Momentum is emerging as a powerful tool for investors seeking alpha in global small-cap equities – a market where inefficiencies remain pronounced and opportunities are often overlooked.
While much of the investment world’s attention remains focused on mega-cap technology stocks and dominant market themes, the global small-cap universe continues to offer solid ground for systematic strategies that can identify mispricing and shifting fundamentals.
Momentum investing is based on a simple but well-documented principle: stocks that have performed strongly tend to continue outperforming in the near term, while underperformers often lag further. Rather than relying on forecasts or valuation assumptions, momentum strategies follow observable price trends over defined periods.
At its core, momentum reflects behavioural patterns in financial markets. Investors can be slow to react to new information, whether it is an earnings upgrade, a change in competitive positioning or a structural shift in demand. As a result, price adjustments can occur gradually rather than instantaneously, creating trends that can be systematically captured. This behavioural underpinning helps explain why momentum has persisted across markets, asset classes and time periods.
The investment factor was first formally documented in a landmark 1993 study by academics Narasimhan Jegadeesh and Sheridan Titman, which showed that buying recent winners and selling recent losers generated consistent excess returns over three- to 12-month holding periods.
At the Informed Momentum Company (IMC), this research underpins a systematic investment process known as Informed Momentum®, which combines momentum signals with stock selection, risk management and disciplined implementation.
IMC’s analysis examined momentum across multiple equity universes, including US large and small caps, global large and mid-caps, global small caps, emerging market equities and non-US markets, over the 20-year period from 2005 to 2025. The research found momentum to be one of the most persistent and reliable drivers of excess returns across regions and market capitalisations.
Contrary to the perception that momentum is inherently riskier than other styles, IMC’s research suggests otherwise.
In a separate paper, ‘Risky Business: Value versus Momentum’, the firm analysed nearly a century of data using multiple risk measures and found that momentum strategies exhibited lower realised risk than value strategies over time, while delivering meaningfully higher returns.
These findings challenge the common belief that momentum is simply a high-volatility, trend-chasing strategy, prone to sharp reversals. When implemented with appropriate risk controls and diversification, momentum can offer an attractive risk-adjusted return profile relative to traditional factor strategies.
Further, looking across 32 equity markets segmented by geography and market size, the effect was particularly pronounced in global small-cap markets. Particularly in emerging market small caps, momentum generated almost 10 per cent annualised excess returns.
Other small cap segments, including Asia Pacific ex-Japan, global ex-US, global, and US micro cap, also showed momentum as quite strong, outperforming value, growth and quality factors.
This outperformance is notable given the structural challenges often associated with small-cap investing, including higher volatility and lower liquidity. Momentum is well suited to navigating these challenges by focusing on stocks where improving fundamentals are already being recognised by the market. In doing so, it can help investors avoid value traps and structurally challenged businesses that may look inexpensive but continue to underperform.
According to IMC, the relative inefficiency of small-cap markets helps explain the result. With less analyst coverage and lower investor attention, improving fundamentals and shifts in company prospects are often reflected in prices more gradually.
In contrast to large-cap stocks, which are typically followed by many analysts and closely monitored by institutional investors, small-cap companies often operate relatively under the radar. This creates an environment where information is available more slowly and where price trends can persist for longer periods. Momentum strategies are positioned to exploit these dynamics by systematically identifying companies gaining traction before they become widely recognised.
This approach is reflected in the positioning of the IMC Global Small Companies Fund, which returned 6.87 per cent net of fees in October, outperforming the MSCI ACWI ex-Australia Small Cap Index by 5.16 percentage points. The portfolio currently has higher weightings to industrials and information technology, where momentum has been supported by continued investment in artificial intelligence and the buildout of data-centre infrastructure.
Smaller technology companies have been key contributors. US-based SanDisk, a leading manufacturer of NAND flash memory which is foundational to the AI buildout, was among the fund’s largest positions in October.
SanDisk’s performance illustrates how momentum can capture the compounding effects of sustained earnings growth and positive investor sentiment. As demand for data-centre capacity has increased, companies providing enabling technologies have seen both revenue growth and valuation re-ratings. Momentum strategies are designed to remain invested in such stocks while positive trends persist, rather than attempting to time an exit based on a valuation judgement.
Momentum in technology and semiconductors also supported strong market performance in Taiwan and South Korea during October, while China lagged. Other companies demonstrating strong momentum include Kratos, a specialist in unmanned aerial vehicles, and Bloom Energy, which supplies alternative energy solutions to data-centre operators.
These examples highlight the breadth of opportunity within the global small-cap universe. From defence technology and biotechnology to advanced manufacturing and digital infrastructure, many emerging growth stories are developing outside traditional large-cap benchmarks. Momentum offers a systematic way to gain exposure to these trends while maintaining diversification across geographies, sectors and business models.
Momentum remains one of the most robust and widely documented anomalies in equity markets. In global small caps, where price trends can be slower to attract attention, it may offer investors a particularly compelling edge.
By Travis Prentice, CIO and portfolio manager, Informed Momentum Company
