Jason Coggins

AI infrastructure, electrification and under-researched companies are creating some of the strongest opportunities in Australian micro and small caps in years.

While Australia’s largest listed companies continue to dominate investor portfolios, we believe the country’s most compelling future growth opportunities are increasingly being found further down the market-cap spectrum.

Structural themes – including artificial intelligence (AI), electrification and digital infrastructure – are driving earnings growth in businesses largely absent from the S&P/ASX 20.

The opportunity comes as Australia’s economic growth outlook remains subdued, forcing investors to look beyond traditional large-cap exposures in search of companies capable of delivering sustained earnings growth.

The businesses building the infrastructure behind AI are where we’re finding some of the most exciting opportunities locally.

Investors can gain very little exposure to these themes through the S&P/ASX 20. Many of the companies benefiting most from these structural shifts are operating in the micro and small-cap universe.

AI infrastructure driving the next investment cycle

Rather than investing directly in AI software developers, we have focused on businesses enabling the rapid expansion of Australia’s digital infrastructure.

Companies including SKS Technologies (ASX: SKS), Mayfield Group Holdings (ASX: MYG), Southern Cross Electrical Engineering (ASX: SXE) and GenusPlus Group (ASX: GNP) have all benefited from increasing investment in hyperscale data centres, power infrastructure and electrical networks.

Order books across many of these businesses have expanded significantly, providing greater earnings visibility than has historically been available in the sector.

The market is still underestimating the duration of this investment cycle. We’re seeing project pipelines extending into 2028 and 2029, which gives these businesses far stronger revenue visibility than they had only a few years ago.

We also believe Australia’s ongoing electrification program, including upgrades to transmission infrastructure, renewable energy projects and increased electricity demand from data centres, will continue supporting earnings growth for many years.

Finding opportunities before the market does

Unlike Australia’s largest companies, many micro and small-cap businesses receive little or no broker research coverage, creating opportunities for specialist active managers.

Rather than relying on macroeconomic forecasts, the investment team employs a research-intensive, bottom-up approach to uncover opportunities across Australia’s under-researched micro and small-cap universe. Frequent company meetings, deep industry analysis and rigorous fundamental research are central to identifying businesses capable of delivering long-term earnings growth before they become widely recognised by the market.

We’ve deliberately built these funds around investment performance rather than gathering assets under management. Being capacity constrained allows us to invest in businesses much earlier in their growth journey and build meaningful positions before they become too large for many institutional investors.

The approach has also enabled the team to identify emerging companies benefiting from long-term structural themes before they become widely recognised by the broader market.

Stock picking, not macro forecasting

The past financial year demonstrated how quickly market leadership can change. Early in the financial year, lower interest rates and improving housing activity supported consumer-facing businesses such as Autosports Group (ASX: ASG) and Cedar Woods Properties (ASX: CWP). However, three consecutive interest rate increases later in the year shifted investor sentiment, prompting the team to reduce exposure to more economically sensitive businesses.

Rather than attempting to forecast macroeconomic outcomes, portfolio decisions remain driven by bottom-up company analysis. Our investment process starts with identifying quality businesses. If the fundamentals change, we’ll adjust our portfolio accordingly.

Backing Australia’s next generation of leaders

For example, among the team’s strongest performers has been SKS Technologies (ASX: SKS), which we first invested in during July 2024 at around $1.30 per share. The company has since benefited from surging demand for hyperscale data centres and AI infrastructure, with increasing project wins driving substantial earnings growth.

Another high-conviction holding is Wagners Holding Company (ASX: WGN), where we see a multi-year investment opportunity supported by Queensland’s population growth, infrastructure spending and preparations for the Brisbane 2032 Olympic Games. The company’s Composite Fibre Technologies business also provides additional exposure to Australia’s electrification rollout through advanced utility poles and transmission infrastructure.

Long-term holding Servcorp (ASX: SRV) represents a different opportunity. The founder-led flexible workspace business has more than doubled earnings over the past three years while maintaining a strong balance sheet, illustrating the team’s preference for companies capable of compounding earnings over extended periods.

Another example is Shape Australia (ASX: SHA), which we identified as a misunderstood business. While often categorised alongside traditional construction companies, the team recognised its lower-risk refurbishment and fit-out model, strong repeat customer base and growing exposure to sectors including education, healthcare and data centres.

The next opportunity may be hiding in plain sight

While AI infrastructure and electrification remain long-term investment themes, the Ellerston team believes the next wave of opportunities may emerge from sectors that have recently fallen out of favour.

Industrial companies, selected financials and consumer discretionary businesses have all experienced meaningful valuation compression following interest rate increases.

Companies such as Plenti Group (ASX: PLT) and Baby Bunting Group (ASX: BBN) are now attracting increased research attention from the team as valuations become increasingly compelling.

Rather than attempting to identify the exact market bottom, portfolio managers are focused on identifying businesses where improving fundamentals are yet to be reflected in share prices.

Looking beyond Australia’s largest companies

As a result, the case for Australian micro and small caps has rarely been stronger.

After several years of lagging large caps, Australian micro and small caps are trading below their long-term relative valuation against the ASX 200. Combined with strengthening structural growth themes, the sector presents an attractive entry point for long-term investors.

Investors looking beyond the ASX 20 aren’t simply buying smaller companies. They’re accessing businesses exposed to some of the fastest-growing parts of the Australian economy. For active investors prepared to do the research, that’s where we believe many of Australia’s future market leaders will be found.

By Jason Coggins, Head of Product Strategy at Ellerston Capital

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James Barker

AI infrastructure, electrification and under-researched companies are creating one of the strongest opportunities in Australian micro and small caps in years, says Ellerston Capital.

While Australia’s largest listed companies continue to dominate investor portfolios, Ellerston Capital believes the country’s most compelling future growth opportunities are increasingly being found further down the market-cap spectrum.

According to James Barker and Jack Briggs, Portfolio Managers of the Ellerston Australian Micro Cap Fund, and Ellerston Australian Emerging Leaders Fund (respectively), structural themes including artificial intelligence (AI), electrification and digital infrastructure are driving earnings growth in businesses largely absent from the S&P/ASX 20.

The opportunity comes as Australia’s economic growth outlook remains subdued, forcing investors to look beyond traditional large-cap exposures in search of companies capable of delivering sustained earnings growth.

“The businesses building the infrastructure behind AI are where we’re finding some of the most exciting opportunities locally,” says Barker.

“Investors can gain very little exposure to these themes through the S&P/ASX 20. Many of the companies benefiting most from these structural shifts are operating in the micro and small-cap universe.”

The Ellerston Australian Micro Cap Fund has demonstrated the strength of this approach, returning 27.8% over the 12 months to 31 May 2026, outperforming the S&P/ASX Small Ordinaries Accumulation Index by 16.6%. Since inception in May 2017, the Fund has delivered 16.0% per annum, compared with 7.2% per annum for its benchmark.

AI infrastructure driving the next investment cycle

Rather than investing directly in AI software developers, Ellerston has focused on businesses enabling the rapid expansion of Australia’s digital infrastructure.

“Companies including

• SKS Technologies (ASX: SKS),
• Mayfield Group Holdings (ASX: MYG),
• Southern Cross Electrical Engineering (ASX: SXE) and
• GenusPlus Group (ASX: GNP)

have all benefited from increasing investment in hyperscale data centres, power infrastructure and electrical networks,” says Barker.

“Order books across many of these businesses have expanded significantly, providing greater earnings visibility than has historically been available in the sector.

“The market is still underestimating the duration of this investment cycle,” says Barker. “We’re seeing project pipelines extending into 2028 and 2029, which gives these businesses far stronger revenue visibility than they had only a few years ago.”

The Ellerston team also believes Australia’s ongoing electrification program, including upgrades to transmission infrastructure, renewable energy projects and increased electricity demand from data centres, will continue supporting earnings growth for many years.

Finding opportunities before the market does

Unlike Australia’s largest companies, many micro and small-cap businesses receive little or no broker research coverage, creating opportunities for specialist active managers.

Rather than relying on macroeconomic forecasts, the investment team employs a research-intensive, bottom-up approach to uncover opportunities across Australia’s under-researched micro and small-cap universe. Frequent company meetings, deep industry analysis and rigorous fundamental research are central to identifying businesses capable of delivering long-term earnings growth before they become widely recognised by the market.

Barker says maintaining a capacity-constrained strategy remained central to the investment philosophy.

“We’ve deliberately built these funds around investment performance rather than gathering assets under management,” he says.

“Being capacity constrained allows us to invest in businesses much earlier in their growth journey and build meaningful positions before they become too large for many institutional investors.”

The approach has also enabled the team to identify emerging companies benefiting from long-term structural themes before they become widely recognised by the broader market.

Stock picking, not macro forecasting

FY26 demonstrated how quickly market leadership can change. Early in the financial year, lower interest rates and improving housing activity supported consumer-facing businesses such as Autosports Group (ASX: ASG) and Cedar Woods Properties (ASX: CWP). However, three consecutive interest rate increases later in the year shifted investor sentiment, prompting the team to reduce exposure to more economically sensitive businesses.

Rather than attempting to forecast macroeconomic outcomes, Ellerston says portfolio decisions remain driven by bottom-up company analysis.

“Our investment process starts with identifying quality businesses,” says Briggs. “If the fundamentals change, we’ll adjust our portfolio accordingly.”

Backing Australia’s next generation of leaders

Among the team’s strongest performers has been SKS Technologies (ASX: SKS), which Ellerston first invested in during July 2024 at around $1.30 per share. The company has since benefited from surging demand for hyperscale data centres and AI infrastructure, with increasing project wins driving substantial earnings growth.

Another high-conviction holding is Wagners Holding Company (ASX: WGN), where Ellerston sees a multi-year investment opportunity supported by Queensland’s population growth, infrastructure spending and preparations for the Brisbane 2032 Olympic Games. The company’s Composite Fibre Technologies business also provides additional exposure to Australia’s electrification rollout through advanced utility poles and transmission infrastructure.

Long-term holding Servcorp (ASX: SRV) represents a different type of opportunity. The founder-led flexible workspace business has more than doubled earnings over the past three years while maintaining a strong balance sheet, illustrating the team’s preference for companies capable of compounding earnings over extended periods.

Another example is Shape Australia (ASX: SHA), which Ellerston identified as a misunderstood business. While often categorised alongside traditional construction companies, the team recognised its lower-risk refurbishment and fit-out model, strong repeat customer base and growing exposure to sectors including education, healthcare and data centres.

The next opportunity may be hiding in plain sight

While AI infrastructure and electrification remain long-term investment themes, Ellerston believes the next wave of opportunities may emerge from sectors that have recently fallen out of favour.

Industrial companies, selected financials and consumer discretionary businesses have all experienced meaningful valuation compression following interest rate increases.

Companies such as Plenti Group (ASX: PLT) and Baby Bunting Group (ASX: BBN) are now attracting increased research attention from the team as valuations become increasingly compelling.

Rather than attempting to identify the exact market bottom, Barker and Briggs are focused on identifying businesses where improving fundamentals are yet to be reflected in share prices.

Looking beyond Australia’s largest companies

For Barker and Briggs, the case for Australian micro and small caps has rarely been stronger.

After several years of lagging large caps, Australian micro and small caps are trading below their long-term relative valuation against the ASX 200. Combined with strengthening structural growth themes, the sector presents an attractive entry point for long-term investors.

Barker says, “Investors looking beyond the ASX 20 aren’t simply buying smaller companies. They’re accessing businesses exposed to some of the fastest-growing parts of the Australian economy. For active investors prepared to do the research, that’s where we believe many of Australia’s future market leaders will be found.”

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Correia joins from Monash Investors, bringing seven years of experience in listed equities, with a focus on global research and small and mid-cap equity analysis. In his new role, he will be responsible for generating investment ideas and enhancing the research depth of the Ellerston Global Equities team.

Nick Markiewicz, Portfolio Manager of the Ellerston Global Mid Small Cap Fund, said “We are pleased to have Sebastian join our growing team. This appointment reflects increased adviser interest in our global capability and a continued commitment to active, research-driven investing.

“He brings a strong fundamental approach to investing that complements our existing process. His experience will help deepen our research capability and broaden our opportunity set across global equities.”

“The small and mid-cap range is often an overlooked corner of the global equities market, going beyond mega-tech. We believe this sector is primed for a comeback. Looking back 25, 30, 40 years, it’s the smaller companies that have consistently outperformed larger companies. Small and mid-caps have a big role to play for advisers and investors who want to have a different return profile in their portfolio. I look forward to contributing to the team’s continued success,” Correia said.

The Ellerston Global Mid Small Cap Fund typically invests in a concentrated portfolio of 20 to 40 securities, targeting globally competitive businesses with above-average growth profiles within the mid and small-cap universe.

The fund seeks to uncover high-quality businesses with long-term growth potential.

The post Ellerston Capital strengthens global equities team with senior analyst hire appeared first on AdviserVoice.

Nick Markiewicz

Global equity markets delivered solid gains over the past year, rising 8.51% in the 12 months to 31 January 2026, supported by favourable economic conditions and continued investor enthusiasm for artificial intelligence-linked growth.

However, beneath the headline performance, market breadth has remained weak, a pattern that has persisted for several years. In the United States, the S&P 500 Equal Weight Index underperformed the market-cap weighted S&P 500 by nearly five percentage points, underscoring the extent to which returns continue to be driven by a small cluster of dominant mega-cap stocks.

The ten largest companies in the US equity market now account for roughly 40% of total market capitalisation, amplifying concerns around concentration risk.

“This concentration of returns has largely been a function of the unrelenting AI investment cycle,” said Nick Markiewicz, portfolio manager at the Ellerston Global Mid Small Cap Fund. “A relatively small number of mega-cap stocks have posted spectacular gains as their AI cloud businesses accelerate and drive revenues.”

Markiewicz noted that two key market developments have emerged in recent months, the first being a widening bifurcation between AI “winners” and “losers”.

On the winning side are businesses with either proprietary AI intellectual property or those leveraged to the surge in AI infrastructure spending.

US hyperscalers recently reported fourth-quarter earnings and sharply lifted their 2026 capital expenditure forecasts. Annual capex is now expected to exceed US$600 billion, up from US$450 billion projected only months earlier.

While the scale of spending is extraordinary, Markiewicz noted that it remains fully funded by operating cash flows.

“These companies still have innovative financing options available should they wish to push investment even harder through securitisation structures and bond issuance. Alphabet recently raised US$20 billion in new bonds, attracting more than US$100 billion in orders.”

A significant portion of this investment will flow into GPUs and data centre capacity, an area where Ellerston has positioned key holdings, including Nebius, Galaxy Digital, Core Scientific, GDS Holdings, and most recently Sharon AI.

“These companies all have one thing in common – a ready access to power,” Markiewicz said. “That remains in acute shortage and difficult to bring online quickly.”

Despite the strength of AI-linked equities, questions remain around whether customer demand can ultimately justify the massive infrastructure buildout.

The market has so far been sceptical about the AI ecosystem’s ability to organically fund itself. However, recent advances in AI model capabilities have renewed debate about the disruptive potential of AI.

A new Claude update from Anthropic in early January, followed shortly by OpenAI’s Codex update, significantly improved agentic coding capabilities. These advances allow autonomous AI agents to build software as well as connect directly with enterprise systems and perform structured tasks previously handled by third-party software platforms or highly skilled engineers.

The implications for SaaS business models have been profound, with investors reassessing competitive moats and long-term valuation assumptions.

Reflecting this shift, the Morgan Stanley US SaaS Index has fallen nearly 30% since December.

“While we are yet to form a confident view of the lasting impacts of agentic coding, the sell-off is a reminder of how quickly AI is developing. The market is aggressively re-pricing perceived AI losers in a shoot first, ask questions later manner,” Markiewicz said.

“We are also questioning whether markets may begin placing greater valuation premiums on businesses with difficult-to-replace tangible assets, which is a potential inversion of the past two decades, during which intangible-heavy firms have commanded expanding multiples.”

Outside AI, a second notable shift has been emerging in a change in market leadership.

Since the start of 2026, the Russell 2000 has begun to meaningfully outperform both the S&P 500 and the so-called “Magnificent Seven”, suggesting investors may be positioning for a broader economic recovery, seeking refuge from stretched mega-cap valuations.

“While still early, we believe this reflects a combination of improving cyclical expectations and growing investor caution around the declining quality of mega-cap cash flows as investment spending accelerates, or the beginning a rotation into businesses with less perceived AI revenue risk,” he said.

Ellerston Global Mid Small Cap ’s portfolio remains positioned to benefit from this theme, with cyclical exposures across the top end of holdings including Corpay, GFL, Clean Harbours, Nexans, MasTec and InterContinental Hotels Group.

“Despite strong trailing returns, the outlook for global equities through the remainder of FY26 remains highly uncertain. Trump’s policy direction has been described as erratic, equity markets are trading at record highs, and investors remain unforgiving of earnings disappointments.

“Offsetting these risks, inflation remains muted, industrial activity appears to be improving, and further rate cuts could provide support for short-cycle sectors,” he said.

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According to Lonsec, the rating reflects the Fund’s logical and robust investment process and a team with strong alignment of interests alongside investors. “The Fund is a natural extension of the investment team’s small cap strategy that has produced solid performance outcomes,” Lonsec noted.

The Fund is a long-only Australian equities product that primarily invests in small and mid-cap companies, with the flexibility to allocate up to 20% of the portfolio to New Zealand-listed securities. Typically holding between 25 and 40 stocks, the Fund seeks ‘quality’ businesses, those with durable competitive advantages, strong growth prospects and trading at mispriced valuations.

Lonsec highlighted that the Fund’s focus on companies with sound business franchises, attractive earnings profiles, and exposure to growth industries aligns closely with Ellerston’s broader investment philosophy. “The Fund invests in companies that have the potential to deliver significant upside over the medium term and where there is a reasonable margin of safety to mitigate downside risk,” Lonsec said.

The Manager adopts a highly active, benchmark-unaware approach, targeting an internal return objective of 2–4% per annum above the benchmark over five years, Lonsec notes.

The Ellerston Australian Equities Mid/Small/Micro Cap Team comprises six investment professionals, led by David Keelan.

Portfolio Manager Jack Briggs said the Fund offers investors exposure to a compelling and often overlooked segment of the market.

“Mid-cap companies offer attractive risk/reward characteristics,” Briggs said. “With an average portfolio market cap of around AUD$3.5 billion, investors gain access to high-quality growth opportunities that can deliver uncorrelated returns across varying market environments.

“Mid-cap securities also tend to have lower levels of broker coverage compared with their large-cap peers, creating information asymmetry that active managers can exploit through deep fundamental research. Additionally, the segment helps diversify portfolios, as the Australian large-cap market remains heavily concentrated in Financials and Materials.”

Ellerston CIO and Portfolio Manager David Keelan said the Lonsec rating is a strong endorsement of the team’s disciplined investment approach.

“We’re pleased to see Lonsec recognise the strength and consistency of our process,” Keelan said. “The mid-cap segment of the market provides an excellent hunting ground for investors, as these are typically established businesses with proven track records, yet they’re still in a phase of structural growth. Our focus is on identifying companies that combine quality fundamentals with the ability to compound returns over time, while maintaining a strong margin of safety.”

Lonsec also highlighted Ellerston’s standardised and iterative research process, which it said adds value in a part of the market where information asymmetry creates opportunities for active managers.

In addition to the new Fund’s rating, Lonsec reaffirmed “Recommended” ratings for other Ellerston strategies including:

• Ellerston Equity Income KIS Fund
• Ellerston Australian Emerging Leaders Fund
• Ellerston Australian Micro Cap Fund

The Ellerston Mid Cap Opportunities Fund is now available on the Praemium platform.

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