Don’t Forget About Us: Why Small Caps Deserve a Second Look

After years of mega‑cap dominance, small‑cap equities have quietly begun to reassert themselves. While performance has improved across Canadian, U.S., and global small caps, investor attention, flows, and positioning remain heavily skewed toward large‑cap names. In Don’t Forget About Us, CI GAM explores why this disconnect between fundamentals and sentiment may be creating a compelling opportunity - and why how investors access small caps matters more than ever.

It’s easy to forget about small caps after years of mega‑cap dominance. But investing isn’t about chasing what’s worked, rather it’s about anticipating what’s next.

So far this year, small caps have outperformed their large-cap peers, with Canadian, global, and U.S. small caps all posting positive returns through the end of March. Despite this performance, investor attention remains limited.

Positioning, flows, and media coverage still overwhelmingly favour mega caps, suggesting that small‑cap leadership is underrecognized, not crowded.

In our view, this disconnect between improving performance and muted investor interest creates opportunity.

Exhibit 1

ASSET CLASS PERFORMANCE (YEAR-TO-DATE)

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Source: Morningstar Research Inc., as of March 31, 2026

Why Small Caps Are Unloved

There’s no shortage of reasons investors have avoided small caps:

• Many companies are unprofitable, diluting index quality
• Inflation pressures can expose companies without pricing power
• Volatility has usually pushed investors toward perceived “safe” large‑cap names

These concerns aren’t wrong but they paint the entire small‑cap universe with the same brush.

How CI Thinks Differently

The problem isn’t small caps. The problem is how most investors access them.

CI’s small‑cap strategies are designed to avoid the structural pitfalls that define passive small‑cap exposure, and to focus instead on quality, discipline, and long‑term value creation.

CI’s Approach to Small Cap Investing

• Business Owner Mindset: We invest like long‑term owners, not short‑term traders, with a focus on sustainable value creation.
• Bottom‑Up Discipline: Independent, objective research designed to capitalize on market dislocations, not headlines.
• Industry Comfort: A focus on high‑quality businesses operating in industries we understand, with rational competition and stable market structures.
• High Conviction: Great ideas are rare. When we find them, we size them accordingly.
• Valuation Discipline: Conservative underwriting using discounted cash flows and investing only when price is meaningfully below intrinsic value.
• Risk Management: Careful security selection and prudent capital allocation underpin every decision.

Exhibit 2

ONE-THIRD OF RUSSELL 2000 STOCK ARE NON-EARNERS

% of Russell 2000 stock (~20% of market cap) are non-earners

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Source: FactSet, Bank of America US Equity & US Quant Strategy

Just as Important: What We Avoid

• Highly Leveraged Businesses: Especially those exposed to refinancing risk in a higher‑rate environment.
• Re‑Pricing Risk: Long‑term contracts that limit pricing flexibility and pressure margins over time.
• Commoditized Industries: Businesses without control over end‑product pricing, particularly vulnerable during inflationary periods.
• Speculative Growth at High Multiples: Companies priced on aggressive assumptions, heavy cash burn, and reliance on capital markets.

Why Active Management Matters More in Small Caps

Small caps are where inefficiencies live.

• Analyst coverage is limited
• Fundamental dispersion is significantly higher than in large caps
• A meaningful portion of small‑cap indices consists of non‑earning companies, diluting passive exposure

This creates a wide gap between high‑quality compounders and structurally challenged businesses: A gap that skilled active managers can exploit.

Through deep fundamental research, disciplined valuation, and selective portfolio construction, CI’s active small‑cap strategies seek to:

• Capture durable growth opportunities
• Avoid weak business models
• Improve risk‑adjusted returns within diversified portfolios

A Word on Volatility and Real Assets

With gold and commodities experiencing sharp swings year‑to‑date, investors are being reminded that volatility isn’t limited to equities.

Our small‑cap strategy doesn’t rely on momentum or macro trades. Instead, it focuses on business fundamentals, which historically has led to:

• More resilient performance across cycles
• Less reliance on crowded trades
• A differentiated return stream within portfolios

Bottom Line

As markets broaden, leadership diversifies, and fundamentals reassert themselves, active small‑cap investing becomes increasingly relevant. This isn’t about revisiting the past. It’s about positioning for what comes next.

How to Express this View: Small Cap Equity Solutions from CI

For investors looking to allocate towards small cap equities, CI provides a diversified set of solutions aimed at capturing durable, long‑term investment opportunities.

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