Despite gold dominating headlines in recent weeks, small caps both globally and in Australia have demonstrated strong performance and diversification benefits, with recent launches in the space including Ausbil’s Global SmallCap Fund Active ETF (GSCF) ASX listing this week.
A new research paper from Royce Investment Partners, Global small-caps: A world of overlooked opportunities, has called global small caps the “Goldilocks” asset class, arguing that while they are often overlooked, small companies can offer strong absolute and relative returns with manageable risk.
Looking at historical performance, the report noted that global small caps have delivered superior and more consistent returns than large-cap stocks over time, noting an average of 8.4 per cent in annualised returns over 10-year periods when compared to 6.8 per cent for global large caps.
Contrary to popular opinion, it found that global small caps also showed higher risk-adjusted returns than that of large caps.
Additionally, the report stated that the asset class was more resilient following downturns, posting an average 56.9 per cent rebound within a year after market troughs, compared to 44.4 per cent for large caps.
Challenging the view that emerging market equities offer investors a high-beta play, it reported that global small caps not only outperformed emerging markets in 69 per cent of five-year and 64 per cent of 10-year rolling periods but also did so with significantly lower volatility.
“Emerging markets come with a far higher risk profile,” it said. “Global small caps offer a comparable growth opportunity at a lower cost to the risk budget.”
Increasing popularity
According to DNR Capital portfolio manager Sam Twidale, there is currently growing momentum in the small-cap sector, with compelling opportunities across a range of industries.
“The standout story in recent months has been the strength of small caps,” Twidale said. “We’ve seen some excellent bottom-up opportunities emerging, with the Small Ordinaries Index up over 8 per cent, significantly outperforming the large-cap index.”
In particular, Twidale pointed to structural growth companies, such as Zip and Life360, which have recently delivered particularly strong results.
As the underperformance gap between small and large caps is beginning to close, Twidale said DNR expects to see continued interest in the space.
Closer to home, Datt Capital also pointed to the growing momentum in Australian small-cap investing.
The fund manager highlighted September’s market environment as particularly supportive of the asset class, with the Small Ordinaries Accumulation Index rising 3.44 per cent, while the ASX 200 fell 1.4 per cent.
According to the firm, this positive performance has led some market analysts to suggest that the period signals the start of a multi-year recovery for smaller companies, after several years of lagging behind.
Additionally, the firm pointed to the recent success of its Datt Small Companies Fund, which invests in small and micro-cap Australian companies. In September, the fund returned 10.21 per cent in net gains, bringing its FY2025–26 year-to-date return to 26.42 per cent.
September was also a strong month for Australian small cap exchange-traded funds (ETFs), with VanEck Asia-Pacific CEO and MD Arian Neiron noting the growth was “fuelled by junior resources”.
According to VanEck data, while the asset class still sat behind gold, emerging market equities, Japanese equities and bitcoin in mainstream returns, it performed far better than Australian equities.
Royce concluded its report by asserting that investors can no longer afford to disregard this market segment.
“Global small caps offer strong absolute and relative performance, lower-than-expected volatility, and resilience across economic environments – all compelling reasons for inclusion in diversified portfolios.”
