The case for EM small caps

1. Strong performance potential
EM small-cap equities as a group have historically delivered attractive performance results over various multiyear time frames, including relative to the other EM market-cap segments. As one example, over the last two decades, EM small caps have consistently outperformed their large-cap counterparts on a rolling five-year basis (Figure 1). In our view, this suggests that over the long term, an appropriate representation of EM small caps within a larger EM allocation may help improve the long-term return potential of a diversified portfolio.

 Figure1

As noted above, the EM Small Cap Index outperformed both the MSCI EM and MSCI World indices last year, generating a return of 19.7% compared to 18.7% for the MSCI EM Index and 16.5% for the MSCI World Index.¹ We believe this outperformance amid the COVID-19 pandemic speaks to the potential resilience of the asset class.

While the return potential may not be news to most investors, many are surprised to learn that the strong return potential of EM small-cap stocks does not necessarily come with excessive volatility. We believe a common misperception surrounding EM small caps is that they are…

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¹EM small caps are represented by the MSCI EM Small Cap Index. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RETURNS AND AN INVESTMENT CAN LOSE VALUE. Sources: MSCI, Wellington Management. As of 31 December 2020. | ²Source: MSCI. Data as of 31 January 2021.