International small-cap stocks have beaten their large-cap global counterparts in recent years, following a trend of small-cap dominance in the U.S. Though international small-cap funds have been on a roll, benefitting from this strength, investors should still be selective since they have failed to beat their benchmark as a group.
We chose two S&P/Citigroup indices to compare the performance of international large-cap and international small-cap stocks. The S&P/Citigroup PMI (Primary Market Index) World ex-U.S. represents international large-cap stocks excluding the U.S., while the S&P/Citigroup EMI (Extended Market Index) World ex-U.S. is the small-cap version of that index.
The EMI has beaten the PMI not only on a year-to-date basis as of August 31, but for the one-, three-, and five-year periods as well. The EMI has done so by a wide margin, as shown in Table 1 below.
The international small-cap funds in Standard & Poor’s database, however, have generally failed to beat the EMI index. We reviewed 126 funds, including multiple share classes. The group’s average return trailed the index in the year-to-date, one- and three-year time frames, but did outperform in the five-year period. As a group, these funds beat the large-cap PMI during all four time periods.
International small caps also have compared favorably to U.S. small cap-stocks, which have outpaced U.S. large caps in recent years. The EMI beat the S&P Small Cap 600 index in the year-to-date, one- and three-year periods, although trailed the 600 during the five-year period.
We decided to screen for international small-cap funds that outperformed the EMI for the one-, three- and five-year periods ended August 31. Though nine funds met the criteria, five had minimum initial investments of $1,000,000 or more. The four remaining funds, which had sharply lower minimum initial investments, are listed in Table 2.