2025 was a golden year for small caps, but what else shone?

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The ASX Small Ordinaries delivered an impressive return of 25% in 2025, comfortably outperforming large caps. Of that 25% return, an amazing 20% came from the materials sector, most of that gold, but what happened in the rest of the market?

In this podcast IML Portfolio Manager Marc Whittaker digs into the performance of Australian small caps last year, as well as giving an update on the performance of IML’s small-mid cap funds and a look ahead to what 2026 might bring.

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Lightly edited transcript – Recorded on 8 January 2026

Carl: Thank you. Hello and welcome to Navigating the Noise, a podcast by Natixis Investment Managers, where we bring you insights from our global collective of experts to help you make better investment decisions. I’m Carl McMinn, and today I’m joined by Marc Whittaker from IML to discuss the performance of markets and IML’s small cap and mid cap funds in 2025. Marc leads the IML small cap team and is a portfolio manager on three funds alongside Lucas Good. Marc, welcome and Happy New Year.

Marc: Thanks, Carl. Always a pleasure to be with you. Happy New Year to you too, and to all our listeners as well.

Carl: Marc, it was another good year for Aussie shares. The ASX 300 accumulation index was up just over 10% for the year, but Small Ordinaries left it for dead, returning a cracking 25%. What were the main things that drove such a great result over the last year?

Marc: Oh, well, certainly, the index was very strong. Now, if you look at that 25%, it’s clearly a story of two towers, you would say. If you look at the materials, and that includes obviously gold, which was very strong through the year as most people would be aware of. That accounted for 20% of that total 25% return.

So if you weren’t in resources or you were underweight resources, you found it quite difficult to match that benchmark return. But outside of gold, which was up in US dollars, gold was up over 60% for the year. As a commodity, the gold stocks — the miners and the companies related to the gold mining industry were very strong. Most gold stocks were up over 100% for the year. So there was a very strong return from commodities and resources, along with associated industrial companies around that – the developers and the contractors, they were all very strong. That didn’t leave a lot of room for the rest of the market to actually perform that well. Other industrials did okay, but healthcare, you know, consumer discretionary stocks, those sorts of names were not as strong, if not negative for the year. So it was a very bipolar market in 2025.

Carl: Now, I know we’ve been talking for some time about the valuation gap between large and small caps. Large has performed a little bit better in recent years perhaps. Does that mean that you guys in the small-cap world have closed the gap now?

Marc: If we look at industrials, the answer to that would be an emphatic no, Carl. The underperformance between small industrials and large industrials is still about 20%. So that divergence or discrepancy between the big caps and the small caps is still very much there. That hasn’t really gone away.

The small caps were very strong last year, but it was really about lithium and gold predominantly, and some of the copper names were performing quite well towards the end there as well. But industrials — which is where we like to hunt — that’s where we see opportunity, quality, and potential. That’s still very much underperforming relative to the large-cap part of the market.

Carl: I know IML in your small and mid-cap funds, you know, had a really nice strong double-digit return, but ultimately couldn’t beat the benchmark’s stellar performance. What are the main things that helped and hampered performance this year?

Marc: It was a bit of a funny year actually, because if you look at some of our names, things like Events, Aussie Broadband, these sorts of names, they’re all up over 40% for the year.
Typically, you’d say that’s great performance, but those sorts of names didn’t even make our top ten last year. So, we were underweight gold; we didn’t own as much gold as what the weighting of gold stocks in the index. So that certainly hampered us, and really the year was about what we didn’t own, as opposed to what we did own, which hurt our relative performance.

In terms of our absolute performance, we’re talking about a near 20% return for the smaller companies fund, which is a good year. Those names are the ones that really drove that performance. It was really about stock picking. So we had names like EOS, which is a defence contractor , or an industrial contracting company. Names like Austal Boats, Dalrymple Bay, names like Events, as I mentioned, Aussie Broadband, TPG Telecom — those sorts of names really drove our absolute performance, which we thought was quite good. But for us, it was about stock picking. We had a couple of gold names. Vault Minerals was one that we owned that was up over 150% for the year. But really it was basically in line with the rest of the gold miners, so we can’t claim too much credit on that one in particular. But a lot of the names that we owned performed really well, so we were pleased with that. But as you say, if we were underweight or not quite at the same weighting in gold and some of these other mining exposures as the benchmark, we did suffer a little bit as a consequence of that.

Carl: Great. Still finding some winners in there. That sounds good. And on that stock-picking side, on the flip side, obviously can’t always back winners. Any that didn’t sort of work out last year?

Marc: It was interesting. I mean, healthcare for us, which we like. If you think about IML and the way we approach stocks, we like companies with the ability to keep repeating their top line or their demand for what they provide over time doesn’t go away. So healthcare — we like that because people are always getting sick. The population’s ageing, people are getting more treatments, more scans, more visitations to the GP and to medical professionals. So that’s a nice sector to be in we feel.

But last year, healthcare was actually negative for the year. We had a reasonable weight in healthcare, the likes of Australian Clinical Labs and Integral Diagnostics — two names that we like in particular — underperformed for the year. So that hurt us a little bit from a relative point of view. In IT as well, I think you know the market was chasing the golds, it was chasing the rare earths and the lithium names, and it did sell off the likes of technology as well. We think this year going forward, some of those profitable tech names that we like — the likes of Readytech, the likes of Hansen — we think they’ve got a long runway to outperform this year, as with the healthcare names too.

Gold was up over 60% in underlying terms in U.S. dollars last year. It’s very hard to see gold doing that again this year, so for us, it’s the opportunities outside of resources and materials where we think there can be real opportunity. We talked about Austal and EOS; EOS was up over 600% for us for the year. So names like that which we think have performed really well, they’ve been exposed to that defence thematic, which has obviously been front of mind for lots of people, given the geopolitics around the world at the moment. These are the sorts of names where you say, okay, they’ve had a really good performance for us. We think they’ve done a lot of the heavy lifting already. Now, what are some of the things we can rotate into?

We saw the likes of Cuscal that was up almost 100% for us last year. Cobram OIl Estates, which is the world’s largest vertically integrated olive oil producer, that was a stock that gave us over 100% last year as well, made a very timely acquisition towards the back end of the year which really helped as well, which we appreciated. And even companies like Rice Growers, people may know it better as Sunrise, it’s basically a branded rice food company that was a very strong performer for us last year as well.

Carl: Yeah, great. And it’s always nice to touch on some recent changes last quarter. Anything that investors should be aware of as far as portfolio changes?

Marc: We’ve been rotating a little bit, so we’ve had a couple of new names in the portfolio going over the last, say, three to six months. The likes of Wagners, Smart Parking, which is an interesting little small cap that we like. Reliance Worldwide, which is basically a behind-the-wall plumbing fixtures company. If you think about the plumbing behind your bathroom wall, the pipes and the interconnection points behind the wall, that’s something that Reliance really focuses on. So that’s a recent addition to the Smaller Companies fund. It’s been a holding in the Future Leaders Fund for a little while, but it’s a more recent addition to Smaller Companies. We’ve trimmed a couple of names as well. We’ve added a bit more to Cleanaway in Future Leaders.

Rural Funds is a new position across the funds; it’s basically an agriculture-focused real estate investment trust. We think it looks quite good. It’s trading at a pretty big discount to what we think it’s worth; the yield is something like 5-6%, which is scoped to grow over time.

So, there’s plenty of new names out there that we’re finding. As I say, there are always opportunities, right? And I think this year in particular, as the market sort of moves its focus away from what we think have been the outperformers last year, obviously the mining resource stocks, we think there are plenty of opportunities in that industrial space which look quite good.

Carl: Great. Well, as you mentioned, January’s always a fun time to throw out a prediction. And of course, it’s a bit of a lottery forecasting most times. But small caps, how do you see that playing out for the next year or even just the next reporting season? What do you see happening?

Marc: Yeah, it’s going to be an interesting time, isn’t it? Markets, as we say, are quite strong at a headline level, but there have been a lot of subsectors in the index which haven’t performed that well.

So we really think healthcare and profitable technology companies, there’s scope for those sorts of exposures to do really well. Stocks like Readytech, which we own — an enterprise software as a service business — we think that’s got potential to do quite well; it needs to announce a few contract wins and so on, but we think that’s likely in the near term. So that should be good.

I think more generally speaking, reporting season is always about stock picking, right? I think the general themes around reporting season will be around margins and cost control, and the health of the consumer. The consumer stocks last year were a little bit soft, and there was some concern around the health of the consumer towards the back end of the year. What are interest rates going to do? That’s always a very pertinent question in terms of how small caps perform, but I think by and large, companies that can maintain their margins will show some margin accretion, so some cost control, a little bit of top-line growth. I think those names will be well positioned to perform this year.

Carl: Great. Well, I think we’ll wrap it there, Marc. Thank you for joining us. And of course, thank you to all our listeners for doing the same. If you enjoyed the episode, please click follow on your favourite podcast platform and tune in again to hear more from our global collective of experts.

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