Occasionally clients come to us with existing portfolios. They have funds in them we share no philosophical alignment with. We’d never recommend them, and we provide a gentle nudge, whenever possible, that they’d be best moved on from, in the most tax efficient way possible.
This can be for many reasons, or a combination. Expense. Risk. Type of portfolio management.
Sometimes it can take a little time to loosen the grip. Why? Performance. It may not be much better or worse than what we put in our portfolios, so there’s no trigger.
This is important because financial markets had a good year last year. They’ve also started off decently this year.
Global Large stocks are down a bit, but that also has to do with the Australian dollar appreciating. Alternatively, hedged global large stocks are in the green.
Global Small stocks have bucked that trend and found themselves up despite the dollar.
Global value stocks have also notched a small gain.
Emerging markets are up.
In Australia, the market is up a few percent also.
If an investor had a globally diversified portfolio, comprised of broad market indices or factor tilted funds, they probably wouldn’t think much was happening right now. Nor would they think much happened after the tariff tantrum stockmarkets had earlier in 2025. Overall, stocks went up and most of us were happy.
However, there’s been a lot going on below the surface.
South Korean stocks are up over 30% in the first six weeks of the year, after being up over 95% last year in their own currency! Fair to note, they had done extremely poorly in the prior 3 years, so there was some catching up to do, but 95% in a year catches the eye, especially when it’s followed by over 30% in the first six weeks of the year.
All those software companies that had been minting billionaires for years have been going backwards at a rapid rate. Most specifically, enterprise SaaS or software as a service, that has a subscription model and is sold to businesses, but it’s not just SaaS, data analytics, video games and tech legal services are suddenly seeing their stock prices tumble.
The New York Times highlighted how South Korea was benefitting.
The artificial intelligence boom — and its demand for computer chips — is also playing a big role in the stock market rally in South Korea, which is among the world’s top chipmakers. Last year, semiconductors made up nearly a quarter of the nation’s exports, the largest slice of the export pie they have ever had, according to government data. That heft is reflected in the shares of Samsung Electronics and SK Hynix, which have more than tripled and quadrupled, respectively, in the past year.
Meanwhile, Bloomberg zeroed in on who was being taken to the woodshed.
AI startup Anthropic released a productivity tool for in-house lawyers, sending shares of legal software and publishing firms tumbling. Selling pressure was evident across the sector with London Stock Exchange Group Plc, which has a large data analytics business, falling 13%, while Thomson Reuters Corp. plunged 16%. CS Disco Inc. sank 12%, and Legalzoom.com Inc. plummeted 20%.
Perceived risks to the software industry have been simmering for months, with the January release of the Claude Cowork tool from Anthropic supercharging disruption fears. Video-game stocks got caught up in the slide last week after Alphabet Inc. began to roll out Project Genie, which can create immersive worlds with text or image prompts. All told, the S&P North American software index is on a three-week losing streak that pushed it to a 15% drop in January, its biggest monthly decline since October 2008.
Yes, it’s all AI related. Investors are looking everywhere to see what companies could see an AI reckoning.
And Australia hasn’t been immune either. Bringing us back to those funds we don’t recommend. One of them popped up on our radar again before a recent client review. A well-known Australian fund manager, based out of Brisbane. This one focused on Australian small stocks. The fund was down over 22% in the last year, when its benchmark was up 22%.
How could this be, we wondered? Then we looked. Firstly, concentration. There were only 21 stocks in the fund. The four largest comprised over 40% of the fund. Three of them had lost about 50% over the second half of 2025, the fourth, mercifully, was flat.
Secondly, looking through all the companies in the fund, there was a common theme: technology, in many cases, software. Platforms that are said to be ripe for disruption by AI.
Sentiment in this sector has previously been good, which has been a nice tailwind, but if the wind changes in a very concentrated fund it’s an accident waiting to happen. And great sector, or concentrated performance, sooner or later always seems to have a reckoning. When that reckoning occurs, the gains that could have been locked-in will evaporate. Investors won’t be wiped out, but if they lose 22% in a year, they may as well have been in the broad market all along because they were dragged back to the pack with the rest of us. In this case, anyone in the fund for five, or even ten years, is now behind the market benchmark.
The most unfortunate thing is many investors in the fund won’t even see close to those longer-term returns. Those that arrive after the spectacular moves, caught up in the advertising and media hype, only see the really poor performance.
The broad stockmarket is volatile enough, but underneath the surface it’s even wilder. It didn’t take much more convincing to move that fund on. The trigger was pulled.
Forget the sectors. Forget the themes. Forget the latest hot thing. We may not see it, we may not even care, but the market will work it all out for us eventually.
That’s the free lunch of diversification and markets working for us.
This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs.
