Events | 05 June 2024

The Quality Advantage in Small Cap Stocks


GMO’s Small Cap Quality portfolio managers, Hassan Chowdhry and James Mendelson, discussed why small cap valuations are attractive today and why they believe using quality is a better way of investing in the asset class. A quality lens helps to identify the truly special companies with sustainable competitive advantages and, like large cap quality, has offered protection in down markets.

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Key Points

  • GMO’s Focused Equity team applies the same quantitative tools and fundamental analysis used in large cap quality to identify the highest quality companies in the small cap universe with the best forward-looking prospects trading at attractive valuations.
  • High-quality small cap companies have outperformed both the small cap market in the U.S. and the broader all-cap U.S. market over time.
  • Small cap underperformance over the last decade has been driven by valuation decline; fundamentals have been strong. Small cap companies have actually grown earnings faster than large cap companies over the period.
  • Relative performance between large and small cap stocks has been cyclical throughout history. Small cap valuations are now much cheaper than large caps, after starting the decade much more expensive.
    Our portfolio has outperformed the S&P 600 Index by a cumulative 22% since inception  powered by superior earnings growth, as shown in the chart below.
  • Despite these strong returns, portfolio valuations remain attractive as there is ample opportunity to rebalance our concentrated portfolio of roughly 40 stocks.


Data from 9/21/2022 – 4/30/2024 | Source: Worldscope, S&P, GMO
The above information is based on a representative account in the strategy, selected because it has the fewest restrictions and best represents the implementation of the strategy.


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Disclaimer: The views expressed are through the period ending June 5, 2024, and are subject to change at any time based on market and other conditions. This is not an offer or solicitation for the purchase or sale of any security and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities.