Small- and mid-cap stocks are often overshadowed by the biggest companies on the stock market, however, they offer up growth at a more reasonable valuation, fund managers say.GETTY IMAGES
The companies with the largest market capitalization tend to get all the attention from investors, and for good reason. They are typically profitable market leaders, and investors generally view them as less risky than small- and mid-cap stocks.
The following portfolio managers, who are running mutual funds recognized as winners of the 2025 LSEG Lipper Fund Awards for excellence in their respective categories, would argue small- and mid-capitalization stocks are worth a closer look.
These categories have many growing and profitable companies that are undervalued simply because they garner less investor attention.
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While the “magnificent seven” technology stocks – powered by exuberance related to artificial intelligence – have fuelled returns in recent years, these award-winning managers make their cases that the small- and mid-cap paths add another facet of long-term growth to portfolios.
Small companies, big potential
Most investors look to the S&P 500 for exposure to the U.S. stock market, but the country’s small-cap market is also fertile ground for growth at a reasonable price for investors such as Jason Hans, portfolio manager for the BMO U.S. Small Cap Equity Fund, a winner in Lipper’s five-year, U.S. small/mid-cap equity category.
“There have been so many flows to the ‘mag seven’ that the flip-side is small-caps have been unloved for the last decade-plus,” he says.
Research done by the likes of Eugene Fama and Ken French, shows that over many decades, small-cap stocks have outperformed large-caps due to the risk premium.
Since small-caps have lagged large-caps for about a decade, investors have greater opportunity to find good companies at lower valuations. The challenge is finding the gems hiding among the many not-so-good companies on indices such as the Russell 2000, where 40 per cent of firms are unprofitable and debt-laden, Mr. Hans says.
Portfolio managers – like Mr. Hans – who do bottom-up analysis can find those largely unknown companies with steady cash flows that are profitable or trending in that direction. This includes companies benefiting from the AI splurge, such as Willdan Group Inc. (WLDN-Q) which does “consulting for data centres with a growing backlog of clients,” Mr. Hans says.
Mind the mid-caps
The U.S. mid-cap market is often under-represented in portfolios despite offering exposure to firms that are highly resilient to economic risks, says Shanthu David, portfolio manager for the RBC U.S. Mid-Cap Growth Equity Fund, a Lipper winner in the three-year category.
Amid concerns about U.S. President Donald Trump’s pro-tariff agenda, he notes that 70 per cent of mid-cap companies serve mostly the domestic economy. “A lot of these are also leaders in highly fragmented markets,” he adds.
A company like United Rentals Inc. (URI-N), which has a “mid-teens” percentage share in its respective market, is using its scale and strong balance sheet to grow amid expanding demand for equipment to construct the mega-projects resulting from re-shoring, among other secular drivers such as the AI-driven demand for electricity, Mr. David says.
What’s more, the mid-cap universe is undervalued relative to the large-cap market, bearing more resemblance to large caps 10 years ago when valuations were significantly lower, says David Tron, also a manager with the RBC fund.
“So you can find category leaders growing profits with long growth runways driven by secular tailwinds,” he explains.
If the economy sours, mid-cap market leaders are also resilient, often coming “out the other side stronger,” taking market share from smaller competitors, Mr. Tron adds.
Homegrown small- and mid-cap profitability
Canada’s small- and mid-cap markets garner even less investor interest than in the United States, presenting plenty of profitable opportunities, says senior portfolio manager Anil Tahiliani, who runs the Matco Opportunities Fund, a Lipper winner in the three-year category.
“They’re often not everyday names,” he says, noting many of these firms have growing profits and strong balance sheets that enable them to weather challenging conditions.
His fund has recently seized on three secular tailwinds: geopolitical risk, rising electricity consumption, and infrastructure renewal.
One company illustrating the geopolitical risk theme is defence business Kraken Robotics (PNG-X), which is on the TSX Venture Exchange. “It’s been one of the best performing stocks this year in the Canadian market,” Mr. Tahiliani says about the manufacturer of underwater drones, with U.S. defence contracts.
A significant risk for mid- and small-caps, however, is downside volatility. ”Panicked investors often sell these stocks first,” he says, while adding it still presents an opportunity. “During that sell-off in April, for example, I was buying.”
A world of opportunity
Investors seeking a profitable path, arguably the least travelled, can look to the global small-cap stock universe of more than 10,000 companies, says Mark Costa, portfolio manager for the Brandes Global Small Cap Equity Strategy Fund, a winner in Lipper’s three-year category. “The more inefficient the market, the bigger price dislocation value investors find.”
Mr. Costa adds that one driver of inefficiency is simply fewer investor dollars chasing global small-caps because investors generally perceive them as even more risky.
For value shops such as Brandes, this affords openings to invest in profitable and growing companies, which dominate their respective markets, at prices below intrinsic value. That includes Ireland’s largest alcoholic beverage producer C&C Group PLC. (CBX-L). “It’s a small-cap only because the country’s population is small.”
Mr. Costa says the company has dominant sales positions in markets where it operates. That said, these companies often have additional risks, including currency, because they operate in jurisdictions outside Canada and the United States. ”One big one today is trade disruption exposure,” he says.
Still, a mitigating factor is that many global small-caps generate revenues from their respective domestic markets, Mr. Costa adds. The Brandes investment team continually analyzes these risks, including trade upheaval. And for those names where we cannot clearly define that risk, we take a pass.”
Editor’s note: A previous version of this article incorrectly identified David Tron as a manager of the BMO U.S. Small Cap Equity Fund. He is a manager of the RBC U.S. Mid-Cap Growth Equity Fund.