Ophir: The trades that worked in FY26 may not lead the next 12 months

There’s a tendency in investing to talk about the averages, from index returns to broad market valuation metrics. You see and hear it all the time, and as those numbers are quoted, there is often an accompanying narrative.

The reality is that the story that is told at an index level rarely provides much insight into what is really going on beneath the surface. For passive investors, those ‘averages’ may be all they need to know, but for active investors it’s what happens within the index that matters the most.

According to Andrew Mitchell, Portfolio Manager at Ophir Asset Management, FY26 was remarkable for the sheer size of the dispersion between different sectors in the small cap index (XSO). The 10% return at the index level hid the underlying story where materials gained ~50% and, at the other end of the spectrum, consumer and communications stocks fell close to 20%.

Against this backdrop, the Ophir Opportunities Fund returned 22.46% for FY26 - in line with the category leading 23.1% p.a. net of fees since inception in 2012.

But Mitchell argues the result is one of the best the firm has delivered given the fund's structural underweight to resources and its typically higher allocation to industrials, consumer and communications.

“I think of last year as our best or arguably our best on record, but we've actually had just an average year at the surface," he says.

“But if you look underneath the surface, this was the year of greatest dispersion between the best performing sector, which is a big sector, and the worst, which is also a reasonably big sector.”

As satisfying as that may be for active managers, the job at hand is always about looking forward. I recently spoke with Mitchell about the lessons from FY26 but importantly how he is positioning for the year ahead.

With the wide divergence between winners and losers, Mitchell and the Ophir team are alert to the reality that recent winners could quickly become the funding source for future opportunities.

Watch the full interview to hear Mitchell explain where Ophir is finding opportunities, the parts of the market he’s wary of, and how he’s positioning for FY27.

Two lessons from the US

Ophir’s roots are in Australian small caps; however, the firm launched its Global Opportunities Fund in October 2018, has returned 19.8% p.a. net of fees since inception. Mitchell says insights from the US market have helped the firm identify opportunities on the ASX., and Mitchell says insights from the US market have helped the firm identify opportunities on the ASX.

One example of this has been companies benefiting from the data centre capex cycle that has hit Australian shores in the past year.

“We could see Quanta (NYSE: PWR) in the US, MasTec (NYSE: MTZ), Powell (NDQ: POWL), IES Holdings (NDQ: IESC)- all these companies- they're electrification, power-related businesses in the US. We saw their multiples start expanding, followed closely by their earnings, supplying into the big data centre build-out.”

Mitchell says this insight led Ophir to stocks including GensusPlus (ASX: GNP), Southern Cross Electrical Engineering (ASX: SXE), SKS Technologies (ASX: SKS) and Tasmea (ASX: TEA), which are benefiting from rapidly expanding order books and improving margins.

Another observation is that the volatility during reporting season is more likely to increase over time than decrease as quantitative and momentum-driven strategies play a bigger role in daily price moves.

Mitchell argues Australia is following the same trajectory as the US, where these forces are already contributing to extreme share price movements. But for active investors, he doesn't necessarily see that as a bad thing.

“Volatility is not a bad thing. We think for our style over the medium to long term, we can make more money," he says.

"The more dumb money that's like ETF, passive money, that's great for us.”

The trade-off is that reporting seasons are likely to produce some spectacular casualties.

His survival tip is simple: know your stocks extremely well, own those that are likely to have positive earnings momentum, and hope you haven’t got too many wrong.

“We don't own any business unless we think that it's got an earnings growth profile that is better than what the market expects.”

Uncomfortably underweight consumer discretionary stocks

When a narrow segment of the market has done a lot of the heavy lifting, Mitchell says he becomes hyper alert that the winners can quickly become a source of funding for the next opportunity.

If discretionary retail and technology stocks have been the funders for the winning trades of the past year, they also have the potential to be a key driver of returns in the year ahead.

“It will happen before rates go down. It will happen when we see inflation and slack appearing in the Australian economy. So we are nibbling away at retailers at the moment," he says.

Just as the dispersion across sectors was wide in FY26, Mitchell expects the recovery in retail-facing companies, when it happens, to be swift. For that reason, he says it’s important to maintain exposure.

“We do have an underweight position. I feel uncomfortable, which is good because it means I need to and the team needs to continue to do work.”

The opportunity Mitchell is searching for is a beaten-down retailer trading on eight or 10 times earnings, compared with perhaps 14 times historically, where the market is expecting a downgrade but Ophir's research points to an upgrade.

So far, he hasn't found it.

“I wish we could, and we'd be owning a lot of it. We don't have any. We need to find them. So that's on my agenda to go out and find. There will be one out there.”

Managing exposure to technology and software

Mitchell says one of the big challenges of the past 12 months was navigating the derating in software stocks. Despite aggressively reducing exposure, Mitchell says the sell-off did "a lot of damage". 

"We've added sparingly recently after cutting down just above index weight. And we've been adding to ones that we feel a lot more confident."

When I last spoke with Mitchell in May 2025, he laid out the case for Bravura (ASX: BVS) - a company that he described as providing 'mission-critical' software in the funds administration and wealth industry.

Mitchell's thesis was centred around the potential for operational improvement under the influence of a new major shareholder - Pinetree Capital, the investment vehicle associated with the family of Constellation Software's founder.

In early July, Bravura upgraded earnings guidance for FY26, with cost savings improving margins as well as revenue growth.

"They're growing at 10% currently top line, and the amount of margin that's coming out is huge. They're running this really, really tight. They've done a great job," he says.

"That second half looks very strong. I do not know how they're not going to have another good year just annualising that second half of last year."

Generation Development (ASX:GDG) presents a different opportunity. Its shares have derated as the migration of financial advisers onto its managed accounts platform has taken longer than expected, contributing to earnings disappointments.

Mitchell argues the key point is that GDG has already won those clients. Ophir's conversations with financial advisers also suggest customers remain positive on the business, leaving the opportunity for those assets to migrate onto the platform over time.

But it is GDG's investment bonds business that Mitchell finds particularly attractive. While smaller than managed accounts, he says the margins earned on each dollar are substantially higher. The money is also typically locked away for at least 10 years, making it far stickier.

“It's really high-quality money. The money's locked away for at least 10 years, whereas managed account money can be lost next year.”

Mitchell also believes the tax changes from the Budget could make investment bonds increasingly attractive, although he acknowledges that could eventually invite greater competition or scrutiny of their tax treatment.

Taking a greater interest in private markets

Interestingly, Mitchell also revealed that Ophir is expanding its capabilities in private markets.

With more disruptive businesses remaining private for longer, understanding which industries and incumbents these companies are targeting could provide an early indication of where earnings are most at risk.

“Wouldn't it be great to get a better flavour of what's happening beneath the surface in the privates that are really changing the world? Because that's going to give us great insights on the listed world.”

This is particularly relevant in AI, where Mitchell wants greater visibility into the companies and industries emerging startups believe they can disrupt.

“There's all these AI businesses that are like, ‘We've figured it out. [Those competitors] are dead meat. We're going after them.’ Well, we don't want to be there, so we would love to get that insight beforehand.”

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