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Fund Spy

Good Smaller-Cap World-Stock Funds Are Hard to Find

But flexible investors do have a few fine options for global small-cap exposure.

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The case for global smaller-cap funds is clear. Such funds have significant diversification value as well as considerable capital-appreciation potential. The small-cap space is less closely followed and thus less efficient than the large-cap space, particularly outside the United States, so managers of such funds have ample opportunity to add lots of value. That's because these managers have the freedom to go wherever the top smaller companies are, while their U.S., foreign, and regional counterparts do not.

But finding good global smaller-cap funds is much easier said than done. More than three fourths of world-stock funds are large-cap offerings. Most of the rest are all-cap vehicles rather than genuine smaller-cap funds. And even the best of the all-cap world-stock vehicles are unlikely to satisfy investors seeking global small-cap exposure due to their often sizable stakes in large-cap stocks.

Meanwhile, many of the true global smaller-cap funds have one or more flaws that render them unattractive. Some of them are in unproven hands or have seen significant manager turnover in recent years, for example, while others employ overly bold strategies or have posted disappointing results given how well small-cap stocks have performed in the 2000s.

William Samuel Rocco does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.