Small-caps have historically outperformed over the long term, but recent years have been dominated by large-cap momentum and narrow market leadership. Nish Patel, manager of the Global Smaller Companies Trust, discusses why the backdrop may now be shifting. The FundC`libre team cover how smaller companies can deliver faster earnings growth, the importance of focusing on quality to reduce fragility and why valuations are at levels that have historically signalled new cycles in small-cap performance. Nish also breaks down the Trust’s three key investment categories, highlights opportunities in industrials and long-cycle commodities, and explains why Japan is currently the most exciting hunting ground for new ideas.
Why you should listen to the interview: If you’re wondering whether small-caps are finally set for a comeback, manager Nish Patel offers clear, data-backed insights. Hear why valuations look compelling, which global themes are driving opportunity and how to balance growth with risk.
This interview was recorded on 1 December 2025. Please note, answers are edited and condensed for clarity. To gain a fuller understanding and clearer context, please listen to the full interview.
Interview highlights:
Why small-caps can outperform over the long-term
“If you look back over the last a hundred years or so, it’s very clear that smaller companies outperform over the long term. The issue is it goes in cycles. Most things are cyclical, believe it or not. And small-cap versus large-cap performance is certainly cyclical. And historically, these cycles have been about 12 years in length on average. Sometimes longer, sometimes shorter. But we have been in a protracted relative bear market for smaller companies that started really in 2011/2012 time period. Since then, larger companies have dominated.
“If you look at the relative valuations of smaller companies versus larger companies, they are at very attractive levels. They’re at the sort of levels that have historically kickstarted a new cycle for smaller companies. So that does get us excited.”
Balancing growth and risk
“One of the beauties of investing in smaller businesses is that it is an inherently faster growing asset class because the companies that we invest in, they tend to start off from a lower base. So whatever they do, it is more meaningful to them than it is for a larger business. For example, if they open a new plant or make an acquisition, that is gonna move the needle a lot more for a small company than it is for a larger company. So that’s why you tend to have faster earnings growth.
“But, the problem Wirth smaller companies is that they are inherently more fragile entities. More things tend to go wrong for smaller companies than for larger companies because these companies aren’t as well developed. They don’t have a wider or a deeper a pool of managers to call on. They have less access to financial capital and they tend to be more reliant on, for example, one particular customer or a supplier or one product. So that makes life a lot more challenging for smaller companies in terms of resilience. So what we wanted to do really from the outset was to offer our clients that faster earnings growth potential that is inherent in this asset class, but we lower levels of risk.
“And the way that we lower risk for our clients is we try to focus on the smaller companies that are higher quality, that are able to deal with all those traditional problems that smaller companies face. So for example, some of the quality characteristics that we look for are companies with really strong competitive advantages so that there might be, for example, a differentiated product or service or they may be a low cost producer. They operate in industries that have barriers to entry. The companies that we invest in generally tend to have good balance sheets. They tend to generate lots of cash, and they’re not so reliant on one customer, one product or one supplier. So they’re able to withstand some of these challenges that smaller companies typically face.
“Now, we do get things wrong. Many people get things wrong, so if you do get things wrong, you want to have protection on the downside. So we look to buy into these higher quality companies when they are trading on a significant discount of what they’re intrinsically worth. So if we are wrong in our analysis, then that margin of safety or that difference between the share price and what the intrinsic value is will protect us on the downside. So that’s how we approach it.”
Why Japan is the biggest opportunity today
“We like Japan because we think there’s a sea change in terms of corporate reform. Not only that Japan has returned to inflation after several years of disinflation or even deflation. The outlook has changed for many companies in Japan because they are now able to raise prices and they’re now seeing nominal revenue growth which is helpful for them. So these factors along with a government that is now spending money on fiscal programs mean that the outlook for Japanese businesses has improved.
“Now in the corporate reform is helpful from the perspective of many of the beneficiaries of corporate reform are smaller businesses. So the opportunity set of candidates that could benefit from corporate reform is bigger in small-caps than it is for large-caps. So we think that that is a fruitful area. Our team have found some really good opportunities there, and they’ve delivered some really good returns in their portfolio from identifying these corporate reform opportunities.”
Conclusion: Small-caps remain a powerful long-term engine of returns, and today’s valuations provide a particularly appealing entry point. With interest rate cuts, improving economic breadth, and structural inflation all acting as potential tailwinds, the landscape is changing. This episode highlights where the most attractive opportunities lie and what could drive the next phase of outperformance.
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