The modern story of globalisation began with efforts to repair the ruined building blocks of trade in the wake of World War II. The Marshall Plan set the tone, with the establishment of the United Nations, the International Monetary Fund, the World Bank and the World Trade Organization all serving to accelerate the process.
Today, by stark contrast, globalisation is no longer virtually unopposed. Donald Trump’s first presidency might have been the key inflection point. The trend now indicates a shift back to bilateral trade relations.
So where does all this leave the managers of global equities portfolios – and, crucially, their clients? Does an investment philosophy that ignores borders have less appeal in an era of conspicuous deglobalisation?
We would argue that the case for global equities has been strengthened, not weakened, by recent and ongoing events.
We say this for a simple reason: it’s still necessary to be different to the market in order to beat the market. In our opinion, identifying the brightest prospects from right across the equities universe remains the best way of accomplishing this goal.
This brings us to the long-underappreciated sphere of smaller companies. These have a record of repeatedly outperforming their larger counterparts, yet they consistently generate little or no attention among the wider investment community.
With 23 developed markets and over 4,000 stocks in the MSCI World Small Cap index, knowing where to look has always been a key challenge. Today, amid increasing trade complexity, this skill may offer more potential for finding unrecognised growth opportunities and alpha.
In search of untapped potential
For some investors, not least during the past two or three years, exposure to global equities has come to revolve almost exclusively around a single country and a single theme. Specifically, it has centred on US technology stocks.
It’s hard to deny the attraction of trillion-dollar corporations whose position at the vanguard of radical, tech-driven disruption is ostensibly unshakeable. Collectively, the ‘Magnificent Seven’ of Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla had another bumper year in 2024, with only Microsoft underperforming the S&P 500 Index as a whole.
Yet putting all your eggs in one basket is seldom a great idea. Index-tracking funds in particular are heavily concentrated around these holdings, whose valuations – like those of numerous mega-cap and large-cap businesses – continue to look relatively stretched.
The picture at the other end of the market-capitalisation scale stands in marked opposition. In our view, many smaller companies are notably undervalued – and not because they don’t have what it takes to make investors sit up and take notice.
The problem stems instead from a dearth of coverage. Most investment analysts pay no heed whatsoever to these stocks, preferring to endlessly pore over the established behemoths that capture headlines whenever their share prices move one way or another.
According to Marlborough’s own research, while a typical large-cap name might be covered by 20 to 50 analysts globally, a small-cap business in Europe is likely to be ‘eyeballed’ by an average of just four analysts – and a micro-crap is likely to stir the interest of only one. As a result, most investors are unlikely to hear a thing about the 4,000 stocks that comprise our investment universe – a major lost opportunity.
This is where the experience and insight of investment teams with a dedicated small-cap focus can deliver an edge. It’s also why direct engagement can be vital in determining which companies genuinely warrant a place in portfolios that are diversified not just along geographic lines but in terms of size, sector, market capitalisation and other factors.
Long-term growth in the face of uncertainty
Especially against a volatile backdrop, it’s often tempting to follow the herd. Sticking with popular trends and big names can frequently appear the safest and most sensible option.
It’s vital to stress that there are occasions when such an approach works perfectly well. On the whole, though, we feel there’s merit in thinking more imaginatively, venturing further afield and digging deeper – which is why smaller companies, ranging from micro-caps to medium-sized businesses, represent around 80% of our holdings.
Looking ahead, it’s reasonable to suppose deglobalisation may bring more losers than winners. For example, businesses with multinational supply chains could suffer in an environment of tit-for-tat tariffs and mounting costs.
‘Easy hits’ might therefore be harder to come by. This is why it could pay to explore the full extent of the market capitalisation spectrum as an ever-shifting geopolitical and geoeconomic landscape compels companies to adapt in their quest for long-term growth.
Some smaller businesses might benefit from a predominantly domestic outlook as markets become more fragmented and inward-looking, as we are seeing in the US at the moment.
Others may be able to escape the turmoil of trade wars by relying on localised production. Company-by-company judgements, not sweeping generalisations, are most likely to separate the wheat from the chaff.
Ultimately, every investor appreciates that uncertainty leads to valuation anomalies and that these, in turn, give rise to opportunities. Since we’re now living in an era in which uncertainty is broadly acknowledged as a ‘new normal’, there should be plenty of both – if you search in the right places.
The notion that ‘small is beautiful’ is unavoidably clichéd. But investors may find it rings truer than ever as the interconnectedness that was once taken for granted erodes at pace and small companies with big potential emerge from the noise.
Tobias Bucks and Simon Wood co-manage the Marlborough Global SmallCap fund. The views expressed above should not be taken as investment advice.