For years, small and mid-cap stocks have lagged their larger peers. Investors gravitated toward the perceived safety of big names, leaving many smaller companies overlooked and undervalued. The result has been a significant stretch of underperformance from small-caps relative to their large-cap peers, both in Australia and globally.
At Forager, we’ve been talking about this divergence for some time. However, we’ve also been clear: market-wide trends don’t stop us from finding opportunities. This environment created a fertile ground for stock pickers and we have still been able to find opportunities in individual businesses. So even through years of relative index underperformance, we’ve been able to build portfolios of stocks that have outperformed.
And now small-cap underperformance could be turning around.
The Tide is Starting to Shift
Over recent months, small and mid-caps have begun to outperform. Overseas, this has been most visible in global SMID (small-to-mid cap) indices, where investor appetite is returning after years of neglect. In Australia, reporting season is providing hard evidence that many companies at the smaller end are not only surviving but thriving.
The numbers tell the story. In August, the Small Ordinaries Accumulation Index returned a whopping 8.4%, more than double the 3.2% return from the All Ordinaries Accumulation Index. And it’s not just a one-month anomaly. Over the 12 months to 29 August 2025, small caps have delivered a 23.5% return, comfortably ahead of the All Ords’ 15.0%.
This is significant. Small caps tend to move in cycles. When confidence is high, they can deliver outsized returns. When risk appetite is low, they lag. The long run of underperformance has meant valuations have reset to more attractive levels. It doesn’t take much good news to move share prices meaningfully.
What Reporting Season is Showing
As reporting season rolls on, a common theme is emerging: expectations are low, and modest results can be nicely rewarded.
Experience Co (EXP) is a good example of this shift in sentiment. The company had already flagged its results to the market, so there were no surprises when the numbers were released. Even so, the share price jumped more than 20% in the aftermath. That kind of reaction highlights how investors are not only rewarding strong results but are also willing to re-rate smaller companies when confidence starts to return.
On the other side of the ledger, several large caps have stumbled badly – including names like James Hardie (JSX) and CSL (CSL). In total, seven of the top 50 listed stocks saw share price falls of 10% or more on the day of results, compared to one or two in reporting seasons past.
It’s a reminder that volatility isn’t confined to smaller companies. Even market giants can deliver nasty surprises, and size alone doesn’t shield investors from risk.
That contrast makes the current environment all the more interesting. While some large caps are struggling to meet expectations, smaller companies are surprising on the upside, and the market is starting to notice.
Double Tailwinds for Forager
Forager’s approach has always been to look where others aren’t. We focus on the unloved and underappreciated. In recent years, the lack of interest in small-caps has suited us well, providing plenty of bargains and strong returns from stock picking. In truth, we haven’t been in a hurry for the broader underperformance to reverse.
But markets rarely deliver exactly what you want. Falling interest rates and weakness among large-caps could quickly drive a reversion to more typical valuation relativities between big and small companies. The Small Ordinaries Index is still trailing significantly over five years, but the past 12 months show just how quickly the gap can close.
As always, investing in small and mid-cap companies carries risks, including the potential for higher volatility, lower liquidity, and business models that may be more sensitive to changing economic conditions. As with all investments, returns are not guaranteed and capital is at risk, so it's important to ensure that this part of your portfolio aligns with your risk tolerance and long-term goals.
For diversified portfolios, however, small caps have an important role to play – and this may be a moment where waiting on the sidelines carries its own risks.
If you are ready to begin your journey into investing in small-caps, you can apply for both of our Funds online.