Small caps are earning another look

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.

Think big. Buy small caps

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.

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.

China’s semiconductor ambitions returned to the spotlight following the recent meeting between President Trump and President Xi. While the US administration reportedly signaled willingness to permit exports of certain downgraded or older-generation AI GPUs into China, the more notable takeaway may have been China’s relatively muted reaction. Rather than relying on controlled access to foreign technology, China appears increasingly focused on accelerating the development of its own semiconductor ecosystem.

While the AI cycle continues to demonstrate remarkable strength, China’s push toward semiconductor self-reliance increasingly appears to represent an additional structural driver for the industry – one that could persist largely independent of the pace or duration of the current AI infrastructure cycle.

A focus on a domestic opportunity for self-reliance

The scale of the opportunity remains significant. China is already the world’s largest semiconductor consumption market, representing well over USD200 billion of annual chip demand and likely continuing to grow meaningfully over the coming decade. Yet domestic self-sufficiency across many semiconductor categories remains relatively low, leaving substantial room for domestic substitution over time. Even within analog and power semiconductors – categories generally viewed as more achievable for domestic suppliers – the opportunity remains large. Industry estimates suggest China’s power management semiconductor demand alone already represents a multi-billion-dollar market, while domestic suppliers still account for a relatively modest share. If China materially increases domestic semiconductor content over the coming years, tens of billions of dollars of annual value could gradually shift toward Chinese suppliers.

China still faces important technological bottlenecks. Advanced EUV lithography remains effectively inaccessible, while gaps persist across certain leading-edge manufacturing equipment, inspection and metrology tools and advanced materials. However, recent developments suggest China continues to make incremental progress across multiple parts of the semiconductor stack despite these restrictions. Domestic memory players have advanced meaningfully in NAND and DRAM, while progress in high-bandwidth memory (HBM), advanced packaging and other areas continues to evolve. More broadly, as the saying goes, necessity is often the mother of invention, and technological constraints themselves can become catalysts for accelerated domestic innovation.

Lessons from solar, batteries and EVs

Importantly, China has already demonstrated an ability to achieve global scale and competitiveness in industries once dominated by foreign incumbents. The country now holds leading positions across solar panels, batteries and electric vehicles, while also becoming increasingly competitive in industrial automation and advanced manufacturing more broadly. Regardless of one’s geopolitical perspective, China’s long-term willingness to commit capital, engineering talent and policy support toward strategic industries should not be underestimated.

As the AI infrastructure cycle evolves, bottlenecks have gradually expanded beyond AI accelerators and memory into broader areas of the semiconductor supply chain. More recently, power management integrated circuits (PMICs) have emerged as an area experiencing tighter supply-demand dynamics, driven by rising demand from data centres and AI infrastructure. AI servers require increasingly sophisticated power architectures, translating into higher semiconductor content and more advanced PMIC requirements. These products typically command higher pricing and more attractive margins, while stronger AI-related demand may also help stabilize pricing conditions across broader analog semiconductor markets.

Against this backdrop, we believe companies positioned within China’s domestic semiconductor ecosystem could benefit from these longer-term trends. One example within our Emerging Markets portfolio is Silergy Corp. (6415 TT), a China-based analog semiconductor company and one of China’s leading domestic suppliers of PMICs.

Why PMICs are important

PMICs are semiconductors responsible for regulating and distributing electrical power within electronic systems, helping ensure that processors, servers, vehicles and industrial equipment receive power efficiently, reliably and safely. Unlike leading-edge AI accelerators, analog and power management semiconductors are embedded across a broad range of everyday electronic applications.

Headquartered in Hangzhou, Silergy designs analog and mixed-signal semiconductors serving industrial, automotive, consumer electronics, computing and communications applications. While the company is gaining increasing exposure to AI servers and data-centre-related applications, its business remains diversified across multiple end markets, which in our view provides a more balanced way to participate in both semiconductor self-reliance and broader electronics content growth.

Silergy is already one of China’s leading domestic PMIC suppliers, yet its market share within China’s broader analog and power semiconductor market likely remains relatively small, suggesting a potentially long runway for continued share gains over time.

While market attention remains concentrated on the most visible AI beneficiaries, some of the more durable investment opportunities may emerge deeper within the semiconductor supply chain and away from the headlines. China’s semiconductor ambitions could ultimately prove to be one of the more important long-term trends still unfolding beneath the surface of today’s AI cycle.

Earnings remain resilient, but growth is concentrated, macro risks are building and selectivity is becoming critical.

Resilience in a tense environment

The Q1 reporting season underscores a growing divergence in global earnings. While US earnings growth remains robust, it is increasingly concentrated in AI-related industries. In contrast, Europe remains in a low-growth, late-cycle environment, while Japan continues to benefit from structural tailwinds. At the same time, a gap is emerging between the AI narrative and broader earnings. While AI-related sectors are seeing strong growth, the benefits have yet to spread across the wider economy.

The conflict in Iran has driven a sharp rise in oil prices and renewed volatility across equities and bonds, reflecting concerns around inflation and energy supply disruptions. It has also led markets to reassess the path of interest rates, with higher energy costs reducing the likelihood of near-term policy easing. This could test the resilience of corporate earnings through 2026.

So far, corporate earnings in developed markets have been more resilient than expected, despite successive macro shocks. Part of this resilience reflects lessons learned over the past five years. The pandemic period, in particular, has led to improved inventory management, stronger cost discipline and a greater willingness to implement cost optimization programs. More broadly, companies appear better equipped to manage their cost base, and in some cases, have demonstrated persistent pricing power. This has been particularly evident in industrials and technology, where contract structures and product differentiation have enabled effective price pass-through. These factors have helped preserve margins even as demand has plateaued or softened.

However, without a swift resolution to the conflict in Iran, global growth could decelerate further, exposing more vulnerable areas of the market. Discretionary spending, manufacturing and energy-intensive sectors such as transportation and logistics are likely to be most at risk. Rate-sensitive sectors, including residential real estate and REITs, could also face valuation pressure.

Looking at the broad small-cap market, balance sheets are structurally more fragile today than they were a decade ago when companies were deleveraging following the Global Financial Crisis. In the current environment, smaller companies are more exposed to rising interest costs and refinancing risk, particularly at the lower end of the quality spectrum.

Positioning for resilience

In this environment, a quality-focused approach centred on sustainable EPS growth remains critical. Our strategy continues to prioritize companies with strong balance sheets and high returns on equity.

As illustrated by our portfolio characteristics, our Global and International Small Cap strategies exhibit the following attributes:

End of March 2026	Global Small Cap vs. Index	International Small Cap vs. Index
Leverage (Net debt/EBITDA)	Leverage is ~74% lower than the benchmark	Leverage is ~83% lower than the benchmark
Operating margin	+558 bps above the benchmark	+937 bps above the benchmark
Return on equity	+ 451bps above the benchmark	+407 bps above the benchmark
Forward EPS growth	+793 bps above the benchmark	+750bps above the benchmark

Source: IDA, Bloomberg, MSCI

The lower leverage of these strategies points to less balance-sheet risk and better ability to navigate higher-for-longer rates. At the same time, the higher operating margins and stronger ROE, alongside faster forward EPS growth, are indicative of higher-quality businesses with more durable profitability and earnings power than the benchmark.

In addition, we continue to focus on companies exposed to structural growth drivers. Themes such as electrification, automation, health-care innovation, defence and reshoring offer improved visibility over the medium term. These areas can provide both defensive characteristics in a slowdown and operating leverage in a recovery.

Driven by years of underinvestment, rapid urbanization and the need to adapt to a power-driven, technology-led world, infrastructure spending is a key tool governments use to stimulate economic growth. Regardless of what drives the allocation, civil infrastructure – the systems that underpin essential societal functions – remains a foundational focus of government spending.

The US government’s current focus on infrastructure

The 2021 Infrastructure Investment and Jobs Act (IIJA) is in full swing and will last until 2030 and beyond. The approximately USD1.2 trillion US expenditure bill is allocated to roads, bridges, transport safety, transit, freight, chargers, power and broadband.

Spending on US highways and streets is currently at historic highs, reaching a seasonally adjusted annual rate of approximately $149.5 billion in January 2026. This sector remains a primary driver of public infrastructure growth, bolstered by long-term federal funding. But despite high spending, the American Society of Civil Engineers (ASCE) estimates a $684 billion funding gap for roads over the next decade (2025–2035).

The business cycle is such that architecture and engineering firms gain from the bulk of the work at the onset, executing on planning and design. Then come the bids and proposals on work and equipment, which ultimately fill the backlogs of suppliers and contractors.

The right tools for the job

Based in Downers Grove, Illinois, Federal Signal Corporation (FSS US) manufactures specialized equipment for infrastructure maintenance, public safety and environmental cleaning. The company operates between 24 to 27 principal manufacturing facilities worldwide and directly manages over 40 service centres. Already within our portfolio, the company is one that may be positioned to benefit from infrastructure spending by providing the necessary equipment and technology to support civil infrastructure projects.

Federal Signal’s diversified business groups offer products that serve multiple infrastructure subsectors. The Environmental Solutions Group is the largest manufacturer of dump trucks in the United States. They also manufacture street sweepers, sewer cleaners and industrial vacuum loaders, safe-digging and road-marking equipment. The Safety and Security Systems Group provides technology and systems used by first responders and industrial facilities to protect lives and property.

Federal Signal delivers a comprehensive suite of equipment designed to support a wide range of IIJA-funded project areas, as highlighted in the table below.

IIJA allocation (in USD)	Area of infrastructure investment	Federal Signal equipment
$10 billion	Roads and bridges	Street sweepers, vacuum excavators
$55 billion	Water and sewers	Sewer cleaners
$65 billion	Broadband	Safe-digging trucks
$73 billion	Electrical grid modernization	Safe-digging trucks
$11 billion	Transportation safety programs	Public warning systems, emergency vehicle equipment

 

Cementing a provider of construction materials

Large scale infrastructure projects such as bridges and transit require longer planning and often are fully realized toward the tail end of the spending period. Global Alpha is positioned through Eagle Materials Inc. (EXP US), an important producer of cement, to strategically capture the roughly USD550 billion allocated for new construction materials.

Eagle Materials possesses regional market dominance: The company’s 70+ facilities are concentrated in the US Heartland, Sun Belt and Mountain West. These inland markets are protected by high transportation costs, which limit competition from cheaper foreign imports.

Between 2024–2025, Eagle invested heavily in modernizing plants like the Laramie, Wyoming facility, increasing cement output by 50% specifically to meet the rise in IIJA-funded municipal projects. Within the same time frame, Eagle converted nearly 100% of its cement capacity to Portland Limestone Cement (or PLC). This low-carbon product is increasingly required for government-funded projects that prioritize environmental sustainability.

Strategically, the company shifted its sales mix toward non-residential and public infrastructure, sectors projected to grow by roughly 5% in 2026, to offset recent softening in the residential housing market.

Global phenomena

Civil infrastructure is being accelerated on a global basis; China spent USD550 billion on transport infrastructure in 2025 alone. Japan just began a USD140 billion mid-term plan for the implementation of national resilience. Global Alpha is exposed to global civil infrastructure buildout through Sany Heavy Equipment International Holdings Co. Ltd. (631 HK).

Hong Kong-listed Sany is the world’s third-largest heavy equipment manufacturer. Their equipment is designed with a focus on being “easy to own, easy to operate and easy to service,” prioritizing essential functionality over excessive technical complexity. The company is also a global leader in concrete machinery, especially after acquiring the legendary German brand Putzmeister. Products include truck-mounted pumps, stationary pumps and concrete mixers. Large-scale engineering contractors account for approximately 45% of Sany’s revenue.

That demand is increasingly coming from outside China: overseas markets now contribute 64% of revenue, led by Africa, where sales surged 55% on the back of infrastructure buildouts. To capitalize on this momentum, Sany has shifted its mix toward infrastructure-heavy “civil works” applications, helping drive a 41% increase in net profit in 2025.

Keeping assets clean, clear and operational

Global Alpha also holds Bucher Industries AG (BUCN SW), a Swiss industrial group that provides specialized machinery and components for essential infrastructure, specifically through its Bucher Municipal and Bucher Hydraulics divisions. Unlike heavy civil construction firms, Bucher focuses on the maintenance, cleaning and operational safety of existing civil assets.

Bucher’s connection to civil infrastructure is primarily functional, ensuring that public and commercial traffic areas remain operational and safe. For sewer and drainage infrastructure, Bucher produces specialized sewer cleaning and water recycling units essential for managing urban water networks and preventing flash flooding on major roadways. Bucher also provides construction site support through its heavy-duty sweepers, specifically engineered to handle the abrasive materials (e.g., aggregate, spoil) found on large-scale infrastructure construction sites.

Civil infrastructure is more than a standalone spending category – it is the operating backbone that enables other critical buildouts, from power and water management to digital connectivity. For Global Alpha, this creates diversified, real-economy exposure to long-duration public investment, spanning both new construction and the ongoing maintenance that keeps cities functioning.

Lime and limestone are materials that have shaped human civilization for thousands of years. Limestone is a common sedimentary rock formed mostly from calcium carbonate. It develops over millions of years from either marine organisms (shells, coral, plankton, etc.) or chemical precipitation in oceans and lakes.

Limestone is converted into lime by burning (calcining) it in a kiln at 1000ºC. Lime can then be mixed with water (hydrated) to form hydrated lime. Finished lime then absorbs CO2 and slowly transforms back to calcium carbonate (i.e., limestone). The lime cycle is one of the oldest known chemical cycles used by humans

Limestone been used as building material for centuries, from pyramids to great cathedrals of Europe, including Notre Dame, Westminster Abbey and St Peter’s Basilica. More commonly it is used as an ingredient in cement and concrete, and in building roads. It is also a widely used industrial mineral, either unprocessed or transformed into a lime derivative.

Limestone is estimated to account for 15% of surface rock on Earth, but high-purity limestone valued in industrial, construction, environmental and agricultural applications is much rarer as are deposits of scale that can be commercially exploited.

Applications across industries

SigmaRoc PLC (SRC LN), a recent addition to the portfolio, is a lime and minerals group targeting quarried materials assets in the UK and Northern Europe. The business is asset backed with over 2.7 billion tonnes of mineral reserves and resources, the equivalent of over 100 years of resources.

SigmaRoc has exposure to the construction, industrial and environmental end markets with applications such as:

Construction

• Quarried limestone and granite materials are used in both infrastructure and residential applications such as the construction of roads, railways, bridges, ports, airports and buildings. The main products include aggregates, asphalt, ready mix concrete, pre-cast concrete and dimension stone.

Industrial

• Lime is used as a flux in steel and copper production to remove impurities and control melt chemistry.
• Quicklime is involved in pulp and paper production.
• Limestone powder is used as a filler in paints and adhesives.

Environmental

• Quicklime, slaked lime and limestone powder remove acidic compounds from flue gas.
• Lime treats drinking water by raising pH, and wastewater by reducing toxicity.
• In soil treatment, lime raises soil pH.

Quarries and their locations

SigmaRoc has an advantage in that it owns quarries. In countries where it does not own quarries (the UK and Poland), it has on-site kilns and long-term supply agreements with the quarry owner. Owning the quarry means fixed costs are manageable and ensures both the quantity and quality of supply.

Having quarries located close to customers has key logistical advantages. Firstly, the weight of the product means it is not feasible to ship long distances. Lime products are dangerous to transport due to lime’s high chemical reactivity. It is classified as corrosive under transport regulations and producers need regulatory compliance to ship. Quicklime degrades over time, meaning shipping long distances is unfeasible, reducing the threat of imports.

Integration, growth and megatrends

The three main lime producers in Europe are SigmaRoc and two privately owned Belgian companies. After those, the market is fragmented and the SigmaRoc has a “buy-and-build” growth model. The strategy is to acquire assets (quarries, lime and limestone businesses, related infrastructure) in fragmented local markets, then integrate them to extract synergies, scale and efficiency.

SigmaRoc has cyclical recovery potential and is poised to benefit from megatrends that support long-term growth. If macro conditions improve – supported by infrastructure spending, lower rates and renewed housing policy – SigmaRoc’s scale and flexibility could drive outperformance. Its diversified presence across geographies also helps smooth region-specific cycles.

Future growth is also supported by the ongoing electrification of economy. This creates a huge increase in demand for batteries, and lime is required in the mining and refining of lithium. European steel – and especially green steel – should also benefit from electrification, so long as the industry is protected from high carbon inputs, potentially reduced import quotas and higher tariffs. Beyond electrification, flue gas scrubbing creates an environmental market for lime, a process that addresses shipping emissions.

Limestone and lime are attractive markets due to high barriers to entry, the irreplaceable nature of product and the lack of material import flow into Europe. With an M&A track record as the foundation for future growth, we believe that makes SigmaRoc a compelling investment in the materials sector.

The technology that harnesses wind and solar power is highly noticeable at a glance – it is hard to miss towering wind turbines or gleaming fields of solar panels. But what is not so obvious is how the power gets from those visible generators into the electrical grid that eventually powers your home.

Nexans S.A. (NEX FP) is increasingly emerging as a differentiated way to play the next phase of the energy transition, where the focus shifts from building renewable capacity to connecting it at scale.

While the first wave of the energy transition was defined by rapid growth in wind and solar generation, the current phase is more complex: integrating that capacity into power systems. This is where Nexans sits – at the intersection of renewable buildout and the infrastructure required to make it usable.

Europe’s plan for energy security

In this context, offshore wind is becoming a central driver of demand once again. Following a period of delays linked to cost inflation and project economics, Europe is now moving to re-accelerate deployment. At the January 2026 North Sea Summit, governments committed to developing ~100GW of offshore wind capacity, with a longer-term ambition of 300GW by 2050, alongside coordinated investments in cross-border grid infrastructure.

This renewed momentum is not just about decarbonization, it is increasingly tied to energy security and affordability. European policymakers are prioritizing domestically generated electricity to reduce dependence on imports, while structurally higher and more volatile power prices continue to incentivize investment in renewable capacity.

Nexans ready to support Europe’s wind commitments

For Nexans, offshore wind is particularly attractive. Each project requires significant volumes of high-voltage subsea export cables and increasingly complex interconnection solutions, positioning cable suppliers as critical enablers of deployment. As projects scale and networks become more integrated, demand is shifting toward higher-specification, higher-margin systems areas where Nexans has strong technological capabilities.

At the same time, the company’s strategic repositioning over recent years has sharpened this exposure. By exiting more commoditized cable activities and focusing on electrification and high-voltage segments, Nexans has aligned its portfolio with the fastest-growing and most structurally supported parts of the market.

Buying local – Nexans is Europe-based

This is further reinforced by an evolving policy backdrop in Europe. The EU’s industrial strategy is increasingly incorporating local content requirements and procurement incentives aimed at strengthening domestic manufacturing in key energy technologies. For a Europe-based player like Nexans, this creates a supportive competitive environment, particularly in large-scale infrastructure linked to renewables.

Importantly, supply dynamics remain favourable. High-voltage subsea cable capacity is limited globally, with long lead times and high technical barriers to expansion. As offshore wind deployment accelerates again, this constraint is likely to support pricing and contract discipline across the industry.

Disciplined execution, rising returns

The key focus for investors is increasingly on Nexans’ ability to translate strong structural demand into consistent and higher-quality earnings. As the group continues to prioritize selective project execution and disciplined contract structures, visibility on margins and cash generation is improving. This reflects a more mature operating model, with greater emphasis on value over volume and a clear focus on returns.

In that context, Nexans offers a differentiated exposure to renewables, not through generation itself, but through the critical systems that enable renewable electricity to be delivered, scaled and monetized. As Europe enters a renewed phase of offshore wind expansion and electrification, the company may be well positioned to capture both growth and improving returns.

“A good laugh and long sleep are the best cures in a doctor’s book.” – Old Irish proverb

It’s been more than a decade since the CDC declared sleep disorders “a public health epidemic.” Since then, the world has woken up and taken note. The long-term impact of sleep loss on mental health and physical performance has been widely documented in scientific studies. From cardiovascular disease to compromised immunity and burnout, poor sleeping habits quietly add up over time while increasing our mortality risk. Sleep is also important for cognitive health because it gives the brain time to remove toxins that accumulate while we are awake.

The three foundational pillars of human health are sleep, diet and exercise. Diet and exercise have always dominated conversations around health with very little attention paid to sleep and sleeping habits. Now sleep (or the lack of it) has finally caught the attention of society at large and with it we have seen the rise of the sleep economy.

The broader sleep economy encompasses everything from sleeping aids to sleep medication and supplements, bedding and furnishing to sleep tourism. Just the sleeping-aid market is estimated to reach $188 billion according to Statista. The emergence of the sleep economy is best represented by the popularity of products like the Oura ring that tracks heart rates, sleep cycles and recovery metrics. Oura ring has sold over 5.5 million rings and the company behind it, Oura Health, was valued at $11 billion last year.

Beyond just physical products, we are also seeing the rise of sleep tourism, with travelers showing an increased preference for sleep-focused holidays. Hotels understand that their customers now value good quality sleep and offer everything from smart beds and pillow menus to sleep-specific spa treatments and dedicated sleep programs to help reset the circadian rhythm and allow customers to rest.

One of the holdings in our portfolio is Atour Lifestyle Holdings Ltd. (ATAT US), the largest hotel operator in China’s upper-midscale segment. There are several attributes of the business that make it attractive purely as a hotel operator – from its brand strength to its ability to expand in an asset-light manner while maintaining its attractiveness to prospective franchisees.

However, Atour also has a fast-growing retail business that caters directly to emerging sleep economy trends. From deep sleep pillows to mattresses and comforters, Atour is the first hotel chain in China to develop a retail business around the sleep economy. Sleep economy aside, Atour also taps into so called new consumption trends in China where consumers prioritize maintaining a balanced lifestyle and personal fulfillment over conspicuous consumption that was prioritized by their parent’s generation. From that perspective, Atour for us checks two boxes: the rise of the sleep economy and shift in spending toward services like travel and tourism, concerts etc.

Atour is able to create synergies with its hotel business by cross selling its products to its hotel guests. Hotel guests get what is in effect a free trial when they stay at an Atour property and their real-time feedback is used to enhance product R&D. It helps that Atour’s premium positioning has a positive spillover effect on the brand positioning of its sleep products. Being alert to changing societal norms and evolving spending priorities is a key element in identifying themes within our investment process. We sleep well at night knowing that these thematic tailwinds provide a nice boost to Atour’s revenues and profitability on top of good execution with its core hotel business.

Japan is a country that remains steeped in tradition and ritual, even as it embraces and leads advanced technologies such as factory automation, semiconductor production equipment and high-speed trains. Staid practices such as invoicing expenses via fax machines, saving data on floppy disks and even signing documents with physical ink stamps continued unabated until the pandemic forced a wholesale rethink.

Historical context: System integrators

Japanese companies’ approach towards IT infrastructure differs fundamentally from their American and European counterparts. In the 1960s, the Japanese government was concerned about IT competitiveness against American behemoths, IBM and Intel. Therefore, the government funded the development of IT national champion NTT, as well as three other IT groups, Fujitsu and Hitachi, NEC and Toshiba, as well as Mitsubishi Electric and Oki. It also awarded these groups public projects over the decades since. By the 1980s, the private sector saw the spinoff of consulting subsidiaries, specializing in the IT needs of service sectors such as e-commerce and finance. These consultants became known as System Integrators (SIs).

Competitive advantage: Talent monopsony

SIs coordinate software vendors, hyperscalers, subcontractors and non-tech companies’ IT departments to meet their clients’ IT needs. SIs’ customer stickiness is strong because clients desire customization but can’t secure the top IT talent because of customers’ comparatively low salaries. Local companies’ IT workers are generalists who don’t know how to effectively procure hardware, manage software or even develop an IT strategy. Gartner found that 67% of such companies blamed “talent scarcity” as a major obstacle to IT upgrades (vs. 38% globally). With growing IT labour shortages and few students pursuing tech degrees, SIs’ core role between the key parties is what leads to higher margins, enabling companies to hire top SI talent.

Industry outlook: Long growth runway

IDC estimated that Japan’s $180 billion in annual general IT spend would grow at 6.4% CAGR into 2029E. Mordor Intelligence estimated that cloud spending would grow significantly faster than general at 17% CAGR into 2031E. According to Gartner, in 2021 31% of Japanese companies stored data on the cloud, with cloud comprising only 4.3% of total IT spend (vs. 14.4% North America, 9.7% Europe, 6.4% China). As of 2023, according to the Information Technology Promotion Agency, large Japanese firms with more than 1,000 employees had already drawn even with large American firms with ~63% of them noting that they had dedicated digital transformation (DX) departments (vs. ~64% for large American firms). In contrast, smaller Japanese firms with fewer than 1,000 employees were lagging behind with just ~12-41% reporting dedicated DX departments (vs. ~39–66% for smaller American firms). Smaller capitalization SIs serve small customers.

Gen-AI: More opportunity than threat

While software-as-a-service (SaaS) company stocks have sold off across America, Europe and Japan year to date, we expect strong demand for cybersecurity and infrastructure to continue, benefiting SIs. This is because declining software development costs amid AI-led coding and fiercer price competition against AI agents reduce overall software package costs. While lower prices hurt SaaS supplier margins, they boost customers demand.

SIs are crucial to the integration of software packages with hardware and networks, all safeguarded by cybersecurity. Japanese companies’ core IT systems were built by the SIs themselves in complex layers based on evolving business needs and characteristics. This makes it hard to standardize processes, a necessary precursor to an AI-first automated approach. Rather, our SIs will even benefit from rising demand for limited IT system standardization as companies seek to deploy agentic AI. Admittedly, agentic AI has the potential to replace end-user applications in enterprise resource planning, but we believe that SIs will retain their crucial role in maintaining infrastructure by offering cybersecurity.

DX favours smaller SIs

Mentioned above, DX refers to the implementation of digitalization through efforts such as transitioning data to the cloud to avoid reliance on onsite physical data storage and, more recently, rolling out gen-AI models to boost productivity. The term captures the shift in approach from treating IT as peripheral toward recognizing its centrality. As IT competitiveness and DX continue in Japan, the next leg of growth should be led by DX service providers that focus on smaller firms.

Simplex Holdings

Simplex Holdings Inc. (4373 JP) was founded in 1997. In 2001, it began offering banks with solutions like IT consulting, systems development, and operations and maintenance. Over the decades, it expanded into FX brokerages, equity, futures, options platforms, insurers and crypto. In 2013, it conducted a $211 million buyout with Carlyle. Carlyle later sold its equity stake upon Simplex’s September 2021 relisting on the Tokyo Stock Exchange. We feel that Simplex is well positioned to benefit from this trend.

* all dollar amounts referenced in this article are in USD.