Investing in the stock market involves knowledge, research, market trends and a decent amount of luck. Throw in the element of timing and it can sometimes feel like yelling at clouds.
From mum & dad retail investors through to mega funds, the question arises – should I try to pick winners or simply invest passively and follow market forces?
Australian markets have seen a steady upward climb from a relatively weak start to the year. The total value of the ~2,200 stocks listed on the Australian Securities Exchange (ASX), represented by market capitalisation, was approximately AUD 2.87 trillion in January 2024. By December 2024, this had increased to about AUD 3.01 trillion, reflecting an approximate growth of 5% over the year.
The Australian sectors leading the way YoY were Tech +60%, Financials +40% and Consumer Discretionary +30%. Languishing at the other end of the scale are the resources, down ~7-9% year on year.
It has been an especially tough year for juniors in the resources space – where raising capital has been challenging for some – and in line with underlying structural changes to commodity demand, has been increasingly dependent on being in the right location and commodity at the right time.
Is this because Australian stock pickers have become more picky? Not necessarily. An interesting factor to consider is the rise of inflows to exchange-traded funds (ETFs) versus outflows from traditional managed equity funds. ETFs essentially represent a basket of shares based around a common theme or sector (ie gold ETF, bank ETF).
Australian ETFs, particularly those focused on equities, recorded strong net inflows. By mid-2024, Australian equities received AUD 3.3 billion in inflows, with international equities attracting AUD 5.6 billion, according to Morningstar. These trends reflect growing investor confidence in both domestic and international markets but also a move away from individual stock picking.
Retail investors played a significant role in driving ETF inflows, with net additions continuing despite some large institutional withdrawals from individual funds like the iShares Core S&P/ASX 200 ETF (IOZ), which faced record withdrawals.
In contrast, traditional managed equity funds saw a less favourable trend, with significant outflows reported throughout 2024. Between January and June, unlisted Australian equity funds experienced net outflows totalling AUD 3.8 billion, driven by investor shifts toward ETFs and alternative investment strategies.
These capital flows reflect increased investor interest in growth-focused and thematic ETFs, such as those related to technology, clean energy, and cybersecurity, suggesting a return to growth-oriented strategies amid improved market sentiment.
What about the rise of ESG? There has been continued growth in ESG funds, which is driven by heightened investor interest and favourable regulatory developments, however they still remain a small proportion of the overall market.
Inflows into ESG-focused funds have been strong throughout the year, and as of mid-2024, sustainable and responsible investment funds, including ESG-focused superannuation funds, amounted to approximately AUD 783 billion according to Morningstar.
In contrast to the traditional fund landscape, active strategies remain the preferred choice for Australian ESG investors, although passive strategies, especially ETFs, are gaining traction. Recognition and ongoing monitoring of ESG metrics make active investment a reality in this sector. Managers like Australian Ethical, Vanguard, and BetaShares have been instrumental in driving growth in the sector, collectively holding a significant share of the ESG market in Australia.
This upward trend is attributed to increasing awareness of sustainable investing principles, outperformance of ESG funds compared to traditional benchmarks, and regulatory focus on green finance practices.
This shift in mainstream funds to passive strategies over 2024 has no doubt impacted the junior space, which typically requires more active monitoring. Your passive investment is unlikely to deliver a ten-bagger, however delivering an albeit smaller consistent return in a difficult market may be preferable in a cost-of-living crisis.
However, as markets turn, active strategies and old-fashioned stock picking will no doubt return, as investors are more likely to take risks, seeking higher returns and a level of FOMO. As the old adage goes, “We are only one drillhole away from the next exploration boom”.
Photo by Nicholas Cappello on Unsplash
