Opportunities Outside the U.S.


On May 22, 2020, we issued a paper entitled U.S. Small Caps After a Downturn—which evaluates U.S. small-cap companies following the pandemic-induced losses in early 2020. In that paper, we conclude, “Our successful, long-term approach still makes sense: We invest in high-quality small-cap companies with great management teams that we believe will be able to rapidly grow sales and earnings in marketplaces with significant headroom to expand.”

In this paper, we go beyond U.S. borders to assess the status of small- and mid-cap companies in international developed and emerging markets. We start with the performance of stocks as categorized by various benchmark indexes. Then we present what we consider to be some of the most important measures of business quality. We also show how several Wasatch international and emerging markets strategies compare to their benchmarks in terms of quality.

Our conclusion is that international developed and emerging markets have generally underperformed their U.S. counterparts for more than five years. But we believe business-quality measures are generally better outside the United States. Moreover, we think the Wasatch international and emerging markets strategies stack up especially well in terms of quality. This combination of modest performance in the recent past and attractive business-quality fundamentals gives us optimism for these strategies going forward.


In our paper on U.S. small caps, we note that they (as represented by the Russell 2000® Index) have underperformed U.S. large caps (as represented by the S&P 500® Index) during the past several years. This underperformance is evident in Figure 1 below.

Not only have U.S. small caps lagged U.S. large caps, but they’ve experienced the worst of both worlds—generally performing less robustly in the rising environment before the Covid-19 pandemic and more poorly in the falling environment after the pandemic began. Since then, U.S. small caps have lagged again in the partial rebound from the trough of the COVID-related selloff.

Like U.S. small caps, international small caps have shown disappointing returns. Among the other categories of stocks presented in Figure 1, the returns have been progressively worse: international mid to large caps, then emerging markets mid to large caps, and finally emerging markets small caps trailing them all.

For the entire five years and five months—leading up to and including the Covid-19 pandemic—Figure 2 below shows the respective cumulative total returns in order of best to worst.

Think about these numbers for a moment. In this span of five years and five months, emerging markets small caps, for example, have actually lost money and emerging markets mid to large caps have made just 10.42% cumulatively—which is less than 2% per year.