Insights
In a market dominated by U.S. mega-cap tech and elevated valuations, many investors may be overlooking one of today’s most compelling long-term opportunities: emerging markets small-cap equities. At Kayne Anderson Rudnick, we believe this segment provides access to high-quality businesses operating in fast-growing economies while also benefiting from structural inefficiencies that can create outsized return potential.
In this Q&A, Portfolio Manager and Senior Research Analyst Hyung Kim explains why investing in emerging markets—particularly through small-cap equities can provide portfolio diversification, alpha potential, and sustainable long-term growth for investors seeking to move beyond traditional large-cap allocations.
What Makes Emerging Markets Small Caps Attractive for Long-Term Investors?
Emerging markets small-cap equities are gaining renewed attention and for good reason. In Hyung’s view, three structural advantages make this asset class particularly attractive:
- Faster economic growth in developing countries creates strong tailwinds for small businesses
- Market inefficiencies that may allow skilled investors to identify undervalued small-cap equities
- Significant portfolio diversification benefits, especially as U.S. large caps become more correlated and mature
Together, these features create a fertile landscape for investing in emerging markets small caps and may give investors long-term upside potential.
Why Have Emerging Markets Small Caps Underperformed in the Past Decade?
Despite recent underperformance, it’s essential to view emerging markets small-cap equities within a longer-term context. From 2000 to 2010, emerging markets outpaced the S&P 500. While the following decade (2010–2020) saw U.S. large caps outperform, a broader view reveals that emerging markets small caps have kept pace with major benchmarks like the S&P 500 and Russell 2000 across cycles. In fact, there have been multiple periods where U.S. equities lagged behind emerging markets. Hyung believes investors should be cautious of recency bias when evaluating this asset class.
Hyung points to three main drivers behind recent underperformance:
- China’s policy and geopolitical uncertainty
- A strong U.S. dollar, which has been a headwind for investing in emerging markets
- Valuation compression, reducing investor sentiment toward non-U.S. small-cap equities
However, these challenges may be easing, making it a timely moment to reconsider this segment for strategic portfolio diversification.
Why Is Now a Strategic Time to Invest Globally?
Hyung sees this moment as a compelling opportunity to invest globally, especially in emerging markets small-cap companies that are:
- Well-managed, with sustainable competitive advantages
- Trading at attractive valuations
- Positioned for durable earnings growth over time
In addition to these fundamentals, investing in emerging markets may offer much-needed portfolio diversification, reducing overexposure to a concentrated and overvalued U.S. equity market. For long-term investors, this could expand global equity exposure.
Explore More Global Equity Insights. Discover how Kayne Anderson Rudnick identifies quality businesses around the world with durable competitive advantages.
Kayne Anderson Rudnick Investment Management, LLC ( “KAR”), a wholly owned subsidiary of Virtus Investment Partners, Inc., is a registered investment advisor under the Investment Advisers Act of 1940. Registration of an investment adviser does not imply any level of skill or training. KAR manages a variety of equity and fixed income strategies focusing exclusively on securities the firm defines as high quality.
KAR assumes no obligation to update or supplement this information to reflect subsequent changes. This material is not intended to be relied upon as a forecast, research, or Investment advice, and is not a recommendation, offer, or solicitation to buy or sell any securities or to adopt any investment strategy. The information and opinions contained in this recording are derived from proprietary and non-proprietary sources deemed by KAR to be reliable, are not necessarily all inclusive, and are not guaranteed as to accuracy. There Is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the viewer. The securities presented in this video were chosen based upon objective, non-performance-based criteria. It should not be deemed as a recommendation to purchase the securities mentioned, and it should not be assumed that securities recommended in the future will be profitable. Past performance is not indicative of future results.
Indexes: The S&P 500® Index is a market capitalization weighted index which includes 500 of the largest companies in leading industries of the U.S. economy. The S&P 493 represents the S&P 500® Index without the Magnificent 7. The Magnificent 7 stocks include Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla. The MSCI Emerging Markets Index (Net) is a free float-adjusted market capitalization-weighted index designed to measure equity market performance in the global emerging markets. The index is calculated on a total return basis with net dividends reinvested. The MSCI Emerging Markets Small Cap Index (Net) is a free float-adjusted market capitalization-weighted index designed to measure small cap equity market performance in the global emerging markets. The index is calculated on a total return basis with net dividends reinvested. The Russell 2000® Index is a free float-adjusted market capitalization-weighted index of the 2,000 smallest companies in the Russell Universe, which comprises the 3,000 largest U.S. companies. The index is calculated on a total return basis with dividends reinvested. The indexes are unmanaged, their returns do not reflect any fees, expenses, or sales charges, and they are not available for direct investment.
