Small-mid cap wrap for FY 2026

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A new financial year is upon us and to start things off portfolio manager and lead for IML’s small-mid cap team, Marc Whittaker, talks to Mark Williams from Natixis Investment Managers about:

• How IML’s small and mid cap funds performed over financial year 2026 and the June quarter
• The stocks that helped and the stocks that hampered
• What he has been buying and selling during the quarter

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Lightly edited transcript – Recorded on 6 July 2026

Mark: 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 Mark Williams, and today I’m joined by Marc Whittaker, portfolio manager and lead for IML’s small and mid-cap team, to discuss the last quarter of financial year 2026 and also how the small and mid-cap funds performed for the year. Marc, great to see you again.

Marc: Thank you, Mark, for having me, and always a pleasure to be here.

Marc: Thanks, Marc. Look, 2026 as a financial year had lots of things thrown into it. So markets are never boring; there’s always things going on. But certainly this year, we’ve had interest rates going up, obviously on the back of inflation. And in light of that, we’ve also had slowing activity, so you’ve had a bit of a double tension there: higher inflation, lower growth, rates going up, and never great for small-cap stock performance. So that’s been a bit of an impact on the smaller end of the market.

And obviously, we’ve also had the Iranian War in the back end of that financial year, so that’s obviously brought in some additional elements of volatility and uncertainty into the market. And if there’s one thing markets hate more than increasing interest rates, it’s uncertainty. So it’s certainly been a volatile mix of factors coming in to impact on smaller companies and small-cap stocks in general, which have generally underperformed their large-cap peers given that level of uncertainty and volatility.

In terms of the funds themselves, we didn’t have a great year in terms of the performance of the smaller mid-cap funds. We were below benchmark in both the Future Leaders Fund, which is our mid-cap product, and the Smaller Companies Fund. So that was a little bit disappointing. It’s always disappointing when you underperform your benchmark.

I don’t think it’s really an issue about stock selections. It’s more the fact that we were probably underweight resources and overweight industrials in that small-cap space. We are an industrials house. We like the greater certainty, the lower volatility that comes with investing in industrial stocks. That hasn’t helped us last year given gold was very strong and the future-facing metals like copper, lithium, and those sorts of exposures in the market were very strong performers.

It’s quite interesting if you actually look at the performance of the small-cap index last year: materials, which covers all those sorts of stocks I’ve just been talking about, basically accounted for all the performance we had in the small-cap index last year. So industrials were arguably a negative contributor to the performance of the index last year.

So you could say, “Well, Marc, why don’t you own more materials, more resources?” It is a big underweight for us in terms of how we invest the portfolio, and it’s a good question. We are very much focused on quality stocks at a reasonable price. That’s the investment mantra we bring to bear when we look to invest in stocks. And we would argue that the quality within that small-cap index, within that Future Leaders mid-cap index, is really in the industrial stocks.

They’re more recurring in terms of their revenue and earnings lines. They have more of a competitive advantage, whereas most commodity stocks don’t really have a competitive advantage. So those are some of the reasons why we don’t really look to invest in that space en masse. It’s not to say we won’t own some resource stocks. We do own a couple of what we think are really good quality resource stocks in the portfolio. Vault Minerals is one of those, for example, which has been a really good performer for us in the gold space and has been subject to a bit of takeover activity as well. But generally speaking, that underweight to resources has really hurt the performance of our funds over the last financial year.

Mark: Fantastic. Let’s take a look at some of the individual stocks now that you’ve started to touch upon. What have been the big movers over the quarter, both positive and negative?

Marc: Well, I think it’s really interesting. If we look at the back end of the financial year last year and that sort of June quarter in particular, what we did start to see was a bit of a rotation away from growth and resources back towards what I would argue is value and sort of more asset-heavy industrial stocks—again, those sorts of stocks that we like to own.

For example, in the mid-cap space, we saw the likes of Amcor have a nice rebound. It was a stock that we added to the Future Leaders portfolio towards the beginning of January, arguably early February, and it did suffer on the back of the Iranian conflict and the fact that resin prices were going up on the back of a higher oil price. So it did fall somewhat, and we did add to our position there. It has really recovered all that loss and then some into the new financial year.

So we’re seeing some of those oversold stocks, I would argue, on the back of that uncertainty start to recover. So the likes of, as I say, Amcor, the likes of Reliance Worldwide, which is a plumbing fittings business in that small-cap index—it got sold off heavily on the back of an increase in copper prices, as a lot of the products they manufacture and sell are copper-based. We’re just starting to see a bit of a recovery in some of these names.

I think healthcare was a sector as well in particular, that really underperformed over the last 12 months. As we see a rotation back to value and a rotation back to more reliable, less volatile industrial-type companies, I think sectors like healthcare and sectors like those hard-asset industrial businesses will start to come good again. We’re just starting to see that.

What’s really interesting, I think, is we’ve started to see a bit of M&A or mergers and acquisition activity start to take shape within markets again. So if you look at our portfolios and the stocks we own, the likes of Steadfast in that insurance broking space has had a bid from a corporate buyer, so we’ve really seen that stock re-rate strongly on the back of that.

We’ve seen the likes of oOh!media in the outdoor advertising space that’s had multiple bids from a number of parties, and that’s a stock that’s really bounced off its lows. We’ve also had ReadyTech, which is an enterprise software business that we own across all the funds, with a real focus on education and local government. That’s a stock that has again received a bid from a corporate buyer.

I think the point to make is, even though our funds did underperform in that fiscal year, a lot of what we own is, in our view, really good quality and really cheap. So when you get that combination together—quality and very reasonable prices—you do tend to see M&A present itself. And that’s what we’re starting to see.

We had Clearview in the portfolio as well; that’s a life insurance company that we’ve owned and have sold out of now on the back of a takeover offer as well. So we are starting to see value start to be realised, or fair value start to recover on the back of corporate buyers coming in and recognising a lot of these stocks are very good businesses, good quality, but trading really cheaply as well. So it’s not a surprise to us that we are starting to see some M&A come through.

On the negative side, we do have a few stocks that disappointed. I mean, there’s always one or two that sort of let you down over the course of a year. Towards the back end of that year, we had a little bit in Judo Bank, which is an SME lender that tends to focus its lending into the SME space. I mean, there was a disappointing update and a surprise downgrade, which caught us a little bit by surprise. It was not a great result and was a little bit disappointing. We interrogated that downgrade with management. We’ve really had a strong and long sit-down with them to understand the reasons why. We’ve come out of that meeting thinking that the business isn’t broken. You know, they’ve got a couple of exposures which have underperformed into the back end of that last financial year, and it really means that they haven’t had time to address the issues around those loans. So there’s been a little bit of a disappointing downgrade on the back of that. The stock did sell down heavily in that last quarter of the year, unfortunately, but we don’t think the business is broken. We think that should recover.

It’s not the only negative performer we’ve had. Things like Equity Trustees (EQT), which has a little bit of an overhang with ASIC on the back of the Guardian and Shield issues in the market at the moment, where they’re looking to contest the potential findings against them from ASIC. So that’s been a bit of an overhang on the stock. We don’t think it’s going to be a material impact on the stock, but certainly a material impact on the share price to date.

And stocks like Integral Diagnostics, which we own in the healthcare space — that’s the number two or three radiology business in the country—that’s had a bit of a disappointing performance too, not for any particular structural reason. Healthcare in general has been a disappointing sector as people were chasing the AI bets, gold, and materials. So healthcare has been left behind a little bit. We think that’s a stock that’s really poised to recover well, trading very cheaply, good business. If you look at the transactions happening on the private market, this is a stock that’s trading at a significant discount to those. So for me, that’s a stock where I wouldn’t be surprised if there’s some M&A activity around it at some point as well.

Mark: You actually just mentioned some of the AI activity. I’m just thinking, are there any stocks that have been negatively impacted by AI fears that are starting to look attractive for you?

Marc: I think ReadyTech was one that people got a little bit concerned about. In any sort of enterprise software business, question marks were automatically raised around the viability of that business going forward, just given the ability of AI to potentially produce its own code and own software to address some of these verticals.

What’s interesting is we own businesses like ReadyTech, and we own businesses like Hansen Technologies, which are in that sort of utilities billing space. So both enterprise software businesses, but very focused on particular niches. As I say, ReadyTech is really about education and local government, and Hansen is really about billing solutions for utilities, whether that’s water companies, electricity companies, and so forth.

These really are sectors which are very well regulated, You can’t just set up shop and start a new software program or a new approach to market when you’re operating in very tightly regulated industries. So that’s a distinct competitive advantage, I believe, for companies like ReadyTech and companies like Hansen.

When I was talking about commodity companies or businesses not really having a competitive advantage, I think in the case of the IT and software stocks that we’re looking to add to the portfolio, we think there’s a real competitive advantage there. Whether it’s a regulatory competitive advantage or a product competitive advantage, we think these sorts of companies are very well placed.

Mark: Fantastic. You’ve touched on a few familiar names in the portfolios. Have you bought any new additional companies over the June quarter that you can share with us?

Marc: We have, indeed. I think what we’re seeing in markets now, with the dislocation between resources companies, materials companies, and industrials — particularly in that small-cap space — is really an opportunity to do what I’m calling “high-grading” the portfolio. If you look back three, four, five years, there’s been a whole line of companies that we would love to have owned, but they’ve just been too expensive.

But in the current market, where we’re seeing a big disconnect between the valuations of small-cap industrials versus resources. Not just small-cap resources, but there’s also a dislocation in valuations between small-cap industrials and large-cap industrials. The divergence we’re seeing in valuations between those small-cap industrials and the rest of the market is as large as it’s ever been. You can go back to the GFC, in fact, to find a period where that divergence is as great as it currently is today.

So I think the market’s really, I guess, lost sight of the bigger picture when it comes to these small industrials. It presents plenty of opportunity to add what we think are really good quality stocks. In that small-cap space, we’ve added stocks like ARB, which we think is a high-quality operator in the four-wheel-drive accessories market.

Again, in the Smaller Companies Fund, we’ve added a business called Vista Group, which is another enterprise software business with a very strong niche in the global cinema operator market. Probably not a sector that people spend too much time thinking about, but it has a very strong market presence — well over 50% market share in that global cinema business. They basically provide software to cinema operators doing everything, whether it’s ticket sales, candy bar, movie scheduling, consumer profiling, and so forth.

With that very strong presence, we bought that at what we thought was a compelling price. It’s had a very strong re-rate since we bought it, and that’s no surprise because it is a good quality business, winning customers, winning share, and winning back former customers who had left to chase an alternative product and have come back to Vista because what they do is best in class.

And in that mid-cap space, we’ve added names like Realestate.com.au (REA Group); we’ve added some dollars to that particular stock. Also, SGH, the old Seven Group Holdings the industrial conglomerate under the Stokes family, which owns the likes of WesTrac—the Caterpillar reseller in Western Australia — which we think is very well exposed. It’s an indirect way to play the mining story, selling and servicing Caterpillar equipment into the mining industry in Western Australia, which we think is a very strong and ongoing dynamic.

With Realestate.com.au, it has been impacted by fears around AI and whether online classifieds or online marketplace businesses will be disrupted by AI. I think Realestate.com.au is just such a powerful brand and such a strong aggregator of property listings and real estate agent services that a business like that is only going to keep thriving over time. I think overblown views around AI really give us an opportunity to look at that name and start adding to it at what we think are pretty reasonable prices.

Mark: And are there any major positions that you’ve sold out of that clients should be aware of?

Marc: So we have been rotating, which does necessitate selling some stocks—in particular, stocks which we have liked for a long time that have held up really, really well. Stocks like TPG Telecom, Aurizon, and Ampol, for example, in the mid-caps — those sorts of names held up really well.

We’ve been using those names to fund some of these other ideas, like ARB, SGH, and REA Group, because we just think there’s a nice, sensible rotation there. We are exiting or trimming those stocks that have held up really well, are nice and defensive, and have done the job that we wanted them to do by maintaining their earnings and continuing to grow. But relatively speaking, they’re now pretty full because they’ve held up so well.

As the rest of the market has pulled back, particularly as I say in those small and mid-cap industrials, we’ve really got a chance to add what we think are some really good quality names at pretty good prices, and we need to fund those rotations. So we’re using those real stalwarts of the portfolio in the past, which have really done well and done their job, and we’re using some of those proceeds to fund these new ideas.

Mark: Now, you touched on it before, and I know that you and Lucas have been saying that small caps are at the biggest discount to large caps since the GFC. I guess the question is, does this still hold? And how do you think the portfolios are positioned for the rest of the year and beyond?

Marc: It absolutely still holds. The market’s still continuing to ignore, in many ways, the tremendous value and opportunity that’s on offer in small-cap industrials. We love that, right? Because that’s really giving us a chance to come in and pick and choose the stocks that we want to be owning. It’s a bit of a buyer’s market at the moment, in my opinion.

We’re looking to really take full advantage of that, and I would argue that we are. What’s really exciting is that the stocks we are adding today, at the prices that we’re adding them at, are really setting up the portfolios in terms of their returns over the next two to three years, I would argue.

These sorts of names we’re finding and adding to the portfolio, we think they’re really well placed and very attractively priced. Over the next two to three years, they should deliver in terms of earnings growth, strengthening of their market positions, and also the share price. We think these companies should re-rate over that time as well.

Mark: Thanks, Marc. Great to get an update on IML’s small and mid-cap holdings, and thank you to all our listeners for tuning in. Please click follow on your favourite podcast platform to hear more from Marc and the team at IML, as well as others in our global collective of experts.

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