ASX:VNGS Vaughan Nelson Global Equity SMID Fund (Quoted Managed Fund) Find out more

Article first published in the Australian Financial Review, 5 March 2024, by James Thomson. 

As bitcoin and Nvidia surge, talk of a bubble is everywhere. But this $25 billion global fund manager warns there is serious pain playing out beneath the surface.

There may or may not be a bubble on financial markets. But there’s no question that we are right in the middle of an extraordinary bubble of talking about bubbles.

In recent days, billionaire hedge fund investor Ray Dalio has released his Bubble Gauge of six key indicators around sentiment and conditions. Goldman Sachs chief strategist David Kostin has addressed the idea of a bubble in highly valued tech stocks in a provocatively titled note called This time it’s different.

Capital Economics says an AI bubble is underway. Japan’s market has surged past its previous record high, set during – you guessed it – a bubble in the 1980s.

The bubble talk is fair enough. The staggering surges in bitcoin in the past month (up a huge 60 per cent) and stocks such as Nvidia (23 per cent) and Super Micro Computer (up 62 per cent) suggest a level of speculation and FOMO that is reminiscent of the dot-com boom and the 2021 pandemic surge. The scramble by strategists to justify these moves may be its own bubble indicator.

But not everyone sees froth. Chris Wallis, the chief executive and chief investment officer of Vaughan Nelson, which has $25 billion under management and operates an ASX-listed active ETF, says investors shouldn’t be blinded by the impressive gains in sharemarket indices or the magnificent seven stocks. Another story is playing out beneath the surface.

“You’re going to have to watch these rolling bear markets, through regions and industries and sectors and sub sectors,” he says. “There’s going to be fits and starts, and people are going to have to figure out when and how to allocate capital. It’s just the world we’re in.”

The contrast between Wallis’ view and the endless talk of bubbles is stark. But the Houston-based market veteran, whose focus is small and mid-cap stocks, says the brutal adjustment to a world of higher interest rates is playing out in a similar way to the multi-year rebalancing of the global economy in the late 1980s and early 1990s.

The US regional banking crisis last March was a prominent example, Wallis says, and banks as far away as in Germany and Japan have more recently been shaken by exposures to the US commercial property sector. European manufacturers are under severe pressure because of a combination of unsupportive industrial policy at home, and competition from US rivals fuelled by government stimulus. China’s equity market tells the story of a painful economic adjustment there.

The process of rebalancing, Wallis argues, has some way to run, with a wall of corporate debt falling due in 2025, and then really climbing in 2026.

Small and mid-cap indices may well further struggle, but Wallis argues investors can pick off good companies with “rifle shots” and build a portfolio that will outperform.

“As we go through and reprice capital, and we figure out what management teams are disciplined with capital allocation decisions, have the right incentives and have the right capital structure, you’re seeing real differences in winners or losers, even in similar industries.”

This has been a theme of the local ASX reporting season, too. Think of the disparity between the major and regional banks, or even between discount department stores Kmart, which delivered stunning results, and Big W, which didn’t.

Return on capital is Wallis’ key criteria for investment; the focus on companies that reinvest, and are therefore less cyclical, means the portfolio has lower earnings variability, Wallis says.

While North America and Western Europe dominate the portfolio, there are some Australian names, including insurance broker Steadfast and laboratory services group ALS. Tech holdings include US groups Insight Enterprises, Monolithic Power Systems and Fabrinet, while Wallis has recently swung into the energy sector, betting a long period of underinvestment will deliver strong returns.

“Politics can’t change physics,” he says. He’s looking for the next group of AI winners that can deploy AI to dramatically rip out costs.

For a believer in rolling bear markets, Wallis is actually very upbeat about the economic environment for the rest of the year, as economic growth gathers momentum in the US and Europe, with Asia not far behind; he says nominal US GDP could be expanding by a staggering 7 per cent by the December quarter.

That will create inflationary pressures, but Wallis expects the Federal Reserve to cut interest rates and the US Treasury to keep spending during an election year. His biggest shock to watch? The normalisation of interest rates in Japan, which would lead to Japanese capital being repatriated from foreign markets in a way that will create shockwaves.

Some performance figures have been removed from the original AFR article. See the latest performance figures for the Vaughan Nelson Global Equity SMID Fund.


This publication (the material) has been prepared and distributed by Natixis Investment Managers Australia Pty Limited AFSL 246830 for the Vaughan Nelson Global Equity SMID Fund (the “Fund”) and may include information provided by third parties. The information in this report is provided for general information purposes only and does not take into account the investment objectives, financial situation or needs of any person. Investors Mutual Limited AFSL 229988 is the responsible entity of the unquoted and quoted class units of the Fund. Vaughan Nelson Investment Management, L.P. is the investment manager. This information should not be relied upon in determining whether to invest or continue to invest in the Fund and is not a recommendation to buy, sell or hold any financial product, security or other instrument. In deciding whether to acquire or continue to hold an investment in the Fund, an investor should consider the current PDS and Target Market Determination for the appropriate class of the Fund, available on the website or by contacting us on 1300 219 207. Past performance is not a reliable indicator of future performance. There is no guarantee the performance of the Fund or any particular rate of return. It may not be reproduced, distributed or published, in whole or in part, without the prior written consent of Natixis Investment Managers Australia Pty Limited and IML.

Stay up to date
with Vaughan Nelson

Register to receive regular performance updates and regular insights from the Vaughan Nelson investment team, featured in the Natixis Investment Managers Expert Collective newsletter.

Vaughan Nelson Investment Management marketing in Australia is distributed by Natixis Investment Managers, a related entity. Your subscriber details are being collected on behalf of Vaughan Nelson Investment Management, and Investors Mutual Limited (the RE for Fund) by Natixis Investment Managers Australia. Please refer to our Privacy Policy. Natixis Investment Managers Australia Pty Limited (ABN 60 088 786 289) (AFSL No. 246830) is authorised to provide financial services to wholesale clients and to provide only general financial product advice to retail clients.