Global small caps, big opportunities

Appreciating the underappreciated

- Gashi Zengeni

Is the market ripe for a resurgence in the small caps universe?

Over the long-term, global small companies outperform their large cap counterparts. This is in large part because much of this outperformance follows prolonged market rallies; they're also known to outperform in times of great volatility.

With this in mind, and given the current market climate, it seems the stage may well be set for small companies to do big things. However, many investors tend to overlook the small cap sector, preferring to put their money in names they know and love, often even seeing lesser-known companies as a risky bet.

But every big name was small once; to underappreciate global small caps is to underappreciate their return potential.

And it's this tendency to undervalue small caps that makes them crucial to any diversified investment portfolio, ClariVest Asset Management portfolio manager Gashi Zengeni says.

Since the dawn of the millennium, the cumulative returns of global small companies have far outpaced those of large cap equities - but it's a story that's not told as often.

"Instead, the focus in terms of the narrative out there has been how the larger cap stocks have dominated markets, which leads to a lot of anchoring from a behavioural standpoint because the expectation is then that larger caps will continue to outperform going forward," Zengeni explains.

"Less people, however, are talking about the fact that a lot of those returns that we've seen from larger cap stocks are largely explained by multiple expansions. Whereas in contrast, you have small caps, where the main driver of those returns over the last 10 years has been earnings growth, which we know to be a more sustainable driver of long-term returns."