Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 518

The case for a global small-mid cap portfolio

Global asset owners have historically allocated capital to two distinct equity asset classes: global large cap (as represented by the MSCI All Country World Index or the MSCI All Country World Large Cap Index) and/or global small cap (as represented by the MSCI Global Small Cap Index). As a long-tenured, seasoned active global small/mid- cap managers, we are often asked, “Why the global small/mid-cap asset class instead of the more common small-cap approach?”

Over the past two decades (2003–2022), both global small-cap stocks and global small/mid-caps have outperformed their large-cap counterparts. At the same time, while global small-caps have slightly outperformed the small/mid-cap asset class, we believe that a global small/mid-cap approach may offer a number of potential benefits and features for asset owners not readily apparent when simply looking at historical return metrics.

Potential benefits of a small/mid-cap approach

Although past performance is no guarantee of future results, similar historical performance results for time period shown above across asset classes, what might be the potential advantages of utilizing a global small/mid-cap strategy vs. a small-cap only approach? Here are a few.

Improved liquidity

The addition of mid-cap stocks to the investable universe can potentially allow for exposure to more liquid names without paying a 'liquidity premium' for this added benefit1. In fact, as of 31 December 2022, the MSCI ACWI Small Mid Cap Index traded at a discount to the MSCI ACWI Small Cap Index while offering a larger percentage of stocks with greater than $10M USD in average daily trading volume, as shown in Exhibit 2.

Date

MSCI AC World Small Mid - P/E - NTM

MSCI AC World Small Cap - P/E - NTM

12/31/22

13.80

14.04

Expanded universe

A global small/mid-cap approach also meaningfully increases the opportunity set for active management. With over 7,500 companies in the MSCI AC World Small Mid Cap Index, making it significantly larger than the global small-cap index that consists of approximately 6,000 names, the associated universe provides abundant opportunity to attempt to uncover unique businesses trading at compelling valuations, as shown in Exhibit 3.

Less risk, greater flexibility

Midsize companies have tended to be early or midway through a growth phase of a new product or market, or dominant players in smaller but very attractive end market. As such, we have tended to find less risk in these often more mature businesses than in new and emerging companies. Plus, midsize companies are still small enough to have years of growth potential ahead of them. Additionally, the ability to hold onto solid companies in the portfolio allows for a longer investment time horizon and the potential for active management to take advantage of short-term market inefficiencies.

Highly inefficient asset class

From a research coverage perspective, the global small/mid-cap universe may offer meaningfully lower sell-side coverage than large-cap stocks (both globally and in the United States) and the US universe of small/mid cap stocks, as well as modestly less coverage relative to global small-caps, as shown in Exhibit 4. This lack of coverage in the small/mid-cap space may allow for increased inefficiencies, which in turn create opportunities for skilled active managers to offer differentiated portfolios, identify new investment ideas and the potential to generate alpha2.

Endnotes

1 'Liquidity premium', in our view, refers to the fact that stocks that offer more liquidity in the marketplace often trade at a higher multiple than stocks with less liquidity. All else being equal, investors tend to value the ability to trade an asset.

2 MFS believes that skilled active managers are those who demonstrate conviction through high active share and long-holding periods, manage risk thoughtfully and bring together different perspectives.

 

Nicholas J. Paul, CFA is an Institutional Portfolio Manager at MFS Investment Management. This article is for general informational purposes only and should not be considered investment advice or a recommendation to invest in any security or to adopt any investment strategy. Comments, opinions and analysis are rendered as of the date given and may change without notice due to market conditions and other factors. This article is issued in Australia by MFS International Australia Pty Ltd (ABN 68 607 579 537, AFSL 485343), a sponsor of Firstlinks.

For more articles and papers from MFS, please click here.

Unless otherwise indicated, logos and product and service names are trademarks of MFS® and its affiliates and may be registered in certain countries.

 

  •   19 July 2023
  • 1
  •      
  •   

RELATED ARTICLES

The cheapest small cap valuations in decades

Now is the time to buy quality stocks

Why Aussie small caps are consistent underperformers

banner

Most viewed in recent weeks

3 ways to fix Australia’s affordability crisis

Our cost-of-living pressures go beyond the RBA: surging house prices, excessive migration, and expanding government programs, including the NDIS, are fuelling inflation, demanding bold, structural solutions.

Making sense of record high markets as the world catches fire

The post-World War Two economic system is unravelling, leading to huge shifts in currency, bond and commodity markets, yet stocks seem oblivious to the chaos. This looks to history as a guide for what’s next.

Is there a better way to reform the CGT discount?

The capital gains tax discount is under review, but debate should go beyond its size. Its original purpose, design flaws and distortions suggest Australia could adopt a better, more targeted approach.

How cutting the CGT discount could help rebalance housing market

A more rational taxation system that supports home ownership but discourages asset speculation could provide greater financial support to first home buyers.

Welcome to Firstlinks Edition 648 with weekend update

This is my last edition as Editor of Firstlinks. I’m moving onto a new role though the newsletter will remain in good hands until my permanent replacement is found.

  • 5 February 2026

It’s economic reality, not fear-based momentum, driving gold higher

Most commentary on gold's recent record highs focus on it being the product of fear or speculative momentum. That's ignoring the deeper structural drivers at play. 

Latest Updates

Superannuation

Super is catching up, but ageing is a triple-threat

An ageing Australia is shifting the superannuation system’s focus from accumulation to the lifecycle of retirement. While these pressures have been anticipated for decades, they are now converging at scale and driving widespread industry change.

Investment strategies

Corporate earnings show resilience against volatility but risks remain

Evidence for a strong reporting season had been piling up for months and validated an upgrade cycle already underway. However, risks remain from policy uncertainty.

Superannuation

Want your loved ones to inherit your super? You can’t afford to skip this one step

One in five Australians die before retirement and most have not set up their super properly so their loved ones can benefit from all their hard work and savings. 

SMSF strategies

Sixteen steps in a typical SMSF borrowing

Getting a mortgage is never an easy process but when an investment property is purchased in a SMSF the complexity increases significantly. Read this before taking the plunge. 

Planning

Do HNWI get better advice?

Good advisers lead to more diversification, lower turnover and less home bias. However, studies show the average adviser may not be adding much value to clients. 

Strategy

AFL Final Ten with wildcard edit 'unlevels' the field

When the new AFL season kicks off a wild-card will be added to the finals. Is this new formula fair and how does it impact the odds of winning the premiership.

Planning

Love them or hate them, it's worth understanding annuities

Investors have historically balked at exchanging a lump sum for a future steam of income. Breaking down the financial and emotional considerations of purchasing an annuity.        

Sponsors

Alliances

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.