Better bet on small caps

Potential beneficiaries of the hyperscaler spend cycle

This year, small caps delivered one of their strongest first-half total returns in years, and the case for the category appears to be strengthening. Small caps combine a long track record of historic outperformance relative to large caps, with improving earnings sentiment and attractive relative valuations¹.

Their greater exposure to the Industrials segment relative to the large-cap index could provide an additional advantage as capital expenditures of the hyperscalers are transmitted to the real economy through spending on AI infrastructure, power and other necessities of the transformation.

This paper considers the case for small caps, and why with the current operating environment the category may warrant renewed attention, particularly as concentration risks rise in the large-cap space.

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The case for small caps

A long history of outperformance

Small caps combine a long track record of historic outperformance² relative to large caps and have delivered one of their strongest first-half total returns in years.

Exposure to the AI investment cycle

As hyperscaler capital expenditure is transmitted to the real economy, small caps may benefit from exposure to infrastructure, power and industrial companies supporting the AI transformation.

Diversification at attractive valuations

Adding small caps, at attractive relative valuations, may help diversify portfolios away from increasingly concentrated large-cap indices while broadening opportunity sets.

Video

Small caps: capturing opportunity in the real economy

As large-cap indices become increasingly concentrated, global small caps may deserve renewed attention. In this video, Jan Willem Berghuis explains the case for the asset class, from diversification and valuations to opportunities linked to the AI investment cycle.

As asset allocators tackle large-cap index concentration risks, we wish to bring forward the case of diversifying into the AI transformation's value chain, rather than the technology itself.

- Jan Willem Berghuis, Head of Small Caps

White paper

Better bet on small caps

Explore the case for small caps in today's market environment. From the real-economy beneficiaries of AI investment to attractive relative valuations and diversification from concentrated large-cap indices, our latest research examines why the asset class may deserve renewed attention.

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There’s a saying in Dutch, Kom verder, it means many things and it’s our business philosophy. It captures the way we work with clients but also the way we steer our investee companies to deliver shareholder value through active engagement.

Capital at risk. The value of investments and the income from them can fall as well as rise, and investors may not get back the amount originally invested. Past performance provides no guarantee for the future.

¹: Outperformance is calculated as the five-year rolling average on a monthly basis of small caps vs. large caps.

²: Based on historic data which is based on past performance that may not be representative of future performance.