Unlocking Small & Mid-Cap Potential

Long outperformed by large-cap stocks, small and mid-caps (SMID) have recently shown signs of a trend reversal, which could enable them to make up lost ground. Current market conditions present a turning point for investors to look at a segment where high-conviction active managers have historically delivered alpha.

With the Magnificent Seven driving equity markets over the past 18 months, it’s hard to think of a time when they haven’t dominated performance. But 11 July 2024 proved an interesting day: we saw an 8% outperformance by the Russell 2000 Index, representing US small & mid-cap stocks, versus those seven tech giants. With large-cap, tech-focused names having run the show for so long, did this summer data outlier mark a turning point for small and mid-caps?

Why SMID?

• Small & mid-cap stocks are sensitive to the economic cycle, which is expected to move from ‘soft landing’ to ‘early-cycle recovery’.
• Ongoing disinflation and falling interest rates should support small caps, whose debt and borrowing costs are, on average, higher than those of large caps.
• Small & mid-caps have catch-up potential in terms of valuations after three years of underperformance relative to large caps.
• Over the short term, small & mid-caps offer diversification from tech-heavy portfolios.
• Over the long term, you could expect an annual excess return from small and mid-caps of 1 percentage point over large caps in Europe and the US.

With the fundamentals stacking up for SMID, the question becomes how to allocate.

At Mirabaud Asset Management, we offer a selection of active, high conviction investment strategies designed to unlock the investment potential of SMIDs.

To read our insights piece on the macro view on SMIDs, click here.