CPD: Global SMID – an engine for growth

Looking beyond the global market giants, small- and mid-sized companies offer investors opportunities for diversification, growth and broader portfolio exposure.

Most Australian investors love their shares. This year’s Australian Investor Study^[1] showed 8.3 million Australian investors hold on-exchange investments, a figure that represents an increase of 2.5 million since 2020.  While this will be a mix of direct shares and ETFs, it’s likely that a closer look will see a familiar cast in many portfolios: the major banks, the big miners, some healthcare and retail names. It is a solid lineup for good reason. Australian equities have rewarded investors with capital growth, strong dividends and franking credits – all in a home market they know well.

However, as we have discussed in previous articles, the Australian market – particularly the top 20 stocks by market cap – is concentrated. It’s a small (in global terms) and top-heavy market, dominated by a handful of financials and resources companies, with relatively little exposure to areas such as technology, advanced manufacturing or medical innovation. An investor who invests close to home may be making a large, often unintentional bet on a narrow slice of the global economy.

Looking offshore is the obvious fix. Many Australian investors have taken advantage of the proliferation of global ETFs to buy broad global index funds, which are themselves weighted heavily toward the world’s largest companies. That adds geographic diversification, but it still leaves out the part of the market where much of the next generation of growth is being built – small and mid-cap companies, otherwise known as SMID companies.

SMID companies tend to be younger, more focused and earlier in their growth journeys, and they number in the thousands across developed and emerging markets. Definitions vary by index provider, but the principle is consistent: these are businesses with room to expand, often operating in niches that larger competitors overlook. They are also more likely to be acquired and, importantly, to be under-researched by analysts.

Through careful stock selection and active management, an exposure to global SMIDs can boost portfolio growth. Their potential is fuelled by rapid innovation, earnings growth and the ability to gain market share. Although the focus of the past two years has been on large-cap titans, particularly those in the AI ecosystem, it’s important to remember that most of today’s large cap companies started as disruptive small or mid-cap companies. The next Nvidia, Amazon or Apple is almost certainly a SMID today. Importantly, each of these mega caps is surrounded by a myriad of SMIDs delivering essential products and services.

While many portfolios have an allocation to domestic SMIDs, fewer investors have exposure to global SMIDs. The global SMID universe offers the same diversification and return-boosting potential as its Australian counterpart, but its opportunity set is exponentially larger.  Global SMID can be one of the growth cylinders of an investor’s portfolio, working alongside core holdings that provide stability and income.

SMID characteristics

Using the MSCI ACWI SMID Cap Index to illustrate the investment potential of the global SMID sector, there are 7,015 constituents across 23 developed markets and 24 emerging markets. The index covers approximately 28 percent of the free float-adjusted market capitalisation in each country^[2]. As shown in figure one, the average market cap of companies in the MSCI ACWI SMID Cap Index universe sits at a little over US$3.8 billion.

Small and mid-cap stocks generally have different characteristics relative to their large cap peers, as outlined in figure two.

The SMID universe is full of early-stage opportunities, but the key to unlocking wealth isn’t just growth – it’s structural change. We are currently witnessing what is considered by many to be one of the greatest structural shifts of our time – artificial intelligence (AI). Where earlier technologies automated physical labour or digitised information, AI extends machine capability into cognition: analysing, writing, designing, forecasting and deciding. That reaches nearly every sector at once, from healthcare and logistics to finance and manufacturing.

While only a few of today’s SMIDs will become tomorrow’s leaders, the investment manager’s goal is to find them in the sweet spot on the S-curve, not at the peak (see figure three). The sweet spot occurs right as growth in that sector inflects and takes off.

Success in SMID investing means identifying structural tailwinds – trends such as AI and high-performance computing, as well as climate – and the companies set to ride them. SMID investing is precisely about capturing the early potential in the innovative growth stories of the future.

How can exposure to global SMID stocks benefit your clients?

There are many good reasons to invest in global SMID stocks. The reasons often cited for investing in small and mid-cap Australian companies hold for their global counterparts:

Diversification – some growth areas, such as power generation, climate and connectivity, have greater representation in the MSCI ACWI SMID Cap Index.

Investing in a SMID company in its early stages of development provides greater opportunity for growth – staying invested while a company expands and grows can potentially provide substantial upside.

Because there are so many of them, SMID companies are typically under-researched by analysts, which makes the potential for mispricing higher than with large cap companies.

SMID companies tend to be more nimble than large caps. This can make them better able to adjust to change or to be agents of change and disrupt their larger competitors.

SMIDs are often the target of merger and acquisition activity, which is generally positive for the company’s share price.

It’s common for a company’s founders to remain on the management team and maintain a significant equity stake, thereby creating a strong alignment between management and shareholders.

Each of these elements will now be examined in greater detail.

Diversification

By spreading investments across different companies, industries and geographies, investors can reduce their overall risk exposure. This is especially important in today’s interconnected world, where economic events or structural change in one part of the world can have far-reaching effects in others.

Because Australian investors typically have a ‘home bias’ in their investment behaviour, diversification is important. Figure four compares the sector weightings of two indices – the MSCI ACWI SMID Cap Index and S&P/ASX 200. Each of the indices has different weightings to the GICS sectors, with the largest in each highlighted.

Investors in Australian equities often have significant exposure to financials and materials; the global SMID market provides representation across a broader range of sectors, including higher exposure to industrials and information technology, particularly those industries supporting the rapid growth in AI.

An exposure to global SMID also provides diversification benefits relative to global large cap markets. The MSCI World Index has a 31.8 percent exposure to information technology stocks, five of which are in the top 10 stocks and comprise 18.3 percent – or nearly one-fifth – of the total index^[3].

Beyond just stock and sector diversification, global SMIDs provide the benefit of responding differently to the economic cycle than their large-cap peers. Because SMID companies are typically more exposed to their domestic economies, they are often less sensitive to global macroeconomic factors such as geopolitical tensions and global economic turbulence. While this domestic focus can make them more vulnerable in a bear market, it also means they tend to outperform larger companies at the beginning of a market rebound.

Opportunities for growth

It’s far easier for a small or medium-sized company to double in size – companies in their early stages have significant room for expansion, particularly those at the beginning of an S-curve.

Many of the most powerful global growth themes are not well represented by Australia’s listed companies. They often play out through small and mid-sized specialists rather than household-name giants:

• AI and its supply chain: beyond the large platforms building the models, a wide ecosystem of smaller companies supplies semiconductors, data infrastructure, cybersecurity, software and industry-specific applications.
• Healthcare innovation: medical devices, diagnostics and specialist services often sit in the SMID range.
• Automation and advanced industrials: robotics, precision manufacturing and engineered components.
• Power generation, including energy transition and grid infrastructure: electrification and grid upgrades need equipment, materials and a range of service providers.

Smaller companies can target niche markets and capitalise on emerging trends faster than larger, more established rivals, which are often slower to adapt. Global SMIDs can also tap into the rising consumer demand of developing economies, adding another source of growth.

A single successful product launch or contract can reshape a smaller company’s earnings, an effect that is diluted across a mega-cap’s vast revenue base. For investors, this is a central part of the growth engine argument – the same qualities that let SMIDs disrupt and innovate are what allow the best of them to compound quickly and, over time, graduate into the large-cap ranks.

Under-researched

Large caps are covered by dozens of analysts. However, SMIDs – with a universe of 7,015 constituents – have much lighter coverage. Given the scale of the sector, research analysts cannot possibly cover each and every stock. Less scrutiny means more potential for mispricing, which gives skilled investment managers the scope to find businesses the market has overlooked.

Nimble

Being nimble is a valuable advantage for a SMID company. SMIDs generally have flatter management structures, the ability to make decisions quickly and less legacy infrastructure to protect or update.

That agility lets them act as disruptors within established industries, winning share with leaner business models, specialised offerings or technology that incumbents are slow to adopt. It also positions them to spearhead entirely new industries, where being first to a young market can build the scale, customer relationships and expertise that become durable advantages.

Demographic trends

SMIDs are uniquely positioned to tap into powerful structural trends and shifts in consumer behaviour. This agility allows companies in high-growth areas – such as climate, power generation and security – to benefit directly as these societal trends accelerate.

Access to niche markets

Global SMIDs often serve niche markets or specialised segments within larger industries. Data centres are a good example. Their rapid growth brings enormous demand for electricity; a host of smaller companies supply the cooling systems, power management and other technology that make these facilities more energy efficient. Specialised segments like this can offer some insulation from broader economic downturns and foster a loyal customer base that values the products and services on offer.

M&A activity

Good quality SMID companies have long been targets for merger and acquisition activity.  Strategic buyers acquire specialist capabilities and private equity firms target companies with solid cash flows and room for improvement. Takeover premiums can deliver a sharp, sometimes sudden boost to returns.

Management engagement

Global SMID companies tend to have a narrower business focus and a higher proportion of managers who hold significant stakes in the company. That ownership aligns the interests of management with those of outside shareholders, since both stand to gain or lose from the same outcomes.

Capacity

While Australian small cap funds can reach capacity quite quickly because of the much smaller investment universe, global SMID funds have a much larger universe from which to select. Consequently, global SMID strategies rarely face capacity issues.

Active vs passive management with global SMIDs

Market volatility in recent months underscores the importance of investing in quality companies; this is where active management in the SMID sector becomes critical. The SMID universe is significantly under-researched by sell-side analysts compared to large caps. Information travels more slowly and prices can drift further from underlying value than they do for a mega-cap. This creates an ‘informational advantage’ for active managers who conduct their own proprietary research, allowing them to be highly selective across countries, sectors and companies.

Quality dispersion strengthens the case for active management. The SMID universe includes strong, profitable businesses alongside many that struggle to generate earnings. A passive, market-cap-weighted index buys all of them and its largest positions are often simply the companies whose share prices have already risen the most. An active manager can screen out the weakest businesses and concentrate on those with structural tailwinds, sound balance sheets and capable management.

Global SMIDs and the current environment

The investment case for global SMIDs in the current environment can be summarised by three key points.

The first is that the sector is currently overlooked and under-owned. Small caps are 20 percent cheaper than large caps (figure five), and the valuation gap is at its widest point in 40 years. This presents excellent buying opportunities for active managers.

The second point is earnings acceleration. While large companies typically dominate industries, periods of major structural change create openings for smaller companies to break through. This dynamic is currently visible in a number of SMID companies in industries undergoing a structural shift, as shown in figure six.

The third point is diversification. These structural growth themes are not concentrated in technology but are spread across uncorrelated industries and geographies, with examples in security, power generation and big data. This provides diversification within the SMID asset class and adds a layer of diversification to a client’s total portfolio – as discussed earlier, this diversification is a key benefit of exposure to the asset class.

An allocation to global SMIDs offers a compelling way to enhance a portfolio’s risk-return profile. The Australian share market has served investors well, but it is a small piece of the global opportunity set. Global SMID stocks can help to address that gap. They offer access to companies that are earlier in their growth journeys, that are focused on specialised niches, often led by managers with real money at stake. As importantly, they are often positioned to benefit from themes that ASX-listed companies barely touch. An exposure to global SMID allows investors to access a deeper, less efficient part of the market and align their portfolios with the powerful structural trends driving the next wave of growth.

Take the FAAA accredited quiz to earn 0.5 CPD hour:

CPD Quiz

The following CPD quiz is accredited by the FAAA at 0.5 hour.

Legislated CPD Area: Technical Competence (0.5 hrs)

ASIC Knowledge Requirements: Securities (0.5 hrs)

please log in to start this quiz

———–

References:
[1] Australian Investor Study, ASX, October 2026
[2] MSCI ACWI SMID Cap Index Fact Sheet, 30 September 2026
[3] Ibid.

The information included in this article is provided for informational purposes only and is general advice only. It does not take into account an investor’s own objectives. The information contained in this article reflects, as of the date of publication, the current opinion of Munro Partners and is subject to change without notice. Sources for the material contained in this article are deemed reliable but cannot be guaranteed. We do not represent that this information is accurate and complete, and it should not be relied upon as such. Any opinions expressed in this material reflect our judgment at this date, are subject to change and should not be relied upon as the basis of your investment decisions. All reasonable care has been taken in producing the information set out in this article however subsequent changes in circumstances may occur at any time and may impact on the accuracy of the information. Neither Munro Partners, GSFM Pty Ltd, their related bodies nor associates gives any warranty nor makes any representation nor accepts responsibility for the accuracy or completeness of the information contained in this article.