Chris Prunty: The 4 small caps heading for ‘Hall of Fame’ status

If you’re reading this article there’s a good chance you follow markets on a weekly, if not daily, basis. News websites provide real time updates on the best and worst-performers, fund managers send investors monthly reports showing how they fared versus the market, and each year returns across asset classes and indices are reviewed to see which came out on top.

For long-term investors, most of these timeframes should be almost irrelevant. They’re filled with noise created by sentiment and investor emotion.

So what is a reasonable timeframe to assess performance of investments?

Professional allocators tend to favour rolling three- and five-year performance when assessing fund managers. It gives a clearer picture of process and persistence.

In 2022, QVG Capital founders Chris Prunty and Tony Waters went a step further. They asked: What makes the great companies great over 10 years or more? Their research, dubbed the “Hall of Fame”, focused on ASX-listed stocks that had delivered exceptional shareholder returns for a decade. The inaugural list included nine of Australia’s best-known growth stories and one name few investors would recognise (the full list is below). 

The exercise wasn’t about nostalgia. It was about reverse-engineering the traits that made those companies special and using that insight to identify the next generation of market leaders.

In this episode of the Rules of Investing, Chris Prunty reveals three attributes possessed by the Hall of Fame stocks, four stocks that he believes have potential for Hall of Fame status, and why QVG is backing Hub24 (ASX: HUB) over Netwealth (ASX: NWL) in the battle of the investment platforms.

Click on the player to listen to the podcast or read a summary below.

What it takes to make the "Hall of Fame"

The “Hall of Fame” study revealed three key traits shared by the top performers:

1. Total shareholder returns are tied to earnings growth. Every Hall of Famer delivered consistent double-digit earnings growth over time.
2. Revenue growth doesn’t have to be spectacular. Many achieved only low-double-digit revenue growth, but did so for a very long time. Duration, not speed, did the heavy lifting.
3. Margin expansion isn’t essential. Prunty says investors should be forgiving when management reinvests to sustain growth. Companies like JB Hi-Fi (ASX: JBH) proved that long-term compounding can happen even with stable margins.

“The lesson,” he explains, “is that reinvestment to grow the top line can be just as powerful as margin improvement. We’d rather back a team that’s building for the future than one that’s squeezing every last dollar today.”

For QVG, these insights reinforced the importance of assessing not just profitability, but the quality of growth. As Prunty puts it, “We want to own businesses that are getting better over time.”

It's worth noting, as readers will likely have picked up, that making the "Hall of Fame" doesn't cement a stocks position in perpetuity. If only investing were that easy!

The outlook for small caps: "I have absolutely no idea!"

After a strong run in 2024 and into 2025, small caps have shaken off their long hibernation. The QVG Opportunities Fund is up more than 30% this calendar year, buoyed by optimism around rate cuts and renewed investor appetite for risk.

Yet Prunty is the first to admit that macro forecasts are a mug’s game. “Whether it’s a bull market or a bear market, our job doesn’t change. We run a concentrated 30-stock portfolio and stick to our process.”

That process is built on fundamentals: profitability, predictability and cashflow. And while easing rates help, Prunty believes the true driver of long-term returns remains earnings growth. 

“Right now, portfolio earnings are growing in the high teens. Over time, that’s what matters most.”

Beneath the surface, he notes that many industrial companies are still cautious. Hiring intentions are muted, revenue growth is anaemic and cost pressures persist. “There’s little appetite to add people or expand aggressively,” he says. “It’s a low-growth environment, which makes stock selection even more critical.”

Four contenders for "Hall of Fame" status

1. Hub24 (ASX:HUB)

QVG has backed Hub24 over Netwealth in the battle of the platforms, Prunty says the preference comes down to reinvestment, strategy and execution.

“Hub was under-earning relative to both Netwealth and its potential. Over time, we’ve seen margins steadily improve as the business scaled. More importantly, Hub has invested heavily in customer service and product capability, and it’s paying off.”

That reinvestment has translated into accelerating inflows and market-share gains. “Hub is now growing faster and taking more flows than its larger rival,” Prunty notes.

The firm’s acquisition of Class and MyProsperity once raised eyebrows for their cost, but QVG now views them as smart moves that deepen integration with financial advisers. “They make the platform stickier and more valuable,” he says.

While Prunty acknowledges Hub24 isn’t cheap, he believes the valuation is justified by its growth runway. “PEs are blunt tools. Hub still has margin expansion ahead of it, and the inflow momentum is exceptional.”

2. Supply Network (ASX: SNL)

Less well-known than the platform names, Supply Network distributes truck and bus parts across Australia and New Zealand. It has delivered steady, high-return growth for years, exactly the profile that appeals to QVG.

“It’s not flashy, but it ticks every box: predictable earnings, strong returns on capital and a culture of discipline,” says Prunty. The company’s expansion of its branch network continues to support double-digit revenue growth without diluting margins which bears the hallmarks of Hall of Fame potential.

3. Aussie Broadband (ASX: ABB)

Originally seen as a residential NBN reseller, Aussie Broadband is evolving into something far more valuable. “They’re transitioning from reselling someone else’s network to owning their own,” Prunty explains.

By targeting small and medium-sized enterprises and large corporates, Aussie Broadband is moving up the value chain. 

“That shift means higher average revenue per customer, lower churn and better economics overall.”

In Prunty’s eyes, that transformation makes it a better business over time. “It’s the sort of journey we love, where the company is improving its quality and durability every year.”

4. MA Financial (MA Financial Group)

Another QVG favourite, MA Financial has broadened far beyond its roots as a property-focused investment bank. It now manages private credit, runs a growing mortgage book through MA Money and is expanding distribution into the US.

“MA is diversifying and upgrading its business mix,” says Prunty. “They’re building a more resilient, higher-quality earnings base. That’s what the Hall of Fame traits are all about -  consistent compounding over time.”

Cautious on IPOs and defence

Despite the strong backdrop for equities, Prunty’s enthusiasm is tempered by caution. “It’s easy to get swept up when small caps are running,” he says, “but that’s when discipline matters most.”

He points to two areas of concern. The first is the IPO market, where quality has been lacking. “Most of the companies trying to list today are doing so because they need the money,” he says. “They’ve burned through private funding and are turning to public investors as a last resort. That’s not the sort of business we want to own.”

The second is the defence thematic, which has seen a rush of speculative buying. “There’s real global demand behind the theme, but the local ways to play it are thin,” Prunty says. “Outside of a handful of credible names, the rest look low quality. Some of these valuations will make people scratch their heads in a year’s time.”

He stresses that periods of exuberance in markets often create the best opportunities. 

“The time to buy great businesses is when everyone’s distracted by the next hot thing. That’s when the future Hall of Famers are on sale.”

One stock to hold for the next five years

When asked which single stock he’d own if markets closed for five years, Prunty defers to his colleague Josh Clark, who runs QVG’s long-short fund. Clark’s pick: Generation Development Group (ASX: GDG).

“It has many of the characteristics we like in Hub24,” Prunty explains. “It sells managed accounts into financial planning practices, benefits from the same structural tailwinds and is a capital-light, cash-generative business. The trend towards outsourced portfolio management is only getting stronger.”

For long-term investors, that combination of durable growth and compounding returns is hard to beat. Or, as Prunty puts it:

“Whether it’s Hub, MA or Generation Development, the common thread is quality businesses getting better over time. That’s the real Hall of Fame story.”