Microcap stocks are sharply outperforming large caps, prompting some institutional investors to reassess long neglected allocations to the smallest of companies.
For years, allocators have ignored microcaps in favor of large U.S. tech stocks for growth. But with microcaps (i.e., companies typically with market caps of around $300 million or less) handily outperforming the tech giants, investors are starting to revisit opportunities in the least followed corner of the market.
As microcaps with attractive valuations soar while expensive large caps underperform, one small-cap specialist argues that allocators can find unique and compelling growth opportunities in tiny companies through active management.
“We think that’s where the alpha is,” said Christopher Tessin, co-founder of Acuitas Investments, a manager of small-cap managers with $1.75 billion in institutional assets. While the sector is “the richest place for active management in equities,” Tessin notes that “plans are either under-allocated or not allocated at all.”
Microcaps are getting a lift from falling borrowing costs, widening gaps between cheap and expensive stocks, surging biotech and defense sectors, as well as more deal activity, all of which are pushing valuations higher.
But the rally at the small end also comes as mega tech and high-profile IPO candidates are dominating investors’ attention. For many portfolio managers, even those skeptical of AI, avoiding large-cap stocks entirely carries its own risk as missing that momentum can hurt performance relative to benchmarks. The result is an unusual paradox: opportunity in the smallest stocks, but pressure to stay invested at the top.
That tension is starting to show up in the numbers. The Russell Microcap Index is up more than 46 percent over the past year as of June 8. By comparison, the S&P 500 and large-cap index Russell 1000 were both up roughly 23 percent during this period. Investment firms are taking notice: To accommodate that growing demand to diversify from both the broad market and increasingly concentrated large cap strategies, Dimensional Fund Advisors launched an exchange-traded fund version of its active U.S. microcap strategy to the market in March.
“In 2026, investors looked to diversify away from just mega cap stocks and turned to smaller companies experiencing strong earnings growth,” said Todd Rosenbluth, head of research and editorial at the Toronto Stock Exchange-owned analytics firm TMX VettaFi. “Microcap companies can also be attractive acquisitions target for those looking for a boost.”
Despite the benefits, institutions rarely make sizable allocations to microcaps. This sector of the market requires significant expertise and attention to make them profitable. Microcaps have capacity restraints and liquidity issues. In addition, the dearth of analyst coverage in the space makes picking winners a hunt for needles in haystacks. Even the SEC has warned investors that accurate information about microcaps “may be difficult to find.”
“You’re asked to do more things with less time,” added Doug Porter, a portfolio manager and analyst at Acuitas. “That ability to get that depth is really difficult, so it’s easy to focus on the most observable, comfortable metrics.” Porter recently authored new research arguing that allocators aren’t taking advantage of the premium that small caps can provide.
Christopher Ailman, founder and CEO of Ailman Advisers, noted that while small caps are a useful diversifier, microcaps remain too illiquid and operationally challenging for most large public pensions. “I could see a small fund making an allocation, but the cost likely outweighs any alpha,” Ailman, the former CalSTRS CIO, added.
Ailman’s skepticism explains why, even as performance improves, institutions remain anchored to more liquid large caps. With all those hurdles — and still no guarantee of sustained, long-term success — it is often simply easier for a resource-constrained investment team that’s stretched thin to simply pick the largest managers with the most recognizable names and sizeable asset bases.
However, now that microcaps are making headlines again and delivering “super powerful returns,” Tessin believes more allocators “are opening their eyes for small- and microcaps,” he added. (Commonfund OCIO’s investment chief Julia Mord told Institutional Investor last year that they were targeting opportunities in U.S. microcap stocks and emerging markets.)
As Tessin explained, there’s a perceived safety in large investment products with good historical returns. But if you don’t have an understanding of the characteristics that drive those returns, then you’re taking on unknown and unnecessary risks.
“If you’re sitting on a committee and a CIO shows you three managers and goes, ‘pick one,’ your eyes will be drawn to the one that performs best,” Tessin said. “But what’s really required is getting under the hood and understanding what drove those returns.”
