Volatility beneath the surface - and why it matters
At first glance, markets in 2026 appear relatively calm. Major indices such as the ASX, NZX and S&P 500 have been broadly flat so far this year.
But beneath the surface, it’s been a very different story.
As Mike Taylor notes, volatility has been significant - comparable in some ways to past periods of major disruption.
While the overall market hasn’t moved dramatically, money has been “rotating” or shifting rapidly between different types of companies.
What is a “rotation”?
When we talk about a “rotation,” we mean investors moving their money from one group of companies into another.
Right now, investors have been selling growth-oriented companies - particularly in technology and software - and reallocating capital into more defensive sectors such as utilities, consumer staples, property and infrastructure.
This is not because the economy is collapsing. In fact, economic conditions remain reasonably solid. Instead, it reflects changing sentiment.
Concerns about artificial intelligence (“AI”) potentially disrupting certain business models have led investors to reassess how much they are willing to pay for growth companies, most notably technology firms. In some cases, the market has been “shooting first and asking questions later” - lowering share prices before there is clear evidence that earnings will be affected.
Rather than exiting markets entirely, investors have simply moved their capital elsewhere.
Impact on our Australasian growth funds
Our Australasian growth funds have a strong performance track record, delivering between 12-20% per annum since inception. These levels of returns continued through to around October 2025, however, since then, they’re down approximately 20% from their peaks.
There are two main drivers behind this.
First, global growth stocks have come under pressure due to fears of AI disruption. This has not only affected technology businesses but also companies across industries such as insurance and consumer discretionary.
Second, the resources sector (mainly mining and energy companies) has performed strongly. Resources represent approximately a third of the Australian small caps market, and we’ve been underweight in this area. That positioning has created a headwind during this period.
It’s important to understand that this has been a style-driven sell-off - not a collapse in company fundamentals across the board.
What we’re doing about it.
We’re not passive observers.
The team has spent significant time reviewing holdings, focusing on businesses with:
- Specialised vertical markets
- Proprietary data
- Long contract cycles
- Mission-critical software embedded in customer workflows
These characteristics help protect companies from competitive disruption.
Where we have reduced conviction, we have exited positions. But many of the businesses we hold continue to demonstrate durable competitive advantages.
Periods like this can feel uncomfortable. But indiscriminate selling often creates opportunities, particularly when strong businesses are marked down alongside weaker ones. We are beginning to see attractive valuations emerge.
Volatility Is the price of higher returns
One of the most important points Mike makes is this: you cannot deliver strong returns over the long term, like our Australasian growth funds for example, without accepting volatility. Higher returns require taking risk. And risk means there will be periods when performance is negative.
Strong long-term performance is never achieved in a straight line. It comes in cycles - years of strong gains, followed by periods of underperformance. Over nearly two decades of investing, we’ve seen this pattern repeat.
Market cycles do turn.
While short-term declines can test conviction, history shows that staying invested through volatility has been critical to achieving strong long-term outcomes.
We remain optimistic about the year ahead. This is a rotation within markets - not a recession, not a financial crisis. And while uncomfortable, these periods often lay the groundwork for the next phase of growth.
Staying the course matters.