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.

 

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

Australian house prices close in on world record

Sydney is set to become the world’s most expensive city for housing over the next 12 months, a new report shows. Our other major cities aren’t far behind unless there are major changes to improve housing affordability.

The case for the $3 million super tax

The Government's proposed tax has copped a lot of flack though I think it's a reasonable approach to improve the long-term sustainability of superannuation and the retirement income system. Here’s why.

Tariffs are a smokescreen to Trump's real endgame

Behind market volatility and tariff threats lies a deeper strategy. Trump’s real goal isn’t trade reform but managing America's massive debts, preserving bond market confidence, and preparing for potential QE.

The super tax and the defined benefits scandal

Australia's superannuation inequities date back to poor decisions made by Parliament two decades ago. If super for the wealthy needs resetting, so too does the defined benefits schemes for our public servants.

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Getting rich vs staying rich

Strategies to get rich versus stay rich are markedly different. Here is a look at the five main ways to get rich, including through work, business, investing and luck, as well as those that preserve wealth.

Latest Updates

SMSF strategies

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Superannuation

The huge cost of super tax concessions

The current net annual cost of superannuation tax subsidies is around $40 billion, growing to more than $110 billion by 2060. These subsidies have always been bad policy, representing a waste of taxpayers' money.

Planning

How to avoid inheritance fights

Inspired by the papal conclave, this explores how families can avoid post-death drama through honest conversations, better planning, and trial runs - so there are no surprises when it really matters.

Superannuation

Super contribution splitting

Super contribution splitting allows couples to divide before-tax contributions to super between spouses, maximizing savings. It’s not for everyone, but in the right circumstances, it can be a smart strategy worth exploring.

Economy

Trump vs Powell: Who will blink first?

The US economy faces an unprecedented clash in leadership styles, but the President and Fed Chair could both take a lesson from the other. Not least because the fiscal and monetary authorities need to work together.

Gold

Credit cuts, rising risks, and the case for gold

Shares trade at steep valuations despite higher risks of a recession. Amid doubts that a 60/40 portfolio can still provide enough protection through times of market stress, gold's record shines bright.

Investment strategies

Buffett acolyte warns passive investors of mediocre future returns

While Chris Bloomstan doesn't have the track record of his hero, it's impressive nonetheless. And he's recently warned that today has uncanny resemblances to the 1990s tech bubble and US returns are likely to be disappointing.

Sponsors

Alliances

© 2025 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.