Small and mid-cap stocks are emerging as the most fertile hunting ground for alpha generation, according to Eric Braz, portfolio manager at MFS Investment Management.
With 17 years at MFS, Braz is now laser-focused on these equities, which he sees as ripe for investment due to market inefficiencies.
Speaking on the Relative Return podcast, Braz said: “I view them [small and mid-cap stocks] as inefficient markets.
“There’s a really great opportunity to generate alpha. And why I think they’re so inefficient is really the investment opportunity set. There’s so many small mid-cap companies globally, and because of that, the actual research coverage of them isn’t as strong.”
Braz highlighted several sectors he finds particularly promising, including aerospace, Japan, infrastructure, and Brazil.
The aerospace industry, he emphasised, offers a unique opportunity amid ongoing challenges for major players like Boeing and Airbus.
“With all the problems that Boeing and Airbus are having, the aftermarket cycle is going to be longer and stronger than people expected,” he said.
Moreover, Braz is optimistic about Japan’s market, where he has invested in a diverse array of companies, from IT services to fast fashion.
“Japan is a place we’ve invested in historically and continue to,” he said. “And we own a broad swathe of companies, everything from IT services companies to a bank … so that’s another place we think is interesting, really attractive valuations in some high-quality companies.”
He also pointed out that infrastructure investments are gaining traction due to trends like reshoring and green energy, mentioning specific holdings in the cement and aggregates sector.
Despite recent volatility, Braz is particularly bullish on Brazil, describing it as a region with “high-quality companies” currently trading at attractive valuations.
“We think there’s a tremendous amount of opportunity there,” he said, noting the long-term growth potential in a market facing short-term challenges.
When it comes to investment strategies, Braz stressed the importance of thorough research and global comparisons.
He pointed out that small and mid-cap companies often get less analyst coverage, creating pricing inefficiencies. The less attention these companies receive, the more opportunities there are for informed investors to capitalise on their true value, Braz said.
“Apple has over 60 analysts covering it. The companies that we own typically have a lot less coverage. And so you can really differentiate yourself and do some good stock pick in the global small-cap space,” he said.
While the US market continues to draw attention, Braz pointed out that MFS is currently overweight in the UK and Europe, citing better valuation opportunities in these regions.
Turning to the firm’s investment process, he said MFS leverages its extensive global research platform, employing over 60 analysts to comb through a wide range of companies. This approach enables them to find high-quality, undervalued firms that often go unnoticed.
Braz emphasised the importance of a “bottom-up” investment philosophy, where decisions are made based on individual company fundamentals rather than macroeconomic trends.
As Braz succinctly put it, “If you’re looking to invest in active management, I think there is no better space than the small and mid-cap sectors.
“We think that provides significant diversification and still gives pretty significant active share,” he said.
“Ultimately, we’re delivering strong risk-adjusted returns.”
