CFS partner insight: Why co‑investment matters

Financial Newswire Contributor

31 March 2026

In the first of our Investment Manager Profile series, Managed Accounts Newswire speaks with Peter Bates, Portfolio Manager at T. Rowe Price – one of CFS’s global investment partners helping shape the thinking behind managed accounts investment. Bates shares why co‑investment matters and how aligned expertise supports better outcomes for clients.

1. How much of your personal wealth is invested in the strategy, and how do you think about co-investment as part of your alignment with clients?

I have a substantial amount invested in the strategy; philosophically I think co-investment matters because it creates the right mindset. When your own capital sits alongside clients’ capital, you experience the same drawdowns, the same volatility, and the same consequences of every portfolio decision. That reinforces discipline. It makes you think very carefully about downside as well as upside, about valuation as well as quality, and about whether each position truly deserves its place in a concentrated portfolio.

2. What risks keep you awake at night that are not obvious from the portfolio?

The less obvious risk is not necessarily a country or sector exposure you can see on a factsheet; it is when markets stop discriminating on fundamentals and start rewarding narrative or momentum instead. In those environments, even strong businesses can underperform for a period simply because they are on the wrong side of the market’s current story. A second risk today is disruption risk. You can have a company that looks fine on near-term earnings, but if AI, regulation, or industry change is altering the long-term economics faster than expected, that matters a great deal. That is why we spend even more time on durability, pricing power, management quality, and making sure the portfolio is not taking unintended macro tilts.

3. How has your investment process evolved in the past three years and what triggered those changes?

The core architecture remains unchanged – it is a bottom-up, style-balanced, risk-managed process built around stock selection. What has evolved is the emphasis. We spend more time today on durability, on second-derivative change, and on whether a business will still look competitively advantaged three-or-four years from now – not just over the next few quarters. AI has clearly accelerated that need because it is changing the range of outcomes across industries, and the higher real-rate environment has changed how the market values duration and premium multiples. In other words, the process is the same, but the underwriting bar is higher around terminal value, capital intensity, and the sustainability of future cash flows.

4. What could cause your strategy to underperform and how long could that persist?

We are most likely to be challenged in markets where there is very little distinction between companies with strong, sustainable earnings power and more speculative businesses, or in periods of very narrow leadership by sector, country, or style. Something similar to the environment last year. We can also lag when a highly defensive macro backdrop overwhelms bottom-up stock selection. The candid answer is that these phases can last longer than you want when you are living through them quarter to quarter. But we do not think they are permanent states of the market. Our job in those periods is not to overreact in the portfolio around a temporary regime; it is to stay disciplined, keep risk under control, and make sure we are being paid for the fundamentals we own.

5. What is your competitive edge relative to peers?

Our edge starts with our highly skilled research engine of more than 150 equity investors and the insights and corporate access that comes with it. Investing is about anticipating future change and the breadth and quality of insights I gather from our team provide an enormous advantage in predicting how economies, industries and companies will evolve. Additionally, there is my own lens. Coming from industrials gave me a healthy respect for cyclicality, capital intensity, and change, which is valuable when you are trying to build a genuinely global, style-balanced portfolio rather than a portfolio that simply leans on one market regime.

6. How do you validate your thesis when the market moves against you?

When a stock moves against us, the first job is to re-underwrite it, not defend it. We go back to first principles: what is the source of the competitive advantage, what is happening to pricing power and industry structure, is management executing, has the change catalyst strengthened or weakened, and does the valuation still compensate us for the risk? We stress test the earnings and cash flow path and ask whether the market is identifying a real deterioration that we missed, or whether it is reacting to a shorter-term narrative. If the thesis is broken, the valuation is no longer attractive, or a better idea emerges, then we act. If not, we stay patient. The key is to be intellectually honest and not let behavioural heuristics get involved.

7. What are the true drivers of performance – both positive and negative – over the past 12–24 months?

At a high level, the big driver has been the market becoming much more selective. Early in the AI cycle, enthusiasm lifted a broad range of businesses. More recently, investors have become much more discriminating – focusing on capital intensity, expected returns on spend, and which profit pools are genuinely durable. That has created tailwinds where we see clear beneficiaries in AI hardware, select early-cycle cyclicals, and idiosyncratic ideas with improving fundamentals. The headwinds have generally been in areas where the market is quickly pricing AI disruption risk. The speed of AI innovation and potential displacement of services, products and labour – among other areas – is creating investor doubt about the durability of future cash flows and a “shoot first, ask questions later” mentality.

8. Does the portfolio have any biases, or is it concentrated in any way, by design?

The portfolio is concentrated by design but concentrated in individual companies rather than in one macro call. We typically hold 30 to 45 companies as we want the majority of portfolio risk to come from stock-specific decisions. The structure is built across three buckets – steady growers, disruptors, and cyclicals/turnarounds – as that is how we maintain a genuinely style-balanced portfolio through different market environments. We may lean more into one bucket when the opportunity set warrants it, but the goal is not to let factor exposures or style tilts define outcomes. Our aim is for returns to be primarily driven by our stock selection.

9. What do you identify as the key changes in the competitive landscape in recent years?

The biggest change is the speed at which competitive positions can now strengthen or erode. AI is clearly accelerating this change across software, data, infrastructure, and increasingly the real economy as well. At the same time, a higher real-rate environment is changing what deserves a premium multiple and what does not. That means the hurdle is higher now. It is not enough for a business to look optically attractive on next year’s earnings. We need to be much more explicit about pricing power, capital intensity, management quality, and whether the company is truly on the right side of change over a multi-year horizon.

10. Is there a client base that particularly appreciates the T. Rowe Price approach?

It tends to resonate most with clients looking for a genuine global core allocation, but who do not want an index-like portfolio. They like the fact that it is concentrated and active, but still style-balanced and risk-aware. In practice, that means it can work for clients who want a single differentiated core global equity manager, or for clients who want a diversifier alongside more style-pure growth or value allocations. The common thread is that they want stock selection to drive outcomes, not hidden factor risk.

Disclaimer

Avanteos Investments Limited ABN 20 096 259 979, AFSL 245531 (AIL) is the trustee of the Avanteos Superannuation Trust ABN 38 876 896 681 and issuer of CFS Edge Super and Pension. Colonial First State Investments Limited ABN 98 002 348 352, AFSL 232468 (CFSIL) is the Investor Directed Portfolio Service (IDPS) operator, administrator and custodian of the Avanteos Wrap Account Service and issuer of CFS Edge Investments. CFSIL is also the administrator and custodian of the Colonial First State Managed Account ARSN 167 425 649 and ARSN 618 390 051. Colonial First State Investments Limited ABN 98 002 348 352, AFSL 232468 is the responsible entity for the Colonial First State Managed Account, available for investment through CFS Edge super, pension and investment products.

This article is based on current requirements and laws as at 31 March 2026. While all care has been taken in preparing the information contained in this document (using reliable and accurate sources), to the extent permitted by law, no one including AIL and/or CFSIL, nor any related parties, their employees or directors, accept responsibility for loss suffered by anyone from reliance on this information. This article may include general advice but does not consider your individual objectives, financial situation, needs or tax circumstances. You can find the Target Market Determinations (TMD) for our financial products at www.cfs.com.au/tmd, which include a description of who a financial product might suit. You should read the relevant Product Disclosure Statement (PDS), Investor Directed Portfolio Service Guide (IDPS) and and Financial Services Guide (FSG) carefully, assess whether the information is appropriate for you, and consider talking to a financial adviser before making an investment decision. The IDPS Guide and FSG can be obtained from your adviser, cfs.com.au/cfsedge or by calling us on 1300 769 619. Any views and/or opinions expressed are solely those of T. Rowe Price.