mid/small) and style (value/core/growth) segments of the U.S. share market since 2017.

The mega-cap tech poster childs, the Magnificent 7, are all large-cap growth businesses.

(Source: Piper Sandler & Co.)

But based on history, the extreme valuation differential we see now means that it’s highly likely small caps will trounce large caps over the next 5-10 years.

So what will the next 12-18 months look like?

Four Scenarios

You thought breaking Holly out of Nakatomi Plaza was tough, well short-term forecasting is the investment equivalent!

So, for this month’s Letter to Investors, we thought we’d lay out the four most likely near-term economic scenarios for U.S. small caps, which given their 65% odd share, is also likely to drive small caps globally.

The four scenarios we see immediately ahead are outlined below from most to least likely, with our best estimate for their likelihood in brackets:

1. Fed normalises rates, low growth continues (40%)

This is the most likely scenario. We’re in good company because it’s the consensus of market participants and economists.

As you can see below, the market is pricing that after being on hold so far this year, the Fed will get off the fence and recommence its rate-cutting cycle at its next meeting on 17th September (blue line).

Source: Ophir. Bloomberg.

For us as stock pickers, this is typically a good environment.

Market returns might be more modest. But when economic (1-2% forecast above) and corporate earnings growth are low, higher-growth companies that we focus on (and are experienced in finding before the market) suddenly become rare diamonds and get bid up by the market.

Scenario 1 bottom line: Moderate market returns (including small caps); best outperformance opportunity

2. Fed normalises rates, growth booms (30%)

The next most likely outcome is rates normalising lower and helping kick off an economic boom later this year and next.

For most businesses in the U.S., rates have been uncomfortably high for many years. It shows as sluggish aggregate earnings growth outside the Magnificent 7.

Combine that with Trump’s One Big Beautiful Bill – including its immediate expensing of Capex and R&D and deregulatory agenda – and some economists see U.S. real GDP boosted to near 3% next year.

This would ignite rocket fuel under the risk-on and cyclical parts of the share market, including the housing, energy, financial, materials sectors … and small caps.

For investors, these are the exciting types of environments where you make 20-50% in a year from the small-cap market.

But while great market returns in small caps could be expected, it would be a more challenging environment for us to outperform.

Why?

Because we tend to be underweight the most cyclical sectors of the share market, particularly energy, financials and materials.

Cyclicals tend to have fewer of the structural-growth businesses that we like to focus on (low-growth regional banks dominate the financial sector in the U.S.).

We also don’t have expertise in forecasting the underlying commodity prices that dominate short-term moves in energy or materials businesses.

Source: Piper Sandler

Still, in this scenario, our investors are likely to be happy because small caps will probably have ripped big time; and we’ll be happy to just keep up with that boom.

Scenario 2 bottom line: Best small-cap market returns, will be tougher for us to outperform

3. Fed cuts quickly as recession arrives (25%)

The consensus of economic forecasters puts the probability of a U.S. recession in the next 12 months in the 25-30% range (Bloomberg).

That may sound high until you realise the forecasts never get below 15%, because recessions occur, on average, about one in every seven years.

So, while recession risk is a little elevated – mostly due to risks from U.S. tariffs and a still-restrictive Fed policy rate – a recession is not the most likely outcome expected from most in the “dismal science”.

But if one did occur, then undoubtedly share markets would fall as they always have in U.S. recessions. This is the worst-case outcome for market returns in both large and small caps.

Just because the recession probability is elevated, though, there is no point getting too defensive by doing things like going to cash for two main reasons:

It’s not the most likely scenario and the cost of foregone returns could be huge if the likelier scenarios above play out; and
Even if a recession is on the cards, it’s virtually impossible to predict the exact timing of the market downturn (and subsequent recovery) that historically has always accompanied it, like you’d need to in order to be better off than just staying invested.

Nine out of 10 times in a recession small caps fall more than large caps. But there is a good case to be made that may not happen if a recession occurred today.

The last recession where large caps fell more than small caps was the Dot.com-related recession in the early 2000s.

Large caps fell more because they were so much more expensive than small caps.

Ring a bell, anyone?

Today, small caps are the cheapest versus large since just before that Dot.com recession. So it’s a real possibility that, if a recession were to rear its head today, large caps would fall more than smalls in a sell-off.

The sectors that do well in a recession are “stability” sectors like health care, consumer staples, utilities and real estate (see table below).

Source: Piper Sandler

The other group of companies that outperform in a recession are businesses whose earnings are beating market expectations. These are our forte.

And while we tend to invest less in utilities and real estate, the health care and consumer staples sectors are firmly in our wheelhouse and provide us with plenty of opportunity to outperform.

Scenario 3 bottom line: Worst market returns (though small caps may outperform); moderate outperformance opportunity

4. Inflation ramps and Fed raises rates (5%)

What happened to all that inflation we were promised by the market pundits from Trump’s tariffs?

If it turns out that material inflation is still on the way – even though the Fed playbook is to look through tariff-induced inflation – we could see higher interest rates if it feeds into higher inflation expectations.

We think this is the least likely scenario, though it’s not completely off the table.

But the Fed will have a high bar for it to decide to reverse its forecasts for rate cuts, even putting aside Trump’s pressure to stack the Federal Open Market Committee (FOMC) with sycophants to get them lower.

Investors could see this as a mini replay of what happened in 2021/2022 when rates rose, markets sold off, and small-cap growth-oriented businesses felt the worst of the valuation squeeze.

This time, though, instead of rates lifting from zero, they are already at 4.5% today in the U.S.

We are not sure the U.S. economy could handle much higher rates without causing a more serious slowing in demand and inflation.

Also, today, U.S. small caps trade on a below-average 16x price-to-earnings ratio (PE). That’s a far cry from the two standard deviations expensive 22x they traded on prior to the 2021/2022 sell-off, so they likely have less downside risk.

Source: Ophir. Bloomberg

Regardless, this scenario would likely see markets fall, though not likely as much as in the recession scenario.

It would be hard for us to outperform, though, as the faster-growing small caps we invest in would have their valuations impacted more.

Lucky it’s the least likely scenario, with probably a 5% or lower likelihood.

Scenario 4 bottom line: markets likely fall, worst outperformance opportunity

An exciting time to be a small-cap investor

Now that’s a lot of different scenarios and only one, or perhaps even a variant of one, will play out. But it’s good to understand the risks, though not be frozen by them. That’s investing.

The first two scenarios are the most likely in our view and great for Ophir investors.

The third is bad for investors, but we think there are quite good prospects that we will perform better than large caps.

The fourth is the worst but least likely.

But this is the short term: the next 12-18 months.

Investors in our Funds should have a minimum time horizon of at least five years.

And on that score global small caps are cheap. They are one of the very few asset classes you can say that about today and that’s great news.

So, as we look out over the next five years we remain confident we can achieve our internal target of 15% per annum on average – a level we have met or exceeded in all our Funds.

Valuations in our part of the market are attractive.

The team is experienced, stable and locked in.

And we remain as hungry as ever to deliver great returns for ourselves and our investors.

As John McClane might say “Yippee-ki-yay”!

As always, thank you for entrusting your capital with us.

Kindest regards,

Andrew Mitchell & Steven Ng

Co-Founders & Senior Portfolio Managers

Ophir Asset Management

This document has been prepared by Ophir Asset Management Pty Ltd (ABN 88 156 146 717, AFSL 420082) (“Ophir”) and contains information about one or more managed investment schemes managed by Ophir (the “Funds”) as at the date of this document. The Trust Company (RE Services) Limited ABN 45 003 278 831, the responsible entity of, and issuer of units in, the Ophir High Conviction Fund (ASX: OPH), the Ophir Global Opportunities Fund and the Ophir Global High Conviction Fund. Ophir is the trustee and issuer of the Ophir Opportunities Fund.

This is general information only and is not intended to provide you with financial advice and does not consider your investment objectives, financial situation or particular needs. You should consider your own investment objectives, financial situation and particular needs before acting upon any information provided and consider seeking advice from a financial advisor if necessary. Before making an investment decision, you should read the relevant Product Disclosure Statement (“PDS”) and Target Market Determination (“TMD”) available at www.ophiram.com or by emailing Ophir at ophir@ophiram.com. The PDS does not constitute a direct or indirect offer of securities in the US to any US person as defined in Regulation S under the Securities Act of 1993 as amended (US Securities Act).

All Ophir Funds are deemed high risk within their respective Target Market Determination documentation. Ophir does not guarantee the performance of the Funds or return of capital. An investment may achieve a lower than expected return and investors risk losing some or all of their principal investment. Past performance is not a reliable indicator of future performance. Any opinions, forecasts, estimates or projections reflect our judgment at the date of this was prepared, and are subject to change without notice. Rates of return cannot be guaranteed and any forecasts, estimates or projections as to future returns should not be relied on, as they are based on assumptions which may or may not ultimately be correct.

Actual returns could differ significantly from any forecasts, estimates or projections provided.

The Trust Company (RE Services) Limited is a part of the Perpetual group of companies. No company in the Perpetual Group (Perpetual Limited ABN 86 000 431 827 and its subsidiaries) guarantees the performance of any fund or the return of an investor’s capital.

11 Aug, 2025 Letter to Investors - July 2025

8 Sep, 2025 U.S. Reporting Season - Winners, Losers & 6 Key Themes

11 Aug, 2025

Letter to Investors - July 2025

Letter to Investors • 16 mins read

PDF

In this Letter to Investors, we explore:

How long markets can continue to ignore U.S. tariff dramas, as they did in July
Why employment and politics have significantly increased the odds of a Fed rate cut
The promising signs that small caps are shifting from facing ‘headwinds’ to ‘tailwinds’ (helped by rate cuts)
Why we’re untroubled by the Japanese market’s impact on our Global Opportunities Fund’s relative performance in July, and
Some great news for the Ophir Funds in Morningstar’s latest performance rankings
An uncovered gem – a US$6.6bn portfolio company exposed to the AI thematic with no analyst coverage.

Ophir Fund Performance – July 2025

Before we dive into the Letter, you’ll find a detailed monthly update on each of the Ophir Funds below.

The Ophir Opportunities Fund returned +3.0% net of fees in July, outperforming its benchmark which returned +2.8%, and has delivered investors +23.3% p.a. after fees since inception (August 2012).

The Ophir High Conviction Fund (ASX:OPH) investment portfolio returned 3.4% after fees in July, underperforming its benchmark which returned +3.6%, and has delivered investors +14.2% p.a. after fees since inception (August 2015). The ASX listing returned +2.6% for the month.

The Ophir Global Opportunities Fund (Class A) returned +2.4% net of fees in July, underperforming its benchmark which returned +2.8%, and has delivered investors +18.2% p.a. after fees since inception (October 2018).

The Ophir Global High Conviction Fund (Class A) returned +1.3% net of fees in July, underperforming its benchmark which returned +2.8%, and has delivered investors +14.0% p.a. after fees since inception (September 2020).

Mo’ Tariffs, Mo’ Problems?

Global trade policy uncertainty rose again in July, but this time, share markets didn’t react.

Markets rose in July, with the S&P 500, Russell 2000, ASX 200 and ASX Small Ordinaries up +2.3%, +1.7%, +2.4% and +2.8% respectively.

Tariff fatigue has clearly set in. The markets have moved on.

But the coming U.S. economic data is almost certain to have a ‘stagflationary’ whiff to it over the next few months, and the big question will be: will the market continue to look through tariffs?

With the U.S. and its trading partners striking tariff ‘deals’ in July, and the U.S. handing many more countries their new tariff rates on 1 August, it’s becoming increasingly clear the U.S.’s new effective tariff rate will settle somewhere around 15%. That’s a level we have to go back to the 1930s to see.

So far, the incoming data suggests that it’s U.S. importers that are ‘eating’ the lion’s share of the tariffs rather than passing them on.

On the other side of the ledger, the Trump Administration’s One Big Beautiful Bill (OBBB), which just passed Congress, has some big tax relief for business, including immediate expensing (100%) of capital expenditure and R&D.

What the U.S. government takes with one hand from domestic corporates, is given back to a degree. Some estimates suggest it’s giving more than it’s taking.

Although the sequencing will be important for the macro data. At a company level, there will definitely be the ‘haves’ (think those with primarily U.S. production and big capex budgets) and the ‘have nots’ (those with supply chains in highly tariffed countries that are capital light).

A U.S. rate cut in September becomes almost certain

The other big question is: how soon will the Fed begin cutting rates again? And what does that mean for the small cap market we play in?

The answer is that a Fed rate cut is now more likely for two reasons.

The first is a weak jobs market.

As many who follow markets would know, on 1 August, the U.S. received a bad jobs report, with job growth in July slower than expected.

More importantly, job growth in the prior two months was revised down by 258,000 jobs.

In a shock move, President Trump fired the economist heading the statistical agency responsible for the numbers. Is it a case of shooting the messenger, or a leader being fired for not providing accurate enough numbers? Economists would argue the prior month revisions are par for the course as more data comes through.

Whatever the answer, the U.S. jobs market is softer than once thought, and this has increased expectations for Fed cuts. Before the jobs report, the prospect of a September Fed rate cut was about 50/50. It now looks like a near certainty.

The market is now predicting 2.5 rate cuts (of 0.25% size) before year end. Given the Fed meets three more times before year end, that is almost a cut at each meeting.

This would be a welcome relief for borrowers because the Fed has been on hold since December last year, when it paused the current rate cutting cycle.

Bad Jobs Report Increases Expected Rate Cuts:

Source: Bloomberg. Data as of 6^th August 2025

“Stubborn moron,” “very stupid person,” “total loser,” “too political,” “low IQ,” and should be “put out to pasture”

The second reason rate cuts are likely more imminent is politics.

The words above are just a few that President Trump has used to describe the Fed Chair Jerome Powell this year for not cutting rates.

It is not only the jobs market that has been putting pressure on the Fed to cut!

With the recent resignation of a voting Fed Governor, Trump now has an early opportunity to appoint a replacement likely to support additional rate cuts within the Fed.

This new appointment to the Federal Open Market Committee (FOMC) will also likely be first in line as Trump’s pick to replace Powell when he is scheduled to step down in May next year (unless Trump removes him for cause before then!).

The point is that politics, and now the macro data, both suggest a resumption of the Fed’s rate cutting cycle is imminent.

Small caps shifting from ‘headwinds’ to ‘tailwinds’

As we’ve been saying for some time now, we think this, looming rate cuts, is THE precondition for small caps to start outperforming.

We have started to see some of this outperformance, and more breadth, more recently. The market’s recovery from its post Liberation Day lows in mid-April is no longer simply dominated by the biggest companies.

Bad Breadth – a fresh mint for small caps:

Source: Bloomberg, Ophir. Data as of 4 August 2025.

As you can see above, the S&P 500 (orange line) rebounded from April to July. This has coincided with micro caps outperforming small caps (brown line), and small caps outperforming an equally weighted basket of large caps (black line).

This type of market breadth, with micro and small caps outperforming, has been very rare over the last few years.

As the market anticipates a resumption of rate cuts, we watch closely to see whether this marks the beginning of sustained small cap outperformance.

It should be, because rate cuts benefit small caps for two main reasons:

They have more floating rate debt and are more economically sensitive, so they benefit more as rates fall; and
Lower rates encourage more risk-taking by investors, often spurring them to invest further down the market capitalisation spectrum.

We don’t speak Japanese

So how did our Funds perform in July?

In our recently reopened, and No. 1-ranked since inception, Global Opportunities Fund, performance was strong in an absolute sense, up +2.4%.

The Fund did lag the benchmark by -0.4% during the month. It was, however, due some slight underperformance given its +41.8% return for the year to 30 June, well ahead of the benchmark’s +18.7% return.

Global Opportunities Fund Factors in July:

Source: Bloomberg. Data as of 31 July 2025. Benchmark: MSCI World SMID Index

When we look at the performance attribution for July, as you can see in the chart above, three things stood out to us:

Stock picking (Selection Effect) added little. Virtually all our companies don’t report Q2 earnings until August, so there was little stock-specific news on our companies to get the market excited. Stay tuned for next month’s result, though. (HINT: so far so good in the month-to-date.)
Size was actually a slight tailwind. Remember our average company size is in the AUD$4-5 billion range. That’s a little bit smaller than the average company in the MSCI World SMID Cap benchmark. And small caps outperformed mid-caps during the month. Micro-caps (the smallest size cohort) outperformed both! This is a really interesting development because over the last four years, the smaller the size of a company, the worse its share price performance has tended to be globally. As we explored above, there are good signs this is switching to a tailwind.
Country was a -0.6% detractor to our relative performance compared to the benchmark. Why? The Japanese share market was the major standout performing country or region in our benchmark in July, and we don’t invest there. Why not? We don’t speak Japanese. In all the other major countries we invest into – the United States, Canada, United Kingdom, Germany, Netherlands, Switzerland and Sweden – we can go into those meetings with company management and speak English, be understood and understand them just fine. Our benchmark has about 4,500 companies, and Japan represents just around 10% of our benchmark. We don’t need to invest everywhere, just where our process works best. And not speaking the language in Japan, unfortunately, at this time, makes it very tough to gain the insights we need to invest.

Morningstar Magic

Finally, we wanted to leave you with some recent good news on the performance rankings of our ‘Aussie’ Ophir Opportunities Fund and our Global Opportunities Fund.

Opportunities Fund’s Rankings:

The data is in for competitors in the key Morningstar database to 30 June 2025, and as you can see above, we have some great results to share:

Our original Ophir Opportunities Fund, which started in 2012 and has returned +23.2% per annum net of fees, is now ranked No. 1 for performance in Australian small/mid caps on a 1, 2, 3, 7, 10, 12 and since inception basis.
While that Fund hard closed at capacity in 2015, our Global Opportunities Fund, which is open and run under the same investment process and shares many of the same team members that worked on that original Fund, is ranked No. 1 on a 1, 2, 3 and since inception in 2018 basis in Global small/mid caps (funds with >$50 million in funds under management)

The open-for-investment Global Opportunities Fund appears to be tracing the same path as our closed-at-capacity Ophir Opportunities Fund.

It’s been hard work and a big team effort, but we wouldn’t have the pleasure of doing what we love every day without the support of our fellow investors. So we sincerely thank you.

We also remain acutely aware that these are just numbers on a page for new investors in our Funds. Our job is to keep it up, so they can have a good experience too, and that’s something we are passionately committed to.

Stock in Focus: IES Holdings Inc.

An Uncovered Gem

At Ophir, we typically don’t find our best investments by running traditional stock screens. Instead, we uncover opportunities by diving deeply into adjacent industries and meeting with people on the ground.

We don’t want to risk missing hidden gems that might otherwise get screened out.

This month’s stock in focus is the perfect example.

If we had relied on a screen, we would never have found IES Holdings (NASDAQ: IESC), a US$6.6 billion company with no analyst coverage.

It truly is an uncovered gem.

Leaving no stone unturned

Two years ago, while most attention was focused on the most obvious beneficiaries of the AI boom, we took a different approach. We were scouring the industrial landscape for companies quietly building the backbone of tomorrow’s digital economy.

Our search began with a simple observation: investor demand was developing across industrials tied to the AI infrastructure build-out.

We started our search in the San Francisco Bay Area, the traditional hub for IT industrial services.

However, we quickly expanded our search across the U.S. This took us to both sides of the coast and off the beaten path to locations like Oklahoma and Wisconsin.

To ensure we left no stone unturned, we ventured to the small city of Guelph in Canada before flying across the Atlantic to Sweden and Switzerland.

But when we turned our attention back to the U.S., in Houston, Texas, it was IES Holdings that really stood out amongst all others.

Plugged into Growth

IES is a founder-led (with over 50% insider ownership) diversified electrical and technology systems company serving critical infrastructure markets across North America. Its four business segments span both secular growth drivers and cyclical recovery opportunities:

Communications (27% of revenue; 14% EBIT margin)
Focused on data centers, distribution facilities and high-tech manufacturing, this segment benefits from multi-year demand visibility in data infrastructure and logistics.
Residential (48% of revenue; 8% EBIT margin)
Provides electrical, heating, ventilation and air conditioning (HVAC), plumbing, cable TV and solar services for the housing market.
Infrastructure Solutions (12% of revenue; 23% EBIT margin)
Manufactures custom generator enclosures (especially for data centers) and provides motor maintenance and repair services. Expansion of the manufacturing footprint and potential M&A will underpin growth in this division.
Commercial & Industrial (13% of revenue; 11% EBIT margin)
Offers electrical and HVAC design, construction and maintenance, competing selectively where regional scale gives them a competitive edge.

Powerful tailwinds

Like its larger peers, including Quanta and Comfort Systems, IES Holdings is benefiting from powerful tailwinds such as:

Tech Infrastructure: The AI, cloud and e-commerce build-out represents a US$500 billion capex market, expected to reach US$1 trillion over the next 4 to 5 years. This implies annual growth in the mid to high teens and underpins strong visibility and sustained growth for the Communications and Infrastructure Solutions segments.

Source: IES Holdings Inc. Investor Presentation. 2025. FMI; limited to private Data Center construction.

Housing Recovery: The U.S. residential market remains structurally undersupplied. IES is expanding into plumbing and HVAC cross-sell opportunities, adding further optionality. Residential appears near a trough, with signs of stabilisation emerging in key Sunbelt markets.

Source: IES Holdings Inc. Investor Presentation. 2025. U.S. Census Bureau, National Association of Home Builders (NAHM); Apollo US Housing Outlook.

We spent extensive time speaking with large contractors, installation peers, and equipment manufacturers across adjacent areas such as switchgear, transformers, cooling systems and power generation.

This on-the-ground perspective gave us confidence in IES’s competitive positioning and ability to capture market share.

Under the radar

We made our initial investment in March 2024 when IES had a share price of around US$120 and was trading on 15x earnings. That represented a 40 to 50% discount to its peer group.

The company also had a strong balance sheet with a net cash position, which would allow it to make acquisitions or repurchase shares.

And with zero analyst coverage, it was truly flying under the radar.

The appeal of IES was simple: it was a cheap and undiscovered exposure to high-growth structural themes.

Supercharged for Success

The stock has nearly tripled since our initial investment. However, A lot of this has been earnings driven, so we believe significant upside remains.

IES Holdings now trades on approximately 20x earnings, while larger covered peers are trading between 25x and 36x earnings. That implies 40 to 50% multiple upside if coverage and recognition catch up, which will stack nicely with double digit earnings growth.

Source: Ophir. Bloomberg.

IES ticks many of the boxes we look for in a company:

Structural growth
Valuation upside
Balance sheet flexibility

While the rest of the market crowds around the usual AI beneficiaries, we are happy owning one of the companies quietly wiring the future.

As always, thank you for entrusting your capital with us.

Kindest regards,

Andrew Mitchell & Steven Ng

Co-Founders & Senior Portfolio Managers

Ophir Asset Management

Footnotes-

[1] Technically they are the ones that actually pay the tariff but ultimately it can in effect be shared across foreign exporters and U.S consumers

[2] Morningstar data for Global Mid/Small Cap Equity funds available in Australia since October 2018 inception

Actual returns could differ significantly from any forecasts, estimates or projections provided.

25 Jul, 2025 Press - Four small caps this top fundie says are worth a look

8 Sep, 2025 Letter to Investors - August 2025

9 Jul, 2025

Letter to Investors - June 2025

Letter to Investors • 12 mins read

Read the PDF

A big FY25 but small cap rate cut benefit still ahead

Financial Year 2025 generated some great returns in the Ophir Funds and in this Letter to Investors we:

Reveal what drove our Funds to achieve 20-40% returns – the punchline….it was stock picking!
Cover what our returns look like in up and down markets
Show how breadth of contributors is a good sign of performance repeatability
Highlight how rate cuts ahead might help small caps outperform

June 2025 Ophir Fund Performance

Before we jump into the Letter, we’ve provided a detailed monthly update for each of the Ophir Funds below.

The Ophir Opportunities Fund returned +0.3% net of fees in June, underperforming its benchmark which returned +0.8%, and has delivered investors +23.2% p.a. post fees since inception (August 2012).

The Ophir High Conviction Fund (ASX:OPH) investment portfolio returned -0.3% net of fees in June, underperforming its benchmark which returned +0.8%, and has delivered investors +13.9% p.a. post fees since inception (August 2015). ASX:OPH returned -0.9% for the month.

The Ophir Global Opportunities Fund (Class A) returned +6.0% net of fees in June, outperforming its benchmark which returned +2.3%, and has delivered investors +18.1% p.a. post fees since inception (October 2018).

The Ophir Global High Conviction Fund (Class A) returned +5.0% net of fees in June, outperforming its benchmark which returned +2.3%, and has delivered investors +13.9% p.a. post fees since inception (September 2020).

A Good Year

Despite four years on the trot now of global small cap underperformance versus large caps, it was a good FY25 (12 months to June 2025) for global and Australian small cap markets, producing total returns in the low to high teens.

But it was an even better year for the Ophir Funds, each of which was up between about 20-40% – see table below.

Longer term we assume the market, and our benchmarks, return about 10% per annum, which is what they have approximately done over the very long term. So, by this standard it was an above average 12 months for the small cap market.

We also target 5% outperformance, or 15% total returns, over the long term for all our funds. All four of our core funds below bested this mark in FY25, led by the Ophir Global Opportunities Fund up 41.8% after fees.

Of course, this is not a return investors should extrapolate out into the future as we are acutely aware virtually no one can achieve those types of returns on average over the long term, with the great Warren Buffett achieving more like 20% pa returns in the very long term.

We’d always caution investors that we seek to achieve 15% pa but that comes with risk. And the only thing we can guarantee is that the return in any one given year will not be exactly 15%!

Ophir Funds – Performance to 30 June 2025

While headline results of 1 year returns are great, its long-term returns that matter most for investors. Here our Australian and Global Opportunities Fund’s at 23.2% net p.a. and 18.1% net p.a. since their respective inceptions in 2012 and 2018 are the clear No.1 performers in their asset classes available in Australia (FE Fundinfo data).

The Ophir Opportunities Fund is hard closed, though the Global Opportunities Fund is still open (learn more here).

So if we can’t extrapolate 1 year returns, what can we learn from them? The answer is a lot!

Stock picking rules the day

Below we “pop the hood” on the Global Opportunities Fund’s 41.8% after fee return in FY25. The Global small and mid cap market, as shown by its benchmark, returned 18.7% over the same period so we outperformed by 23.1%. The below chart shows multi-factor performance attribution from Bloomberg which is really just a fancy way of saying, you outperformed the market by 23.1%, what factors caused it?

We haven’t shown the long list of 35 odd factors that Bloomberg tracks, that’d be a really ugly chart, so many of them are just clumped under “Other”. It’s clear the outperformance wasn’t due to the “Size” of companies we invested in as Mid Caps outperformed Small Caps but we are more invested in Small Caps. It wasn’t due to us allocating more to certain countries over others compared to the benchmark – we broadly mirrored the benchmarks/markets allocations to different countries based on their size, with the U.S. being about 60%.

Anyone who tells you they can pick which country is likely to have a better performing share market over the short term is in our view likely lying to themselves, or worse, to you. Good luck to them. And it wasn’t due to taking on more market risk as Beta only contributed 0.4%, or virtually nothing, to the 23.1% outperformance.

Source: Bloomberg. Data as of 30 June 2025. Benchmark MSCI World SMID Index.

In fact, more than 100% of the outperformance was due to Selection Effect which, like we’ve covered previously, means it can’t be explained by standard investment characteristics or styles, but rather from stock picking by the team. That’s good and important because outperformance from stock picking, if you have a genuine edge versus the market, is more likely to be sustainable than outperformance due to some specific factor or style of company like “Size”, or “Growth” or “Industry”.

Those factors and styles might work for a while, but often mean revert (subsequently underperform) and there is not a lot of great evidence that one of them always outperforms in all markets or over the short and long term.

Protecting the downside and outperforming in up markets

Another attribute that investors often crave is to not fall as much as the share market when it inevitably does. The share market is volatile enough, if you can protect during the dips then that’s a trait virtually all investors would put their hand up for.

After a tough 2022 for our style of investing when smaller faster growing businesses saw their valuations get hit when interest rates rose rapidly, we are pleased to show that we’ve fallen less than the global small and mid cap market when there has been pull backs. Over the last year when our benchmark has been down, we have only been down on average 76% of that amount, meaning we fell only about three quarters the amount of the market, protecting value for investors (green bar in chart below). For example, if the market fell -4% in a month we tended to only fall about -3%.

Source: Ophir. Bloomberg. Data as of 30 June 2025.

On the flip side when the market has been up, we have been up 183% of the market’s return. So here if the market was up +4% in a month, we were up 7.3% on average.

As the chart shows this is not just a trait of the last year, but the last three years. That is we’ve both fallen less in down markets and outperformed more in up markets, but the size of the outperformance is more when the market is up.

This outperformance in both up and down markets is something we also notice in our Australian small and mid cap funds that have been running for even longer.

What do we put it down to?

At the end of the day we are looking for companies that can structurally grow and beat the market’s expectations on both revenues and profits. Sure, there might be shorter term periods where other styles of investing might be more in vogue (think Dot.com bubble where nobody cared about fundamentals if you had “.com” in your name!) but if you’re growing cash flows for owners more than the market expects, that’s going to be pretty attractive no matter if the market is in the red or black.

You don’t want to be a one trick pony or a lucky duck

One of our favourite ways to tell if a fund manager is more likely to be skilful or just lucky is to ask them this “How many different (uncorrelated) bets led to your outperformance?” The more there are, the more likely there is to be a repeatable skill in their investment process.

Why?

It’s pretty simple. Even a novice can beat a World Series of Poker Champion on one hand. You can get lucky once. Play enough times though and the novice will lose all their dough.

If you have only one or two stocks doing all the heavy lifting contributing to your outperformance then, though its still not certain, but you’re more likely to have just gotten lucky.

Put another way, the greater the spread of stocks contributing to your outperformance, the more comfortable you should be that outperformance is likely to continue in the future. And before you ask, yes they still need to be uncorrelated. Owning 40 gold stocks out of a supposed diversified 50-stock portfolio when the gold price does well, doesn’t mean you got 40 separate calls right, you got one!

In FY25, we had 19 stocks give over 1% contribution to the 41.8% return of the Global Opportunities Fund, with the biggest 3 contributors providing less than 10% of the fund’s return.

Source: Ophir. Bloomberg. Data as of 30 June 2025.

9 of the 10 industry sectors we invested in provided a positive return in FY25, with our industry allocation compared to our benchmark contributing virtually nothing to our outperformance (no big gold bet here!).

The key point being there was a wide spread of contributors to the return of our Global Opportunities Fund in FY25. While that doesn’t guarantee results in the future, we think it makes it more likely our investment process can sustainably produce outperformance in the long term, as it has in the past.

Cuts remain key

To close we thought we’d leave you with a chart that caught our eye this month. We don’t think we necessarily need small caps to be outperforming large caps to generate attractive returns for investors, and ourselves. FY25 is an example of that. But it sure would be nice if they did after 4 years of small cap market underperformance.

As we have argued for a while now (like in our May Letter to Investors), lower interest rates should certainly help.

Why? For one it reduces interest costs on smaller companies more (as they have more floating rate debt on average than large caps) and secondly it also spurs more risk taking by investors to venture further down the market cap spectrum.

The below chart shows Small Cap versus Large Cap performance in Australia (indexed to 100) in orange since 2019. A falling line means Small Caps are underperforming Large as has happened since late 2021. That coincided with interest rates rising in Australia (RBA Cash Rate inverted in grey). But now Small Caps have just more recently stopped their obvious underperformance as the RBA has begun their rate cutting cycle. A further 0.75%-1% of RBA rate cuts is priced by the market to occur over the next year.

Sometimes the investment world can get too technical in its analysis. Maybe it is just as simple this, as higher rates have hurt Small Caps relative to Large over the last few years. Perhaps more rate cuts are the antidote?

(The chart below looks very similar for U.S. Small versus Large Caps).

Source: Ophir. Bloomberg. Data as at 30 June 2025.

After strong returns in FY25 investors might be asking “is there more juice left in the stocks you hold in the funds, or has it all been squeezed out?” It’s the right question to ask.

The reality is the funds, and more so the global funds, which have a truly enormous investment pond to fish from, are fresh with several high conviction new ideas with big upside, replacing companies that did well and we sold in FY25, after hitting our valuation targets. This keeps us very excited for what lies ahead in FY26.

As always, thank you for entrusting your capital with us.

Kindest regards,

Andrew Mitchell & Steven Ng

Co-Founders & Senior Portfolio Managers

Ophir Asset Management

All Ophir Funds are deemed high risk within their respective Target Market Determination documentation. Ophir does not guarantee the performance of the Funds or return of capital. An investment may achieve a lower than expected return and investors risk losing some or all of their principal investment. Past performance is not a reliable indicator of future performance. Any opinions, forecasts, estimates or projections reflect our judgment at the date of this information and video was prepared, and are subject to change without notice. Rates of return cannot be guaranteed and any forecasts, estimates or projections as to future returns should not be relied on, as they are based on assumptions which may or may not ultimately be correct.

Actual returns could differ significantly from any forecasts, estimates or projections provided.

16 Jun, 2025 Fund Update - Distribution Estimates FY25

9 Jul, 2025 Stock in Focus - Vusion Group (VU: FP)

10 Jun, 2025

Letter to Investors - May 2025

Letter to Investors • 13 mins read

May was a record-setting month for Ophir. In this Letter to Investors, we:

Reveal the exact above-market returns our Funds generated for investors this month, making it our best ever
Examine 4 crucial lessons from this month of big outperformance
Highlight two Australian stocks that delivered outsized gains for the Funds after reporting very strong results
And for the Stock in Focus this month, we look at former market darling, Bravura Solutions. After several years in the wilderness, we explain why it is now one of the most exciting holdings in our Aussie Funds

May 2025 Ophir Fund Performance

Before we dive into the Letter, we’ve provided a detailed monthly update for each of the Ophir Funds below.

The Ophir Opportunities Fund returned +11.9% net of fees in May, outperforming its benchmark which returned +5.8%, and has delivered investors +23.3% p.a. post fees since inception (August 2012).

The Ophir High Conviction Fund (ASX:OPH) investment portfolio returned +11.4% net of fees in May, outperforming its benchmark which returned +5.9%, and has delivered investors +14.1% p.a. post fees since inception (August 2015). ASX:OPH returned +11.3% for the month.

The Ophir Global Opportunities Fund (Class A) returned +8.7% net of fees in May, outperforming its benchmark which returned +5.0%, and has delivered investors +17.3% p.a. post fees since inception (October 2018).

The Ophir Global High Conviction Fund (Class A) returned +7.8% net of fees in May, outperforming its benchmark which returned +5.0%, and has delivered investors +13.0% p.a. post fees since inception (September 2020).

Our best month ever

At Ophir, amongst the hundreds of emails we receive daily, there is only one that is guaranteed to be read by every single member of the Ophir team.

It is our daily performance email of the Ophir Funds versus their benchmarks, which gets sent around at about 4.15pm after market close.

Now you might think a day is way too short a timeframe to be judging performance, and in many ways it is. But as much as anything we are trying to see two things:

How much any stock news helped or hurt fund performance, and
Whether there were any market factors (like quality, growth, size, momentum, sectors or geographies) that had a big influence.

But if you think daily performance gets our attention, monthly performance gets exponentially more focus by us – particularly the months where we have many companies report.

For our Aussie Funds that’s mostly February and August, and for our Global Funds it’s those same months, plus May and November.

So, May is a really important month for us, and we are pleased to report May was our best month EVER for Ophir investors!

All our Funds were up between about 8-12%, net of fees, in May; and all outperformed their benchmarks which were each up 5-6%.

The benchmarks and share markets, in general, had a very good month in May with the TACO (Trump Always Chickens Out) trade in full force. Markets bet that we’ve seen the worst of tariff news from the U.S. and that an Armageddon scenario is seemingly now off the table.

Setting records

It was the best month ever because we generated about AUD$115 million of above-market returns (outperformance) for our investors.

From when we started in 2012, that result represents a record.

Based on absolute returns, each of our four Funds in May ranked near their best-ever month, as shown in the chart below.

One of Ophir’s Top Performing Months – Gross Returns

Source: Ophir. Data as of 31 May 2025.

Most of those small number of months with better returns were ones driven by the market ripping higher and not necessarily because of strong outperformance by us.

Last month we had both strong market returns AND strong outperformance.

Our flagship Fund, ‘the Ophir Opportunities Fund’, led the way. While the market was up +5.8% in May, the Opportunities Fund surged +11.9% after fees. That was the third-highest-returning month for investment performance from the 154-month history of the Fund!

So, which months beat May 2025?

As you can see from the chart below, it was April and May 2020 when the market recovered from the Covid Collapse in March 2020 after central banks slashed interest rates.

Source: Ophir.

4 Lessons from May

Our four key observations from the May result across the Ophir Funds are:

1. Position sizing matters

Our biggest positions, like Life360, were our biggest winners in May.

As George Soros said: “It’s not whether you’re right or wrong, but how much money you make when you’re right and how much you lose when you’re wrong.”

While May typically isn’t a big news or reporting season month for Australian companies, we did have a smattering of companies report quarterly results, and some of our biggest positions delivered good news for our Australian Funds, two in particular:

Life360 – the family safety app – reported a great Q1 result on the back of surging user subscription numbers.
Also, Generation Development Group, led by former Olympic champion Grant Hackett, announced a tie-up with Blackrock, one of the world’s largest financial services companies, to provide retirement solutions to the Australian market. It also received a boost for its tax-effective investment bonds business, which will become more attractive with the government’s $3m super tax still on the agenda, a policy that lowers the attractiveness of super for the uber wealthy.

Below, we show the average return in each quartile of the Ophir Opportunities Fund by weight for May. So, for example quartile 1 (Q1), which is the top 25% of the Fund by average weight over May (in this case the largest 10 stocks by weight out of the 40 in the Fund) – or in other words our highest conviction stocks – provided an average return of +21.5%.

Whereas our fourth quartile (Q4) stocks – the bottom quarter of the fund by weight – only provided a +0.7% return on average.

Source: Ophir. Bloomberg.

Bottom line: the stocks with the biggest weights in the Fund generally had the best returns; and stocks that lost ground on the month or just treaded water were generally our lowest-weight positions.

As a fund manager, this is exactly what you want.

Our highest-weight positions are generally the stocks we have done the most work on, that we have the biggest edge in, and that the market is most underappreciating.

It’s best to knock it out of the park on a big bet and keep your losers (of which there will always be some) to those stocks where you’ve got less money at risk.

For the Ophir Global Funds, May was a key month because the majority of our stocks reported their March quarter Q1 results.

Again, here our biggest weights were often our best.

For example, iRhythm, a stock we wrote about last month here, was one of our top-3 holdings going into May. The company posted a cracking result that saw its share price up just over +30% for the month.

2. Compounding is a marvellous thing

A foundation investor who invested $100,000 into our Ophir Opportunities Fund when we started in 2012 saw their investment increase by around $170,000 in May alone.

That’s an almost doubling of their initial investment in a single month!

This clearly illustrates that returns on your returns (ie compounding) truly is the 8^th wonder of the world, as Einstein supposedly said.

You just need to start early, be consistent, and let time and hopefully high returns work their magic.

Over a lifetime, you can think of investing as a marathon, with compounding essentially acting like a slowly building tailwind at your back as the race rolls on.

3. The best months usually accompany the worst months as the market recovers from the bottom.

If you miss the best months trying to time the market, it is very costly.

In investment speak, volatility “clusters”. That is, the best and the worst months often happen side by side.

As we showed in a chart above, we had two of our best months in April and May 2020, right after two of the worst in February and March 2020 when Covid hit.

If you get scared out on the way down, you often don’t get back into the market in time to benefit from the rebound, and you destroy the ability of compounding to work its magic.

The siren song of trying to time the ups and downs of markets is a strong one. In theory billions could be made from successfully doing it.

But as Yogi Berra said, “In theory there is no difference between theory and practice – in practice there is”.

Just because market timing COULD be done doesn’t mean it CAN be done.

One of the best investors of all time Peter Lynch said:

“I can’t recall ever once having seen the name of a market timer on the Forbes’ annual list of the richest people in the world. If it were truly possible to predict corrections, you’d think somebody would have made billions by doing it”.

And we’d add that, if anyone could time the market, they are not going to sell/tell you their way of doing it. They’d keep that almighty secret to themselves, lest the benefit get competed away if others knew about it.

4. Never get ahead of yourself

We have no doubt that tough months will be ahead at Ophir. It’s part and parcel of investing. And there are always new lessons to learn.

Good months of performance can easily reverse, particularly if it’s not driven by sustainable increases in the earnings of the companies in which you are invested (pleasingly, though, better earnings drove much of our May result).

We always have new investors who haven’t benefited from past results and have high expectations. This, along with our love of investing, is what keeps us motivated to keep generating attractive returns.

For the remainder of this month’s Letter to Investors we wanted to take you through one of our key holdings in our Aussie Funds that we are particularly excited about: Bravura Solutions.

A Brave New Solution

Bravura Solutions (ASX:BVS) is an enterprise software business that provides the funds and wealth management industries with mission-critical software. Bravura counts as clients some of the largest global investment management firms and Australian superannuation funds.

Back from the brink

After many years of poor capital allocation and mismanagement, Bravura had a near-death experience in 2023.

With revenue going backwards and costs going up, it seemed the writing was on the wall.

Bravura wasn’t winning any new business, and their existing clients were delaying investment decisions over fears Bravura wasn’t a going concern.

At the same time, cost inflation was out of control and the business was burning cash on unscalable Research & Development.

Following an emergency capital raise in March 2023, things needed to change.

Up stepped Pinetree Capital.

Pinetree are an investment firm founded by the Chairman and founder of $100bn+ global software behemoth, Constellation Software, one of the most respected operators in global software.

Action was swift and decisive …

Source: Bravura FY24 presentation

The Board and management team underwent an immediate overhaul.

New management embarked on an aggressive cost-out program where:

A large number of staff that hadn’t been doing much were tapped on the shoulder
Excessive R&D spend was reined in
Lavish London offices full of empty desks were replaced with more appropriate surroundings; and
Specific roles and operations were shifted to the much cheaper jurisdictions of India and Poland.

… and we believe there are more efficiencies to be achieved.

Source: Bravura 1H25 presentation

Revenue starting to grow again

When businesses take such aggressive cost-cutting measures, it’s not uncommon to see revenue growth suffer.

However, with the business now a going concern Bravura’s clients have regained enough confidence to reallocate spend to in-house software development, which means revenue for Bravura.

Despite the reduction in staff numbers, customer feedback has also improved.

As you can see in the chart below, the company has upgraded guidance twice during FY25, with an expected increase in revenue the primary contributor to the guidance upgrades (driven by both the business and FX movements).

Source: Bravura FY25 presentation, Ophir

With Bravura now able to focus on building a pipeline, the next phase of the revenue growth story will be new customer wins. The wins will likely come across both smaller, modular-type sales (shorter sales cycle) and larger-ticket enterprise sales (longer sales cycle).

Should Bravura’s existing customers continue to increase their activity levels, and some new customers start to land, it’s possible for revenue growth to move from the current mid-single digits to low-to-mid double digits in FY27.

Rule of 40?

While Bravura isn’t a pure SaaS (software as a service) business, we see it on a trajectory to becoming a Rule of 40 stock – a software business where profit margin and revenue growth combined equal or exceed 40%.

If Bravura can continue to manage costs well, and they can hit double-digit revenue growth, 25% cash EBITDA margins would be within reach.

And Rule of 40 software companies don’t trade on 3x sales – they trade on 6-7x.

So we think there is big upside for Bravura.

As always, thank you for entrusting your capital with us.

Kindest regards,

Andrew Mitchell & Steven Ng

Co-Founders & Senior Portfolio Managers

Ophir Asset Management

All Ophir Funds are deemed high risk within their respective Target Market Determination documentation. Ophir does not guarantee the performance of the Funds or return of capital. An investment may achieve a lower than expected return and investors risk losing some or all of their principal investment. Past performance is not a reliable indicator of future performance. Any opinions, forecasts, estimates or projections reflect our judgment at the date of this information and video was prepared, and are subject to change without notice. Rates of return cannot be guaranteed and any forecasts, estimates or projections as to future returns should not be relied on, as they are based on assumptions which may or may not ultimately be correct.

Actual returns could differ significantly from any forecasts, estimates or projections provided.

10 Jun, 2025 Podcast - Andrew Mitchell on the Rules of Investing “The market always wins”

16 Jun, 2025 Fund Update - Distribution Estimates FY25

23 May, 2025

Letter to Investors - April 2025

Letter to Investors • 15 mins read

What small caps need to outperform – and does it even matter for us?

After a dramatic period for markets, in this month’s Letter to Investors, we examine:

Why markets bounced back strongly from April’s shock sell-off
The headwinds that have led to small caps underperforming large caps
The key factors that will trigger a much-anticipated small-cap revival
How Ophir’s Funds managed to outperform both small and large-cap indexes in 2024, including the S&P 500, despite smalls struggling
Why the sheer number of opportunities in small-cap stocks means investors should stick with quality active small-cap managers during periods of small-cap index underperformance
A historical perspective on why U.S. small caps have rarely been this cheap relative to large caps

April 2025 Ophir Fund Performance

Before we jump into the Letter, we’ve provided a detailed monthly update for each of the Ophir Funds below.

The Ophir Opportunities Fund returned +1.0% net of fees in April, underperforming its benchmark which returned +1.8%, and has delivered investors +22.4% p.a. post fees since inception (August 2012).

The Ophir High Conviction Fund (ASX:OPH) investment portfolio returned +1.5% net of fees in April, underperforming its benchmark which returned +2.6%, and has delivered investors +13.0% p.a. post fees since inception (August 2015). ASX:OPH returned -0.7% for the month.

The Ophir Global Opportunities Fund (Class A) returned -0.9% net of fees in April, outperforming its benchmark which returned -1.7%, and has delivered investors +16.0% p.a. post fees since inception (October 2018).

The Ophir Global High Conviction Fund (Class A) returned -0.6% net of fees in April, outperforming its benchmark which returned -1.7%, and has delivered investors +11.4% p.a. post fees since inception (September 2020).

See latest performance for the Ophir Global Opportunities Fund (Class B) here and the Ophir Global High Conviction Fund (Class B) here.

“Life moves pretty fast. If you don’t stop and look around once in a while, you could miss it” – Ferris Bueller

If you only check the markets once a month, you’d have seen the S&P 500 fell just -0.8% in April. Ho-hum. Big deal.

But what you would have missed is one hell of a rollercoaster ride.

After U.S. President Donald Trump announced higher-than-expected tariffs on ‘Liberation Day’, the S&P 500 crashed -11.2% from the start of the month to its April 8^th low.

Then, by month end, it had recovered almost all that fall.

Clearly, since we last spoke in our mid-April Letter to Investors a lot has happened – most of it investor friendly.

From its April 8^th low – when Trump paused tariffs for 90 days – the Nasdaq, at writing in mid-May, has put on an incredible +25.4%.

That’s the third-largest rally in any 27-day period in the last two decades, behind only the April 2009 and April 2020 explosions coming out of the GFC and COVID bear markets.

The S&P 500 has also clawed back all its post-Liberation Day losses and is within a whisker of the all-time high reached in February of this year.

Fender bender fades

Is the rally because expectations for U.S. corporate earnings have suddenly improved?

No.

Corporate earnings expectations for the S&P 500 over the next 12 months are marginally lower now than when the market bottomed on April 8^th.

But over the last month global trade uncertainty and recession risk in the U.S. and globally has receded. It’s become clearer that President Trump isn’t willing to drive the economic car off the cliff in pursuit of his tariff agenda.

That’s not to say a crash is totally off the cards; but a truly horrific fender bender looks less likely, particularly with airtime starting to increase for growth-positive U.S. tax cuts and deregulation.

The probability of a U.S. recession in 2025, according to Polymarket, has dropped from a high of 66% earlier in May to just 38% now.

And despite some deteriorating softer economic data (mostly survey data of households and businesses), hard economic data such as actual consumer spending and employment, for now at least, have remained rock solid.

While Trump continues to fill the headlines – and that’s not about to change – we thought we’d turn our attention this month to our No.1 question from investors:

“As a small caps manager, what do you think it’s going to take for small caps to start outperforming?”

The recent small cap ride

Given U.S. small caps make up about 60% of global small caps (with Japan in a distant second place at 13%), it makes sense to focus on the U.S. because it’s in the cockpit for launching small-cap outperformance.

Below, the orange line shows U.S. small-cap performance (S&P 600 index) divided by U.S. large-cap performance (S&P 500 index).

When the orange line moves up, small caps are outperforming large caps, and when it moves down small caps are underperforming.

Source: Bloomberg. Data to 16 May 2025

In March 2020, when COVID first hit and markets sank, small caps underperformed. Investors shunned the less liquid small end of the market in favour of less risky and more liquid large caps.

The Federal Reserve in the U.S., and most other central banks, cut interest rates in short order, and share markets recovered through the middle of the year. The rally was similar across U.S. small and large caps.

Then came November 2020, when first news of an effective COVID vaccine spread, and small caps shot ahead. We all knew we’d be able to go out again and the market looked forward to a recovering economy.

That small cap bullishness started to wane, though, around mid-2021 when inflation began shooting up as a result of the COVID lockdowns clogging supply chains, and – in hindsight – when the U.S. government and its handout cheques created overstimulus.

This would start the current four-years-and-counting underperformance of small caps through to today.

Why have small caps underperformed?

The inflation/rates headwind for smalls

Higher inflation is typically harder for smaller companies to pass on to consumers because they have less pricing power than large caps.

But, most importantly, higher inflation means higher interest rates.

Small caps in the U.S. typically have more short-term floating rate debt, making them more sensitive to higher interest rates.

At the same time, when war between Russia and Ukraine broke out in early 2022, pushing up oil prices and inflation again, it turned a gentle Fed interest-rate tightening cycle into the fastest hiking in 40 years.

Almost every economist you could find was predicting a U.S. recession in 2022 on the back of those rate hikes. That worry drove continued underperformance of small caps which historically have fallen more in recessions.

But by the third quarter of 2022 it had become clear inflation was peaking, and the U.S. share market finally reached a bottom after a brutal bear market.

This current bull market started in the U.S. (and globally) in October 2022, fuelled first by “the worst is over” for inflation hopes.

The bull market then received extra fuel after the release of ChatGPT in November that year, which boosted large cap tech performance amid optimism they would dominate the AI arms race.

All the while U.S. small caps continued to underperform.

Big clues

However, it’s important to note that this action historically is VERY unusual.

Every other bull market that we have small-cap data for going back to the late 1970s shows small caps outperform in the initial days, weeks and months of a new bull market.

Not this time.

There have been three periods during this bull market, however, when small caps have outperformed for two to four weeks.

That gives us a BIG clue of what the market is looking for to drive a more durable small-cap rally.

Those periods of small-cap outperformance occurred in December 2023, July 2024 and November 2024.

The first two were driven by soft inflation data and hopes for imminent interest rate cuts by the Fed. No surprise here: High inflation/rates were the catalyst for small-cap underperformance, lower inflation/rates should be the antidote.
The third was a big small-cap rally when Trump was elected late last year that had investors salivating for a cyclical upswing in economic and corporate earnings growth from the more business-friendly President.

The reality since then, however, is that the Fed has held off further rate cuts, preferring to wait and see how Trump’s tariffs impact inflation.

Though the Fed has taken rates down by 1%, they are still restrictive at 4.25% to 4.5%, and they remain above its estimates of a ‘neutral’ rate of 3.0%.

The good news is that markets are pricing in approximately almost 1% of rate cuts over the next year which will make rates much less restrictive and more small-cap friendly.

Earnings drive share markets – small caps need some!

Ultimately, lower interest rates are just a means to an end for small-cap outperformance. And that end is better earnings growth.

U.S. small-cap earnings growth in aggregate has been on the fast train to nowhere over the last two years or so.

And while mid caps have eked out some tiny growth, both mid caps and small caps have been well and truly bested by large-cap earnings growth driven, of course, by a Magnificent 7-induced earnings spree.

Source: Bloomberg. Data to 19 May 2025

Here’s some more good news: U.S. small-cap earnings have never flat lined or gone backwards before for more than about two years. So history says this earnings wilderness might be getting a little long in the tooth.

Rate cuts for more rates-sensitive small caps will help.

Greater tariff clarity would also help. The U.S. tariff situation is a mixed bag for U.S. small-cap revenues and earnings. Small caps are less likely than large caps to have supply chains weaving throughout the world which run afoul of tariffs.

But if they do source goods from overseas, they are less likely than large caps to have the bargaining power to rework those supply chains through lower tariffed countries (if it was even possible to identify who they are yet!).

The bottom line is that when tariff uncertainty is high, economic growth uncertainty is also high. And while that’s happening investors are likely to prefer larger and more liquid companies, which will keep the share prices of large caps comparatively higher than small caps until the tariff dust settles.

The good news is that tariff dust will likely clear at some point this year.

How the Ophir Funds can thrive even if small caps underperform

So should investors shun small caps, or the Ophir Funds, until lower rates, broader growth and more tariff certainty arrives?

Of course, the answer is no.

Exhibit A is the returns of the Ophir Funds in 2024.

The Aussie and Global small-cap benchmarks had average-ish years in 2024. The ASX Small Ords returned +8.4% and the MSCI World SMID index in AUD terms returned +20.7%, but was close to 10% in local currency terms as around half of that gain was due to a falling Aussie dollar.

Each small-cap index underperformed their large-cap index counterparts – in 2024 the ASX 200 rose +12.7% and the MSCI World index (AUD) rose +31.8%.

But, at Ophir, during 2024 we notched up some great results including:

Our Aussie Ophir Opportunities Fund returned +42.8%, and
Our Global Opportunities Fund returned +45.1%

Not only did our Aussie and global small-cap Funds comfortably beat our small-cap benchmarks, but they also beat the large-cap benchmarks.

How is that possible?

As we show by examining the two charts below, it’s because of a huge number of opportunities for savvy investors in the small-cap space.

Yes U.S. large caps did outperform small caps in 2024 – the S&P 500 returned 25.1% while the Russell 2000 and S&P 600 small-cap indices returned 11.4% and 8.6% each.

Approximately 21% of U.S. large cap stocks outperformed the U.S. large-cap index. A similar percentage of U.S. small-cap stocks – 25% and 21% respectively for the Russell 2000 and S&P 600 Index – also outperformed the large-cap index.

Source: Bloomberg. Data for 2024.

But because there are more stocks in the U.S. small-cap indexes than large caps, there were actually MORE small-cap stocks, by number, that outperformed the U.S. large cap index.

That meant that if you’re a good active fund manager it’s possible to find lots of companies that outperform amid small caps, which in turn allows you to beat the large-cap indices. That’s exactly what we did in the Global Opportunities Fund in 2024. (Just don’t expect +40% returns every year! Our internal target is +15% p.a. returns in our funds over the long term.)

2024 isn’t just an anomaly though.

Source: Bloomberg. Data for 2025 to 16 May 2025.

As you can see above, year-to-date in 2025, despite U.S. small caps again underperforming the S&P 500 (-4.8% and -5.5% versus +1.8%) and a higher proportion of the large cap S&P 500 companies outperforming its index (52% versus 31% and 34% of small cap companies outperforming the large cap index) there are still heaps of small caps again beating the large cap index.

Bottom line: don’t shun all active managers in small caps because you think small caps will underperform.

There is still lots of small-cap stocks that are outperforming large cap indexes, providing opportunity for good small-cap managers.

Small caps are cheap

And despite a tough four years for small caps versus large caps, the tide will turn for the three reasons we mentioned above.

While we don’t feel we need small caps to outperform to necessarily generate attractive returns, it will be welcome when it arrives, nonetheless.

One final reason that small caps are highly attractive now; they are relatively cheap.

U.S. large caps are trading on a forward price-to-earnings (PE) valuation of 21.7x at writing. That’s in the 90^th percentile for most expensive in its history – so very expensive.

But at a forward PE of 15.6x, U.S. small caps are only in the 37% percentile of its valuation history – so cheaper than its historical average.

When you combine the two U.S. small cap valuations versus U.S. large caps, only during 9% of the time through history have small caps been this cheap compared with their large cap counterparts.

And it’s not just an expensive Magnificent 7 story driving the relative cheapness of U.S. small caps.

If you equal-weight U.S. large caps (nullifying the Mag 7’s normal huge influence on large-cap index valuations) – though the data doesn’t go back as far – U.S. small caps are still in just the 12^th percentile of expensiveness versus large caps.

As Buffett said, “price is what you pay, value is what you get”.

As relative valuations for U.S. small caps versus large caps are generationally cheap, we think you are getting a lot more value for your investment dollar.

And we expect that to play out in the years ahead.

So when we combine the fantastic opportunities on offer given the huge number of small-caps, lower rather than higher interest rates over the next couple of years, and their cheapness relative to large caps, I think we’ll look back in a few years as now being as good a time as any to be investing in the small-caps space.

As always, thank you for entrusting your capital with us.

Kindest regards,

Andrew Mitchell & Steven Ng

Co-Founders & Senior Portfolio Managers

Ophir Asset Management

All Ophir Funds are deemed high risk within their respective Target Market Determination documentation. Ophir does not guarantee the performance of the Funds or return of capital. An investment may achieve a lower than expected return and investors risk losing some or all of their principal investment. Past performance is not a reliable indicator of future performance. Any opinions, forecasts, estimates or projections reflect our judgment at the date of this information and video was prepared, and are subject to change without notice. Rates of return cannot be guaranteed and any forecasts, estimates or projections as to future returns should not be relied on, as they are based on assumptions which may or may not ultimately be correct.

Actual returns could differ significantly from any forecasts, estimates or projections provided.

14 May, 2025 Stock in Focus - iRhythm (NASDAQ: IRTC) "I Can Feel the Beat"

10 Jun, 2025 Podcast - Andrew Mitchell on the Rules of Investing “The market always wins”

17 Apr, 2025

Letter to Investors - March 2025

Letter to Investors • 15 mins read

Investing in the Age of Populism

Trade Policy uncertainty has been driving extreme levels of market volatility
As a result, both the Russell 2000 and the S&P 500 fell -6.8% and -5.6% respectively in March with more volatility seen in April post “Liberation Day”
Growth underperformed Value from an investing style perspective during March, with sectors we are typically more exposed to such as Consumer Discretionary and Tech most impacted
We reflect on the extreme starting point for tariffs compared with market expectations and its impact on the share and bond markets
We highlight some of the recent steps we have been taking due to the current tariff and economic backdrop
While we don’t profess to know the final outcome, 1-year and 5-year returns following such elevated levels of volatility have all been positive since 1990

March 2025 Ophir Fund Performance

Before we jump into the Letter, we’ve provided a detailed monthly update for each of the Ophir Funds below.

The Ophir Opportunities Fund returned -3.6% net of fees in March, in line with its benchmark which returned -3.6%, and has delivered investors +22.4% p.a. post fees since inception (August 2012).

The Ophir High Conviction Fund (ASX:OPH) investment portfolio returned -5.7% net of fees in March, underperforming its benchmark which returned -3.6%, and has delivered investors +12.9% p.a. post fees since inception (August 2015). ASX:OPH returned -10.9% for the month.

The Ophir Global Opportunities Fund (Class A) returned -4.3% net of fees in March, underperforming its benchmark which returned -3.5%, and has delivered investors +16.4% p.a. post fees since inception (October 2018).

The Ophir Global High Conviction Fund (Class A) returned -4.0% net of fees in March, underperforming its benchmark which returned -3.5%, and has delivered investors +11.8% p.a. post fees since inception (September 2020).

See latest performance for the Ophir Global Opportunities Fund (Class B) here and the Ophir Global High Conviction Fund (Class B) here.

The 1987 stock market crash, the GFC, COVID and now Trump’s trade war. What do they have in common?

Extreme levels of share market volatility. In big and/or fast share market sell-offs we see that “volatility clusters”. The market doesn’t fall in a straight line. The very best and worst days on the market are not spread out like needles in a haystack. They more likely sit, like those on a blind first date, uncomfortably side by side.

Why?

In a word – “uncertainty”. Uncertainty has skyrocketed and investors are struggling during these periods to work out what is the right market reaction.

You can see this clearly below where we show the daily market moves in the worlds most followed share market index, the S&P 500.

The U.S. share market has gone up about 10% p.a. long term, which over ~250 trading days a year, means on average it goes up about 0.04% a day. Of course, it’s never so calm that it goes up that amount every day. If it did, it would cease to be as risky, and you wouldn’t get anything like a 10% p.a. long term return.

It’s in part because you occasionally get these days where it goes up +5% or -5% intraday, you get rewarded by higher long-term returns in the share market. Stomaching uncertainty, volatility and occasional big daily swings is the price you pay – and the prize inside is an asset class with the highest long-term returns.

Source: Bloomberg. Data to 14 April 2025.

Markets had already started becoming more volatile in February and March as Trump’s initial tariff moves on China, Mexico and Canada spooked investors with his 2^nd April Liberation Day “big daddy” reciprocal tariff announcement looming.

The Art of the Tariff Deal

As widely reported, the 2^nd April didn’t go well for investors. The following two trading days saw the S&P 500 down about -5% and -6% respectively. Basically, the fastest “correction” (>-10% fall) in history, outside of COVID.

Investors were struggling to comprehend the size of the tariffs announced by the U.S. on its trading partners (and some islands only inhabited by penguins! – story link).

The tariffs were much bigger than virtually anyone expected and if implemented would take the U.S. average tariff rate on imports from less than 3% in 2024 to a little over 25% – a level not seen for over a century! Effectively this would unwind 100 years’ worth of global trade liberalisation. A very big deal and why the market puked in response.

Of course, what Trump claimed – that he was placing reciprocal U.S. tariffs on countries that imposed tariffs on U.S. goods – was far from reality (see chart); in fact, it simply reflected the size of the U.S. goods trade deficit with those countries.

Sources: USA Census Data, World Trade Organisation, World Bank.

Perhaps this was just the typical Trump playbook of starting with a maximal opening offer to gain leverage in negotiations for better trade deals. We should all hope this is not the end position!

Deal or No Deal – the countries you should care about

As trade uncertainty at writing in mid-April looked to have peaked (at least for now) with Trump pushing back reciprocal tariffs for those countries above the 10% minimum baseline rate by 90 days (except for China), the market breathed a big sigh of relief staging an almighty +9.5% S&P 500 rally on the day. Subsequently Trump has also announced some tariff carve outs for tech equipment imports, such as laptops and smartphones, and also the possibility of concessions for the auto industry.

But does this mean the worst is over for markets from Trump’s trade war?

Maybe, however it’s still far from clear. The biggest “offenders” in Trump’s mind is those countries with the biggest goods trade deficit. As shown below, China, Europe, Mexico and Vietnam stand out. Trade deals with smaller deficit countries will no doubt be hailed as successes by the U.S. but won’t really move the dial in the trade war. Ultimately what happens with the big deficit countries like China, who retaliated and now each face over 100%+ tariffs on goods trade, is the main game.

Source: U.S. Census Bureau. P. Thal Larsen. 31 March 2025.

Trump blinks

Probably the most important piece of information for investors post Liberation Day was that Trump is willing to course adjust and back off when pushed.

So, what made Trump blink – pausing the reciprocal tariffs for 90 days and adding carve-outs for certain sectors and products?

It’s the market that bats 1,000 to use a baseball term – the bond market. In the second week of April the U.S. 10-year yield rose 0.5% to about 4.5%. A weekly rise that large hasn’t been seen since November 2001! (A bygone era where Sony Discman’s were the rage and the first Harry Potter movie had just been released).

Source: Bloomberg. Data to 11 April 2025.

Remember the U.S. runs a momentous US$2tr fiscal deficit (6.3% of GDP) alongside its trade deficit. That fiscal deficit must be financed through issuing debt, so Trump, and particularly Secretary of the Treasury Scott Bessent, are very sensitive to escalating debt costs to fund that deficit and the U.S.’s growing US$36tr debt pile. It might not be as sexy and lucrative as the share market, but you can bet the bond market still knows how to scare the most powerful man in the world, especially when debt interest costs make up the largest expense in your budget.

That’s not to say it was all beer and skittles for share investors recently.

How bad did it get for shares?

Below we show the drawdown (peak to trough fall) for U.S. and Australian Large and Small Caps. What’s clear is that U.S. small caps (Russell 2000) copped it the hardest, entering into bear market territory (>-20% down) and just shy of a -30% fall before the partial recovery. This is interesting because U.S. small caps have had a median drop of -36% during the six U.S. recessions since 1980 for which we have data. In other words, they fell about ¾ of the typical decline seen in a recession. However, despite the trade war, the U.S. has yet to experience a recession—and may still avoid one. (At writing, Polymarket currently places the probability of a U.S. recession in 2025 at 53%.)

The S&P 500 fell -19% by early April, roughly 80% of the way toward its median decline of -24%, calculated from the twelve U.S. recessions for which we have data, dating back to World War II. So, things got pretty rough. Australian Large and Small caps faired relatively better, falling near -15%, but are now less than -10% off their highs. This in many ways makes sense as the U.S. represents less than 4% of Australia’s total exports (and less than 1% of GDP), as well as having received the equal lowest announced tariff rate of 10% on Liberation Day.

Source: Bloomberg. Data to 14 April 2025.

The bigger worry for Australia is any slowing down in China, Australia’s largest export destination by far, as it gets targeted by the U.S. given its huge trade surplus.

What we’ve been doing

What does all this mean for us at Ophir and how we are managing our Funds in response?

Firstly, our Global Funds that are most directly impacted from recent tariff announcements. This is a result of those funds being about 60-65% allocated to U.S. based companies (in line with our benchmark) who are either at tariff risk to increase their costs of goods sold if they have supply chains going through newly tariffed countries, or from less purchasing power of consumers for their goods if tariff costs are passed on more generally to them.

Non-U.S. companies in our Global Funds, mostly European and U.K. businesses, if they sell into the U.S. may also find they are able to sell less volume or see margins squeezed as a result of the new tariffs.

It also means businesses impacted by tariffs are likely to pull back on capital expenditure and hiring until they know where the tariff end state is likely to be. There is a wide range of scenarios from a more mild increase to inflation and decrease to economic growth and corporate earnings in the U.S. – in which case the bottom of this sell-off has likely been seen – to something more sinister like a U.S. recession this year and stall growth globally.

We are not making a big bold tariff or macroeconomic call either way. We have been around for long enough to know that is not where our edge in investing is. And it’s been proven time and again for those who think it is that the vast majority have no edge here. Famed economics professor Paul Samuelson’s great quote “the stock market has predicated nine out of the last five recessions” is ringing in our ears. Even the economics team at Goldman Sachs suffered some recession call whiplash – dropping it 73 minutes after declaring it (story here).

We always want to let our bottom-up stock picking do most, if not all of the talking.

That said we have been making some incremental changes to portfolio positioning in reaction to what has been happening over the last 2-3 months, without making any big heroic forecasts. In response to evidence of slowing U.S. growth and tariff risks we have been positioning a little more defensively in our Global funds. Some of the key ways we have done this, for example, is through cutting exposure to stocks in the cyclical Consumer Discretionary sector and increasing exposure to those in the more defensive Health Care sector. These generally haven’t been in new names but rather by moving the weights in existing companies that we do like. From February onwards we’ve also deliberately adjusted upwards the Cash allocation in the Global Funds from less than 5% to closer to 10%.

All-in-all this has seen the so-called “beta” of the Global Opportunities Fund as an example reduce from 1.15-1.2 down to around 1.05. (Note: beta measures the sensitivity of the returns of the stocks in the Fund aggregated up to the portfolio level compared to the market. A Beta of 1 for example means that a Fund has average market risk).

Source: Bloomberg

We have also been careful to limit binary direct tariff risk to stocks in our funds as we don’t want President Trump’s thoughts on tariffs to be the primary determinant of whether we outperform or underperform.

Some hope ahead

This month’s Letter has mostly covered all the risks that the U.S.’s approach to tariff policy have introduced to the global economy and markets. And to be sure we still don’t know the final outcome. But one reason for optimism over the next few years comes from the below table.

The VIX index, or more formally the CBOE Volatility Index, which measures the market’s expectation of volatility for the S&P 500 over the next month recently broke through 50. This index is often called the “fear gauge” as it shoots up when investors get panicky.

In calm times it spends most of its day relaxing around the 10-15 level. Very very rarely does it get above 50, like it did on the 8^th April this year. Historically it’s been a good contrarian indicator for when to invest. As Buffett says, “be greedy when others are fearful, and fearful when others are greedy”.

Source: Creative Planning

Every time the VIX has closed above 50, S&P 500 returns have been positive over the next 1-5 years. Also, the average 1 year return is 35%, far higher than the average 12% returns earned when investing while the VIX is below 50. Does this guarantee success? No. All of these periods were during the GFC (2008/09) or COVID (2020). But getting scared away when markets have fallen is more than likely the wrong thing to do. It’s trite but true: time in the market beats timing the market.

We have chosen to mitigate as best we can some direct tariff risk through analysing our portfolio company’s supply chains and making a small number of changes where those risks were too high. We have also incrementally dialled back the risk a little in our Global Funds, increasing our allocation to more defensive growers that are less reliant on strong economic growth globally.

To us, this, along with staying invested, remains the best course of action. Share markets have weathered worse trade wars before, and they will do so again.

In times of market uncertainty I always remind friends of my favourite Buffett quote: “In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.” Back the productive capability of good businesses. It wins time and again.

As always, thank you for entrusting your capital with us.

Kindest regards,

Andrew Mitchell & Steven Ng

Co-Founders & Senior Portfolio Managers

Ophir Asset Management

All Ophir Funds are deemed high risk within their respective Target Market Determination documentation. Ophir does not guarantee the performance of the Funds or return of capital. An investment may achieve a lower than expected return and investors risk losing some or all of their principal investment. Past performance is not a reliable indicator of future performance. Any opinions, forecasts, estimates or projections reflect our judgment at the date of this information and video was prepared, and are subject to change without notice. Rates of return cannot be guaranteed and any forecasts, estimates or projections as to future returns should not be relied on, as they are based on assumptions which may or may not ultimately be correct.

Actual returns could differ significantly from any forecasts, estimates or projections provided.

13 Mar, 2025 Letter To Investors - February 2025

1 May, 2025 Press - How Australia’s best small-cap fund got its 39.6pc return

13 Mar, 2025

Letter To Investors - February 2025

Letter to Investors • 14 mins read

Ophir Opportunities Fund Factsheet

What causes market corrections – and are we due for one now?

Trump’s policy uncertainty, particularly around tariffs, has soured investor sentiment and helped unwind 2024’s market themes including the Magnificent 7
Small and growth stocks underperformed in February, which our Global Funds offset by getting earnings calls right in the recent reporting season
With the S&P 500 down -9% (at writing from highs) investors are fretting about whether this is a correction or the start of a bear market
We examine the history of corrections and find 3 major causes that can help investors define the likely severity of a sell-off
We also explore which sectors and factors provide investment safe havens for investors during sharp corrections
Despite the recent sell-off, we find there is some evidence to suggest this ‘correction’ could be short and shallow, providing investors with a window of opportunity

After January’s rally, global share markets (with the notable exception of European and Chinese share markets) took a step back in February, a dynamic that continued into March at writing.

Despite a generally solid February Q4 reporting season out of the U.S., markets are starting to get fed up with the new Trump Administration’s policy uncertainty.

Tariffs remain front and centre here with everyone still guessing about their ultimate motivation and extent. Are they to stem illegal immigration and fentanyl? To raise U.S. government revenue to pay for tax cuts? Are they just on Canada, Mexico and China? What is the tariff rate? When do they take effect? The possibilities go on and on!

When these questions go unanswered, or are changed or delayed daily or weekly, companies and consumers unsurprisingly respond by reducing their activity until uncertainty is resolved.

The changing political and policy uncertainty has soured investor sentiment and helped turn many of the market themes from 2024 on their head in 2025. Last year’s outperformance of the Mag7, U.S. share market, and momentum and growth factors have now given way to European, value and defensive stock leadership.

Small cap underperformance has continued, though, with the Russell 2000 down over -5% in February, only edged out by the Japanese share market (Nikkei) as the worst performers in the month.

February 2025 Ophir Fund Performance

Before we jump into the Letter, we’ve provided a detailed monthly update for each of the Ophir Funds below.

The Ophir Opportunities Fund returned +1.3% net of fees in February, outperforming its benchmark which returned -2.8%, and has delivered investors +23.0% p.a. post fees since inception (August 2012).

The Ophir High Conviction Fund (ASX:OPH) investment portfolio returned -2.5% net of fees in February, outperforming its benchmark which returned -3.7%, and has delivered investors +13.7% p.a. post fees since inception (August 2015). ASX:OPH provided a total return of +5.6% for the month.

Ophir High Conviction Fund Factsheet

The Ophir Global Opportunities Fund (Class A) returned -1.9% net of fees in February, in line with its benchmark which returned -1.9%, and has delivered investors +17.4% p.a. post fees since inception (October 2018).

Ophir Global Opportunities Fund (Class A) Factsheet

The Ophir Global Opportunities Fund (Class B) returned +0.2% net of fees in February, underperforming its benchmark which returned +0.4%.

Ophir Global Opportunities Fund (Class B) Factsheet

The Ophir Global High Conviction Fund (Class A) returned -2.3% net of fees in February, underperforming its benchmark which returned -1.9%, and has delivered investors +13.1% p.a. post fees since inception (September 2020).

Ophir Global High Conviction (Class A) Fund Factsheet

The Ophir Global High Conviction Fund (Class B) returned -2.2% net of fees in February, underperforming its benchmark which returned -1.9%, and has delivered investors +25.1% p.a. post fees since inception (June 2023).

Ophir Global High Conviction (Class B) Fund Factsheet

Asset Returns – February 2025

Source: JP Morgan

Despite the Ophir team having a great Q4 reporting season, with our Global Funds in February getting our earnings calls right, it didn’t really show up on the scoreboard for the month, with both funds down around -2%, similar to our benchmark.

As a small cap growth-orientated investor this was because, within our SMID (small/mid) cap benchmark, mid-caps outperformed small caps, and value stocks outperformed growth stocks during the month.

Source: Bloomberg. Data as of 28 February 2025.

Those stocks with price momentum – which we typically have some exposure to as we’re looking for those companies doing well and outperforming the market’s growth expectations – were sold off hard, too, in February.

While this might have seen us ‘swimming upstream’ during the month, as we’ve stated many times before: if you get the earnings right – which we did during the reporting season –the share price performance will ultimately look after itself long term.

A history of U.S. drawdowns

With the S&P 500 down just over -8% from its all-time high in February, many investors are asking whether this is a correction (a >10% fall), or is there a bear market (a >20% fall) around the corner for the U.S.? And given the U.S.’s dominance, a bear market for global shares?

As we show below for the S&P 500 (since the mid 1960s) and the Russell 2000 (since the late 1970s), there have been plenty of falls greater than -10% and -20%, with even the odd fall of more than -30% or -40%. The only fall greater than -50% during this period was the gut-wrenching GFC.

Source: Ophir. Bloomberg.

Many of the biggest drawdowns (peak-to-trough falls) were associated with U.S. recessions, including those in the early and mid 70s, the ‘81/82 recession, the ‘90/91 recession, the Dot.com Bubble with its early 2000s recession, and of course the 2008/09 GFC, as well as the brief Covid-19 recession in 2020.

The benefits of understanding corrections

Why care about understanding market corrections in the first place?

One obvious answer is: knowing what tends to cause corrections might help you avoid them. But, despite thousands of studies and books trying, it is very difficult, or perhaps even impossible, to identify corrections ahead of time with sufficient accuracy to be useful.

While you may not be able to time a correction by going into or out of cash, if you understand what causes corrections you can identify when you are in the ‘danger zone’; where a correction is more probable. You then may be able to mitigate some of the fall by skewing your portfolio to companies with stronger fundamentals and less risk.

Knowing what caused a correction can also help you can understand what will likely stabilise it and trigger a market rebound.

The three causes of corrections

In the table below our friends at Piper Sandler have categorised every U.S. share market correction greater than -10% going back to 1964. There have been 27 of them! Or about one every 2.2 years. (Get used to them long term investors!)

Source: Piper Sandler.

As you can see, most of the deepest falls are associated with recessions. The 1987 Crash, and the 2022 fall courtesy of the rapid hiking of interest rates by the U.S. Fed, are key exceptions.

Importantly, most corrections are driven overwhelmingly by valuations (price to earnings ratios) shrinking as risk aversion increases, rather than corporate earnings falling off a cliff.

Each correction can be grouped into three main causes:

High interest rates
Higher unemployment
Exogenous global shocks (such as the Asian Financial Crisis or Euro Debt Crisis)

Of course some of these can overlap and have other intertwined causes, but there is usually one of these three causes that stands out as the major reason the correction starts and ends.

History shows that not all correction causes are created equal

The most important insight history tells us is that the cause of the correction will go a long way to explaining how deep and long it is.

The six charts below are great ones to commit to any investor’s memory bank.

S&P 500 Drawdowns Peak to Trough

S&P 500 Drawdowns Duration (Weeks)

Source: Piper Sandler.

They tell us that:

Higher rates have historically caused, and lower rates ended, the most corrections (52% of them), followed by higher unemployment (30%) and global shocks (18%). However, since inflation targeting was introduced in the U.S. in the 1990s, inflation and hence interest rates have been less volatile and caused fewer market corrections.
Those corrections associated with job losses should be the most feared because they typically see the largest falls (-36% on average) and last the longest. This is probably because they are the most likely to see corporate earnings fall the most, alongside valuation falls.
Those corrections based on exogenous global shocks tend to be the ‘best’, with similar average falls to those caused by higher rates (around -16%), but global shock corrections tend to be shorter lived.

While rising interest rates or unemployment might indicate a correction is ahead, getting the timing right is always difficult because markets are forward looking and the correction may begin when market participants EXPECT rates or unemployment to increase, before they actually do. It can still be useful though to understand the cause, because when rates or unemployment stabilise that can signal that the correction may be coming to an end, with a rebound to follow.

Almost by their very definition, exogenous global shocks are unpredictable, but at least their resolution can provide some guidance on what the market needs to see before it recovers.

How different sectors perform in corrections

Perhaps the most useful part of this history lesson is understanding which parts of the market do better when staying invested during a market correction. (And staying invested will be the best outcome for most investors.)

Here the evidence is pretty clear, though not infallible. First, at a sector level, during a market correction the sectors that tend to perform better provide more stable, reliable and defensive revenue and earnings.

Which ones are they?

Typically, Real Estate, Health Care, Consumer Staples and Utilities.

Each has, on average, outperformed the U.S. share market as a whole during the 15 market corrections that we have data for going back to 1990.

Each also has an 80% or better ‘Hit Rate’ – that is, they have outperformed the market in at least 4 out of every 5 corrections.

What do these sectors have in common?

Their revenues and earnings tends to fluctuate less, generally because consumers don’t cut spending on them easily (everyone has to pay their utilities, grocery or doctors bills). They can therefore provide something that is prized in market uncertainty: more certain returns to their shareholders.

Source: Piper Sandler.

The type of stocks (‘factors’) that outperform in sell-offs

But investment ‘factors’ are better guideposts for investing during corrections than Sectors. (Factors is just a fancy investment term for common characteristics of different stocks.)

So, what are the best and worst factors during market corrections?

Source: Piper Sandler.

The table above shows that during corrections there are a few types of stocks that tend to underperform:

Those with more volatile share prices compared to the market (so called higher Beta)
Those with volatile revenues; and
Smaller stocks.

By contrast, stocks with higher-quality cash flows, less debt and less volatile prices outperform.

It’s perhaps unsurprising that when markets are falling a lot, investors favour those businesses they can be more certain of their fundamentals and their share prices.

Important Point: While smaller companies tend to fall more during market corrections, the key exception to this in the table above is the 2000 to 2002 Dot.com-related market falls, where smaller companies significantly outperformed. This period shares some similarities to today where U.S. small caps have been the cheapest compared to large caps since the Dot.com Bubble. This was a key reason 25 years ago U.S. small caps fell less – they started from much cheaper valuations.

Where does that leave us today?

With the U.S. share market on the precipice of a correction (>-10% fall), it seems U.S. tariffs are the most likely cause of the drop and would fall in the ‘global exogenous shock’ bucket.

Neither interest rates nor unemployment has moved higher in the last few weeks to cause the sell-off. In fact, the most recent move in both short and long-term interest rates in the U.S. has been down.

It remains a risk, though, as tariffs are inflationary. So, it can’t yet be ruled out that the Fed may need to reverse course and hike rates as a result.

The U.S. unemployment rate has been moving up from its low in 2023, but this isn’t a new occurrence, and it is still near multi-decade lows.

If history is any guide this is good news because, as we’ve seen, exogenous shocks tend to see smaller market falls that recover more quickly.

Investors need to watch, however, that tariffs and policy uncertainty in general in the U.S. don’t morph into something more sinister like a recession, which would see job losses and a likely further fall in the share market. For now, though, this doesn’t seem the most likely outcome as the typical recession precursors like rising interest rates and lax credit conditions are absent.

We don’t even know if the U.S. share market will enter a correction at this stage.

At Ophir, we always remain bottom-up stock pickers first and foremost.

This is ultimately where our ‘edge’ lays, and what has driven the vast majority of our outperformance over the long term. Though from a portfolio management perspective we are not ignoring the lessons of history about what sectors and factors tend to do well during share market sell-offs.

We see this as just part and parcel of prudent management of ours, and our investors’ capital.

As always, thank you for entrusting your capital with us.

Kindest regards,

Andrew Mitchell & Steven Ng

Co-Founders & Senior Portfolio Managers

Ophir Asset Management

This document is issued by Ophir Asset Management Pty Ltd (ABN 88 156 146 717, AFSL 420 082) (Ophir) in relation to the Ophir Opportunities Fund, the Ophir High Conviction Fund and the Ophir Global Opportunities Fund (the Funds). Ophir is the trustee and investment manager for the Ophir Opportunities Fund. The Trust Company (RE Services) Limited ABN 45 003 278 831 AFSL 235150 (Perpetual) is the responsible entity of, and Ophir is the investment manager for, the Ophir Global Opportunities Fund and the Ophir High Conviction Fund. Ophir is authorised to provide financial services to wholesale clients only (as defined under s761G or s761GA of the Corporations Act 2001 (Cth)). This information is intended only for wholesale clients and must not be forwarded or otherwise made available to anyone who is not a wholesale client. Only investors who are wholesale clients may invest in the Ophir Opportunities Fund. The information provided in this document is general information only and does not constitute investment or other advice. The information is not intended to provide financial product advice to any person. No aspect of this information takes into account the objectives, financial situation or needs of any person. Before making an investment decision, you should read the offer document and (if appropriate) seek professional advice to determine whether the investment is suitable for you. The content of this document does not constitute an offer or solicitation to subscribe for units in the Funds. Ophir makes no representations or warranties, express or implied, as to the accuracy or completeness of the information it provides, or that it should be relied upon and to the maximum extent permitted by law, neither Ophir nor its directors, employees or agents accept any liability for any inaccurate, incomplete or omitted information of any kind or any losses caused by using this information. This information is current as at the date specified and is subject to change. An investment may achieve a lower than expected return and investors risk losing some or all of their principal investment. Ophir does not guarantee repayment of capital or any particular rate of return from the Funds. Past performance is no indication of future performance. Any investment decision in connection with the Funds should only be made based on the information contained in the relevant Information Memorandum or Product Disclosure Statement.

27 Feb, 2025 Keeping you in the AIR

17 Apr, 2025 Letter to Investors - March 2025

20 Feb, 2025

Letter To Investors - January 2025

Letter to Investors • 14 mins read

🡣 Ophir Opportunities Fund Factsheet

🡣 Download PDF

Idea Bonanza!

In another good month for equity markets, January saw all of the Ophir funds outperform, with gains of at least +4% each, driven by good early Q4 earnings results for our Global Funds.
The Mag-7 took a back seat in performance during the month, and many investors are asking whether DeepSeek’s AI has turned their once-powerful moats into mere puddles.
Investors are focused on what could spark small-cap outperformance, but they should also be judging small caps on their superior reward-to-risk ratio relative to large caps which, in our opinion, should deliver outperformance over the next 5 years.
While small-cap performance has been hampered by sluggish earnings growth, there are promising signs this could be about to change.
In January we made the trek to the Needham Growth Conference in New York, leaving with a record number of fantastic ideas which should serve to significantly strengthen our portfolio.

At Ophir, we have notification alerts set up on our phones with many of the major news outlets including The Australian Financial Review, The Australian, The Wall Street Journal, The New York Times, Bloomberg News … the list goes on.

This year it has felt like almost every time a notification has popped up, in the headline has been the word ‘Trump’ or ‘Musk’. We don’t expect that to change much over the next four years. We just have to get used to it.

For investors, though, it helps to remember that, over the long run, almost the only thing that matters for a company’s share price is its earnings.

Not tariffs, interest rates, inflation, immigration policy, DOGE spending cuts, how many ‘illegal aliens’ are getting deported this week from the U.S., or whether a new ‘Riveria’ is being created in the Middle East.

Of course, some of these things will matter for some companies’ share prices, but mostly in the short term.

At a portfolio level, over the longer term, politics and government policy runs a distant second (or third or fourth) behind the idiosyncratic drivers of a company’s earnings.

Overwhelmingly, the things that have always mattered the most in investing will continue, such as:

The size of a company’s addressable market
The value the company offers its customers compared to its selling price
Its ability to scale cost effectively
The size of any moats that protect it from competition
The strength of its balance sheet
Its bargaining power with suppliers, and
The gap between current and assessed value of the business

It’s easy to forget this when the volume of Trump or Musk articles goes stratospheric.

January 2025 Ophir Fund Performance

Before we dive further into the Letter, we’ve provided a detailed monthly update for each of the Ophir Funds below.

The Ophir Opportunities Fund returned +5.2% net of fees in January, outperforming its benchmark which returned +4.6%, and has delivered investors +23.0% p.a. post fees since inception (August 2012).

The Ophir High Conviction Fund (ASX:OPH) investment portfolio returned +6.6% net of fees in January, outperforming its benchmark which returned +5.1%, and has delivered investors +14.1% p.a. post fees since inception (August 2015). ASX:OPH provided a total return of +2.0% for the month.

🡣 Ophir High Conviction Fund Factsheet

The Ophir Global Opportunities Fund returned +5.1% net of fees in January, outperforming its benchmark which returned +3.1%, and has delivered investors +18.0% p.a. post fees since inception (October 2018).

🡣 Ophir Global Opportunities Fund Factsheet

The Ophir Global High Conviction Fund (Class A) returned +4.5% net of fees in January, outperforming its benchmark which returned +3.1%, and has delivered investors +13.9% p.a. post fees since inception (September 2020).

🡣 Ophir Global High Conviction (Class A) Fund Factsheet

The Ophir Global High Conviction Fund (Class B) returned +4.3% net of fees in January, outperforming its benchmark which returned +3.1%, and has delivered investors +28.1% p.a. post fees since inception (June 2023).

🡣 Ophir Global High Conviction (Class B) Fund Factsheet

The Mag-7 finally takes a backseat

Putting aside some of the noise, it was a good month for equity markets overall in January, and for the Ophir Funds.

Each of the Ophir Funds were up +4% or more, and all outperformed for the month. A pleasing result, particularly for the Ophir Global Funds where the performance was driven by good Q4 earnings results for some of our stocks.

After a muddle through the first half of January, major equity indices put on solid, to- in some cases great, returns in the second half of the month.

What was most interesting was that U.S. exceptionalism and Magnificent-7 led outperformance over the last couple of years, took a back seat.

While the S&P 500 was up +2.7%, the Mag-7 actually underperformed, rising just +2.5%. The equal weighted S&P 500 (where all 500 stocks get a 0.2% weight) rose +3.4%, which highlights that smaller large caps did better than the behemoths.

The perennially underperforming European equity market (Euro Stoxx 50) put on a whopping +8.0% – eclipsing that index’s all-time high from way back in the year 2000!

It also reverses, albeit for just a month, a little of the 25-year underperformance of the European versus the U.S. share market.

The question for investors is whether this the start of a rotation in leadership for this current bull market in shares that started back in October of 2022?

Space Race redux

Undoubtedly the big news in January that put a chink in the armour of some of the Mag-7, and particularly U.S. chipmaker Nvidia, was Chinese firm DeepSeek.

We won’t go into the details here because it’s been thoroughly covered by the press. But many were calling it a ‘Sputnik’ moment for the U.S. – that is, the U.S. might not be as far ahead in the AI ‘arms race’ as previously thought. This had echoes of the USSR’s 1957 launch of Sputnik, the first earth-orbiting satellite, a development which shocked Americans and helped trigger the space race between the U.S. and Russia.

This raises several questions:

Is DeepSeek’s R1 – China’s new open sourced ‘reasoning’ AI large language model (LLM) – close in performance to the best U.S. models like Open AI’s ChatGPT? It appears so.
Is it significantly cheaper to build and train than the best U.S. models? That’s what is being claimed, with some saying R1 was built for only 5% of the cost of U.S. models, though others argue that figure is understated.
And has DeepSeek made some significant advances in software architecture that helped provide great performance at low cost? It seems the answer here too is yes, with U.S. competitors acknowledging the smarts behind DeepSeek’s code.

What is undeniable, though, is the meltdown that Nvidia’s share price suffered. After the DeepSeek announcement on the 27^th January, Nvidia fell -17.0%, wiping out US$593 billion in market cap from the then-largest listed company in the world.

To put that in perspective, below are the 30 largest listed companies in the U.S. below $US500 billion in value at the time.

Source: Jefferies.

So, in other words, Nvidia’s market cap loss was the equivalent of McDonalds and Coca Cola being wiped from the face of the earth. (New Secretary of Health and Human Services RFK Jr has assured us he’s not taking away McDonald’s, one of Trump favourite foods!)

Source: X (Donald Trump Jr)

Moats or puddles?

All eyes during the recent U.S. reporting season were on the big capex plans of the hyperscalers, such as Meta, Google and Microsoft. Given DeepSeek’s seemingly cut-price AI LLM build job, investors wanted to know the hyperscalers weren’t wasting that big capex spend.

Investors have given them the benefit of the doubt for now.

As Microsoft CEO, Satya Nadella, said: “Jevons Paradox strikes again! As AI gets more efficient and accessible, we will see its use skyrocket, turning it into a commodity we just can’t get enough of.”

The logic of the ‘Jevons Paradox’ is that a lower cost to produce = lower cost to consumers = higher demand from consumers as AI is built into all sorts of products.

But while the news from DeepSeek seems good for consumers and demand for AI applications more generally, the question now is whether the ‘moats’ for Meta, Google, Microsoft, and Co, are now more like shallow puddles in AI – that is, easier to be attacked by smaller upstarts?

What could spark small-cap outperformance?

Speaking of smaller upstarts, as small-cap investors, probably the most frequent question we get asked is: “We get small-cap valuations are very cheap versus large caps globally, but what might be the catalyst for small-cap outperformance?”

It’s an excellent question.

While small-cap valuations are very cheap globally versus large caps – and particularly in the U.S. where they really haven’t been this cheap in 25 years – small caps, in our opinion, will likely outperform large over the next 5-10 years.

It’s trickier to identify when that outperformance may start.

Firstly, we’d say don’t try pick the start. It’s better to focus on the fact that ultra-cheap relative valuations provide an asymmetric return payoff in small versus large caps. That is, should mean reversion in valuations occur like it has historically, small caps have more limited relative downside (it’s hard for them to get much cheaper in a relative sense) but much larger upside than large caps. This is why we are personally putting more money into our Ophir Global Funds now.

Earnings growth set to broaden out to small caps

One thing that’s likely been holding back small-cap outperformance is that for much of the last two years aggregate earnings of U.S. small caps (which make up almost 2/3’s of the global small cap market) have been stagnant. (Side Note: this is not the case for our Ophir Global Funds where through stock picking we have continued to be able to find companies growing earnings significantly).

This stagnant aggregate U.S. small cap earnings can be seen in the chart below with the yellow line of U.S. small cap earnings-per-share growth moving sideways, whilst mid, large and mega-cap earnings have grown.

Source: Bloomberg, Ophir

Why?

The Fed’s rate rise cycle has basically caused a bifurcated U.S. economy. Large caps earnings have been boosted by very strong Mag-7 earnings. But small caps, which hold disproportionately shorter-term floating-rate debt, have suffered under the weight of higher interest costs.

This may be about to change though.

Interest rates, not just in the U.S., but globally, are now being cut (yellow line below). That should lead to a cyclical upswing in the U.S. economy – as measured by the Institute of Supply Management’s New Orders Index – a key leading index of manufacturing activity in the U.S. (red line below).

Source: Piper Sandler

Historically, as seen in the below chart, upswings in manufacturing activity have tended to see a broadening out of earnings growth in corporate America.

Never before have we seen more than two years in a row of flat or negative aggregate earnings growth across U.S. small caps. So there is some hope that 2025 represents a return to growth and leads to further liquidity flowing into and supporting the cheap small-cap valuations.

Source: Piper Sandler

Big conference conversion

In last month’s Letter to Investors (read here) we spoke about how the election of Donald Trump has given a shot in the arm to U.S. small business optimism.

Over November and December, the NFIB Small Business Optimism Index jumped the most in any two-month period in the Index’s 50-year history!

The percentage of small business owners expecting the U.S. economy to improve in the next year also recently reached near record levels.

With this background we were very excited to head one of our favourite small-cap conferences globally in January, the Needham Growth Conference in New York.

Over a few days, we had 28 one-on-one company meetings.

Normally at conferences like this we would have 2 or 3 high-quality ideas that result in 1 or 2 investments.

This year we had 9 ideas! And we think 4 or 5 investments might come from it.

High grading the portfolio

Small-cap businesses are definitely more bullish heading into the New Year, with a new market and US-economy-friendly administration in place, and major central banks cutting rates (ex the Bank of Japan who is doing its own thing!).

On one hand our cautious nature has the team asking: have we lowered our threshold for great ideas?

But for us (Andrew and Steven), who have seen this movie before, our muscle memory would tell us it’s more likely that, overall, the businesses we have seen are indeed more confident that they can grow earnings faster than last year and faster than the market expects.

This is great news for our Global Funds because it keeps pressure on the portfolios and increases the quality of ideas.

If we do have 5 new stocks come into the Global Funds, the threshold for getting in usually means they are at least an average weight stock of say 3-4%.

This in turn means the bottom 5 get pushed out, and the strength of the overall companies in the portfolios gets high graded.

That is exactly what we want. New year, new ideas and high pressure for only the best companies to remain in our Funds.

As always, thank you for entrusting your capital with us.

Kindest regards,

Andrew Mitchell & Steven Ng

Co-Founders & Senior Portfolio Managers

Ophir Asset Management

16 Jan, 2025 Letter To Investors - December

27 Feb, 2025 Keeping you in the AIR

16 Jan, 2025

Letter To Investors - December

Letter to Investors • 11 mins read

🡣 Ophir Opportunities Fund Factsheet

🡣 Download PDF

Ho Ho Ho… Hum

2024 saw the fifth best year in the U.S. share market in the last quarter century, led by large caps, with material underperformance (albeit still positive) for small caps
Last year all Ophir Funds delivered strong outperformance and met their long-term investment objectives
We’re particularly pleased that our outperformance in 2024 was driven by our investment process, which focuses on stock selection, rather than other investing “factors”
The outlook for further U.S. interest rate cuts may be diminishing, but there is renewed optimism in small businesses and a continuing strong U.S. economy should finally deliver the anticipated earnings growth (and share price performance) of small caps

We hope Santa delivered what you wanted under the tree because he didn’t deliver what investors were hoping for – a Santa share market rally in December.

Perhaps it was too much to ask for after November’s generally stellar gains across the major bourses.

The cause of December’s weakness?

The most obvious was the U.S. Federal Reserve. Despite cutting rates by 0.25% during the month, the Fed signalled there may not be many more cuts (with a non-zero chance of no more cuts!) in 2025.

Most share markets fell in December, with the S&P 500, Russell 2000, MSCI Europe and MSCI Australia Indices down -2.4%, -8.3%, -0.5% and -3.1% respectively (local total returns).

Fortunately for unhedged investors, including those in our Global Funds, much of the fall in the U.S. share market was offset by a falling Australian Dollar, which helped protect returns when converted to the domestic currency.

But, overall, 2024 was still a great year for the global share market. Though, admittedly, this was mostly because U.S. large caps had such a stellar year … again!

The S&P 500 ended up +25.7% (total return) in 2024 – the 5^th best calendar year return in the last 25 years. You know what beat it out for 4^th spot? 2023 – with a return of +26.8%.

And when you consider 2019 (+31.3%) and 2021 (+30.6%) hold first and second place over the last quarter century, it’s hard to escape the conclusion that being invested in the biggest companies from the biggest economy in the world has been a great place to be recently.

Share markets rose in 2024 because of several factors:

U.S. macro risks, like recession, high inflation and employment worries, generally fell;
The Fed started cutting interest rates;
Trump was elected, raising economic and market hopes; and
The AI train rolled on, boosting the Magnificent 7’s earnings and share prices.

December 2024 Ophir Fund Performance

Before we jump into the Letter, we’ve provided a detailed monthly update for each of the Ophir Funds below.

The Ophir Opportunities Fund returned -2.5% net of fees in December, outperforming its benchmark which returned -3.1%, and has delivered investors +22.7% p.a. post fees since inception (August 2012).

The Ophir High Conviction Fund (ASX:OPH) investment portfolio returned -5.4% net of fees in December, underperforming its benchmark which returned -3.4%, and has delivered investors +13.5% p.a. post fees since inception (August 2015). ASX:OPH provided a total return of +0.0% for the month.

🡣 Ophir High Conviction Fund Factsheet

The Ophir Global Opportunities Fund returned -0.9% net of fees in December, in-line with its benchmark which returned -0.9%, and has delivered investors +17.4% p.a. post fees since inception (October 2018).

🡣 Ophir Global Opportunities Fund Factsheet

The Ophir Global High Conviction Fund (Class A) returned -1.3% net of fees in December, underperforming its benchmark which returned -0.9%, and has delivered investors +13.0% p.a. post fees since inception (September 2020).

🡣 Ophir Global High Conviction (Class A) Fund Factsheet

The Ophir Global High Conviction Fund (Class B) returned -1.2% net of fees in December, underperforming its benchmark which returned -0.9%, and has delivered investors +26.3% p.a. post fees since inception (June 2023).

🡣 Ophir Global High Conviction (Class B) Fund Factsheet

Small cap struggle

Last year small caps continued to underperform large caps, and nowhere was this more evident than in the U.S.

In fact, in 2024, U.S. small caps (Russell 2000) lagged large caps (S&P 500) by +13.3% – the most since 1998.

A good chunk of this came in December just gone, where the almost 6% underperformance delivered the 5^th worst monthly underperformance by U.S. small caps to U.S. large caps this century.

Longer term, as seen in the chart below, U.S. small caps have now underperformed for four years in a row.

Source: Ophir, Bloomberg. Calendar year returns are provided for the S&P 500 (US Large Caps) minus the Russell 2000 (US Small Caps) from 1980 to 2024.

But Ophir Funds provided great returns and outperformance in 2024

Whilst one-year returns are too short a period to get overly excited about, we are happy that, despite the small-cap underperformance, the Ophir Funds provided returns between +21% to +45% over 2024:

Starting off with our Ophir Opportunities Fund. Despite operating for more than 12 years now, we’ve been able to continue with the good results, returning +42.8% last year.
Not as strong but still a great outcome, our Ophir High Conviction Fund provided an investment portfolio return of +21.2%. But based on its ASX listed price, it returned an even higher +26.7%, as its discount to Net Asset Value shrank over the year.

Ophir Australian Funds – Performance to 31 December 2024

Turning to our Global Funds, given their high level of stock overlap, they provided very similar returns at +45.1% and +44.7% each for the Global Opportunities Fund and Global High Conviction Fund.

Ophir Global Funds – Performance to 31 December 2024

Source: Ophir. Bloomberg. Data as of 31 December 2024.

These numbers mean that the Ophir funds even outperformed the Australian and global large cap Indices in 2024.

While we would never want investors to extrapolate those sorts of one-year numbers into perpetuity, or think we are going to repeat them year in and year out, they have comfortably met our long-term goal of 5% outperformance versus our market benchmarks, and the 15% absolute return per annum we target over the long term.

It was stock picking that drove Ophir’s 2024 outperformance

So what drove the outperformance in the Ophir funds last year?

As we highlighted in our Investment Strategy Note last month (link) it has continued to be stock picking.

We show this below for our Global Opportunities Fund (which is mirrored very closely with outperformance from our Global High Conviction Fund).

When we look at the ‘factors’ (see article linked above for further details) or common characteristics that might have caused this outperformance, we see things like our allocation to different countries, the market sensitivity of the companies we held in the portfolio (‘beta’), or the size of those businesses, amongst other things, made very little contribution to our outperformance.

Source: Ophir. Bloomberg. Data as of 31 December 2024. Benchmark is the MSCI World SMID Cap Index NR (AUD). Factor analysis uses proxy of Bloomberg Global Developed Mid Small Index.

Ultimately, it was good old fashioned stock picking (here formally called “selection effect”).

This is great news because that is what our investment process targets.

If it was exposure to some other factor – like being overweight U.S. stocks when the U.S. share market did well (which would show up as a positive “Country” factor attribution) – we’d be worried (and so should you!) because it’s not a sustainable way to outperform with our investment process. We don’t try to invest based on factors other than stock picking because a) it’s very difficult to do; and b) we have no skill in it.

We are happy our hard work finding mispriced companies that are growing faster than the market expects has been rewarded in 2024.

Of course, the work doesn’t stop. We need to keep “pounding the rock” (see link to this great motto from the NBA San Antonio Spurs Hall of Fame coach Greg Popovich here).

We are acutely aware new investors are coming on board all the time and for you our very long-term returns are just numbers on a page, not tangible results.

U.S. small business gets excited about Trump 2.0 from 2025

Returning to U.S. small caps, one thing holding back the relative performance of U.S. small caps over the last few years is that their earnings have not been growing as fast as their larger brothers and sisters, such as the Magnificent 7.

When may that change?

We were encouraged in December when the NFIB (leading U.S. small business association) Small Business Optimism Index – closely followed by economists – jumped 8 points in November after Trump’s election win.

This was the third-biggest monthly jump in U.S. small business optimism in the last half century! It also took the reading back above its 50-year average of 98, a level it had been below for the last almost 3 years.

Source: Bloomberg. Data to 31 December 2024.

As NFIB Chief Economist Bill Bunkelberg wrote at the time:

“The election results signal a major shift in economic policy, leading to a surge in optimism among small business owners. Main Street also became more certain about future business conditions following the election, breaking a nearly three-year streak of record high uncertainty. Owners are particularly hopeful for tax and regulation policies that favor strong economic growth as well as relief from inflationary pressures. In addition, small business owners are eager to expand their operations.”

*At writing the December data for the NFIB Small Business Optimism Index was released, showing another gain, and the highest reading since late 2018. Interestingly, the net percent of owners expecting the economy to improve rose to a net 52%, the highest since the fourth quarter of 1983!

We are hearing this from the coal face from our portfolio companies too. Optimism is up. Hiring and capex intentions have increased. We’ll be keeping a keen eye on how this translates to company guidance for revenues and profits this year that will be provided at full-year 2024 results in late January and February.

This optimism needs to be tempered with the more recent news that potentially little further rate cut relief is ahead in the U.S., which may limit further valuation increases.

But here too we may have a silver lining.

U.S. rates may not come down much from here, simply because the U.S. economy is in such strong health. And that bodes well for small cap earnings too – especially if we see a friendly Trump 2.0 policy mix for domestically orientated U.S. small-cap businesses.

We are excited about the new year ahead having returned from a brief break and raring to go. The investment team is in a great place, and we can’t wait to get stuck into reporting season for our portfolio companies that starts later this month. We think we own some great businesses that should pleasantly surprise the market and help build on 2024’s investment returns.

As always, thank you for entrusting your capital with us.

Kindest regards,

Andrew Mitchell & Steven Ng

Co-Founders & Senior Portfolio Managers

Ophir Asset Management

11 Dec, 2024 Letter To Investors - November

20 Feb, 2025 Letter To Investors - January 2025

11 Dec, 2024

Letter To Investors - November

Letter to Investors • 14 mins read