Portfolio Manager Maroun Younes explains why global small- and mid-cap stocks offer smart, diversified exposure across sectors and geographies featuring profitable, well-established businesses, not just speculative startups.
Why small- and mid-caps deserve a spot in your portfolio
Investors should consider a dedicated allocation to small- to mid-caps for a number of different reasons.
Firstly, historically it has outperformed the large-cap space. Now I understand that the last five or so years have been dominated more by large-caps, but if you look back in time, historically, small- to mid-caps have delivered higher returns than large-caps. They do come with a bit volatility but you're more than compensated for in terms of additional return. So, from a risk adjusted return perspective, you get a superior outcome by investing in small- and mid-cap stocks.
Secondly, there is a lack of diversification in the large-cap segment.
When we talk about small- and mid-caps, we're talking about well established, vastly profitable businesses.
If you look at the large cap universe today, it is heavily concentrated, predominantly in a bunch of US names in the technology sector. When you invest in that space, you are effectively taking a much larger exposure to US technology names than in our segment of the universe.
The small- to mid-cap universe is more diversified both across sectors as well as across individual stocks. For example, today, the top of the mid-cap universe is about US$60 billion, which equates to roughly AU$100 billion.
So, when we talk about small- and mid-caps, we're not talking about speculative businesses, loss making businesses, very tiny businesses. By and large, we are talking about well established businesses, vastly profitable, which have been around for, in some cases, many generations.
The expanding universe of small- and mid-cap opportunities
The small- to mid-cap universe is dynamic.
If I go back five years ago when we first launched the Fidelity Future Leaders Fund, the top end of the mid-cap universe was roughly about US$28 - $30 billion dollars. That is now US$60 billion. So, you've seen a huge inflation in asset prices. The mid-cap universe goes down roughly all the way to about US$1billion.
Five-years ago, small-caps would top out at about US$5 billion. Today, it tops out about US$25 billion, almost AU$40 billion. So there too is the US$1 - $25 billion which is both part of small- and mid-caps.
The beauty of the Fidelity Future Leaders Fund is that we invest across that spectrum. So, as it stands today, the portfolio has roughly half the names in what would be considered small-caps, below US$25 billion in market cap, and roughly half purely in the mid-cap space.
