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Diversifying into International Small-Cap Equities

Side-Stepping Home Bias via International Small-Caps

Equity investors are often biased towards their local market, but for investors with a global remit, this home bias can result in problematic concentrations within their portfolios. FTSE Russell illustrates this through an examination of Mexican pension fund investments. Minimising home bias necessarily involves diversifying into international equities.

Industry- and stock-specific concentration risk also exists when investors exclusively focus upon international large-cap equities. Additionally, recent evidence suggests that the international small-cap market may not be as risky as once thought, provided active managers are combining quality screens with a keen eye for local opportunities.

Bottle Caps: International small-caps


U.S. Equities Beyond the S&P 500 (S&P Dow Jones Indices, Apr 2021)

This paper from S&P Dow Jones Indices suggests European investors may be underallocated to U.S. small-cap and mid-cap stocks. In aggregate, both have outperformed the S&P 500 index in recent years.

Podcast: Hunting for small caps in Europe (Wellington Management, Apr 2021)

In this podcast, Anna Lundén, Portfolio Manager at Wellington Management, suggests small-cap equities should be a strategic allocation for many investors. She argues that the universe of European small-cap equities may prove particularly attractive.

In Emerging Markets, Small is Beautiful (Aviva Investors, 2021)

For compliance reasons, this paper is only accessible in certain geographies

This article from Aviva Investors shows that paradoxically, small caps have had both lower volatility and greater returns than large-cap stocks in emerging markets. EM small caps also provide investors with diversification away from concentrated large-cap sectors that are more prone to bubble risk.

Appraising Home Bias Exposure – Mexico (FTSE Russell, 2020)

FTSE Russell looks at the effects of home bias within the allocations of Mexican pension funds. The authors show that the effects of this bias have proved particularly costly in Mexico and other emerging markets.

A Case for Active Non-U.S. Small-Cap Equity (Putnam Investments, 2021)

Putnam makes the case for a strategic, long-term allocation to international small caps for U.S. investors.

International Small Caps: Quality plus quantity (Neuberger Berman, 2021)

For compliance reasons, this paper is only accessible in certain geographies

Neuberger Berman recommends overlaying a quality screen on the universe of international small-cap equities in order to uncover investment opportunities across a variety of sectors.

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