After a long time out of favour, global smaller companies have started to perform well again. Choosing a fund to capitalise on this trend isn’t straightforward, however.
The MSCI World Small Cap index returned just 10 per cent in the three years to the start of 2025 – worse than all major indices other than emerging markets, as inflation and higher interest rates hit home. Absolute performance improved in 2024 and at the start of last year, but it wasn’t until the market bottom following President Donald Trump’s so-called “liberation day” that global small caps started to outperform.
The improved returns have gone hand in hand with a better time for the US small-cap index, the Russell 2000. As with the mainstream global index, small-cap benchmarks are dominated by US stocks: the MSCI small-cap index holds 60 per cent of assets in the region. This is 10 percentage points lower than the MSCI World’s own weighting, but still easily enough for what happens in the US to define how global small caps perform.