Microstructure evolution of vapour-grown carbon nanofibre (VGCF)-reinforced aluminium matrix composites during fabrication and microstructure–property relationships of these materials were studied. Composites were fabricated using powder metallurgy, i.e. by mixing VGCFs and aluminium powder via ball-milling followed by sintering or hot extrusion. The mixing condition was selected to achieve small powder particle size and homogeneously dispersed VGCFs. Aluminium grains and VGCFs were elongated along the longitudinal direction of aluminium particles in the mixed powder. Detailed observation of the aluminium grains in the composites found grain size and morphology dominated by recrystallization. Apparently, grain growth was inhibited by VGCFs. Theoretical models considering strength increment due to grain refinement resulting from VGCF addition, load bearing of VGCFs, thermal mismatch of VGCFs and aluminium and Orowan effect were developed. Theoretical values coincided well with hardness, yield strength, and ultimate tensile strength of the composites, and thus the models could precisely explain the microstructure–property relationships.