In this episode, Mark and Shani sit down with Matt Wacher, Chief Investment Officer of Morningstar Investment Management APAC, to unpack where professional investors are seeing value right now, and which parts of the market look dangerously stretched.

From AI valuations, to China tech, to US consumer giants like Nike, to cash, bonds and private markets, Matt breaks down how Morningstar builds portfolios in an environment where headlines scream “bubble” but opportunities still exist beneath the surface.

Matt regularly shares his thoughts on current market conditions through his series ‘From the Desk of the CIO’ on morningstar.com.au. You can follow his work here.

You can find the transcript for the episode below:

Shani Jayamanne: Invest Your Way is a different kind of book about money. We want it to be a trusted resource for investors who have graduated from investing 101. For investors who know what a share is and an ETF is, but are struggling to put it all together to get onto the pathway to financial independence.

Mark LaMonica: Too much financial commentary focuses on investments rather than on the people investing. We believe investors are hungry for a new perspective. The investors we talk to tell us that they are tired of aspirational messages that lack the practical steps to put a plan into action. They don’t want bewildering and unrelatable jargon and complexity. They want the focus to be on the only thing that truly matters, creating a better life for themselves and their loved ones.

Jayamanne: Invest Your Way is a guide to successful investing with actionable insights and practical applications. You’re able to purchase the book through the links in the episode notes and at major bookstores or request a copy through your local library.

Welcome to another episode of Investing Compass. Before we begin, a quick note that the information contained in this podcast is general in nature. It does not take into consideration your personal situations, circumstances, or needs.

LaMonica: We have another guest episode today, Shani. And today we’re having Matt Wacher. He is the Chief Investment Officer, Asia Pacific of Morningstar Investment Management. And he has been on the podcast before and the first episode that he was on, he was explaining why valuations matter and how expected returns fit into decisions that Morningstar Investment Management makes around their portfolios. But today we’re obviously going to pivot to a different topic. And he’s going to be talking about the opportunities that Morningstar Investment Management, or MIM, as it’s known, what they see right now in the market, where those opportunities are.

Jayamanne: Yeah. So first, a little introduction to Matt. Matt leads the investment team that manages diversified portfolios for clients. And he’s responsible for setting strategy, asset allocation, and finding opportunities across global markets. He has more than two decades of experience in financial markets, having worked across investment consulting, multi-asset investing, and portfolio construction. But before joining Morningstar, he held senior roles at Mercer and Russell Investments, advising some of Australia’s largest institutions and super funds. And at Morningstar, his focus is on delivering strong, long-term outcomes for investors by balancing risk, opportunity, and discipline.

LaMonica: Wow. You sound like you’re his publicist.

Jayamanne: Yeah. That was a pretty...

LaMonica: I mean, it was a good description. But we do want to set a little context before Matt comes on here. So I think as people are aware, markets have gone up a lot. There’s a lot of talk about bubbles. And at Morningstar, we also see markets as being expensive right now. So we looked at Morningstar’s market valuation tool. And what that does is it shows a bottom-up intrinsic value of all the individual securities we rate in the market and looks at those at individual country levels. So right now, in Australia, the market is 13% overvalued according to our equity research team. The US is 3% overvalued. And that doesn’t mean that there are no opportunities within those markets. But on an aggregate level, our analysts do see the market as overvalued.

Jayamanne: So we do hope this is an interesting conversation for you. We certainly find Matt’s insights approachable, interesting and insightful to understand how a professional investor is thinking about markets.

LaMonica: First of all, thank you very much for joining us, Matt.

Matt Wacher: Thanks for having me, Mark.

LaMonica: One of the things we ask every guest, and this is because a lot of our listeners are less familiar with what professional investors do on a day-to-day basis, is just to describe that, what do you do over the course of a week?

Wacher: Over the course of a week, so many things. But the key to what we do from an investment perspective is we work with our Morningstar colleagues globally in the investment team, but even broader than that, for example, our manager research or equity research teams. And we, as an investment team here in Australia, want to take all of those views and condense them down so that we can make a coherent portfolio to be investing on behalf of our investors, our clients. And we want to make sure that we’re able to deliver really good returns, but not taking too much risk in order to deliver those returns to clients. So our job is really to build portfolios for investors to be able to invest in.

LaMonica: I think that risk statement is a good place to start. I actually went back, and it was for an article I was writing, I counted the number of times bubble was used in the AFR. So over the first 20 days of October, it was used 43 times. So there’s concern out there, I think, from a lot of people that the market might be overvalued. How do you see the market right now? How does Morningstar Investment Management see it?

Wacher: Yeah, there’s certainly parts of the market that look like they’re exhibiting bubble-like qualities, and not necessarily here in Australia, like maybe one or two stocks are. But we’re multi-asset investors, and so we look not only in Australia, but globally. And we also look into, say, the bond market as well. Now, let me start by saying that for a multi-asset investor, for your average mum and dad, who wants to invest in a broadly diversified portfolio, it’s not the worst time to be investing. Bond yields, they’re not the greatest they’ve ever been, but they’re actually a good anchor for a diversified portfolio at this point in time. But there are parts of the market that we think are expensive. The whole AI theme has run a lot. Now, maybe that comes good and continues to come good, and that continues to be a great opportunity. But we think that there’s actually other opportunities that if you dig under the surface that look much better from a risk-adjusted perspective, when you take into account the risks that you might have to spend, that are going to be better than throwing all your eggs in the AI basket at this point in time.

LaMonica: Now, when you say, we’ll get into those opportunities in a second, when you say risk-adjusted, how would you explain that to a layman?

Wacher: So I’ve been, ever since the Olympics last year, I’ve been using the example of the high jump, and people have kind of resonated with that a little bit. So the high jump, the aim obviously, is to get over the bar. Now, the best high jumpers in the world. So if we think about in terms of stocks, the NVIDIAs, the Microsofts, the Googles, et cetera, very high quality companies. Even the best high jumpers in the world knock off the bar at some stage, because the bar gets so high, expectations are so high in markets that they have to keep delivering in order for the price to continue to appreciate. And if they don’t deliver, they knock off the high jump bar.

Now, what we do and where we think you can get better reward for risk is when the bar is very low. Now, I’m very short, you can’t see that here, but we want to look for stocks where I can jump over the bar, or opportunities, not just stocks, credit, whatever it might be, where I can get over the bar, where the bar is very low and not much has to go right for the stock to do very well. Now, it might not be the highest quality, the quality of say, NVIDIA business, but when you take into account that actually it’s priced very cheaply, you can take that, that potentially gives you a better risk adjusted return. The bar is low, not much has to go right for it to do well. And so that’s how we think about investing. And that’s kind of what I mean by risk adjusted returns. Not trying to jump over the highest hurdle out there. Let’s get over the, let’s look for the stocks that have the lower bar.

LaMonica: So what are some examples you talked about? Obviously, AI might be a little overvalued. What are examples where there’s a low bar right now where you see opportunities?

Wacher: Yeah. So I think this is changing a little bit, but there’s been stocks in terms of, say, if we’re looking globally in, say, China tech names, so your Alibabas and your Tencents, a year ago the bar was very, very low for those stocks. And they’ve done very well lately, but we think that the bar, and there’s some catalysts for those to do well. So the whole trade deal, is there going to be a trade deal, is there not? They’re fluctuating around, but we think that there’s potential there at reasonable valuations. And so that’s an opportunity. We also think that there’s some consumer names out there as well, like household names, that everyone would know, say, Nike is a good one, a really good example, where there’s actually multiple catalysts for those to do well.

We think the valuations for a company like Nike are actually pretty reasonable, you know, and that’s on the back of, don’t get me wrong, that’s on the back of some management failures and some issues that they’ve had over the last couple of years, but we think that they’re sorting those out. And some of the catalysts, again, the whole tariff regime has that impacted its suppliers and where it manufactures its goods in countries like Vietnam. So there’s lots of noise around that. There’s lots of noise around just the cost of living pressures and things like that. And if any of those things you start to get some good news, then a company like Nike can appreciate quite substantially from this point in time. So we look for catalysts as well.

LaMonica: And how do you think about cash? I do, I get a lot of emails from readers and listeners and I think what a lot of individuals tend to do is they’re making, whether they use this terminology or not, they’re making tactical asset allocation decisions between cash when they obviously get worried about what’s going on and then being more fully invested. What is your take on cash?

Wacher: Look, I mean, for an asset manager or an institutional investor like us, cash is a tool that we use. If we look back to say the end of 2021, our portfolios had a lot more cash in them for probably some of the same reasons that the investors that you’re talking to were making, but really bond yields were very low and equity markets were very expensive. So we had more cash than we probably would have, but that’s a tool, a defensive tool in our portfolio. Nowadays we have much less cash in our portfolio because we think you can get a reasonable yield from bonds and build a robust portfolio without cash. And we would say generally to investors is that over the time horizon that they’re looking at, which is generally a very long time horizon, you don’t want to be invested in cash. You want to be invested in growth assets and have a, or in higher yielding assets like bonds in order to generate compound returns over the longer term.

We would say exiting, letting professional managers do their job, they’re going to hold a certain amount of cash in their portfolios for the reasons that I described because they think it’s a useful tool at times and letting them do the job, not necessarily chopping and changing, where you can mistime the market is generally remaining invested is what we would try and educate clients to do.

LaMonica: Another popular topic is private markets. So obviously a lot of people are using industry super funds, they’re allocating more and more to private markets. Now we’re starting to get private market investments that are marketed directly to retail investors. What is Morningstar Investment Management’s view? Is this something that you guys use? You invest in private markets and there’s a variety of them or something you don’t use?

Wacher: Yeah, we, I mean, it’s certainly a space that we are cognizant of. And we do use some private market assets in our portfolios. We use some private credit, we’re looking at whether we want to use private equity in our portfolios. Generally the way that we invest favors liquidity, but it doesn’t mean that we couldn’t have a core of private market assets that are generally speaking illiquid in the portfolios. I think the key thing for investors and more kind of individual investors to think about when they’re wanting to look at private markets is generally speaking, if you look at all of the research out there, the best returns from private markets come from the best managers.

So whether that’s private equity or even to a lesser extent private credit, but the efficacy is still there of this research. So you want to be invested alongside the best managers and sometimes it’s very hard to get access to some of those, the best managers out there, which is why the big super funds with lots of money can get access to those private market funds alongside the best managers. So I would be cautious if I was an individual investor and I’d certainly do my due diligence to the extent that you could rely on, external diligence of those sorts of things to make sure that you’re investing alongside managers that really knew, private market managers that really knew what they were doing and that you could see their results and really understand how they can help you. I think the biggest risk is partnering with someone or investing with someone that you don’t know what they do, the optics, they lack the transparency and that they’re not the greatest manager out there. Private markets you really need people to know what they’re doing.

LaMonica: Yeah, it’s that, that Groucho Marx quote that I don’t want to join any club that would actually let me in. So yeah, it can be challenging, challenging because I think you get a lot of headline returns. That how great private equity is doing, but if you can’t access those managers, then it’s a problem. This is something, and this is maybe a question that is related to the way I personally invest. I tend to get very nervous about valuations and we did talk about this a little bit. So, I of course then, read all these headlines about everything being overpriced and we did talk about AI. We talked about a couple different parts of the market that are expensive. You know, how, how do you think about that? You are lowering allocations to certain pockets. You’re not like completely pulling out of things.

Wacher: No, I mean, if we were to build a portfolio at this point in time based purely on what the valuations and not kind of thinking about, well what do investors need out of a long term portfolio? We would have very little invested in kind of US tech or AI and those sorts of things. What that doesn’t account for is that we could be wrong, and some often are. So we want to build a portfolio that’s going to still access some of those themes maybe directly. So we, you know, it’s not that we don’t own NVIDIA, just to use that as an example in our portfolios. But we might want to look for other adjacent kind of exposures that are going to give us access to that AI theme. So, in emerging markets, there might be Samsung out of Korea that’s much more attractively priced than say some of the US names and is still part of that AI theme. And so we’re looking for ways to access the themes, but at better, better valuations. But we don’t want to completely be out of a theme or an idea because as I say, we could be wrong based purely on valuations.

Or we could be right, but it might take a very long time to be right. And investors, that’s not fair to the investors that invest in our portfolio. So we want to build a robust portfolio that we think is going to do the right thing by investors. And sometimes that means not being underweight certain ideas, but still having some exposure to them.

LaMonica: Yeah, I think something that would probably be helpful for people is, you know, investors are just bombarded with news these days. You know, there certainly is a lot of news coming out. You mentioned tariffs earlier, a lot of news comes out of the White House that, you know, twists and turns, back and forth every single day. How do you deal with this news cycle? And how does that inform the way you invest?

Wacher: Yeah, I think, I mean, it’s easier said than done. But, what we try and do is block out all of that noise. You know, some of the noise is the news and the news flow and the noise that it creates, creates opportunities to invest at better valuations. If you get a sell-off in markets, for example, like we saw back in April, we saw that as an opportunity to take advantage of the sell-off and we’re lucky enough that that paid off. But we, I think that the fundamental thing that we have as a kind of more institutional style investor, but others could have, individual investors could have as well, is a really clear investment process. Why am I going to invest in and how am I going to invest in something?

In the market. What is that investment process? What’s my investment philosophy that sits around that? And if you have an investment process, you’re only going to, for example, you want to focus on market valuations or you want to focus different to us. You want to focus on, you know, growth and growth stocks. Everyone has a different kind of approach to markets, but they all have a invest, if you’ve got an investment process, sticking to that investment process and kind of not listening to the short-term noise is kind of a way that, or certainly the way that we think about investing and making sure that we don’t get sucked in to kind of the latest and bit of news flow.

LaMonica: Okay. Well, that’s, I think, a great place to end this. So thank you very much, Matt. Really appreciate it. I’m sure the listeners appreciate it as well.

Wacher: Thanks a lot for having me.

(Disclaimer: Any advice in this podcast is general advice or regulated financial advice under New Zealand law prepared by Morningstar Australasia Proprietary Limited and/or Morningstar Research Limited without reference to your financial objectives, situations or needs. You should consider the advice in light of these matters and any relevant product disclosure statement before making any decision to invest. To obtain advice for your own situation, contact a financial advisor.)

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