Australia’s good fortune was forged in the red dust of its mines and the vast expanses of its energy fields and that luck continues to pay dividends for every Australian. The resources sector contributes around 15% of GDP directly, but its true footprint is far larger: mining and energy exports account for nearly 70% of Australia’s total goods exports. The royalties and company taxes flowing from this sector fund hospitals, schools, and infrastructure across the nation. Yet many small cap investors have turned their backs on resources, choosing to focus exclusively on technology, consumer and services economy investments.

Beneath the surface of the Small Ordinaries Index lies a wealth of opportunity that the “lucky country” is still uniquely positioned to deliver and returns over the past year highlight just how important resource stocks can be to a portfolio.

Small resource stocks – contained in the GICS sectors of Materials and Energy – currently account for around 1/3 of the weight in the small ords index.

Source: Longwave (December 2025)

Applying a single definition of Natural Resources to these companies understates the meaningful diversification in the markets they serve and the demand and supply characteristics of each. Iron ore, gold and Oil & Gas are the heavy weight sectors in the Australian listed market, but base metals (Copper, Nickel, Zinc), Other precious metals (Silver, Platinum), Rare Earths, Uranium, Coal (coking and thermal), Lithium, Mineral Sands, Steel, Titanium and Manganese are among the diverse exposures available. There are companies across the development lifecycle – from exploration plays, development companies and those either ramping up or into mid-life production. There are companies across the risk curve, whether that relates to position on the cost curve, asset complexity, mine diversification, jurisdiction or financial leverage. Put simply, there are a huge number of investment opportunities to research, select and position size in a portfolio. As we do for all sectors, the Longwave process focuses on what we believe are the higher quality and lower risk names in resources.

Quality is an interesting characteristic as investors do not always agree on what this means. For example, many quality investors believe quality can only exist in certain sectors (which excludes materials and energy). This has implications for portfolio construction as resource stocks can provide a source of non-correlated returns to most other market sectors during parts of an economic cycle – which is exactly what we are seeing today. Many small cap investors, much like quality investors, also exclude resources. If we look at the history of returns, it seems obvious why.

Since 1995, up until the end of 2024, The S&P / ASX Small Industrials Index outperformed the S&P / ASX Small Ordinaries Index by almost 1% per annum, because the S&P / ASX Small Resources Index had underperformed by almost 2% per annum. Not only were returns for small resources lower, but they were also (and remain) more volatile. Avoiding them looks like a free lunch.

But resource returns are very episodic and can move much more sharply than industrial share prices – both up and down.

By the end of January 2026, the performance difference between the two sub-indices has largely closed. The incredible resource returns in the past year have narrowed almost three decades of small industrial stock advantage. To frame where we are today vs the last boom, it is worth noting that from 2003 to 2007, the S&P / ASX Small Resources Index increased almost seven-fold. This cycle, since 2023, we have seen a doubling. This cycle is much more gold-driven (vs Iron Ore and Base Metals in 2003 to 2007), but of course every cycle is different.

There are a lot of low-quality names within the Small Resources Index however by focusing on higher quality companies, resource stock returns can be competitive with industrial stock returns and preserve their terrific diversification characteristics.

This brings us to two other benefits of resource stock investment – industrial company adjacency and portfolio construction.

There are many industrial companies in Australia which provide services to resource companies. Mining and drilling services, information technology systems, assaying and laboratory services, labour and equipment hire. Understanding what is happening in resource companies (including capital market activity) can provide valuable insight into investments in these companies, who represent probably another 5-10% of index weight in resource-adjacent industrial companies.

Investor and media attention is dominated by single stock stories and stock selection however for long-term investor outcomes, portfolio construction remains just as important. Position sizing and understanding the correlation between stocks and sectors can make a portfolio robustly diversified. Not the simple diversification measured by the number of stocks and the limited impact any one position can have on the portfolio, but diversification as measured by the robustness of the portfolio to many different market and economic regimes – most of which as an investor you will not anticipate. I still vividly recall when I managed my first portfolio back in 2006, being told by the head of equities that a portfolio “is more than just a collection of stock ideas”. This was an insight I believe remains a universal truth to portfolio construction.

Unlike almost all other resource companies, gold stocks are a special case as the metal they mine is not consumed by a downstream industrial process. The economics of gold price formation do not relate to demand, supply and marginal cost as they do with almost all other commodities. But nevertheless, gold mining companies turn the activity of mining this metal into real cashflow if the prevailing gold price allows. And right now, the cash flow difference between prices received and cost to mine is higher than it has ever been.

The driver of the gold price can also be very different to what drives other resource companies and other sectors in the market and economy. Fear. Uncertainty. Currency debasement. Lack of confidence in government financial discipline. Even just price momentum and FOMO. Different driver’s equal portfolio diversification to different market regimes.

The long-term gold price is the single biggest driver of the long-term value of the equity. But what is the right long-term price to use? Gold is the ultimate mimetic asset (which we discussed last month) and although the range of potential outcomes is wide, meaning the range of potential equity valuations is even wider, we do see a role in our portfolio for gold stocks and have held a position of varying weight in gold equities, diversified across a number of individual names, since our fund inception.

For many years, the market has become accepting of technology stocks at valuations by some measures exceeding those we saw in 2000 and 2021. After recent strong performance, global mining stocks are now only around their long-term valuation levels relative to the broader market. Technology stocks remain significantly above.

Source: Longwave (January 2026)

These two sectors, technology and resources, have had a consistent and negative excess return correlation structure for many decades, and as such are both worthwhile building blocks in a diversified portfolio. In the same way as we discussed using small caps to diversify large cap bank heavy portfolios in late 2024, investors should consider resources and tech exposures for a similar purpose.

Through luck and providence, Australia is endowed with some of the greatest sources of natural wealth in the world. To ignore the opportunity right on our doorstep is likely limiting the potential investment returns for Australian equity funds.