The Bottom Line
- The opportunities available outside the U.S. in small-cap stocks are both numerous and diverse—and well worth considering for investors seeking a higher level of equity diversification.
- There are more than twice as many choices in small-cap stocks outside the U.S. than in it, and those stocks represent twice the overall market value ($4.6 trillion vs. $2.3 trillion).1
- That’s a lot to digest, but the long-term performance of international small-caps is attractive enough to merit a deeper look.
- Looking at the average annualized rolling monthly 10-year returns over the last two decades (July 31, 1996 through June 30, 2017) is instructive; 8.53% for the Russell Global ex-U.S. Small Cap Index -- significantly better than the Russell 2000 Index (6.97%), the Russell Global ex-U.S. Large Cap Index (5.92%) and the Russell 1000 Index (5.26%).
- In addition to its attractive long-term performance history, international small-cap has displayed lower volatility than the Russell 2000.
- Perhaps more important for those seeking diversification, it’s also had a lower correlation to U.S. large caps than either international large-caps or U.S. small-caps.
- That’s due in part to the tremendous variety of geographies represented. The international small cap index includes companies from 44 countries, which rarely occupy the same position in their respective economic cycles at the same time.
- Also helping is the prevalence of dividend-paying companies abroad. Approximately 84% of the companies in the Russell Global ex-U.S. Small Cap paid dividends as of the end of June.
- Given that this is an exceptionally multifaceted asset class—and because many international small-cap companies are not followed by analysts—it can provide fertile ground for active managers to locate potential pricing inefficiencies.
1 Source for all data is Royce & Associates and Factset, for the period 7/31/1996 – 6/30/2017.