Why global small caps deserve a place in your Australian portfolio

When you’re an Australian investor, it’s easy to fall into the “home bias” trap. The ASX feels familiar, the companies are in your backyard, and there are tax advantages like franking credits that make it even more appealing. But sticking too close to home also comes with risks - limited sector diversity, concentration in a handful of large banks and miners, not to mention exposure to a single economy and currency.

Adding global stocks, especially small and mid-caps to your portfolio could help balance those risks, while opening up a world of opportunity. This is why:

Access to Sectors and Trends You Can’t Find on the ASX

Australia’s stock market is heavily skewed toward financials and resources, leaving big gaps in areas like technology, healthcare, and consumer brands. Global small caps could give you exposure to innovative companies in niche industries that simply don’t exist in Australia.

These businesses often operate in growing markets and can scale quickly, making them attractive for long-term investors looking for growth beyond the ASX’s usual suspects.

Diversification Beyond the Big Banks and Miners

Even the strongest home market has its limitations. Australian investors who stay local end up with a portfolio highly sensitive to domestic economic cycles, housing market risks, and commodity price swings.

Global small caps may spread that risk across countries, currencies, and economic drivers. When one market slows, another might be accelerating. That kind of diversification can smooth out your returns over time.

Inefficiencies Create Opportunity

The global small and mid-cap universe is huge. Thousands of companies, many flying under the radar of large institutional investors and analysts. Less coverage means less efficient pricing, which is exactly where active managers like Forager thrive.

These overlooked businesses may be mispriced relative to their fundamentals, creating opportunities to buy quality companies at attractive valuations.

Different Return Drivers from Global Large Caps

You might already have exposure to global large caps through an ETF or your super fund. But large-cap multinationals are more correlated with global macroeconomic trends and tend to move in sync with major indices.

Small and mid-caps, on the other hand, are often driven by company-specific factors, such as launching a new product, entering a new market, or being acquired. This may give them a return profile that’s less tied to the overall market, adding a new dimension to your portfolio.

Risks to Consider

While global small-cap stocks can offer compelling growth opportunities, they also come with specific risks. These companies tend to be more volatile than larger, more established businesses and may be more sensitive to changes in economic conditions or investor sentiment. They can also be less liquid, meaning it may be harder to buy or sell positions without affecting the price.

In addition, investing in international markets introduces currency risk and exposure to different regulatory and political environments. 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.

How Global SMIDs Might Fit Alongside Australian Shares

Global small caps aren’t a replacement for your Australian shares - they can be a complement. A balanced portfolio might combine:

• Australian equities for income (franking credits, distributions) and exposure to familiar sectors
• Global large-caps for blue-chip stability and mega-trend exposure
• Global small and mid-caps for growth, diversification, and access to niche opportunities

This blend could help you manage risk while tapping into growth stories you simply can’t find in one market alone.

Why Now?

Right now, global SMID caps are trading at very attractive valuations relative to their larger peers. Investor sentiment has been cautious, creating opportunities to buy quality businesses at a discount.

For long-term investors, that’s the kind of dislocation that can set up strong future returns if you’re willing to look beyond your home market.

At Forager, we’ve built the Forager International Shares Fund specifically to hunt for these types of opportunities - smaller, often overlooked companies with the potential for long-term growth. By pairing it with the Forager Australian Shares Fund, you get the best of both worlds: local familiarity and global diversification.

There are plenty of interesting global small and mid-caps researched by Forager's investment team. Subscribe to our monthly and quarterly reports to hear more about these businesses and which ones the team are investing in now..