Beyond big tech and into ‘beautiful compounders' universe

AU Financial Review

3 days ago

'These are businesses delivering around 10 per cent earnings growth, yet trading at long-term average valuations,' says Abela. This part of the market, he says, offers potential growth without the hype.
Abela views the recent pullback in large-cap tech as part of a broader normalisation. The shift into large-scale AI infrastructure marks the start of a capex-heavy phase – one that could compress margins and weigh on returns over time.
'These are great businesses,' he says. 'But they're massive already, and the capex cycle is coming.'
While optimism around AI continues, Abela believes its real-world rollout may take longer than anticipated.
'It will require a lot of capex, a lot of power, a lot of water for cooling,' he says.
Fidelity's approach to global mid-caps is based on three pillars: viability, sustainability and credibility.
'Viability is about cash flow return on investment – looking at return level, direction and duration,' he says. 'Sustainability asks how long that return can last. Is it just a cycle, or something that can endure for 10 or 20 years? And credibility is about trust: trusting the management, the accounts, and verifying it yourself.'
That framework allows the fund to identify what Abela calls 'beautiful compounders' – long-term holdings with strong fundamentals and consistent returns. While quality remains the core, the team also finds opportunities in cyclical rebounds and special situations where sentiment is low but improving.
Abela believes the most compelling potential opportunities lie in industrials, particularly in the US, Europe and Japan.
'Most of our buying has been in industrials,' he says. 'They benefit from the recovery but they're not in those various coveted or hot sectors like tech and financials, which have been popular in the last couple of years.'
The team's QVTM framework – balancing quality, value, transition and momentum – helps structure the portfolio to perform across different market conditions.
'That QVTM balance from a portfolio perspective has allowed us to navigate four very different sort of cycles or years,' says Abela. According to the firm, the strategy has helped deliver attractive upside capture (around 95 per cent) while limiting downside to 75 per cent.
Tim Murphy, co-CEO and head of research at Genium Investment Partners, says recent equity concentration has prompted allocators to reassess risk – and to consider whether mid-caps deserve a more permanent place in global portfolios.
'They are coming to think of them as more part of a regular allocation in portfolios, where they might not have done historically,' says Murphy. 'Allocators are certainly keen to diversify some of that risk away.'
Murphy points out that mid-caps are currently trading at 'much, much lower valuation levels than large caps at this point in the cycle'.
That valuation gap, combined with the breadth and diversity of the mid-cap universe by geography, sector and company size, has made it an increasingly compelling area for long-term investors.
'By its nature, the market is much more diverse in terms of smaller size of stocks, number of stocks, spread of companies by both sector and geography,' he says.
Murphy says his firm has been steadily increasing allocations to global mid-caps over the past year.
'For the past 12 months we've been increasing allocations of global mid-caps in most of our client portfolios,' he says. 'Largely through valuation ... but also because the global part of most people's allocation has become so concentrated in such a handful of names.'
When it comes to sector exposure, Murphy sees common interest among managers in areas like US health care, particularly in specialist operators rather than large pharmaceutical names.
'Certainly, they're seeing good opportunities within that sphere,' he says. 'Especially in the US side of the market.'
He also highlights industrials as a consistent potential opportunity.
'Sometimes the businesses are frankly a bit more boring,' Murphy says. 'But those steady compounders tend to be better longer-term investments.'
Looking ahead, Murphy expects the valuation gap between mid- and large-caps to narrow over time.
'The timing of that is anyone's guess,' he says. 'But we would expect that valuation gap to narrow, and it's why we've been allocating more money into this segment of the market.'
For both Abela and Murphy, the takeaway is clear: while headlines continue to focus on the mag seven, the next chapter of US market leadership may be forming quietly in the middle.