Global small-caps combine an attractive long-term track record with unusually low valuations. Raj Manon, Head of Investments – Multi-Asset at Marlborough, explains why the asset class deserves renewed attention from diversified investors.
There is a corner of the equity market which contains nearly 4,000 companies and spans virtually every sector of the global economy. These stocks have outperformed large-caps by hundreds of percentage points over the past 25 years and are currently trading at one of the deepest valuation discounts to large-caps in a generation.
Step forward global small-caps, which we believe offer an interesting long-term opportunity as part of a broadly diversified multi-asset portfolio.
The MSCI World Small Cap Index contains 3,829 stocks with a combined market capitalisation of almost $10 trillion. That is nearly three times as many companies as the MSCI World Index, which is comprised of 1,308 large-cap and mid-cap stocks with a combined market cap of more than $90 trillion.
By any measure, global small-caps offer a large and diverse investment universe. In our view, many of these companies are also likely to offer robust growth potential.
On the flip side, it is worth remembering that small-caps can be less liquid, more volatile and more exposed to changes in the economic backdrop and fluctuations in interest rates. Nonetheless we see potential in global small-caps and have taken a toehold position in our portfolios, which we are likely to build on.
Outperformance over 25 years
To explain the opportunity we see in more detail, let us start with long-term performance data.
From December 2000 to April 2026 the MSCI World Small Cap Index delivered a cumulative total return of 838%. Over the same period the MSCI World Large Cap Index returned 484% and the MSCI World Mid Cap Index 565%[1].
That means global small-caps delivered around 354 percentage points of additional cumulative return relative to large-caps over this time.
It is also worth noting that the risk-adjusted returns look attractive. The Sharpe ratio for global small-caps over this period was 0.49, compared to 0.43 for mid-caps and 0.42 for large-caps[2].
Small-caps cheap on two key valuations
Now let us turn to valuations, which is where the long-term performance track record meets the near-term opportunity. Two commonly used industry measures tell the same story – that global small-caps look cheap relative to historical norms.
On a price-to-earnings basis, small-caps commanded a premium to large-caps for most of the period between 2005 and 2019. Investors were willing to pay more for small-cap earnings than large-cap earnings, which was a rational reflection of their superior long-term growth potential.
However, since mid-2019 that relationship has been inverted. The MSCI World Small Cap Index is now on a meaningful P/E discount to the MSCI World[3]. This discount is currently one the largest seen in two decades of data.
The price-to-sales picture tells a similar story. Small-caps have historically traded at a discount to large-caps, with the price-to-sales ratio of the MSCI World Small Cap relative to the MSCI World averaging around 0.68 over the long term. But this discount has widened dramatically since 2019, falling to approximately 0.46 by mid-2025 – roughly 30% below its historical norm[4].
We do not believe this de-rating is the result of small-cap company fundamentals deteriorating. Rather, it is the consequence of a decade of capital flowing into large-cap stocks, concentrating money into an ever-smaller pool of mega-cap names and leaving the rest of the equity universe proportionally cheaper every year. The compression has been slow, consistent and largely unnoticed – and it has created a gap between price and potential long-term value which is now hard to ignore.
Why the gap persists
The under-researched nature of global small-caps may help to explain why this difference in pricing has persisted. Global small-caps with a market capitalisation of between $500 million and $2 billion dollars are covered by an average of just four analysts, while global large-caps with a market capitalisation of more than $250 billion dollars are covered by an average of 28 analysts[5].
This sevenfold gap means the market is structurally less efficient at valuing the small-cap universe. We believe this provides the potential for positive earnings surprises – the events that typically move share prices most decisively – to be more frequent and have a greater impact.
Potential catalysts
In our view, what years of capital flows have compressed, a rotation could re-rate. Mean reversion even partway back towards long-term averages on either valuation metric would represent a substantial tailwind – entirely separate from any improvement in underlying earnings.
Add a global industrial capex cycle and structural tailwinds from reshoring, investment in electrical power grids and European fiscal expansion and the re-rating case becomes considerably more powerful.
There is also a portfolio construction argument worth making. With the top 100 stocks accounting for over half of the MSCI World Index weight, large-cap exposure has never been more concentrated. Global small-caps, spread across nearly 4,000 companies, offer genuine breadth and diversification that an increasingly top-heavy large-cap index cannot provide.
In this context, we believe global small-caps more than deserve a place in diversified multi-asset portfolios.
Raj Manon is Head of Investments – Multi-Asset at Marlborough.
[1] Source: Ausbil Investment Management, FactSet, MSCI. Data as at 30/04/26
[2] Sharpe Ratio calculated from monthly returns, risk-free rate used was ICE Libor 1M
[3] Source: L&G, Bloomberg, 29/05/26
[4] Source: Ausbil, Bloomberg, 30/06/25
[5] Source: Ausbil and FactSet estimates
