In this in-depth discussion, we sit down with Innova Asset Management explore the structural opportunity within global small- and mid-cap equities, and why the “mid-cap sweet spot” may represent one of the most attractive risk-adjusted entry points in today’s market.
Key topics
- The strategic rationale behind Innova’s allocation to the Fidelity Global Future Leaders Fund
- How SMID valuations compare to large caps amid elevated market concentration
- What allocators look for when selecting a specialist SMID manager
- Portfolio positioning across quality, valuation, momentum, and stocks in transition
- Navigating regional and sector divergence in a concentrated global equity market
- Balancing short-term market noise with long-term compounding discipline
Speakers
- Rafio Khan, Portfolio Manager & Investment Analyst, Innova Asset Management
- Maroun Younes, Co-Portfolio Manager, Fidelity Global Future Leaders Strategy, Fidelity International
- Hosted by Lukasz de Pourbaix, Head of Strategic Sales & Solutions, Fidelity International
This video was filmed on 11 February 2026
What is the overarching investment philosophy that underpins Innova Asset Management’s portfolios?
Rafio Khan: We start from a reference point of valuations because we know that valuations matter when it comes to future expected returns. It’s been proven repeatedly in various research.
We start with the whole valuation framework as we know that has predictive power over the future. We also believe that your asset class returns are driven by its underlying factors. In equities, they’re popularly known as growth, value, momentum, low volatility. Therefore, our philosophy is that we want to be harvesting factor premiums at the equity asset class level. This means we look at factor premiums across various regions and timeframes to be allocating our risk budget to where it makes sense the most.
We mostly utilise a quantitative approach to analysing those factor exposures then we apply a quantitative approach to analysing fund managers to make sure we’re getting adequate factor exposure.
What is your rationale for the allocation to global SMIDs?
Rafio Khan: We know in small‑caps there is a lot of valuation dispersion. There are some markets that are quite attractively valued and some are quite overvalued, meaning there is definitely an opportunity from a valuation standpoint.
The other point to note is that while that’s the case, you have to target exactly where you’re going to get your exposure from. In the small and mid‑cap space, we know there’s a lot of predictability in a manager’s factors, such as holding period, style drift, and process consistency. We know these have a lot of predictive ability over the future. We know active managers in the space also outperform more.
In the small‑cap space, on an asset class level, we know that if you go down the market cap spectrum and control for factors like quality and value, you can outperform. There are some premiums to be harvested there.
At the asset class level, there are some factor premiums. This combined with an active asset manager can provide those quality metrics that improve your overall portfolio.
Global SMIDs are a very broad universe. Maroun, you’ve been managing the Fidelity Global Future Leaders Fund for over five years. From your perspective, why do you think it’s a ‘sweet spot’ from a risk‑adjusted perspective?
Maroun Younes: As you go down the cap spectrum, you can harvest additional returns i.e., when you move from mega and large‑caps down into the small and mid‑cap segment, you can, over the long term, pick up additional returns.
Obviously, the last 10 years or so has been a bit of an anomaly. So, you get that additional return premium, but then if you go too far down the cap spectrum into small and micro‑caps, you get a lot of issues including illiquidity. You can get issues volatility and increased standard deviation. The drawdowns become a lot larger and a lot more magnified.
For us, that mid‑cap segment really is the ‘sweet spot’ because you can harvest additional return without dialling up the risk, volatility, drawdown metrics, and illiquidity metrics of the entire portfolio.
Investors have been asking, “are markets expensive?” Obviously, in the large‑cap part of the market, we have seen certain parts run strongly in terms of performance. If you look at valuation from a relative perspective within mid‑caps, how do you see valuations?
Maroun Younes: It’s funny when you hear comments like “markets are quite expensive”. What market are you talking about? U.S. is quite expensive. Large and mega‑cap is quite expensive.
If you looked at something like the MSCI World or the S&P 500, they would both be, relative to their own history, within the top decile in terms of high valuation levels.
If you looked at the MSCI World Mid‑Cap, which is our universe, that’s trading in line with its 30‑year history. For us, in the pond that we’re fishing in, we’re not seeing anywhere near the same level of valuation extremes compared to what other people are seeing.
What are the key attributes that you’re looking for in a fund manager?
Rafio Khan: On a whole when we complete manager analysis, what we really like to test is does the manager achieve what it purports to achieve, and how consistently/persistently do they do it?
In the case of small mid‑caps, the thesis we’re testing is: does the manager get us that factor exposure to small mid‑caps? Is there a size bias? Is there an alpha component with that? Is that alpha coming with that factor exposure or is it just coming from market beta? Are they extracting factor‑adjusted alpha?
Specifically with the Fidelity Global Future Leaders Fund, what we’ve seen is that the portfolio managers have been consistently quite successful in doing so. For our portfolios, what it also gave us was quality metrics away from the benchmark. It allowed us to lower the market cap of our portfolio going into small mid‑caps but also improved our quality metrics because the managers are looking for those companies.
As part of your process, you are looking at a variety of different factors including quality, valuation, momentum, etc. How do those various factors work within the context of the portfolio and how is the portfolio positioned at the moment across those various factors?
Maroun Younes: We look at four buckets: quality, value, transition, momentum. The idea is that by having a slightly more blended approach, you get a smoother ride over time. Having said that, quality is by far the largest component. From a strategic asset allocation perspective, it’s typically around 40% of the portfolio. That’s been proven throughout internal back‑testing that works overtime.
At present, we have a small bias towards quality. We’ve seen quality over the last nine to 12-months, have a really tough time. It’s underperformed quite materially. It doesn’t happen all that often historically, but it does happen throughout certain periods in time. As we’ve seen some of these high‑quality companies trade lower in terms of valuation levels, where we have confidence in their long‑term fundamental outlook for those individual businesses, we’ve been incrementally leaning more and more into that.
Because, from our perspective, we’re now getting an opportunity to buy high‑quality businesses that give us confidence in their long‑term outlook but we’re able to buy now at cheaper prices than we were 12-18 months ago. For us, we’ve been incrementally leaning increasingly into that. So, we have a small active tilt right now towards quality, above that 40% threshold, but we’re always looking to adjust depending on where we see opportunities really.
If you look at the market more broadly, there has been a lot of dispersion generally, whether it’s between factors like quality, value, growth, or whether it’s between market caps, large‑cap versus smalls and mids, or sectors, AI versus non‑AI. How are you viewing this market environment, and do you think this theme of divergence is going to continue?
Rafio Khan: I think it’ll just keep continuing until it doesn’t. What we are seeing right now is that equity markets did well last year. Everything rallied, but what we were surprised about is that your junkier end of the spectrum did even better. If you’re focused on valuations and quality, it’s very hard to have that end of the market as an overweight position so you’re naturally going to miss out on that. But it also means everything did so well, and it’s very hard to find any pocket of opportunity globally, no matter what region you’re looking at.
If you compare European smalls to European value, growth with U.S. global, no matter how you slice and dice it, almost every market is operating at a pretty high valuation. So, it’s very hard to find those opportunities right now. Away from equities, even in credit, it’s very hard. If you’re a valuation‑driven investor, you’re stuck between a rock and a hard place finding those opportunities.
Patience is tested. Your thesis is tested all the time. We’ll probably continue to see this keep trending unless we get some sort of regime change or volatility that upends things, and then we’ll recalibrate.
So ultimately, yes, things are driven by a lot of trends right now: monetary policy, fiscal policy. There’s a lot of external factors, geopolitical factors, that are driving markets as well.
If you think about divergence specifically from a sector level, it seems like it has been a market where you’re either on the AI train or not. If you haven’t been on that train, it’s been a tough environment to perform in. How do you balance those two things in a market where it is so divergent?
Maroun Younes: The simple answer is we’re letting the stock picking do the heavy lifting. What we’re looking for is, by and large, high‑quality businesses where we’ve got a high degree of confidence in its outlook. We want a business that can grow revenues over time, grow earnings over time, good margins, really good returns, solid balance sheet, and good management teams.
You’re going to get periods where the prevailing sentiment shifts one way or the other, and they can shift quickly. So, for us, the anchor is really that long‑term perspective, looking at the business at the micro level, understanding does it have a durable competitive advantage, what separates it from its competitors, what the future outlook for the business is.
Then when you put them together into a portfolio, you ask whether you’re overly exposed to AI, or U.S. versus the rest of the world, or resources, and if you are, you adjust. That is the risk management layer at the portfolio level. Fundamentally, what we’re trying to do is find these good businesses, and if you are successful in that, over the long term, they’re going to do exceptionally well.
Markets have been volatile. What would your key advice be to investors in managing a holistic portfolio in this type of environment?
Rafio Khan: I think it goes back to sticking to your guns on value and focusing on long‑term metrics that have predictive ability over the long run. We know metrics like valuations, return on invested capital, and return on assets have predictive ability over the future.
Regardless of geopolitical tensions or regime changes, those factors are no excuse to deviate from your investment philosophy. Stick to your process, stick to your valuation framework, and follow what has worked over the long run.
