I recently learned it can take 20-40 years for an acorn to turn into a substantial oak tree. Not only does it take time, but it also needs the right soil, sunlight, water and room to grow. Give it those conditions and that tiny acorn can become a towering oak – offering environmental, economic and nutritional benefits to the wider world.
Patience is the key. Small-cap investing can be much the same: meaningful growth takes patience, but time can create lasting value for investors.
To say they have not had the conditions to grow in recent years would be an understatement. The small-cap acorn has been left in the shade thanks to the narrow focus on large-cap (particularly tech) companies, liquidity challenges, higher interest rates and a slower earnings recovery post-Covid.
Small-caps always seem to be in the eye of the storm when the world faces geopolitical challenges (of which there are many at present).
Figures from MSCI show global small-caps have lagged the broader global equity market by almost 4% a year over the past five years. But there are risks with backing the bigger players – notably when it comes to diversification.
Anyone tracking the MSCI World index has almost two-thirds (64%) invested in US companies – and around 24% in the Magnificent Seven. In fact, almost double (31% vs 16%) of the MSCI World index is in technology companies, when compared to the MSCI AC World Smaller Companies index.
Reasons for optimism
But could investor patience (for those who have stayed) finally be rewarded – as we are starting to see green shoots of growth?
Performance has started to turn, to a degree, with the MSCI World Small-Cap index slightly ahead of the MSCI World in the past 12 months. Figures from Janus Henderson reflect this point, as small-caps are expected to deliver stronger earnings growth over the next two years, helped by lower funding costs, lower taxation, AI demand and near-shoring.
Having seen only a limited post-Covid recovery, they estimate that global small-caps will see earnings growth of 33% and 17% respectively over the next two years, versus 20% and 14% for large-caps.
This comes at a time when the valuation differential remains stark. Since 2010, global small-caps have traded at an average premium of 9% versus large-caps; as recently as July 2026 they were trading at a 13.5% discount (on a forward price-to-earnings [P/E] basis).
Artemis SmartGARP Global Smaller Companies co-manager Raheel Altaf said his portfolio currently trades on a forward P/E of 9.4x, at the end of July, versus 17x for the MSCI AC World index.
He said: "This does not reflect any lack of growth in the stocks we own. At the end of July, analysts' earnings forecasts for our holdings were being revised up by 6.8% – a faster rate than the 4.2% uplift in their earnings projections for the wider global market.
"The portfolio offers a free cashflow yield of 7.3% versus 3.5% for the all-cap index. As shareholders, we receive some of that cash through a 3.5% dividend yield (as opposed to 1.7% for the MSCI AC World index) as well as through share buybacks."
Do inflationary moves and historical cycles point to faster growth from here?
With two wars still dominating the global geopolitical landscape, inflation is very much back on the agenda. Global Smaller Companies Trust manager Nish Patel believes this could favour global smaller-caps in the medium term, citing that many operate in more traditional sectors that benefit from rises in inflation.
Examples include industrials (20.1% in the MSCI ACWI Global Small-Cap index versus 9.6% the MSCI ACWI Large Cap index), materials (9.3% vs. 3.4%) and energy (5.3% vs. 4.8%).
Patel said we are now into a 14-year cycle of large-cap outperformance (the average of one market-cap outperforming another is 12 years) – adding that when this occurs it usually results in a major reversal in favour of the other. The last two occasions were the early 1970s (Nifty Fifty) and the late 1990s (dot-com).
He said: "Our analysis suggests these cycles tend to turn well when small-cap valuation discounts reach extremes relative to large-caps. This has occurred when the relative small-cap P/E ratios are around one standard deviation below their long-term average. That is where markets stand today.
"As in the 1970s, an oil shock may be altering the backdrop in ways that favour smaller, old-economy businesses."
Sentiment is key here. A market can begin recovering before investor sentiment has fully recovered. That means smaller companies could be experiencing improving share prices and earnings expectations while still attracting less enthusiasm than their larger counterparts. The picture also varies markedly across different regions.
Any potential recovery is not risk-free, but market leadership is broadening, and earnings expectations are improving for one of the few areas of the market with historically compelling market valuations. Financing costs, economic uncertainty and company-specific risks still matter – but these acorns may finally be getting the conditions they need to grow into tomorrow's oaks.
In addition to those mentioned, investors might consider the IFSL Marlborough Global SmallCap fund, which is sub-managed by Australian specialist Ausbil Investment Management.
Its philosophy is centred on "unrecognised growth" – identifying businesses where future earnings growth is not yet fully reflected in share prices. The final portfolio typically holds between 50 and 80 companies.
The managers combine their highest-conviction investment ideas with the broader regional and sector insights from the earlier stages in their investment process to create a diversified portfolio.
Darius McDermott is managing director of FundCalibre and Chelsea Financial Services. The views expressed above should not be taken as investment advice.