Smaller Companies Access Full Spectrum of US Growth

This breadth provides investors in smaller companies exposure to medical innovation, advanced manufacturing, aerospace and defense, transportation, data infrastructure, specialized semiconductors and consumer services. Many of these companies are also more domestically oriented than large multinational businesses, providing more direct exposure to US customers, investment and economic activity. For investors whose global equity allocations have become closely tied to a relatively small group of multinational mega caps, SMID can introduce different end markets, competitive advantages and sources of earnings growth.

Risk Budget Is a Portfolio Question

SMID growth portfolios have, admittedly, exhibited greater stand-alone volatility than their large-cap growth peers historically. However, allocators do not experience an asset class in isolation. The more relevant question is how a thoughtfully sized allocation changes the return, volatility, drawdown and concentration of the total portfolio.

Portfolio risk depends on position size, correlation and the interaction among underlying return drivers. A SMID allocation that introduces different industries, customers and company-specific catalysts may consume less marginal risk than its stand-alone volatility implies. It may also reduce reliance on the performance of a narrow group of large companies.

Why Active: Discernment Over Exposure

The US SMID market is large and comparatively under-researched, creating opportunities for managers with the resources to conduct detailed fundamental work. The deeper argument for active management, however, lies in the wide dispersion in business quality, financial strength, competitive durability and the expectations embedded in share prices.

Recent market behavior illustrates the challenge. In the second quarter of 2026, leadership within the Russell 2500 Growth Index favored higher-beta companies with lower returns on equity, elevated valuations and, in many cases, limited or no current earnings. The pattern extends across the broader small-cap universe: Roughly 40% of Russell 2000 constituents carry negative trailing earnings, according to Apollo Global Management, yet since April 2025 those unprofitable companies have returned approximately 60%, well ahead of the 38% gain for their profitable peers.

The benchmark itself is also dynamic. Successful smaller companies graduate into larger-cap indexes, while annual reconstitutions introduce new businesses and alter sector and quality characteristics. In 2026, Russell 2500 Growth turnover approached twice its historical average as several AI beneficiaries left the universe, biotechnology representation increased and a larger cohort of lower-quality growth companies entered. An index is a useful opportunity set, but it is not a quality filter.

Yet active management cannot be reduced to avoiding every company perceived as lower quality. Powerful investment cycles can produce genuine fundamental improvement. When AI-related demand meets constrained industry supply, companies can gain pricing power, accelerate revenue, absorb fixed costs and improve margins, cash flow and balance sheets. Some of those gains may prove structural, particularly where stronger cash generation supports reinvestment and creates a more durable competitive position.

The task is therefore to distinguish among durable compounders whose existing advantages are being amplified, cyclical companies whose through-cycle economics are genuinely improving, and more fragile beneficiaries whose results remain dependent on scarcity, pricing and repeated earnings surprises. We believe this is particularly important in SMID, where earlier-stage businesses and established companies undergoing meaningful change can coexist within the same benchmark.

Expectations are central to that assessment. Strong operating results do not have to reverse for a stock to stop working; they may only need to become less surprising. Revenue can continue to grow and margins can continue to expand, but smaller earnings beats, slower estimate revisions or flattening incremental margins may indicate that expectations have caught up. Even a seemingly lower forward valuation can reflect a substantial earnings increase that must still be delivered.

Static quality screens are unlikely to capture these distinctions. Fundamental research must examine the durability of pricing power, incremental margins, cash conversion, customer concentration, recurring revenue, switching costs, reinvestment discipline and valuation. Active portfolio construction can then balance opportunity against risk through position limits, diversification across revenue sources and business models, ongoing valuation review and independent risk oversight.

Active Access to the Full SMID Opportunity

The case for US SMID growth is not that every smaller company is less risky, nor that the asset class will outperform in every period. It is that SMID expands the investable universe beyond today’s largest companies and provides access to businesses across a wider range of industries and stages of development. Active management seeks to capture that breadth while remaining selective about quality, valuation and portfolio risk—and flexible as the evidence changes. Our objective is to recognize genuine new leaders without mistaking temporary scarcity or momentum for a durable competitive advantage.