Forager’s Steve Johnson says momentum is driving markets and creating opportunity

Markets delivered respectable headline returns in 2025, but for active investors, the year was anything but straightforward. Beneath the surface, dispersion was extreme, leadership narrow, and sentiment shifts abrupt.

Australia, in particular, lagged global peers (the ASX 200 finished 2nd last out of 24 major stock indices in 2025), even as pockets of the market delivered outsized gains. For fund managers willing to stay disciplined and occasionally uncomfortable that volatility created both opportunity and frustration.

In Forager Funds’ December quarter update, the team - Steve Johnson (CIO), Harvey Migotti (Portfolio Manager) and Nicholas Plessas (Analyst) - reflected on a year where small caps finally began to close the gap, momentum-driven excesses started to unwind, and valuation discipline was tested across both local and offshore portfolios.

Importantly, the discussion wasn’t framed around forecasting the next big theme, but around positioning portfolios for a market where price sensitivity is returning.

As Forager’s Chief Investment Officer, Steve Johnson put it during the webinar:

“The last quarter of the year only serves to enhance how momentum-driven markets have become, and how important that is in terms of us finding attractive long-term investment opportunities.”

What followed was a candid assessment of what worked, what didn’t, and where Forager is increasingly finding opportunity, particularly within Australian industrials and small-cap stocks that have been left behind as sentiment swung.

Australian small caps finally reassert themselves

After years of underperformance, Australian small caps staged a meaningful comeback in 2025. The Forager Australian Shares Fund returned 24.77% for the year, broadly in line with the Small Ordinaries Index, but well ahead of the All Ordinaries’ 10.5% gain.

Nicholas Plessas noted that while index-level results looked strong, the drivers were narrow. Resources, particularly gold-related names, accounted for much of the headline outperformance.

“A lot of that outperformance has been driven by the resources companies,” he said, adding that industrial small caps actually lagged, creating dispersion beneath the surface.

That dispersion mattered. Forager had little exposure to resources, instead focusing on industrial businesses where revenues are more controllable and forecasting confidence is higher.

According to Steve Johnson, “The weakness in our part of the market — that industrial side of things where we are much more comfortable — is a positive thing in terms of new opportunities.”

Taking profits as valuations stretched

A defining feature of 2025 for the Australian fund was knowing when to step aside. Forager exited several high-profile small-cap technology holdings as valuations ran ahead of fundamentals.

Catapult (ASX: CAT) and Bravura (ASX: BVS) were both sold during the year, with Plessas describing Catapult’s ASX 200 inclusion as a classic example of momentum overshooting reality. 

“It added a dollar in the course of five trading days. At that point, the business was trading at more than ten times forward revenue estimates, and we decided we were getting a very full valuation.”

That discipline has since been vindicated. Both stocks have retraced sharply, reinforcing Forager’s view that liquidity-driven moves can reverse just as quickly as they appear.

Leaning back into unloved industrials

As former winners pulled back, Forager began adding to positions where operational performance remained intact, but share prices weakened. IDP Education (ASX: IEL), EML Payments (ASX: EML) and NZX (NZX: NZX) were all increased during the December quarter.

Johnson highlighted the importance of separating business performance from share price action: “We’ve had some pullbacks in share prices of businesses that were actually delivering really good progress. From much less demanding share prices today, the prospects are good.”

The fund also trimmed long-held mining services exposure, including Macmahon (ASX: MAH), where valuation discipline again took precedence. “It’s still a cyclical industry,” Johnson said. “We’ve been very disciplined about making sure we’re not left holding the can when that cycle turns.”

When pain creates optionality: OFX and early-stage ideas

Not every position worked. OFX Group (ASX: OFX) detracted from performance, both operationally and in share price terms. Still, Plessas argued the underlying asset remains attractive. 

“This is a business that’s been around for decades, with 30,000 corporate customers and $200 million of revenue,” he said. “If the turnaround doesn’t work, we think this business could be very valuable in the hands of a larger-scale FX player.”

Forager also discussed earlier-stage positions, including Aroa Biosurgery (ASX: ARX), which Plessas described as “one of the most industrial-like companies on the ASX and definitely within the biotech industry.” With revenue above $100 million and good incremental profitability, Forager believes the market is only beginning to recognise its operating leverage.

A more fertile hunting ground for 2026

Despite markets near highs, Forager is more optimistic about the opportunity set than it was three months ago. Small-cap tech, quality industrials, and previously crowded trades are all being re-priced. As Johnson summed up: 

“You buy the right business, and you never know when it’s going to happen, but ultimately the share price will reflect the value of it.”

For Australian-focused investors, 2026 may prove less about chasing what’s worked and more about patience, valuation discipline, and being ready when sentiment turns.