From Research Affiliates:

Small Caps, Big Opportunities: Investing Beyond Large-Cap Stocks

By Que Nguyen, Xi Liu, and Mario Albuquerque

In today’s market, the historically wide valuation gap between small- and large-cap stocks presents a compelling opportunity for investors to unlock value and pursue outperformance. Our latest research highlights how an active strategy—anchored in valuation and enhanced with quality and momentum screens—can effectively navigate risks and capture alpha in the small-cap space.

Key Points from the Article Include:

• The current valuation gap favoring small-cap stocks signals the potential to unlock value and outperform.
• Even though a structural premium to small-cap stocks does not exist, small caps provide abundant alpha opportunities for an active value approach.
• Our research demonstrates that successful active investing in this asset class hinges on using three key tools: valuation, quality, and momentum.
• A smarter strategy that combines an emphasis on valuation with quality and momentum screens can help investors avoid value traps and falling knives as well as generate enhanced performance.

Read the full article here.