Ep 79 | The Financial Year That Broke Every Forecast

Tariffs, Trump, the Iran conflict, soaring oil prices, an overvalued market that still refuses to crash - the 2026 financial year had it all. In this end-of-financial-year special, Capital Partners founder David Andrew and investment coordinator Nick Menegola join Aden Wilkins to break down what actually drove returns, what the so-called experts got wrong, and what investors should expect heading into the 2027 financial year.

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Chapters:
(0:00) Welcome & Wins of the Week
(4:00) The Three Big Themes of the 2026 Financial Year
(6:30) Markets Were Resilient - Despite the Headlines
(8:30) Are Markets Overvalued? What the Data Says
(10:30) Where Returns Actually Came From: Korea, Taiwan & Emerging Markets
(14:00) The Gold Story: Queues at Martin Place and a 22% Drop
(18:00) Bitcoin Down 45% - What Cryptocurrency Gets Wrong
(21:00) The Scorecard: ASX, International & Emerging Markets Returns
(27:00) Why Value and Small Beat the Market Again
(30:00) CSL and CBA: How Being Underweight Added 2.5% to Portfolios
(34:00) SanDisk Up 3,000%: The Case for Diversification
(37:00) What to Expect in the 2027 Financial Year

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Recorded and produced by Podwave Studios: https://podwavestudios.au/

The Purposeful Investor Podcast is a public service provided for Australian investors wanting to make smart decisions with their money, avoid costly mistakes, look after the people they care about, and, have a great life!

We draw on over 30 years of experience from David Andrew and the Capital Partners team.

For more information on Capital Partners' award winning team, visit capital-partners.com.au.

Have a question? Email us ask@capital-partners.com.au.

This episode provides general advice only. We do not consider your personal circumstances when we share this information. Always refer to your financial adviser for advice about your personal circumstances. 

Capital Partners Consulting Pty Ltd AFSL 227148 trading as Capital Partners Private Wealth Advisers ABN 27 086 670 788.

Transcript

Cold Open AI Hype And Gold Reality

Aden 0:00

What are the key themes that have dominated the last 12 months again?

SPEAKER_00 0:03

There's probably three, and they're not going to surprise anyone. Obviously, AI has been the main one, and that's the one most people are talking about, and dominating conversations with clients.

SPEAKER_02 0:12

I got a story about gold. Walking past Martin Place, people lining up to being interviewed to say why they're buying their gold. Gold's meant to be the asset you buy for a risk security hedge, but it's basically had a downward trend ever since then.

Aden 0:28

These companies that seem big, enormous, too hard to slay at the time, they can come crashing down to earth and CSL is probably the example of pundits and commentators saying markets are overvalued, markets are overvalued.

SPEAKER_02 0:39

And in certain parts they are.

SPEAKER_00 0:41

The video's up 870% over the last five years, which is averaging 57% per annum, which is just crazy.

SPEAKER_02 0:49

It would be a very brave person to pick when the music's going to stop.

Welcome And Wins Of The Week

Aden 0:53

Welcome to another episode of the Purposeful Investor Podcast. We're a podcast for successful families who want to make smart decisions with their money and avoid costly mistakes. We're here so that you and the people you care about are going to be okay no matter what. And we're also here to set you up to live a great life. Welcome back to another episode of the Purposeful Investor Podcast. Today we're going to check in as it's the end of the financial year or the start of the new financial year and recap the year that was. Joining me in the studio, I've got Capital Partners founder, David Andrew. David, welcome.

SPEAKER_02 1:27

Always good, Aidan.

Aden 1:28

And our investment coordinator, Nick Menangulla. Nick, welcome to the studio.

SPEAKER_02 1:31

Thanks for having me.

Aden 1:32

So as I've alluded to, we've got to the point end of the year where we like to look back and say what's happened and also reflect on all the different things that have happened across share markets. But before we get into the content, as our listeners know, we'd like to start off with our little win of the week. It can be something personal, professional, anything you can look back on that was a little win. I'll change it up. Nick, why don't you start off with your little win?

SPEAKER_00 1:54

Sure. So I'm injured at the moment and I can't run. And so I've been looking for alternatives. So I've been going and swimming laps at the local pool. And despite losing to every single person in that pool who's in there with me who don't know the word racing, I'm really enjoying it. And so that's my little win. That's a strange start to the little win at the moment.

SPEAKER_02 2:14

I go to Claremont pool occasionally, and I'm always in the slow lane and I don't think I'm ever going to graduate.

SPEAKER_00 2:20

No, well, there's a there's a lady who's always there without fail, and I assume her name's Doris. She's about 80, and I think she's absolutely smoked me on every single lap we've ever raced. I love that.

Aden 2:31

I like how you can take a positive out of a negative, though. Um what about you, Dave?

SPEAKER_02 2:34

What was your little Oh look, I'm really enjoying um uh one of our sons and his fiancees j have just got their f a little puppy. Um so it's Robinson, my first grand dog. And um we had Walter, young Walter, the golden retriever puppy, over to our place yesterday and um woke up this morning to to you know a hole, you know, halfway to China and uh, you know, black paw prints across the alfresco tiles. So no, but it's just really cute. It's really lovely to have a dog around again.

Aden 3:08

As well to have the good puppy dog eyes as soon as he's dug up the hole as looks in.

SPEAKER_02 3:12

Oh, totally. He's so cute, you know, that you can't get cross with him.

Aden 3:16

Yeah, nice. Um, I've got a personal win as well, something a little bit different. Um, so my brother actually got me a voucher to Float Lab, um, something I'd never done before. And as we sort of got close to the end of the financial year, I thought, oh, it might be a good time to use it, just relax, cap off the year and sort of reset. So last week when we hit 30 June after work, I actually booked in at the Float Lab. Um, and for anyone that doesn't know, you're basically in sort of a pool of water or a spa and it's got all these salts and magnesium in it, and you just sit there and float um with relaxing music on. So that was a nice way to unwind and reset for the year. Um, yeah, and unique experience.

SPEAKER_02 3:54

Nice.

Year In Review Key Market Themes

Aden 3:55

So to the content at hand, I think where we want to go today is starting off, as I said before, by recapping the year that was. And it honestly feels a little bit deja vu-like for me in terms of what are the key themes that have dominated financial markets and the headlines again. And then we want to spend a little bit of time digging a little bit deeper underneath the surface to say where have the returns come from? What's that looked like? And was it what we expected? And was it what the so-called experts forecast over that period? But I guess just to start off with, what are the key themes that have dominated the last 12 months again?

SPEAKER_00 4:31

Well, there's probably three, um, and they're not going to surprise anyone. Obviously, AI has been the main one, and that's the one most people are talking about and dominating conversations with clients. Obviously, we've had geopolitical conflict, um, and with the Strait of Humus being closed, that's knocked onto oil prices, and then with that inflation. And so they're the three key inflation and interest rates. Um, they're the three that we've been really um talking about a lot this year with clients.

SPEAKER_02 4:59

Trevor Burrus, Jr. And underpinning pretty much all of those in one way or another is the ongoing sort of turmoil of the Trump presidency, you know, the on a on an on-again, off-again tariffs. So we shouldn't forget that it's not that long ago that the Supreme Court overruled um the variable tariffs that had been inst installed, were instated under a uh a so-called state of emergency, and and they overturned those. And then the very next day he said, No, no, I've got Plan B. Um, so I'm imposing tariffs on people again. So it's been a really topsy, topsy turvy year.

Aden 5:36

If you look back, I think it was around March, April 2025, all the noise around tariffs was coming out. And you fast forward 12 months, March, April this year, that's really when the conflict in Iran kicked off and the strata form was all the issues around that. So that's sort of why I said at the start, it does feel a little bit deja vu, like because the messaging's been similar. There's a lot of anxiety around from people because, like you said, they don't know which way President Trump's going to go and what that's gonna do to markets. And I think we've seen it's been pretty emotional time.

SPEAKER_00 6:07

And even so those were the three kind of key big ones. But in that we also had a government shutdown, which people forgot about and it was a long one. Um we had Trump trying to, or the Department of Um Justice Um opened a criminal case against the Fed share, um, which was obviously Trump driven or Trumped up. Someone else. Um and then throw in that there's been some wobbles in private markets as well. And there's there's been headlines around that. It's been a tumultuous 12 months, but then you look at the total returns and the 12 month figures and you wouldn't know. You look back and it looks fantastic. But in that 12 months, boy, did we have some headlines to deal with and work through.

Aden 6:50

And even like close at home in terms of oil prices and how high they were at one point. And I the one that sticks with me is we gather around in the footy. The AFL were offering discounted um petrol tickets to help people that wanted to drive there. And you go back to the Bowser now and it sort of you sort of think, oh, I've completely forgot that happened because.

SPEAKER_02 7:09

Well, yeah, of course now though that the government's put the excise fuel excise back on, half excise at 16 uh and a half cents a litre. You know, diesel, for example, is back up in the the you know, $1.90. So I think I think that is going to be an ongoing theme for the next twelve months or so because you know, the war, uh a treaty, a peace treaty or a truce in the straight of in the in the Iran-US-Israel conflict doesn't realistically look any closer than it did, you know, a month ago or two months ago.

Markets Resilient Despite Headlines

Aden 7:43

So that's that's I guess the themes. But then as we said, when we've had conversations or people look at the headline numbers, markets have been pretty good.

SPEAKER_00 7:52

Absolutely.

SPEAKER_02 7:53

Absolutely.

SPEAKER_00 7:54

And if we look at the the last 12 months, so the backdrop obviously, so April last year we had the big correction or the big liberation day correction, and then markets did quite well, and then we had a another correction in February when the oil prices were going on. But even that was relatively muted. And so we've had big headlines, but the markets actually haven't wobbled that much. Um, like it relative to what is going on in the world, markets have been incredibly resilient.

SPEAKER_02 8:25

Yeah. And I and I think you know, looking forward, that's that that's actually going to result because there are elements of the market, there are parts of the market that today trade on valuations that historically are very high. So you will see an increasing amount of narrative from pundits and commentators saying markets are overvalued, markets are overvalued. And they and and and in certain parts they are. But um it would be a very brave person to pick when the music's going to stop. Trevor Burrus, Jr.

SPEAKER_00 8:56

And especially because markets have looked overvalued for a long time. Like the PE ratios have been, which is a a measure of how expensive companies are relative to their earnings. They've been expensive for five, five odd years. And five the last five years in markets have been fantastic. And so calling it based on valuations is a um a brave consensus. There is there's some research to suggest that high valuations, long-term returns, tend to be a little bit lower than low valuations, but it's still positive, you know, six to eight percent as opposed to positive eight to ten. And so the the markets um they look expensive, but they have for a long time, and calling it is as we've talked about a lot on this podcast, good luck.

SPEAKER_02 9:41

Very, very tough. Yeah. Yeah. Well, I think some of the Ray Dalio, one of the one of the big pundits, has been calling a market correction since about 2019.

SPEAKER_00 9:49

2016, I think.

SPEAKER_02 9:50

2016, oh yeah. I stand corrected.

AI Trade Moves Beyond US

Aden 9:53

So where are the returns actually come from in the markets? Because it's not it's not like every specific sector, country, company, industry has performed the same. But what's actually driven it uh over this last period, I'm assuming that the move to AI has had a lot to do with art.

SPEAKER_02 10:08

And I think, you know, the the the big sectors there have been um semiconductors, you know, the chipmakers, um, and the And data centers. You know, that's that's been the that they've been the really, really big beneficiaries of this. And and um I get asked quite often what I think about AI and whether it's way over overvalued and so forth. And we don't really know because the big AI companies are um are not publicly traded, with the exception now of SpaceX. But Anthropic and um uh OpenAI, Chat GPT, are yet to are yet to show their colours in terms of a market listing. So so my guess is when they do finally list in the in the early part of this financial year for Australians, they are going to look very, very expensive. If SpaceX was anything to go by. But if you look at the year that's just been, a lot of the returns, the the highest returning countries, even though the contribution to a diversified portfolio is low because they're relatively small markets. But um Korea is a great example. It has returned over 150 percent to the year ended the 30th of June. That's pretty amazing. Yeah, that's a very big return.

SPEAKER_00 11:25

Just quickly on that, I think 85 percent of that, of that 150% can be attributed to two companies um who produce memory chips. And so um and 40 percent of their market is those two companies that they're gonna be.

SPEAKER_02 11:37

Sandisk, I imagine, is probably in there somewhere.

SPEAKER_00 11:41

Uh yeah, yeah, yeah.

SPEAKER_02 11:42

Um Taiwan. Interestingly, then, if I look at going down the list of the highest performing um markets for the year, um Korea, Taiwan, Peru, Hungary, um, Colombia, uh, Egypt, um, the first developed nation to get an elephant staff high performance, which is almost 50 percent, um, was the Netherlands, um, followed by Austria. And so, you know, really the the markets have been the returns have been stellar. Um, in the United States, um the return across the S P 500, whilst there's been so much talk about the Magnificent 7, interestingly, the returns haven't been, you know, as stellar as you would think.

SPEAKER_00 12:31

It's almost like it's moved on a phase. You know, the first phase was the the US companies and the Mag 7 had their massive run-ups, and some of it is because we're not seeing it because Anthropic and OpenAI haven't listed. But the the companies or the countries you just mentioned, so Korea is definitely AI trade and it's about the memory and specifically it's a specific type of memory, so HBM, high bandwidth memory, and it's just essentially really fast memory disks. And then Taiwan, they're they're driven by the TSMC, which is the um, without a shadow of a doubt, the premier chip producer in the world. So Nvidia, almost 100% of their high um quality chips are produced through TSMC, and there's almost no one else in the world that can produce chips that are um anywhere near it. And so that's where it's almost um the next phase of AI investment has moved from um the big US companies to some of these smaller markets. Um because they have uh looking at Nvidia, Nvidia's up 870% over the last five years, which is averaging 57% per annum, which is just crazy.

SPEAKER_02 13:37

But in the in the um the the final the second half of the um 2026 financial year, the Magnificent 7, including Nvidia, really didn't fire a shot in the same way that they have in in in the past. And so if we if we think about the returns, you know, the S P 500 index started the year um at 6,846 points. And the um, you know, Microsoft was a detractor. So its contribution went backwards. Uh Meta was a detractor, its contribution went backwards, as was Tesla's. Amazon was slightly positive, Nvidia was slightly positive, Apple was pretty strong, um, Google was uh was reasonably strong, but the other 493 companies in the S Port 500 contributed, you know, 609 points to the final S P 500 index um number, which was 7,483 points.

Why Diversification Keeps Working

SPEAKER_02 14:46

And so, you know, I think I think a recurring theme, and this might might not surprise some of our um regular listeners, is that this has yet again been a really strong reminder of just how important it has been to be a diversified investor. You know, rolling rolling all of your money out of the boring sectors and into your technology stocks, for people who are super active and who want to take a real lean-in approach to their investing, that might have been a really compelling thing to do. But at some point, those thematic strategies, when we've talked about thematics on this podcast before, they work for a while, but they're not always there. And that's why the idea of a diversified portfolio is also is always so compelling and so so attractive.

Aden 15:38

And you'll remember, I think it's probably about over two years ago now, we did a specific podcast episode of Should I Just Be Investing in the US? And sometimes we get come across uh prospective clients who come in and it's just a concentrated um clump of Australian listed companies. And like you said, the last 12 months, 24, 36 months is such a strong reminder of the importance of diversification.

SPEAKER_02 16:00

Yeah, well, well, when I started out in my career, and this might still be true to some degree, but but going back sort of I hate to say this, but nearly you don't have to say that a while, 40 years. No, it was really in the 90s, it was really common for people to have a portfolio. Their retirement portfolio was a portfolio of stocks that were advised on by their stockbroker. And they might have had between eight and thirteen or fourteen blue chip stocks. Now, again, that that's not that's not the um um mag 7, but but a portfolio like that, a highly concentrated portfolio in Australian blue chip shops, is there every chance that if you've had that over the past 12 months, you've had an absolute shocker. You know, because uh anyone who's had a concentrated portfolio that had CSL in it has had an absolute shocker of a year.

Aden 16:59

I think it just yet shows that there's it's always difficult when there's concentration risk in a stock. And some people say, no, I love it, I'm so attached to it. But yeah, the these companies that seem big, enormous, too hard to slay at the time, they can come crashing down to earth. And CSL is probably the example that most Australian um investors will be familiar with.

SPEAKER_02 17:19

And more recently, you know, the banks have come off, you know, significantly. Um and so portfolio concentration is a really attractive proposition. The idea that you can pick the eyes out of the market and pick the twelve or thirteen best stocks. Now there used to be some some sort of common wisdom that if you owned you know twelve or b twelve between twelve and fifteen stocks, you were in effect achieving the same level of diversification as you were getting if you had owned the entire stock market. Now that's just I don't know who dreamt that up, but it's utter rubbish.

SPEAKER_00 17:57

Do do you want to know? I do. Yeah, is Dalio. Um, was it really 12 as long as they're all uncorrelated, which is the bit that where it breaks down. Because if they're f if they're properly uncorrelated, so they perform completely differently. Differently all the time.

SPEAKER_02 18:11

They they never perform differently every day.

SPEAKER_00 18:13

And the correlation of I don't know in sectors, but um I think of say like Australian market to US market, it's like 80% or 0.8 of um 0.8, which so to argue that within the ASX you can get zero correlation, 12 companies or even across markets, good luck. Yeah, just no.

SPEAKER_02 18:35

Yeah, yeah. And well, a lot of that correlation, of course, is the is the you know, the the sentiment towards the entire market. Yeah.

Asset Class Scorecard And Emerging Markets

Aden 18:43

So I wouldn't mind. So I play a bit of golf and normally at the end of the round you get your scorecard out, you mark it up and say who's won. But it'd actually be useful to go across some of the different asset classes for the financial year and have a bit of a check of the scorecard and see what the numbers were, where the returns have come from. And then also, as all our listeners know, we've got a very specific way of investing here at Capital Partners and have a look at how some of those subsectors have showed up over the past two months, 12 months.

SPEAKER_02 19:09

Absolutely.

SPEAKER_00 19:10

Okay, so looking at um broad market indexes, so that ASX 300, which is the the most common ASX market index, that's up 6.16% on the year. The international uh unhedged, so you're taking on the currency of that you're investing in, that's up about 15% on the year. Um, the hedged version. So because the Australian dollar has appreciated, you're better off being hedged. And so it's done 22.6%. Emerging markets has really been the standout, and that's up 35%. And that a lot of that is driven by um Korea and Taiwan, as we talked about.

SPEAKER_02 19:49

Property has let's just pause on emerging markets because um because again, there's a diversification story and a performance story here. We have always held a small-ish exposure to emerging markets in our client portfolios, and yet if you look at the long-term performance of emerging markets, they've it's always seemed to have struggled a bit. Um there's a lot of very, very good companies in the emerging markets, but it seems they struggle to attract the attention when you know of large capital flows. Um and so it's been very interesting to watch over this last little period. But even oh going back over the last decade or so, even though there have been years where the emerging markets sector has not performed as well as developed markets, the way the performance has worked meant there's still been a diversification benefit in being there. And that's why we persist with it. That's why we think emerging markets is a is kind of a smart place to be. Absolutely.

SPEAKER_00 20:50

And if you know hypothetically the AI trade is overheated, and obviously a lot of that is concentrated in the US. Um having those additional markets, you know, Australia as an example, what AI sector do we have? And so um, even if it is just downside protection, having those diversified markets for outside of the US is pretty attractive.

Gold And Bitcoin As Unproductive Assets

SPEAKER_02 21:13

I got a story about gold. So Aid Aidan and I were in um in Sydney, what was it, about March, April?

Aden 21:22

Late March, early April, right?

SPEAKER_02 21:23

Yeah. And um we're walking to the conference one morning and we're walking past Martin Place. And um there's ABC bullion, and that got quite a lot of press um um over the last year or so, people lining up to being interviewed to say why they're buying their gold. But you know, the Iran war started in um uh sort of March twenty twenty six, about then. And what's been interesting is that you know i gold's meant to be the asset you buy for a a risk security hedge, but it's basically had a downward trend ever since. Then. Yeah. You know, it's it's it just hasn't done what people um had said.

SPEAKER_00 22:05

I think it's down 22 percent.

SPEAKER_02 22:06

22 percent. And and and the from when Aidan and I made that comment or observation as we walked past this queue, I said to Aiden before the show started today, I said, Well if all the people lining up were sellers, then that was genius. Well well done. You know, they've done really, really well. But I have a sneaking suspicion they were not there to sell, they were there to buy, and they've absolutely done their shirts in the few months since.

Aden 22:32

Yeah. Well at the start of the year, I think that was we're feeling quite a lot of questions because gold had a really good run to December. Oh, should I be should we be adding gold to the portfolios or should I be investing in gold? And I think it just sort of our rationale for not including it, like you don't want to pat yourself on the back too often. But that's exactly why we don't do it.

SPEAKER_02 22:50

Yeah, and it's probably worth just taking a little sort of sidetracked version on that. Why don't we? You know, gold, gold's not a terrible asset class by any, by any stretch, but it has no productive capacity. Like it it doesn't have a yield. It doesn't have, you know, it just is, it's a commodity, right? So you stick it in a safe or you stick it on a shelf and let it you know look good. Or you know, you make it into jewelry or something like that. I can understand the speculative bubble that forms around these asset classes, but for a serious investor for long-term money, I I'm really not sure. I I would rather, personally, I would rather have the volatility that goes with, you know, being a shareholder of a company. So being a shareholder of Toyota, being a shareholder of, you know, um Meta or Apple or Samsung or any of the really impressive companies around the world, I understand that there is a volatility risk associated with that. But if I'm a long-term investor and I'm willing to accept that volatility, then I'd always prefer to have a product a portfolio of productive assets as opposed to an asset like gold that is not productive in any way, shape, or form.

SPEAKER_00 24:08

And I'd al that almost be an argument of um what type of volatility? Because sure, in daily volatility, equity is going to be more volatile. But gold has had 20-year periods where it's underperformed. There's no equities market that's underperformed for 20 years, or a diversified equities portfolio that's underperformed for 20 years. Um that's like underperformed underwater. So it's not just underperformed its benchmark, it's gone backwards. And so um picking what volatility you accept, so accepting some daily volatility for some because equity markets are pretty predictable long-term. Like the if you look at the range of possible returns over a one month, three months, six months, the longer you go out, they actually get quite narrow the expected returns. But the expected returns for gold, they can vary quite a lot. Um you can have major corrections in gold, which I think is one of those um misunderstood and unknown elements of it. And as we've seen, a 22% correction in your defensive part of the portfolio is pretty um alarming.

Aden 25:07

Just closing it out on um unproductive assets with high vol levels of volatility, um Bitcoin's off about 45% over the year as well. And that's always the it gets talked about when it's in the news cycle, but as we've said, there's if you want to speculate and have a bit of fun with it, fine, but it's not shouldn't be part of a diversified portfolio. And we're seeing that in the last 12 months as well.

SPEAKER_00 25:26

Especially when you look at you, you go Nick. Oh, especially when you look at the the tailwinds it's got in terms of you know that digital gold story. So it's supposed to be a safe asset when there's market volatility. Well, we definitely had market volatility and global tensions and inflation and you know, the what was it, the um um the US debasement trade and all those kind of tailwinds and throw in a sympathetic government. So Bitcoin's had plenty of reasons why it should have done well and it hasn't, which just kind of points to the fact that we don't really know where its value is or how to value it. Um so yeah, I I think cryptocurrency is absolutely valuable. I just don't know if Bitcoin as a long-term investment position is.

SPEAKER_02 26:07

Well, as is the blockchain.

SPEAKER_00 26:08

Yeah.

SPEAKER_02 26:08

Is that what you mean?

SPEAKER_00 26:10

Are stable coins. Yeah. So stable coins will be super valuable and um they're kind of getting a bit of um traction. And so there's plenty of major institutions investing heavily in setting up stablecoin infrastructures, which makes sense because you know, especially in um some of the um developing countries, it's really important. And um, if you get into any of the AI hype, the kind of the AI economy will be built on stable coins probably. But it doesn't need to be Bitcoin. And so that's where I kind of look at it and I go, what is the the real value driver other than speculation?

SPEAKER_02 26:43

Yeah.

Factor Investing Value Small Profitability

SPEAKER_02 26:44

It's probably useful, Aidan, for us to dive in a bit to some of the returns on the different portfolio um building blocks that we use. Because most of our regular listeners now, and certainly our clients, will know that we we have adopted for 23 years, the last 23 years evolving, but the the core philosophy is around the work of Eugene Farmer and Ken French, um, Eugene Farmer from the University of Chicago and Ken French from Dartmouth College, um, around the the drivers of equity returns. And so our portfolios typically will will comprise an exposure to the large the large, you know, almost the index. It's not the index, but almost the index. And we want to buy that exposure at the lowest possible price we can. And it's not indexed for a whole lot of reasons that we don't really love. We we don't mind index funds. For the retail investor on the street, index funds are great, but there's a whole bunch of reasons why if you can if you can invest slightly differently to an index fund, you would. Then we like an exposure to value companies, and then we like uh an exposure to smaller companies. And over the top of that we overlay a profitability um filter as well. So the more profitable companies in in a portfolio tend to stay profitable for longer, the less profitable companies tend to stay less profitable for longer. And that we've seen that downwards momentum with CSL. Yeah. So it's a good story for today. So if we if we Nick, if we look at the Australian uh market, the um the ASX um 300 index over the last 12 months, including dividends, and that's often missed out, right, isn't it, when people are quoting what the return on that has been has been about six six six point two, yeah. Six two point two, you know. So uh um and so if you were in that portfolio and you were comparing that to the uh SP 500 index, you'd probably be feeling as though you'd missed out a little bit.

unknown 28:51

Yeah.

SPEAKER_00 28:51

Yeah. Well, if the SM SP I think is 20 odd percent for the year. And so yeah, you'd be wondering where your other 14 is.

SPEAKER_02 28:58

Yeah, yeah, yeah. But you know, the interesting thing, if you think about it, is that if you then say, okay, well, let's follow the capital partners or the pharma French sort of philosophy, and let's include some um Australian value companies in there. So lower-priced companies, not the darlings of the market that everyone's looking at and everyone wants to be part of. You know, the the um the MSI MSCI Australia value index for the year ended the 30th of June was 23.89 percent. Now that's that's like that's astonishing when you consider that the overall market or the top 300 was um was six to six point two. Yeah. And then you move again to the um to the smaller, smaller companies, uh, and that was eight and a bit. And so if all you did was have the ASX 300 index, you've had a pretty pretty miserable year, really. But if you employed the the factor approach, you know, the performance has been far stronger.

SPEAKER_00 30:05

And really, you know, there's a there's a long list of there, lots of micro decisions that add up to that, but then there is a few big decisions that kind of stand out over the last 12 months. So if we look at so we've we've talked about CSL, which is obviously a major, major company in the Australian Index, it's fallen 60%, or the best part of 60% over the last 12 months. And um, through that valuation metric, they were the um funds we typically recommend are very much underweight. So they they held about a third of what the broad benchmark would.

SPEAKER_02 30:36

Because it would have been a top 10 company. It would have been top 10 in the year.

SPEAKER_00 30:39

Yeah, so it makes up about 3.5% of the total market. And uh just that, you know, having a third of the exposure uh when it falls that hard actually added two percent to returns, just that one stock alone. Uh throw in CBA, which is obviously another big name that has been on a fantastic run and was looking very expensive. So it's its um peer ratios were comparable with the major tech companies, which you know makes it great. Impressive for a bank.

SPEAKER_02 31:09

It's it's really impressive for a big valuable bank in the world.

SPEAKER_00 31:13

Yeah, it was yeah. Anyway, it's uh the portfolios we put clients in have about four percent exposure to that, whereas just a simple index fund would have about ten and a half percent. And um that that's added another 70 basis points or 0.7 percent of a percent. And then if you go down this list, relative to the index. Yeah, yeah. And that's as in dollars in your pocket additional. Yep. Um and so there's two and a half percent uplift just from two names. And then you add there's many other names that we can go through. Um, but they're the two that stood out, um, that looking at the year ahead.

Aden 31:46

And so, yeah, pretty similarly, it was a similar story in the international world of equities, wasn't it?

SPEAKER_02 31:51

Yeah, and I I obviously I watch this every month because you know it's part of my role on our investment team. But um, you know, the hype around the Mag 7, it just doesn't let up. The the the whole the narrative just does not let up. And if you look at the MSCI um index, so the whole essentially the whole developed world share market, um, the return there was 22.6% for the year. Um, but exactly the same theme applied in terms of value and small. Um, you know, value came in at in terms of the portfolios that our clients um are exposed to, um 27.81, which is just a a huge outperformance. And probably, I don't know, Nick, that probably means that there are there are people buying companies that are that a lot of others would consider to be pretty boring, you know, the like the Toyota's and the you know, Toyota is one of my favorite stocks. But you know, the the the stocks that aren't the market darlings, I guess, is the point I'd make. And similarly for smaller companies, you know, smaller companies, you know, the the return was 23.5% for the year. Um and and and then we already talked about emerging markets that was that was around 35% for the year. And so putting all those a bit like a Lego game, you know, you put the pieces together to make a coherent whole, um, the returns have been really strong. Yeah. Um but what I think was he what I'm always heartened by is when I look out to three years and five years and seven years and ten years, the persistence of those factors, not always, not not in every time period. So value will underpe underperform for a period of time and small will underperform for a period of time. But the persistence of those factors over time is really quite incredible.

SPEAKER_00 33:43

There's a million different ways you can measure outperformance over time. And there's a lot of different studies that try and quantify it, but they all kind of tend to average around three out of four 15-year periods, you're gonna outperform in a very small profitability strategy. And is is that a bet that I think you should be taking? Yes. If you're gonna outperform 75% of the time, accepting that there's gonna be some periods where they underperform. Um, but it also tends to be that when they underperform, it's not by much, but when it outperforms, it outperforms by quite a lot. And so um we saw it with the dot-com. So in the dot lead up to the dot com, the portfolios they trailed. They trailed because you know the market darlings just continued to be more and bigger. And then the correction happened and the portfolio outperformed so strongly. And we've seen that in multiple periods, and so it's uh it's a portfolio that you give up a little bit on the top side, but you save a fair bit on the bottom, on the downside. And so it's a it's a good balanced way to invest.

Big Winners And Staying Systematic

Aden 34:42

Just to give a bit of a sizzle as we round out the conversation in terms of like what are some of the companies that have just shot the lights out over the last 12 months. So internationally, Sand Disc, which we talked about, I think has done over 3,000% as a return. And within our portfolios, we've actually captured some of that because it's a small company within there. Um and then on an Australian front, 4D Medical, which does um lung imaging, has delivered over 1700% as a return over the last 12 months. So if you were if you had a really good stock picking hat on and you could do that, good on you. But yeah, as we know, that's a very, very hard game to play.

SPEAKER_02 35:14

Yeah, and picking out these um high performing stocks is is interesting, right? But but the reality is within any diversified portfolio, you've also got stocks that have underpo underperformed significantly. But it's the it's the aggregate performance of the whole portfolio that matters. And you don't get too strung out. That's the beautiful thing about a systematic investment philosophy, is you set it up and you stick to the rules and you implement and you rebalance, and you don't really have to think about it too much. You know, as a as an investor in these strategies, I really enjoy it. I I I take the good years and with gratitude. I I I take the bad years and which happen less often than one would expect. But they happen. And you take them with You probably almost take them with gratitude as well, because it tells you the system's working.

Aden 36:07

Yeah, exactly.

SPEAKER_02 36:08

Um but over over the long haul, you know, we really do have this sense of the time um rewarding discipline over speculation.

Aden 36:21

I think just to close out the conversation, as we've alluded to, it can be really easy to simplify the return figures. And the reason why why we want to have this conversation as we end the financial year is to just give our listeners a little bit more of the insight into the why. Yeah. So they've got the confidence to understand this is why we invest the way we do, this is how it's played out, and it's not just one percentage point on a line item where it's not just the Australian and the US market. There's so many more factors at play. But our job is to try and make it as simple as possible. Um so like you said.

SPEAKER_02 36:52

And everyone needs an investment strategy they can stick to. All right. Having an investment strategy they can stick to generally gets anchored in a plan. You say, okay, I I get this plan, I like the plan, and I think if if you can help me if you can help deliver me to the other end of this um effectively, then I'll be happy. But then you need an investment strategy that's based around evidence and that can be validated over time. It's not anyone's opinion over anyone else's. This is the thing about stock picking and stockbroking type portfolios. You know, we we we see uh uh portfolios come in from other advisors from prospective um clients, and there'll be three or four pages of investments. And half of the may as well be hieroglyphics. You don't even know. You don't even know what they are. You've got to go to the research department and say, Nick, help me understand what this even is. But you just don't need that level of complexity to be successful.

Looking Ahead Volatility And Listener Questions

SPEAKER_02 37:51

You just don't need it. I think the interesting thing for us to close out on, too, for both of you, is is the themes for next year. Like we don't have a crystal ball. The crystal ball's cloudy. But I I don't know about you guys, but I don't see any resolution to the Strait of Hormuz debacle happening anytime soon. So, you know, fuel prices are probably gonna be higher for longer.

Aden 38:13

So yeah. And while Trump remains in the presidency, I don't see any change to the volatility of his decision making, and that's gonna keep people on edge.

SPEAKER_00 38:21

No, unless the midterm kind of keeps him in check.

SPEAKER_02 38:24

The Reserve Bank is pretty firm that they're expecting inflation for longer. Um so I I I reckon we're in for more of the same. I I think I think any investor that's hoping that the 2027 financial year is gonna be an armchair ride. I hate to say it, but they might be a bit disappointing. I think the other thing that we've talked about that that is real is that that I think there will be a lot more, and I just want our listeners and certainly our clients to be aware of this and to sort of calibrate this. Um I think there will be a lot more pundits and um a lot more um hyperbole and a lot more catastrophization and noise in the news cycle. Uh, you know, our markets are, you know, we're gonna have uh it's gonna be a debacle, you know, and uh but as you said, I think Ray Dalio has predicted a market meltdown, like not just a a correction, but a market meltdown every year. Every year?

SPEAKER_00 39:25

100 year debt cycle correction um for the pretty much every year for since 2016.

SPEAKER_02 39:30

Yeah. Okay. So I don't know what's gonna happen next. I wish I did have a crystal ball, but it you know, life would be easier if we did. What do you have any other any other thoughts on on the year ahead?

SPEAKER_00 39:40

Uh just it to your point, it'll be volatile. People will be watching AI, CapEx, and it actually converting to profit pretty heavily. And we'll have news that supports it and we'll have news that discredits it, and the market will wreck hard both ways because um so much of the market is kind of watching that trade. Um and then there'll be the questions of how does that flow into the economy? And that'll be we'll be we'll be watching those.

SPEAKER_02 40:05

So then Aidan, I reckon if we come back to first principles, you need a plan. You know, every sing every successful investor we have as a client is acting on a plan. They're not just making it up day by day. They've got a long-term plan and they're thinking about it and they're adjusting and they're doing their thing, but they've got a plan. And then we, you know, I think to be a successful investor, you need an investment philosophy that you can actually believe in and an investment philosophy you can stick to, which which hopefully is what we're able to educate people on. The whole point of this podcast is to to give some people insights into that sort of idea.

Aden 40:39

And that closes it out well in terms of we love it when people send through questions, comments, anything that'd like us to have a conversation about, we actually really enjoy when we get that interaction and feedback. So if there is anything that you say that you go, oh, I'd love for the guys to chat about that on the podcast, please send it through to myself, David, Nick, or the Capital Partners podcast email, which is ask at capitalheart andpartners.com.au. And most importantly, make sure you share it with a friend, colleague, anyone in your network who you think would benefit from having a listen. Nick, David, thanks for joining me.

SPEAKER_02 41:08

Been a pleasure.

Aden 41:09

Thanks for having me. Thank you for listening to another episode of the Purposeful Investor Podcast. Make sure that you share it with a friend or someone in your network who you think would benefit from having a listen. Both David Andrew and myself, Aiden Wilkins, are authorised representatives of Capital Partners Consulting Proprietary Limited, and we operate under the Australian Financial Services Licence 227148.