Go Small or Go Home

AQR

Chris Doheny, Peihan Zhao, Charles Fattouche

Research

9 Pages

AQR explores why small caps, especially in the international and emerging regions, present a compelling investment opportunity driven by the potential for higher expected market returns, attractive earnings growth, strong diversification benefits, and rich alpha opportunities.

Key Takeaways

Higher expected returns: International and emerging market small caps are projected to outperform their large-cap counterparts over the medium to long term, driven by favorable valuations and growth prospects.
Enhanced diversification: These small-cap segments exhibit lower correlations with U.S. large-cap equities, providing investors with better diversification and reduced portfolio volatility.
Alpha opportunities through inefficiencies: The under-researched nature of international and emerging small-cap markets presents opportunities for skilled managers to generate alpha by exploiting market inefficiencies.
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