Small cap companies – will the outperformance continue?

Smaller companies can be some of the most exciting businesses. They’re often at the forefront of innovation and still have the potential to grow into much larger companies. Smaller companies are also often under-researched which creates lots of opportunities to uncover hidden gems for those prepared to look.

Over the long term, smaller companies have outperformed larger counterparts. But in recent years, they’ve lagged as investors focused on a relatively small group of mega‑cap companies — particularly those seen as the immediate beneficiaries of artificial intelligence (AI).

But so far in 2026, smaller companies have stolen back their lead. The MSCI World Small Cap Index returned 9.86% from the start of the year to the end of February, ahead of the MSCI World Index, which returned 3.03%.* This is over a very short period though, and we’ve seen some volatility more recently in March amid concerns around the crisis in the Middle East. Remember, past performance isn’t a guide to the future.

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Emma Wall

Chief Investment Strategist

This article isn’t personal advice. Investments can rise and fall in value, so you could get back less than you invest. If you’re not sure if an investment’s right for you, ask for financial advice.

3 reasons this might continue

Smaller companies typically perform better than larger ones during periods of falling interest rates. With inflation trending closer to central bank targets, policymakers across major economies have more room to cut rates in 2026. The US Federal Reserve is expected to cut twice this year, with the Bank of England expected to do similar.

Because smaller firms are often more reliant on borrowing to fund investment and growth, they’re more sensitive to changes in interest rates. If rates go down, then cheaper borrowing costs can boost profitability, support expansion, and improve investor sentiment.

The valuations of global smaller companies – a reflection of their future growth potential – are below their long-term averages and look attractive compared with larger firms. This could spell opportunity for investors with a long-term outlook as at some point the valuation ‘gap’ could close. Smaller firms are also expected to grow their earnings faster in 2026, which could help share prices.

While headlines around AI tend to focus on the mega‑cap technology giants, the broader ecosystem needed to support AI expansion is vast. Large companies have committed enormous sums to AI investment, but delivering on those commitments requires significant infrastructure – from data centres and specialised components to logistics and equipment.

Many of the companies supplying this infrastructure are smaller firms. They’re the “picks and shovels” of the AI boom, the builders, transporters, manufacturers, and service providers enabling the larger companies to execute their AI strategies. As AI spending shows no signs of slowing, these smaller companies could benefit from a long runway of demand.

There are no guarantees these will materialise though – it’s important to remember that although smaller companies typically offer greater growth potential than larger ones, they’re also higher risk and more volatile, more sensitive to changes in economic conditions, and more exposed to funding pressures. That’s why a long investment horizon is essential when investing in this part of the market.

3 smaller companies fund ideas

Investing in these funds isn’t right for everyone. Investors should only invest if the fund’s objectives are aligned with their own, and there’s a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio.

All these funds invest in smaller companies, which makes them higher risk. For more details on each fund, its risks and charges, use the links to their factsheets and key investor information.