28 October 2026
5 mins 30 secs read
Over 30 years, Macquarie Systematic Investments has developed its quantitative investment process which seeks to identify the statistical markers and digital fingerprints historically associated with long-term outperformance. Applying this technology to the global small companies space - the proving ground for developed markets equities - gives investors a unique opportunity to invest in a strategy which applies cutting edge technology in search of tomorrow's equity market leaders, today.
1. Many global share portfolios are heavily exposed to a small number of very large companies, making them less diversified than they first appear.
2. An allocation to global small caps can help broaden diversification by adding exposure to a wider range of businesses, sectors and growth opportunities.
3. Over the long term, global smaller companies have historically delivered strong returns, as per Chart 3 below, although this can come with higher volatility.
4. Given the size and diversity of the global small cap universe, a disciplined and systematic approach can help identify opportunities while managing risk.
Global equities have delivered strong outcomes in recent years, as per Chart 3 below. However, a growing share of index returns has been driven by a relatively small group of mega‑cap stocks. This concentration means many global equity portfolios may be exposed to a narrower set of outcomes than investors realise.
There are many ways to diversify global equity exposure: by region, sector, or investment style. Company size is another dimension, and global small companies generally behave differently to the mega caps that dominate headline indices.
Allocating to small caps can help broaden the opportunity set within an overall global equity allocation. For example, there are circa 1,200 companies in MSCI World ex-Australia Index, which is the generally recognised global large cap benchmark, whereas the MSCI World ex-Australia Small Cap Index contains more than 3,600 companies1. Importantly, there is no overlap.
Historically, global small caps have outperformed global large caps over the long term2, typically due to longer growth runways, given these companies are starting from a lower base. They also tend to offer different sector and style exposures compared with index heavyweights.
Key reasons investors may consider global small caps include:
Diversifying beyond index heavyweights
Major global equity indices are increasingly dominated by a small number of mega cap stocks, which can lead to unintended concentration risk.
Broadening opportunity sets and return drivers
Global small companies expand the investable universe across regions and earlier stage businesses, offering access to innovation and potential long term growth as future leaders emerge.
Enhancing sector and style diversification
Small caps typically have greater exposure to sectors such as industrials, healthcare and specialist services, helping diversify portfolios away from technology heavy index leaders.
Small caps are publicly listed companies that sit toward the lower end of the share market by size, typically measured by market capitalisation (share price multiplied by shares on issue).
The MSCI World ex-Australia Small Cap Index is designed to represent global markets by covering over 3,600 small cap stocks across 23 developed countries.
MSCI defines global small caps relative to each country’s share market, rather than using a fixed market-capitalisation cutoff. In developed markets, large- and mid-cap companies account for around 86% of the market, with small caps making up approximately the remaining 14%, based on free-float-adjusted market capitalisation.
In practice, this results in a broad and diversified universe of thousands of companies globally, most commonly with market capitalisations around US$1–3 billion, spanning regions, industries and business models.
These companies are often earlier stage or less well‑known businesses that may be more exposed to emerging growth opportunities and potentially more locally focused than large multinational businesses.
Many investors access global shares through broad market indices via index-tracking managed funds or ETFs. While these can be cost-effective and diversified across countries, index construction can lead to concentration in the biggest companies - especially when a small group of stocks are doing most of the market’s heavy lifting.
Read more here: Why are investors settling for just the index?
For example, as seen in the below chart, in October 2026, one company (NVIDIA) had a 5% weighting of the ~1,200 constituents in the MSCI World ex-Australia Index. In comparison, the combined top 10 holdings of the MSCI World ex-Australia Small Cap Index total only just over 3% of the total index (out of 3,600+ constituents) 1. Again, leading to a more diversified portfolio of companies.
Source: MSCI, as at 16 October 2026
On a regional basis, the US (in part driven by the “Magnificent 7”) geographically represented 73.9%3 of the MSCI World ex-Australia Index vs 63.3% in the MSCI World ex-Australia Small Cap Index3. The practical implication is that allocating to a global ETF to “globally diversify” can sometimes have less diversity than it appears, particularly as performance and risk become increasingly linked to a small number of very large businesses.
Source: MSCI, as at 16 October 2026
Over long periods, global small caps have historically outperformed global large caps. As shown in Chart 3 below, since December 2000, the MSCI World Small Cap Index outperformed the MSCI World Index by +1.68% p.a. (to 30 September 2026).
One explanation is that smaller companies are earlier in their lifecycle and hence often have a longer runway for growth. Doubling market cap from a smaller base is typically more achievable than doubling from an already dominant market position.
Past performance is not a reliable indicator of future performance. Source: MSCI, for the period from 31 December 2000 to 30 September 2026. Indices used are the MSCI World NR Index in AUD and the MSCI World Small Cap NR Index in AUD.
It is important to note, that small caps can be more volatile than large caps and are often more sensitive to economic conditions, funding environments and shifts in market sentiment. They have the propensity to underperform, particularly when market leadership is narrow or when financial conditions tighten and/or rates rise. Smaller companies are also more economically localised meaning they can benefit or suffer more from their local economic conditions than broader global trends. Being smaller companies, they also have more propensity to fail than the mega-caps and hence remaining invested for the long term is important to ride out the ups and downs of the business and economic cycles over time.
Global small companies can materially alter the sector composition of a global equity allocation. Large cap indices tend to be dominated by established incumbents in sectors such as technology, financials, pharmaceuticals.
By contrast, small caps often have greater exposure to more cyclical or specialised areas of the economy, including industrials, consumer services, healthcare innovation, construction and real estate. This can help broaden the sources of return without the need for separate thematic allocations.
Source: MSCI, as at 16 October 2026
Many of today’s global market leaders began as small, relatively unknown companies – such as Netflix and Nvidia. Global small caps sit earlier in the business lifecycle, where innovation, disruption and faster growth have more potential to occur.
By investing across this segment, investors gain exposure to companies as they seek to scale new technologies, niches and business models well before they become index heavyweights. Investing in global small caps provides investors with a pathway to participate in the emergence of tomorrow’s leaders as over time those companies who are successful may grow enough to graduate from small caps into the larger cap indices. Those with portfolio allocations across both small and large caps may be able to participate in both the early and long term growth of some of these companies.
With the MSCI World ex-Australia Small Cap Index containing more than 3,600 companies (as at March 2026) it makes the traditional, specific company by company research approach challenging to implement at scale. While investing in a small cap fund or ETF removes the need for investors to research thousands of stocks, a simple index may not fully capture the opportunity for this segment of the market. The breadth of the small cap universe creates both attractive opportunities and potential traps, making a disciplined and effective selection process critical.
This is where systematic (or quantitative) investing can help, by applying a disciplined, rules-based process to select stocks across a large and information-rich universe. The goal of systematic investing is designed around improving consistency of alpha generation, reducing inherent behavioural biases and ultimately managing risk in pursuit of attractive long-term returns.
Learn more about systematic investing here
A systematic portfolio such as Macquarie Global Small Companies Active ETF (ASX: MQXS) - also available in an unquoted class – incorporates sophisticated considerations for each company’s portfolio weight, rather than the simplistic metric of market cap alone.
To access the breadth of global small caps with a disciplined systematic approach, MQXS uses the MSCI World ex Australia Small Cap Index as its investable universe, then systematically builds a diversified portfolio of ~200–500 stocks using 70+ quantitative signals and ~100 million data points each week, with the portfolio recalibrated every few weeks.
All investments carry risk. Different investments carry different levels of risk, depending on the investment strategy and the underlying investments. Generally, the higher the potential return of an investment, the greater the risk (including the potential for loss and unit price variability over the short term). The risks of investing in this Fund include:
Investment risk: The Fund has exposure to share markets. The risk of an investment in the Fund is higher than an investment in a bank account or fixed income investment. Amounts distributed to unitholders may fluctuate, as may the Fund’s unit price, by material amounts over short periods.
Market risk: The growth investments that the Fund has exposure to are likely to have a broad correlation with share markets in general. Share markets can be volatile and have the potential to fall by large amounts over short periods of time. Poor performance or losses in domestic and/or global share markets are likely to negatively impact the overall performance of the Fund.
Small companies risk: The Fund has exposure to companies generally considered small in terms of market capitalisation and may include recently established entities with limited public information or entities engaged in new-to-market concepts, which may be speculative in nature. Shares in these companies are generally less liquid and more volatile than those of larger companies and therefore, have a higher risk of loss.
Manager risk: There is no guarantee that the Fund will achieve its performance objectives, produce returns that are positive, or compare favourably against its peers, or that the strategies or models used by the investment manager of the Fund and/or underlying fund will produce favourable outcomes.
Important information
The Target Market Determination (TMD), available at macquarie.com/mam/tmd, includes a description of the class of consumers for whom the Fund is likely to be consistent with their objectives, financial situation and needs.
The Macquarie Global Small Companies Active ETF is a separate class of units in the Macquarie Global Small Companies Fund (ARSN 696 510 504). A separate class of units is not a separate managed investment scheme.
