Third Link's fund managers look to fundamentals after a wild 2025

As the year winds down, the underlying Australian equities fund managers of the Third Link Growth Fund are striking a similar note in a year defined by volatility and sharp style dispersion. Although the review of 2025 is broadly aligned, expectations for 2026 reveal a more nuanced approach with fundamentals reasserting themselves after a momentum-heavy cycle.

“Across our managers, the clear common thread was volatility, a defining feature of 2025,” said Chris Cuffe, founder and CIO of the Third Link Growth Fund. “Early in the year, equities leadership remained narrow, with large-caps and defensive winners driving index outcomes. But the pattern shifted meaningfully as the year progressed, setting the stage for a small- and mid-cap resurgence that became a defining theme supported by more favourable conditions.

“Returns were tightly concentrated across the S&P/ASX 300, with the Big Four banks and defensive sectors accounting for around three-quarters of performance to 31 October,” Cuffe said. “Although their perspectives on the year ahead varied, fund managers were aligned in seeing 2025 as a year of wide dispersion that favoured disciplined, active investing.”

“As at 30 November 2025, the Third Link Growth Fund marked its fifth consecutive month of outperforming the S&P/ASX 300 Accumulation Index benchmark, bringing the Fund’s alpha to +5.25 per cent for FY26,” he added.

The Third Link Growth Fund’s managers share a clear expectation that 2026 will mark a return to fundamentals. Valuation discipline, earnings quality and selective stock picking are expected to take precedence over the momentum driven themes of recent years.

Manager perspectives

Eiger Capital: Victor Gomes, co-founder of Eiger Capital and portfolio manager for the Eiger Australian Small Companies Fund, said smaller companies were the clear outperformers.

“Small and mid-caps were the real standouts of 2025 outperforming the top 50 stocks by two to four times,” Gomes said. He pointed to April’s Liberation Day sell-off as a buying opportunity missed by many, with the sharp correction not ultimately matched by the most severe tariff outcomes feared from the US.

Expectations of lower interest rates also supported growth-sensitive smaller companies, while AI, though less economically central in Australia than the US, helped lift sentiment.

Still, Gomes is more cautious moving into 2026. Inflation remains sticky, the outlook for further rate cuts is less certain, consumer signals are mixed and geopolitical risks persist. Valuations appear stretched, he noted.

“Against a long-run Australian equity nominal return of around 10 per cent per annum (6 per cent–7 per cent after inflation), small- and mid-caps have delivered closer to 20 per cent annualised over the last two years, well above trend, suggesting a more muted forward return profile is likely.”

Firetrail Investments: Patrick Hodgens, managing director and portfolio manager at Firetrail, said volatility created fertile ground for stock-pickers, particularly in smaller-caps.

“Volatility was the headline story this year, but it also created many opportunities we were able to take advantage of,” Hodgens said. Key alpha contributors in the Firetrail Small Caps Fund included Greatland Gold, Life360, Genesis Minerals, Generation Development Group and Aspen Group.

With Firetrail’s funds outperforming year-to-date, Hodgens said the team is focused on carrying momentum into 2026. “Barring any left-field macro events we are cautiously optimistic about mid- and small-caps,” he said, citing still-cheap relative valuations to large caps and outsized earnings-per-share (EPS) growth in that segment.

Lennox Capital Partners: Liam Donohue, founding principal at Lennox Capital Partners and portfolio manager for the Lennox Small Companies Fund, described 2025 as volatile but unexpectedly resilient.

“Interest-rate cuts and AI enthusiasm buoyed sentiment. Small-caps outperformed our large-cap peers supplemented by multiple negative earnings surprises from blue-chip large-caps,” he said. For 2026, Donohue expects supportive monetary policy and renewed attention to company fundamentals to help smaller businesses, while industrials may outperform resources after the latter’s strong 2025. Lower funding costs could also catalyse corporate activity and earnings upgrades.

Australian Eagle: Sean Sequeira, chief investment officer at Australian Eagle Investments, said markets ultimately reflected a relatively benign economic backdrop despite high geopolitical and regulatory noise, though volatility at the stock level was extreme, especially around reporting seasons.

“Even the extreme outperformance of the bank stocks, though difficult to understand from our process perspective, needs to be acknowledged and considered into our thinking about risk going forward,” he said. Australian Eagle expects higher stock-specific volatility to persist, prompting a balance between strong convictions and tighter portfolio exposure management.

“How long will markets continue to price emerging technology exuberantly with capital availability is likely to be decisive,” he said.

L1 Capital: James Hawkins, partner and head of the L1 Capital Catalyst Fund, said returns were dominated by large caps and the S&P/ASX20, while some former favourites disappointed.

“In 2026, I’m looking forward to returns being driven by a broader set of names from across sectors. I would like to leave behind markets driven by momentum and take forward markets driven by fundamentals,” he said.

Chester Asset Management: Rob Tucker, managing director and portfolio manager at Chester Asset Management, said 2025 underscored how small earnings changes can trigger outsized price swings in a market increasingly influenced by passive and trend-following flows.

“This creates opportunities for patient investors when the fundamentals of a company are disconnected from the share price,” Tucker said.

He noted CSL as the fund’s largest challenge, held for 12 years through prolonged derating despite earnings growth. In a relative valuation frame, Tucker sees CSL (FY26 price/earnings ratio (PER) about 16 times, for 7 per cent–8 per cent EPS growth) as more compelling than CBA (FY26 PER about 25 times, for about 3 per centEPS growth). He is leaning into areas AI can’t easily disrupt like real assets, infrastructure and gold miners alongside a contrarian view that healthcare, after three years of underperformance, offers fertile ground in 2026.

Spheria Asset Management: Matt Booker, co-founder and portfolio manager at Spheria, said 2025 began with narrow leadership but was upended by two shocks: the late-January ‘DeepSeek’ AI sell-off in global tech, and the rapid escalation of US tariffs from February to April, which briefly drove the S&P/ASX200 into negative territory for the year.

From April, small -and mid-caps took the lead powered by small resources, gold’s record run and risk-off flows. Booker noted that rare earths names like Lynas surged despite weakening cash flows, illustrating how narrative often trumped fundamentals.

Since mid-October, he said the market has once again punished high-multiple, low-earnings-quality names, including over-hyped AI and tech plays, defence “darlings,” and debt-heavy serial acquirers.

“What stood out most was how often narrative trumped fundamentals for a good part of the year, and when valuations are treated as an afterthought, reversals can be brutal,” Booker said. For 2026, he expects a rotation toward overlooked, cash-generative small- and mid-caps, continued corporate activity and a normalisation of overstretched thematic pockets across AI, gold and defence.

Eley Griffiths: 2025’s volatility was driven by tariff shocks and the evolution of AI enthusiasm into concerns over capex (capital spending) returns and business model disruption. Resources materially outperformed industrials, with S&P/ASX300 Resources up about 20 per cent in 2025 to date, versus Industrials up about 1 per cent.

Looking to 2026, the firm expects the perceived threat of AI disruption to remain a sentiment overhang but also a source of opportunity for insulated or productivity-levered companies. Select consumer discretionary names may recover as tariff pressures fade and lower rates support demand.

ECP: Jared Pohl, director at ECP, said 2025 was unusually difficult for quality- and growth-focused investors, with low quality stocks, characterised by low return on equity (ROE) and high leverage, posting their strongest six-month outperformance in 25 years outside the GFC recovery.

At index level, he noted the concentrated-return story: banks, defensives and materials contributed roughly three-quarters of S&P/ASX300 performance year-to-date to 31 October. Yet he remains highly convinced that 2025’s headwinds are creating future alpha opportunities, particularly for high-quality, capital-light businesses trading at more attractive expected returns.

Auscap: Tim Carleton, CIO at Auscap, said 2025 has been a solid year for the firm, but sees the bigger message in the market structure itself.

“We think genuine stock-picking is going to be critical to delivering performance over the coming decade,” Carleton said. “The increased volatility in markets is creating opportunities and we are trying to take advantage of dislocations over time.”

James Dunn

James is an experienced senior journalist and editor of The Inside Network's publications.