Les répartitions en titres à revenu fixe sont généralement construites en silos selon des catégories de produits, comme les obligations universelles, les obligations à long terme, les obligations à rendement élevé et le crédit privé. Cette approche fragmentée de la prise de décision mène souvent à des résultats sous-optimaux.

Le présent document remet en question ce modèle. Il explique comment une approche plus intégrée, fondée sur les objectifs des investisseurs, leurs passifs et leur tolérance au risque plutôt que sur les catégories de produits, peut produire de meilleurs résultats ajustés au risque.

L’approche en silos

Les portefeuilles à revenu fixe sont souvent présentés comme étant diversifiés; pourtant, dans les faits, ils sont généralement construits en silos. Les répartitions sont effectuées entre différentes stratégies, comme les obligations à long terme, les obligations à rendement élevé ou le crédit privé, chacune étant justifiée selon ses propres mérites. Ce qui semble être une diversification du portefeuille à première vue peut masquer des concentrations involontaires de risques, notamment un risque de duration découlant d’une exposition aux obligations à long terme, des baisses de valeur comparables à celles des actions attribuables aux placements en obligations à rendement élevé, ainsi que des enjeux de liquidité liés au crédit privé. Ces risques ne sont pas toujours évidents lorsqu’ils sont examinés individuellement, mais ils peuvent se manifester simultanément précisément au moment où ils sont le moins souhaitables.

Cette situation découle souvent du processus décisionnel, dans lequel le portefeuille est constitué progressivement plutôt que conçu de façon globale. De nouvelles répartitions sont généralement ajoutées graduellement afin d’améliorer le rendement ou de combler des lacunes perçues dans les portefeuilles existants, sans tenir pleinement compte de la structure d’ensemble ni des risques involontaires qui peuvent en résulter. Avec le temps, les portefeuilles peuvent ainsi demeurer ancrés dans les occasions d’hier, alors même que les conditions de marché, les dynamiques de liquidité et les valorisations relatives évoluent.

Une approche plus efficace consiste d’abord à prendre du recul et à considérer le revenu fixe comme un système intégré. Cela signifie qu’il faut évaluer le portefeuille dans son ensemble, comprendre comment chaque composante contribue à la génération de revenu, à la liquidité, à la préservation du capital et à la diversification, tout en veillant à ce que ces rôles soient délibérément choisis plutôt qu’hérités de manière involontaire.

Approche intégrée

Une approche plus intégrée commence par redéfinir le revenu fixe, non pas comme un ensemble de répartitions individuelles, mais comme un système coordonné visant l’atteinte d’un objectif précis. Dans ce système, le risque, le rendement et la liquidité sont équilibrés de façon intentionnelle à l’échelle de l’ensemble des occasions de placement, et chaque répartition doit justifier sa place en fonction du rôle qu’elle joue, et non simplement de l’étiquette qui lui est attribuée.

Une façon de conceptualiser cette approche est de prendre l’exemple d’une voiture de course haute performance, où chaque composante remplit une fonction distincte et essentielle, et où la performance globale dépend de la façon dont ces composantes travaillent ensemble.

Dans cette analogie, les obligations traditionnelles représentent le châssis. Elles constituent l’assise de la préservation du capital et soutiennent l’appariement avec les passifs. Toutefois, leurs limites dans certains contextes de marché ont amené les investisseurs à aller au-delà des expositions traditionnelles, en intégrant des sources complémentaires comme les prêts hypothécaires commerciaux, le crédit privé et la dette des marchés émergents afin d’élargir leur boîte à outils et d’améliorer la résilience du portefeuille.

Les obligations à long terme jouent le rôle du système de suspension, absorbant les chocs et stabilisant la conduite. Elles sont particulièrement utiles pour les régimes de retraite à prestations déterminées (PD), puisque leur sensibilité aux taux d’intérêt favorise un meilleur arrimage aux fluctuations des passifs. Lorsque les taux diminuent et que les passifs augmentent, les obligations à long terme peuvent offrir un contrepoids essentiel, contribuant ainsi à préserver le degré de capitalisation du régime.

Les obligations à rendement élevé, quant à elles, représentent le moteur, soit la source de puissance et d’élan. Leur rendement est davantage influencé par les écarts de crédit que par les fluctuations des taux d’intérêt, ce qui en fait une source attrayante de revenu grâce au portage lorsque les données fondamentales demeurent solides.

Le crédit des marchés émergents agit comme le groupe motopropulseur, en élargissant l’univers des occasions de placement. En offrant une exposition à des économies et à des dynamiques de marché différentes de celles des marchés développés, le crédit des marchés émergents peut accroître le rendement tout en réduisant la corrélation globale du portefeuille. La diversification entre les pays, les secteurs et les émetteurs contribue à atténuer les risques localisés et ajoute un niveau supplémentaire de résilience, particulièrement lorsque les cycles des marchés développés sont soumis à des pressions.

Les prêts hypothécaires commerciaux et le crédit privé procurent l’adhérence dans les virages, en offrant un flux de revenu stable et un gain de performance supplémentaire. Ces actifs sont généralement adossés à des flux de trésorerie garantis, et la prime d’illiquidité peut se traduire par un revenu plus stable et plus prévisible, tout en offrant une certaine protection contre les baisses.

Enfin, les stratégies de revenu fixe à rendement absolu jouent le rôle du système de contrôle adaptatif, conçu non pas pour suivre le marché, mais pour s’y adapter. Plutôt que d’être ancrées à des indices de référence, ces stratégies visent à générer des rendements positifs dans un large éventail de contextes de marché. En intégrant davantage de souplesse, notamment grâce à des positions non contraintes ou à la possibilité de vendre à découvert, elles réduisent la dépendance aux sources traditionnelles de rendement, comme le revenu courant et la duration. Elles peuvent ainsi améliorer la diversification et accroître l’efficacité globale du portefeuille.

Ces caractéristiques ne font toutefois pas l’unanimité. Par exemple, le compromis associé aux obligations à long terme est que leur exposition à la duration peut devenir un frein lorsque les rendements réels augmentent, entraînant des coûts d’opportunité et, à l’occasion, des surprises liées à leur convexité. Comme tout moteur haute performance, elles peuvent surchauffer dans des périodes de tension. Lors des épisodes de turbulences sur les marchés, les obligations à rendement élevé peuvent se comporter beaucoup plus comme des actions, en affichant des replis qui remettent en question leur rôle de stabilisateur. De même, l’adhérence procurée par les actifs moins liquides peut être trompeuse, puisque les compromis liés à la liquidité ne deviennent souvent apparents qu’en période de tensions sur les marchés.

En définitive, l’efficacité d’un portefeuille de titres à revenu fixe ne repose pas uniquement sur chacune de ses composantes, mais sur la façon dont elles sont délibérément combinées. Lorsque chaque répartition est évaluée en fonction de sa contribution à l’ensemble — qu’il s’agisse de générer un revenu, d’assurer la liquidité, de protéger le capital ou de diversifier le portefeuille — celui-ci devient plus que la somme de ses parties; il devient un système conçu pour offrir un rendement durable.

Construction de portefeuille

Une approche plus efficace en matière de revenu fixe commence par remettre en question une hypothèse profondément ancrée : la façon dont les portefeuilles sont généralement construits. Plutôt que de partir des catégories de produits pour ensuite chercher à atteindre un résultat, cette approche inverse le processus en commençant par le résultat recherché.

Le point de départ devient les objectifs fondamentaux du portefeuille, qu’il s’agisse de générer un revenu, de couvrir les passifs ou d’améliorer l’efficacité du capital, puis de concevoir délibérément les expositions nécessaires pour atteindre ces objectifs. Bien que ce changement puisse sembler subtil, il transforme fondamentalement la réflexion. L’attention ne porte plus sur la répartition du capital entre différentes catégories, mais plutôt sur les risques qui sont assumés de façon délibérée.

Dans ce cadre, la duration, le crédit, la liquidité et la convexité ne sont plus les sous-produits des décisions de répartition; ils deviennent les éléments constitutifs du portefeuille. Chacun est sélectionné, dimensionné et combiné de manière intentionnelle afin de créer un système cohérent où chaque exposition est choisie pour le rôle qu’elle joue dans l’atteinte des résultats recherchés, et non simplement parce qu’elle correspond à une catégorie prédéfinie.

Cette approche permet également de concevoir des portefeuilles plus adaptables. Au lieu d’être implicitement liés à des indices de référence statiques, les portefeuilles peuvent être construits de façon à s’ajuster de manière dynamique à l’évolution des marchés. À mesure que les taux d’intérêt fluctuent, que les conditions de crédit changent et que la liquidité varie, le portefeuille est en mesure de s’adapter.

Elle ouvre également la voie à une intégration plus réfléchie du crédit public et privé, permettant de tirer parti des primes d’illiquidité lorsque cela est approprié, tout en faisant une place à des stratégies moins traditionnelles, comme les stratégies de revenu fixe à rendement absolu, qui visent non pas à reproduire un indice de référence, mais à générer des résultats constants dans différents contextes de marché.

En intégrant les caractéristiques propres aux différentes stratégies de revenu fixe, les portefeuilles peuvent devenir plus adaptables, plus efficients sur le plan du capital et mieux outillés pour gérer les risques, particulièrement en période de tensions. Le changement réside dans le passage d’une approche consistant à construire des portefeuilles reflétant des catégories d’actifs à une approche visant à concevoir des portefeuilles axés sur les résultats.

Adapter les stratégies selon le type d’investisseur

La conception d’un portefeuille de titres à revenu fixe dépend ultimement du type d’investisseur ainsi que de ses objectifs, de ses passifs, de sa gouvernance et de sa tolérance au risque.

Régimes de retraite à prestations déterminées

Pour les régimes de retraite à prestations déterminées, la construction de portefeuille est plus efficace lorsque la prise en compte des passifs et la génération de rendement sont traitées comme les deux volets d’une même décision, plutôt que comme des priorités concurrentes. Les obligations à long terme jouent un rôle essentiel en servant d’assise au ratio de couverture et en stabilisant le degré de capitalisation, tandis que le crédit peut constituer une source fiable de liquidité et de portage.

À cela peuvent s’ajouter des stratégies à rendement absolu, qui contribuent à atténuer la volatilité de l’excédent actuariel en procurant une plus grande souplesse lorsque les marchés sont incertains. Des répartitions ciblées en crédit privé peuvent également améliorer les rendements en permettant de capter une prime d’illiquidité.

Le principal avantage réside dans l’intégration de ces composantes au sein d’un cadre cohérent de placement axé sur le passif (LDI) bonifié par des stratégies de rendement. Plutôt que de gérer séparément les actifs de couverture et les actifs axés sur le rendement, cette approche harmonise l’efficience du capital, les besoins de liquidité et la gestion des risques avec les obligations à long terme du régime. Il en résulte un portefeuille conçu non seulement pour répondre aux passifs, mais aussi pour traverser les cycles de marché avec davantage de confiance et de maîtrise.

Comptes généraux des compagnies d’assurance

Pour les comptes généraux des compagnies d’assurance, la construction de portefeuille consiste à maximiser le rendement généré par chaque unité de capital réglementaire tout en maintenant la prévisibilité des flux financiers et le respect des exigences réglementaires. Le crédit de base de grande qualité constitue le fondement du portefeuille, procurant un revenu stable et favorisant l’efficience du capital dans le cadre des exigences réglementaires. Les prêts hypothécaires commerciaux peuvent compléter cette base en offrant un rendement supérieur et des flux de trésorerie durables qui s’harmonisent avec les passifs. Des répartitions ciblées dans le crédit opportuniste peuvent également améliorer les résultats, pourvu qu’elles demeurent compatibles avec les contraintes de capital.

Exemple – Comptes généraux des compagnies d’assurance
Accent : Rendement par unité de capital et appariement actif-passif
Objectifs	Efficience du capital, respect des contraintes réglementaires, prévisibilité des flux de trésorerie
Répartition illustrative	Crédit de base de grande qualité Prêts hypothécaires commerciaux Crédit opportuniste dans les limites du capital

Fondations et fonds de dotation

Pour les fondations et les fonds de dotation, la construction de portefeuille vise à générer des rendements réels, à préserver le capital et à soutenir les besoins de décaissement dans différents contextes de marché. Cet objectif est atteint au moyen d’une combinaison de stratégies complémentaires. Les obligations de plus courte duration peuvent jouer un rôle stabilisateur en contribuant à gérer le risque de taux d’intérêt tout en préservant la liquidité. En complément, des stratégies diversifiées à rendement absolu peuvent procurer un revenu et une protection contre les baisses lorsque les marchés traditionnels deviennent plus volatils.

Une répartition importante en prêts hypothécaires commerciaux ou en crédit privé renforce davantage le portefeuille en offrant un potentiel de rendements attrayants ajustés au risque ainsi que des flux de trésorerie contractuels. Ensemble, ces composantes peuvent contribuer à limiter l’ampleur des baisses de valeur et à soutenir la capacité des organisations à financer leur mission avec confiance, peu importe où elles se situent dans le cycle des marchés.

Considérations relatives à la gouvernance

Passer d’une approche fondée sur des catégories d’actifs cloisonnées à une approche plus intégrée consiste à redéfinir la façon d’envisager l’investissement, ce qui exige un changement de mentalité et, possiblement, des pratiques de gouvernance. Plutôt que de sélectionner des catégories d’actifs individuellement, les investisseurs mettent l’accent sur les résultats qui correspondent le mieux à leurs objectifs.

Cette approche exige des gestionnaires de placement capables de répartir le risque de façon dynamique, de demeurer agiles à mesure que les marchés évoluent et d’offrir une transparence quant à la manière dont la valeur est créée. Elle invite également les conseils d’administration à être à l’aise avec des indices de référence personnalisés plutôt qu’avec des indices publics à des fins de comparaison, en accordant moins d’importance au fait de surpasser un indice et davantage à la protection contre les risques de baisse et au renforcement de la résilience globale du portefeuille.

Des silos aux solutions

Pour les investisseurs institutionnels, il s’agit d’une occasion de prendre du recul et de repenser le revenu fixe, non pas comme un ensemble de répartitions par catégories de produits, mais comme un outil permettant d’améliorer les résultats du portefeuille global. En partant des objectifs — qu’il s’agisse de générer un revenu, de couvrir les passifs ou d’améliorer l’efficience du capital — les investisseurs peuvent concevoir leurs expositions de manière plus délibérée. Il en résulte un portefeuille plus cohérent, dans lequel chaque composante contribue plus efficacement à l’ensemble, les risques sont mieux gérés et les résultats sont davantage alignés sur les objectifs globaux.

Before we discuss the silver economy, let’s talk about the markets as we are at the mid-year mark.

Rumbling grows louder and louder that we are in stock market euphoria. By many metrics, including trading volume, margin debt and multiples, in our view, this is shaping up to be one of the biggest stock market bubbles in history.

If we go back to 2000, we had a different market composition.

• Passive investing was less than 20% – today, it is over 50%.
• Retail share of trading was less than 10% – today, it is above 20%.
• There were no leveraged ETFs, zero-day options, etc.
• Hedge funds managed around $600 billion – that number is now above $6 trillion.
• Active managers were mainly fundamental bottom-up, split about equally between value, growth and core.
• Systematic investing (quantitative funds) accounted for the management of $200 billion – today, around $2 trillion.

So, what happens when this bubble deflates? In our view, today’s market structure differs materially from prior cycles, making historical comparisons more challenging.

What is risk in this situation? Is it underperforming the market or is it losing money? Pension funds have an estimated rate of return of 6 or 7%. Should they look to reduce risk? Diversify their portfolio?

Diversification, quality and long-term opportunity

At Global Alpha, we believe in building true small cap portfolios, diversified by country, currency, sector and industries. At the same time, we remain exposed to different long-term secular industries. We buy quality companies, defined by stronger growth and margin profiles; with strong balance sheets and low debt.

Unfortunately, this approach has not been rewarded over the last few years. Not even for famed investors like Warren Buffet who underperformed the S&P 500 by 20% and the Nasdaq-100 by 30% year over year.

As he famously said, “Be fearful when others are greedy, and greedy when others are fearful.” Perhaps he viewed the overconcentration as others being greedy, which recalls another Buffet quote:

“Only when the tide goes out do you discover who’s been swimming naked.”

As investors clamoured to the top ten, the rest of the small cap universe was left a little stark.

On that note, there’s still opportunity in the markets, represented by the silver economy.

A trend that never gets old

From Japan to Italy to the United States and Canada, the world is facing the largest demographic shift in its existence. According to data from World Bank Group, about 16% of the current population (ex-Africa) is over 65. And 18% is less than 14. By 2050, it is expected that less than 15% of the population will be less than 14 and over 26% will be over 65.

World Bank Group also indicates that Japan is the globe’s fastest aging society. 35% of its population is over 65 years of age, with 6% of that older than 85. By 2050, more than 50% of the population will be above 65 years old.

Countries like Korea and Italy are not far behind. What does an aging, “silver” population mean for investments?

A population that is only getting older means that there are growth prospects for companies that offer or adapt their products to cater to that demographic.

In our portfolio, we have several names that are in that category:

• Extendicare Inc. (EXE CN): a Canadian operator of long-term care as well as one of the largest providers of home health care in Canada.
• Service Corporation International (SCI US): one of North America’s largest providers of death care services.
• Challenger Limited (CGF AU): one of the largest providers of annuities in Australia.
• Globus Medical Inc. (GMED US): a medical device company focused exclusively on spine disorders.

We also have many other companies in the portfolio who have a growing part of their revenues addressing this market. One such company is Shanghai Conant Optical Co. Ltd. (2276 HK), which is the second largest global manufacturer of optical lenses and a leading manufacturer of lenses for smart glasses.

We also own WeRide Inc. (800 HK, WRD US) a diversified, Robotaxis, Robobuses, Robovans, autonomous driving stack and software licensing, deployed globally in China, the Middle East and Europe.

Back to the top

Overall, while current markets may be expensive and structurally different from past bubbles, investors should focus on diversified, quality small-cap companies exposed to durable secular trends. Our team is constantly looking at thematics to identify long-term trends like this one of the silver economy.

The securities identified and described do not represent all securities purchased, sold or recommended for client accounts. It should not be assumed that investments in these securities were or will be profitable.

This is the second in a two-part series on small caps. Last week, we looked at historical small caps performance, recent small caps performance and the reasons behind the unexpected. This week, we dive into what this means for allocators and skeptics.

Small caps have captured the attention of allocators, what with their outperformance of large caps, their durability through economic surprises and the access they offer outside of the crowded top ten mega caps. How does this information impact portfolio allocations?

Implementation: where the allocator’s choices can make a difference

The case for small caps is strongest when implementation is treated as part of the allocation decision. In a broad and inefficient universe, choosing active over passive, quality over the index, and a global opportunity set can make a meaningful difference. What needs to be considered when it comes to portfolio allocation?

Active over passive

We’ve previously discussed eVestment peer universe data showing the median active manager added value in Global and EAFE small cap. As of May 31, 2026, according to eVestment peer universe data the median EAFE small-cap manager has delivered 1.75% higher returns than the  MSCI EAFE Small Cap index, since the inception of our respective strategies.

BofA Global Research notes that small-cap active managers have posted better hit rates than large-cap active managers in seven of the last 11 years through 2025. The opportunity set supports it: BofA shows the long-run annualized Quintile 1 versus Quintile 5 spread for the FCF/EV factor within the Russell 2000 is approximately 20 percentage points, versus 7 within the Russell 1000.

Quality over the index

As we argued in our December 2025 commentary, “Time to take out the trash – Why high ROE matters in the long run,” the global small-cap universe contains over 12,000 names and the dispersion between the best and worst businesses is enormous.

Global breadth, with a regional lens

EAFE small caps are, in our view, the strongest within-asset-class call today. The European valuation gap to long-term averages is wide, the regional economies are at different points in their cycles, and the structural themes – German fiscal deployment, European industrial policy, Japanese reform – sit disproportionately in this universe.

Four objections to small caps, and what the evidence actually shows

If the historical evidence supports investing in small caps, and allocators have the opportunity to actively make a difference within portfolios, why aren’t small caps more heavily weighted? The four objections below come up most often in our conversations with allocators.

« Small caps are too volatile in this environment. »

But BofA Global Research’s May 2026 data documents that the realized volatility of the Russell 2000 has been lower than the S&P 500 during this decade’s worst weeks – a reversal of the prior pattern. The same has held year to date through the Iran war, and through several recent stress episodes (Brexit 2016, Taper Tantrum 2013, COVID 2020, tariffs 2025).

Reality is the dispersion in S&P 500 names has compressed as concentration has risen, while small-cap volatility no longer carries the size premium it once did. Volatility is no longer the reason to avoid the asset class.

« The small-cap index has become a junk bucket of non-earners and unprofitable biotechs. »

This was true through 2022. It is becoming less true. The median ROE of the Russell 2000 has been rising off multi-decade lows, the share of non-earners has begun to decline, the Russell 2000 saw more upgrades to the Russell 1000 than downgrades in the 2023 and 2024 rebalances and the share of US IPOs with negative earnings has fallen from roughly 80% during the 2020–22 bubble to approximately 60% year to date.

The S&P 600, which applies a profitability screen, currently has only about 10% non-earners against approximately 32% in the Russell 2000 – a structural choice available to any allocator concerned about index composition. As we argued before, high-ROE small caps have, over multi-year horizons, materially outperformed their lower-quality peers; quality selection is the answer to this objection, not avoidance of the asset class.

« Active managers can’t beat the small-cap index – look at 2025. »

2025 was the worst year on record for active small cap managers, with roughly 15% beating the Russell 2000 (BofA). It was also one of the most extreme low-quality rallies of the past decade. Active small cap managers tend to be structurally tilted toward quality, which is precisely the wrong tilt during a junk-led move. The longer-run picture is different. As above, active small cap managers have posted better hit rates than active large cap managers in seven of the last 11 years. The 2025 episode is best understood as an extreme drawdown in a strategy that has otherwise compounded reliably, not as evidence that the asset class is too efficient for active management.

« We should wait for rate cuts before adding small caps. »

Two pieces of evidence cut against this. First, per Kepler Cheuvreux, the historical correlation between European small-cap relative performance and the German Bund yield has materially weakened since early 2025. The asset class has been outperforming through rising rates, not waiting for them to fall. Second, per BofA, what matters more for small-cap performance than rates per se is the corporate profits cycle: in periods of accelerating EPS growth, US small caps have averaged 18–19% annual returns regardless of whether GDP was accelerating or decelerating, with the highest average and best hit rate in accelerating EPS combined with decelerating GDP.

The current Russell 2000 forward P/E of approximately 16.9x implies roughly 8% annualized 10-year returns based on the historical regression (BofA, R-squared 0.46). The setup does not require a particular rate path to work.

The case against small caps often rests on backward-looking assumptions: higher volatility, weaker quality, poor active outcomes and rate dependence. But recent evidence is showing us that those assumptions need to be revisited.

Sizing: the wrong question, asked the right way

Clients regularly ask how much small cap is the right amount. In our September 2025 article, “Why small caps are built for what’s next,”* we shared that our typical recommendation falls between 5% and 15%, and the precise figure matters less than the choice to size the allocation meaningfully in the first place. A four-asset mean-variance optimization on EAFE and US large and small caps – using eVestment median manager returns from January 1999 to June 2025 – produces an efficient frontier on which an all-large-cap portfolio does not sit. The closest efficient point combines roughly 30% small caps with 70% US large caps at the same volatility level, with higher expected returns. The number will vary with assumptions; the qualitative conclusion does not.

The harder question for most allocators is not 5% versus 15%. It is whether the strategic underweight that has accumulated over a decade of large-cap dominance gets revisited at all. The structural arguments stand on their own.

The recent evidence – small-cap outperformance through a genuinely difficult macro backdrop, broad-based across sectors, decoupled from bond yields, supported by a valuation gap that has if anything widened, and an index whose quality composition is improving from its 2022 lows – reinforces the timing. The objections can keep coming, but we can see through them with evidence-backed rebuttals. Allocators can make a clear difference. We think the case for revisiting the underweight is as clear as it has been in years.

Global Alpha was founded on the conviction that small caps are an inefficient asset class in which an experienced team can generate alpha across a full cycle. We are happy to discuss how a small-cap allocation can be sized within a particular plan’s constraints, and how our Global and International Small Cap strategies have navigated the recent environment.

* Contact us for a copy of this article.

Chart 1

The stall could be explained by a less favourable “excess” money backdrop. Six-month growth of global (i.e. G7 plus E7) real money – on both narrow and broad definitions – crossed below that of industrial output in April. Narrow money growth was higher over August-March, while the broad money gap had been positive in most months since end-2022 – chart 2.

Chart 2

Real money growth rates appear to have recovered in May but may not have moved back above output expansion, based on partial information.

Prospects for a restoration of excess money support are mixed.

The real money slowdown reflected an energy-driven rise in six-month CPI momentum. This should reverse if recent commodity price relief is sustained – chart 3.

Chart 3

Yield curves, however, remain higher than before Gulf conflict, reflecting tighter actual and expected monetary policies. Higher rates could dampen nominal money growth.

Meanwhile, solid June flash PMI results suggest that six-month industrial output expansion will hold up near term.

As previously discussed, global money growth has been supported recently by faster US expansion. Six-month growth of the preferred US narrow and broad measures here – M1A and M2+ respectively – rose further to 9.3% and 8.2% annualised respectively in May – chart 4. (The M1A series has been adjusted for a reclassification of some savings deposits as demand deposits in November.)

Chart 4

By contrast, six-month growth of Eurozone and UK broad money – as measured by non-financial M3 / M4 – was just 3.7% and 3.4% annualised respectively in April. May numbers are released next week.

The break-out of US six-month money growth above a January 2025 high coincided with a resumption of Fed balance sheet expansion. Chair Warsh wants to reverse this policy, suggesting a future downside risk to money trends.

This is a two-part series on small caps. This week, we look at historical small caps performance, recent small caps performance and the reasons behind the unexpected. Next week, we’ll dive into what this means for allocators and skeptics.

The case for a meaningful small-cap allocation in institutional portfolios

Small caps have just done something the textbook says they should not have. Since the Middle East conflict began at the end of February 2026, small caps have outperformed large caps on both sides of the Atlantic – through an oil-price spike, a sharp re-pricing of European front-end rates and deeply negative eurozone economic surprises. Inside those headline numbers, that is not the behaviour of an asset class to be avoided.

Source: Bloomberg

Small caps have outperformed large caps on both sides of the Atlantic for the last two years.

Source: Bloomberg

Crowded at the top, despite a universe of options

MSCI’s classification methodology defines small caps as roughly the bottom 14% of free-float market capitalization in each country it covers. This creates a universe that spans over 12,000 listed companies and the institutional allocation to that universe has, if anything, contracted. Even within the S&P 500, long-only funds remain overweight the largest quintile by market cap and underweight the smallest. The result is a public-equity allocation that, for all its sophistication, is structurally tethered to the same fifty or so mega-caps that everyone else owns.

As we observed in our September 2025 article, “Why small caps are built for what’s next,”* three of the four episodes of extreme S&P 500 top-ten concentration over the past century – the Go-Go conglomerate years, the Nifty Fifty, and the dot-com boom – were each followed by extended periods of small-cap leadership. Top-ten concentration at the dot-com peak reached 37.0%; today it stands at roughly 40%. The fourth episode, today’s AI-and-Mag-7 configuration, has not yet resolved. An allocator who treats the current setup as permanent is implicitly betting that this time is different, despite repeated historical evidence.
 

Why small caps matter through the cycle, not just at the turn

Small caps earn a place in the policy mix on three grounds independent of timing the next rotation.

1. Breadth of opportunity.
   The small-cap universe is where most listed companies actually live, offering diversified factor and theme exposure that a mega-cap-dominated large-cap book does not provide. Further, the sector composition is materially different from large caps; US small caps carry more industrials, financials and real estate than US large caps, against an underweight in technology.
2. Direct, undiluted exposure to the themes that matter.
   Reshoring, European fiscal expansion, defence, grid and AI-infrastructure build-out and Japanese corporate reform all get expressed more purely through small caps than through the large-cap index, because the pure-play, picks-and-shovels companies in these themes are typically not listed at large-cap market capitalizations.
3. Differentiated economic exposure.
   According to research by Kepler Cheuvreux, European small caps generate roughly 60% of revenues from within Europe, versus roughly 33% for the blue-chip 50. This domestic tilt has become a feature rather than a bug in a world of recurring trade frictions, and the pattern broadly extends across EAFE.Bloomberg data indicate that Japanese small caps generate roughly 65–75% of their revenues domestically, compared with about 45% for TOPIX large caps. That domestic exposure leaves them well positioned to benefit from the emerging global order.

Unexpected outperformance: How are small caps doing it?

The cyclical setup we identified previously – technological disruption, top-of-market concentration, valuations well above long-run averages – remains in place. The conditions since end-February 2026 have been textbook unfavourable for small caps. Per Kepler, European front-end rate expectations re-priced sharply higher, eurozone economic surprises turned deeply negative, and oil spiked before partially retracing. Kepler’s analysis of monthly relative returns since 1994 shows European small caps have, on average, underperformed large caps by roughly -0.29% per month in OECD-defined « downturn » phases and -0.43% per month in « slowdown » phases. That headwind has not materialized.

And yet, small caps are outperforming large caps. Two features of the outperformance are worth flagging:

1. Outperformance has been broad-based across sectors rather than carried by a narrow theme: Kepler’s sector-level data since February 27, 2026 shows positive median small-cap performance against negative median large-cap performance, with European small caps outperforming large caps in nearly every sector.
2. Small caps’ historical sensitivity to bond yields has visibly weakened – per Kepler, the relative performance of European small caps versus large caps has materially decoupled from the German Bund yield since early 2025, breaking a relationship that had held for most of the post-2021 period.

The asset class is no longer waiting for rate cuts.

The valuation picture is the cleanest piece of the case. On Kepler’s data, European large caps trade at roughly 15.2x forward earnings against a long-term average since 2009 of 13.2x. European small caps trade at 14.4x against an average of 14.8x. The US picture is similar: BofA Global Research reports the relative forward P/E of the Russell 2000 versus the Russell 1000 is approximately 0.82x, and historically the relative forward P/E explains roughly 46% of the variability in subsequent 10-year relative returns.
 

Next week: turning the case into allocation

Small cap performance has been unexpected, but not entirely surprising. As investment managers specializing small caps, we know what small caps are capable of. Now that this market segment is regaining the attention of investors, what does this information mean for portfolio allocations? How can allocators adjust their underweight? We’ll discuss those details in next week’s commentary.

Global Alpha was founded on the conviction that small caps are an inefficient asset class in which an experienced team can generate alpha across a full cycle. We are happy to discuss how a small-cap allocation can be sized within a particular plan’s constraints, and how our Global and International Small Cap strategies have navigated the recent environment.

* Contact us for a copy of this article.

Last month, we wrote to investors about how the outperformance of EM equities was the product of a very narrow rally driven by a boom in South Korean and Taiwan tech companies. We noted that despite parabolic moves in semiconductor stocks, valuations have actually become cheaper due to a massive acceleration in earnings growth underpinned by rising US hyperscaler investment seeking to power frontier AI models.

In the weeks since, tech stocks continued to surge in feverish trading led by leveraged retail investors in South Korea. Jefferies Global Head of Equity Strategies, Chris Wood, flagged in early April that margin lending in South Korea had doubled from W15.8 trillion at the end of 2024 to an incredible W32.7 trillion this year.

Korea margin loan balance (Kospi + Kosdaq)

Source: Jefferies Global Equity, April 2026.

Investors also rushed to gain exposure through passive vehicles including leveraged ETFs.

 CSOP SK Hynix daily 2X leveraged product

Source: Bloomberg

Among GEM managers, overweight positioning has been steadily rising since the beginning of 2025.

Source: NS Partners & EPFR (date to end-April 2026).

The only game in town

The acceleration in fundamentals for stocks in the AI supply chain has been so dramatic that it has swamped the broader EM investment universe. The economic drag created by the US–Iran conflict has hit markets with higher sensitivity to rising energy prices. As these markets weather the economic turbulence, AI looks increasingly like the only game in town. In response, many investors have sold down areas hit by these tailwinds to fund larger weightings in AI-exposed names.

This shift in allocation resembles Charlie Munger’s “Lollapalooza Effect,” where extreme, disproportionate outcomes arise when multiple cognitive biases and incentives converge and reinforce each other simultaneously. In this case, a shift by investors, attracted by a sharp acceleration in fundamentals, has been magnified by systematic strategies, passives and leverage chasing the momentum. As a result, the IT sector now accounts for over 40% of the benchmark.

Source: NS Partners & LSEG Datastream.

Deteriorating monetary backdrop another source of fragility

Our Chief Economist, Simon Ward, has been writing about a global monetary squeeze which began in the months leading up to Gulf War III. This was exacerbated by the war sending commodity prices and CPI momentum higher, leading to a slowdown in real money growth.

Deterioration in real money growth due to high CPI momentum

Source: Money Moves Markets, May 2026.

Nominal money expansion to counteract the liquidity squeeze is unlikely in the near term, with most major central banks now making more hawkish noises in response to price pressures. This means less liquidity support for markets, especially in pockets which have run hard such as semiconductors.

Broken story or a reset in overbought technicals?

In early June, crowded positioning and an itch to take profits collided with rising macro uncertainty arising from the release of strong US payroll data which topped market forecasts, igniting fears the US Federal Reserve would be forced into tightening monetary policy. It is also possible that forthcoming blockbuster IPOs of SpaceX, OpenAI and Anthropic placing a strain on market liquidity further unsettled investors sitting on large gains. This culminated in a sharp selloff on the 5^th of June, with winning trades in the tech sector suffering the most.

Source: Bloomberg data

Behavioural discipline

As noted in last month’s commentary, Rallying EM equities reflect an AI-powered earnings surge, we had been trimming AI exposure into strength on a view that parabolic stock moves would inevitably run into a pullback. We have also been re-allocating within our IT exposure (a modest c.3% overweight as at the end of May), from companies where stock performance risks becoming detached from reality and into niches benefiting from the same demand drivers but where investor enthusiasm has not been so frenzied.

Over the past few years, we have worked to sweat our risk budget within the AI-supply chain, tweaking the portfolio as data and conviction changes by rotating through a number of segments outlined below.

AI exposure across layers

Source: NS Partners, June 2026.

The aim of this activity is to maximise risk-adjusted returns by maintaining a healthy exposure to AI supply chain companies, but in an allocation that is cheaper, less crowded, more positively skewed and with more independent catalysts than a static allocation to the original winners.

Rack Attack, une entreprise du portefeuille de Banyan Capital Partners, a annoncé aujourd’hui son partenariat avec RealTruck, apportant ainsi les produits et l’expertise de RealTruck à chacun des 45 points de vente au détail de Rack Attack. Le partenariat est conçu pour rendre les accessoires haut de gamme pour camions plus accessibles pour les clients, en combinaison avec l’expertise offerte en magasin et les services d’installation.

« Le lancement officiel des magasins de détail RealTruck dans nos points de vente Rack Attack rehaussera notre partenariat et créera l’expérience client ultime. Ensemble, nous offrons aux propriétaires de camions et aux amateurs de plein air le plus grand choix de produits, ainsi que le meilleur service dans tous nos marchés en Amérique du Nord », explique Alexander Welbers, chef de la direction de Rack Attack.

Global manufacturing PMI new orders edged down in May from April’s four-year-plus high. The expectation here has been for a further decline in H2, reflecting a slowdown in global six-month real narrow money momentum from a February peak – see previous post.

Two recent releases support this forecast. First, one-month growth of the OECD’s G7 leading indicator fell again in May. Growth peaked in December and has led PMI new orders by three months on average historically, suggesting that April’s orders high will prove lasting – see chart 1.

Chart 1

Secondly, the PMI stocks of purchases index indicates that stockpiling of inputs accelerated further last month, likely marking a cycle peak – chart 2.

Chart 2

Growth in new orders is related to the rate of change of stockbuilding, implying a slowdown even in the unlikely event that the stocks of purchases index remains at its current extended level – chart 3.

Chart 3

AI infrastructure investment has moved upstream. The advent of ChatGPT, Claude and other AI applications fueled demand for semiconductor chips that enable the software to “think.” The demand concurrently brought about record capital expenditures to build out hyperscale data centres housing those chips. Now the bottleneck is even more basic: power. For AI, electricity is no longer a utility input; it is strategic infrastructure.

Data centre growth needs energy – a lot of it

That shift is colliding with a US grid whose expansion is constrained at multiple points: new generators are stuck in interconnection queues; interstate transmission still requires approvals across multiple jurisdictions; transformer shortages are delaying grid upgrades; and local opposition is increasingly slowing or cancelling data centre projects. North American Electric Reliability Corporation’s 2025 long-term reliability assessment warned that 13 of 23 North American assessment areas face resource-adequacy challenges over the next decade, underscoring that the issue is not only energy volume, but deliverability and reliability.

Electric Power Research Institute’s Powering Intelligence 2026 report makes the same point from the data centre side. Its “Generation and Capacity Impacts of Data Center Load” analysis finds that data centre growth could require large additions of generation and transmission capacity, but that supply-chain, siting and permitting constraints may limit how fast those additions arrive. In least-cost scenarios, incremental data centre load is met primarily by new and existing gas generation rather than carbon-free resources.

Getting power to where it’s hard to get

That naturally explains the recent order flow into large reciprocating engines. In April, the Finnish vessel engine manufacturer Wärtsilä Oyj Abp announced a 790 MW off-grid power solution for a new Texas data centre facility, using its 50SG natural gas engines. Wärtsilä explicitly framed the order around fast access to reliable power in a region where the grid cannot adequately meet urgent AI-infrastructure demand. Around the same time, the Korean shipbuilder HD Hyundai Heavy Industries Co. Ltd. disclosed that it had signed a US data centre power generation equipment contract based on its 20 MW-class HiMSEN engines, citing total capacity of 684 MW.

The appeal is straightforward. Large reciprocating engines are modular, dispatchable, fast-starting, scalable in increments and deployable closer to load than central-station plants. Compared with combined-cycle gas turbines, nuclear projects or major transmission upgrades, they can often be installed in shorter phases and avoid waiting years for grid interconnection. For a data centre developer, speed-to-power can be as important as cost-of-power.

Maintaining engine power at sea and on land

HD Hyundai Marine Solution Co. Ltd. (443060 KS) in our Emerging Markets Small Cap Strategy is the sole authorized provider of maintenance, repair and overhaul (MRO) aftermarket services to HiMSEN engines worldwide. As a HD Hyundai-affiliate, the company benefits from having HD Hyundai Heavy Industries – the world’s second largest shipbuilder and the largest manufacturer of medium-speed 4-stroke vessel engines – as a captive market. Of approximately 17,000 HiMSEN units in operation globally (most of them generating power for over 4,000 ships at sea), roughly 2,000 units are generating power on the ground.

Could data centres move offshore?

Mitsui O.S.K. Lines and Karpowership’s Kinetics have already signed a memorandum of understanding to develop what they describe as the world’s first integrated floating data centre platform, hosted on a retrofitted vessel and supplied by a powership capable of using LNG. In that scenario, vessel-engine makers are also powering the physical layer of AI.

La société Crestpoint Real Estate Investments est heureuse de poursuivre son partenariat avec Vestcor et Anthem Properties dans le cadre du projet d’envergure King + Park, un immeuble à usage mixte à la frontière de Burnaby. En compagnie du maire de Burnaby et d’autres invités, Crestpoint, Vestcor et Anthem ont pris part à la cérémonie d’inauguration des travaux du projet le 1er juin 2026.

Situé dans un milieu axé sur le transport en commun, le projet complet de King + Park comprend :

• 724 logements locatifs dans deux tours sur un même socle (la phase 1 est en cours de construction)
• Restauration de l’emblématique Boot Office Tower
• 512 350 pieds carrés de locaux à bureaux conservés et restaurés (Boot)
• 43 402 pieds carrés d’espaces commerciaux livrés à toutes les phases
• 1 559 logements en copropriété divise (phase future)

Comme l’a souligné Max Rosenfeld, vice-président exécutif et chef de la gestion des biens à Crestpoint, King + Park est « à la fois une occasion unique d’honorer le patrimoine et de réinventer un site », et Crestpoint est ravie de prendre part à un projet qui aura un impact positif et durable.