Q&A with Tony Waters, QVG Capital
Delivering Strong Returns with a Long-Term Lens
QVG Opportunities Fund has delivered a gross return of 34.2 % (or 28.7% net of fees) in the 12 months to July 31 – a standout performance in a small-cap market that’s lagged. We spoke with Portfolio Manager Tony Waters about the key drivers; his approach to managing risk in a concentrated portfolio; and what’s on his radar for the year ahead.
QVG Opportunities Fund has had an exceptional 12 months. What’s driven that performance?
We run a relatively concentrated portfolio – currently around 30 stocks, with about half the portfolio in the top 10 positions. Our process doesn’t change through the investment cycle, which means we’ve stuck with high-quality, long-duration growth names, even when rising rates in 2022 and 2023 worked against them.
The current environment – where rates have peaked and are likely to fall – is better suited to the type of structural growth stories we own. It’s been a sweet spot for us. But I always say, you need to assess our performance over a full economic cycle to really understand the value of our approach.
How do you manage risk in such a concentrated portfolio?
While we are concentrated, our industry exposure is quite diverse. Our top holdings include names in financial services, consumer tech (like Life360), telco (Aussie Broadband), and industrial services (such as Maas Group). We’re looking for businesses that can consistently generate strong returns on capital and grow free cash flow through the cycle. That growth can come from many different sectors.
Who were the standout contributors over the past year?
There were really 6 standouts that delivered more than 200 basis points to performance: Life360 (ASX: 360), our largest position over the past 12 months; Hub24 (ASX: HUB), Catapult (ASX: CAT), MA Financial (ASX: MAF), Zip Co (ASX: ZIP), and Generation Development Group (ASX: GDG) in that order. These holdings have continued to add value in July.
We also had a couple of other wins. Johns Lyng Group (ASX: JLG), which had been under pressure, received a takeover offer from Pacific Equity Partners. And Hansen Technologies had a strong earnings upgrade.
What do you look for in a ‘quality’ business – and do you see further upside in your key holdings?
Our definition of quality includes strong balance sheets, high returns on capital, and a belief that the business still has a significant addressable market to grow into.
HUB24 is a great example. We’ve held it since QVG’s inception. It’s moved past mid-stage growth, but we still see a solid runway ahead. Generation Development and Life360 are earlier in their cycles, and we see multiple years of earnings compounding still to come. As long as they continue to do what we expect, we’ll keep holding them.
Small caps have underperformed large caps for a while now. What could turn that around?
Falling rates will help. Small caps typically have higher “beta” – they underperform in times of economic downturns or uncertainty, but outperform when investor sentiment is more buoyant.
That said, there are structural changes working against small caps. The increasing role of passive flows and the concentration of money into large-cap index names – especially those in the ASX 200 – have made life harder for stocks outside those benchmarks. I used to think this was cyclical, but it’s feeling more structural as time goes on.
We’ve seen Australia’s large-cap index performance dominated by just a handful of names. Do you see risks in that?
Not for us directly – we don’t own those names. But yes, there are risks. If valuations like Commonwealth Bank’s (ASX:CBA) are driven by passive flows and industry super inflows, that support may wane as demographic shifts take hold and more people enter the retirement drawdown phase. That’s not a short-term risk, but something to watch over the next 5–10 years.
Many active managers say volatility creates opportunity. How do you take advantage of it?
That’s spot on. The myth of small-cap managers unearthing undiscovered gems is largely gone – everyone knows everything now. But volatility creates mispricing, and that’s where we lean in.
Execution has become more important – factors like short interest, index inclusion, and how a stock is owned across peer funds matter a lot during reporting season. We focus on companies we know well and take a through-the-cycle view. Volatility often gives us a better entry or exit point.
What are you expecting from the upcoming reporting season?
I don’t expect much change from recent seasons. Overall, earnings are likely to be flat to down, but there will be standout businesses still growing strongly.
We’re bottom-up investors, so we’ll be watching closely for companies that beat earnings; changes to outlooks; and revisions to consensus. But I’m not expecting any major surprises.
How do you distinguish between hype and sustainable growth in small caps?
Cash flow and earnings. We start with the cash flow statement, then look at the balance sheet before even considering the P&L. It’s how you separate story from substance.
We’re not interested in bleeding-edge ideas. By the time we invest, we want to see evidence of delivery – positive cash flow, real earnings, and a strong runway ahead. That’s our sweet spot: leading edge, not bleeding edge.
Markets are pricing in rate cuts of 75–100 basis points in the next year or so. What happens if they don’t materialise?
If they don’t come through, there will likely be a sell-off. Markets are priced for lower rates – not just in Australia, but globally. That forward view underpins today’s buoyant equity markets. The risk is if the interest rate path doesn’t follow the curve.
Our shareholders love a stock tip – anything you’re particularly excited about?
You just need to look at our top five holdings to get an idea of what we like, but the three that I’d call out are:
- Generation Development (ASX: GDG) it’s performed well and still has a long runway for growth.
- Zip Co (ASX: ZIP) we think there will be some decent upgrades going into FY26 and beyond.
- MA Financial Group (ASX: MAF) is a strong player in alternative asset management—an area with significant tailwinds, especially with the coming generational wealth transfer. We’re overweight financial services for that reason.
Anything keeping you up at night heading into the second half of the year?
Only if the expected rate cuts don’t materialise. That would shake markets. But otherwise, we’re focused on staying disciplined and long-term.
Finally, why do you support Future Generation Australia?
It’s such a brilliant concept. We were very happy to join and are proud to be part of it. As long as Future Generation will have us, we’ll keep supporting the fund.
