The small and mid-cap advantage: growth, value and resilience

Small and mid-caps may not have the glamour of trillion-dollar tech, but with less coverage, cheaper valuations, and real growth potential, Markiewicz argues they could be exactly what investors need to diversify their returns.

In the interview above, Markiewicz breaks down his case for small and mid-caps, why Ellerston’s family office DNA matters, two stock stories that stand out, and how they’re thinking about AI and risk in a volatile world.

A family-office approach

Every fund manager says they think long-term. But for Ellerston, that mindset is baked into its DNA.

“We have a family office heritage. And I think that’s interesting because it really informs the DNA of the business. It informs the investing style. Families are all about long-term thinking.

“They’re all about continuity, they’re all about managing risk, and they’re all about investing where the opportunities are rather than by a specific product set like maybe a retail investor might.”

That philosophy and family office investing style frees the firm from the constraints that hamper many managers, says Markeizwicz, whether it’s an index, the specific part of the market they look at, or how many stocks they hold.

Why small and mid-caps now?

It’s no secret that small and mid-caps have lagged large caps over the last decade, the culprit being the rise and performance of the Mag 7.

But Markiewicz argues that history suggests the tide can turn. “If you go back 25, 30, 40 years, it’s consistently been smaller companies that have outperformed larger companies. And that’s just by definition of being small."

Markiewicz believes this leaves investors with a neglected pocket of the market offering growth at more reasonable prices.

Smaller companies have a bigger ability to grow… I think the opportunity today in small mid-caps, particularly, is that the market is so stretched in terms of the size of these large-cap stocks, their valuations and their future growth from here.”

Stock stories

Ellerston’s approach in finding stocks is two-fold - they search for both “fallen angels” and underappreciated growth businesses.

Corpay (NYSE: CPAY), a US payments company, falls into the latter camp.

“This business has compounded EPS at 20% for 20 years. That puts them in an elite club. I think there’s only 10 to 15 companies that have done that historically in the S&P 500 today. So we’re talking a business in the top 2 - 3%,” says Markiewicz. 

Despite this, it trades at just 14 times earnings. “Wonderful business, great EPS growth, growing at, valued at 13, 14 times earnings is a rarity in this market,” he says. 

Another example is Warner Music (NASDAQ: WMG). "Warner Music is a great business because it has a bank of content and IP that is non-replicable. They’ve made content over the last 50 years that is still being monetised today and is going to be monetised in the future.”

With new pricing power flowing through from Spotify and other platforms, Markiewicz sees a margin kicker on the horizon. “That drops straight through to the bottom line and should mean that EPS will grow very nicely.”

Playing the AI theme differently

Like most investors, Ellerston is watching AI closely. But its positioning looks different to large-cap peers whose choices are limited to the Mag 7, which Markiewicz says are great businesses but already priced to perfection.

We can look at a whole bunch of companies that are exposed to what we would call the picks and shovels plays of AI,” says Markiewicz.

Right now, that means focusing on energy. “Where we really like to focus our time and attention is when we find pinch points in industries where a lot of value is going to accrue to a small number of players. And at the moment in AI, it's power," he explains.

"Power is the number one constraining factor, and there are a lot of smaller companies that are levered to that theme. So we have investments in those.”

Balancing risk

Of course, no theme exists in a vacuum, which makes building resilient portfolios matter more than ever.

Ellerston’s focus on diversification reflects the risks Markiewicz sees most clearly: interest rates, FX, and geopolitics.

“Interest rates at the moment really define what pockets of the market people get excited by… The challenge of building a portfolio today is that the market is still undecided on where interest rates are going and what that means for equity valuations.”

Geopolitics is another live risk. “What used to be once-in-a-generation events… all seem to be happening every six months at the moment. And so the challenge is having a portfolio that’s resilient to events like that, but also not putting too many eggs in one basket.”

Which is why Ellerston is blending diversification with stock-specific catalysts. Markiewicz concludes: “I think it’s a really nice setup for small mid-caps at the moment, and I think small mid-caps have a big role to play for advisors and investors who want to have a different return profile in their portfolio.”

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Ellerston Global Mid Small Cap Fund

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