The Case for Small Caps: Why They Still Matter in Today’s Market

In a world where blockbuster large-company stocks seem to dominate the headlines and deliver the best returns, the question arises: why bother with small caps? At the recent Morningstar Investment Conference, three managers of stock funds specializing in small-company stocks made a compelling case for the continued relevance of small caps in the investing landscape.

Despite the current shine coming off of some of the Magnificent Seven large-cap stocks like Apple and Tesla, large caps continue to outperform small caps. However, the panelists at the conference pointed to opportunities in sectors like industrials and consumer discretionary, as well as across the globe in countries like Japan and the United Kingdom.

Morgen Peck of Fidelity Investments emphasized the importance of focusing on companies that can compete and find a small niche, particularly in markets too small for big companies to care about. Don San Jose of JP Morgan Asset Management echoed the attractiveness of industrials and other cyclicals, while Keith Lee of Brown Capital Management highlighted the importance of growth-oriented companies with less than $500 million in annual operating revenue.

As artificial intelligence and machine learning continue to drive mega-cap stocks higher, the panelists expressed a focus on how firms might utilize AI to improve their businesses rather than directly benefit from AI demand. They also emphasized the importance of consistency in investing discipline and not letting market trends like meme stocks sway their investment decisions.

Challenges facing small-cap strategies, such as companies staying private longer and higher interest rates, were also acknowledged by the managers. However, they remain optimistic about the opportunities in small-cap investing, particularly in global markets where there are still many thousands of small-company stocks to choose from.

In conclusion, while large caps may be currently outperforming small caps, the panelists at the Morningstar Investment Conference made a compelling case for the continued relevance and opportunities in small-cap investing. By focusing on niche markets, growth-oriented companies, and utilizing AI to improve businesses, investors can still find value in the shadows of giants.