Small- and mid-cap stocks appear to be the most fertile hunting ground for alpha generation, according to Eric Braz, portfolio manager at MFS Investment Management.
After 17 years of experience at MFS, Braz is now focusing on these stocks, which he considers ripe for investment due to market inefficiency.
Speaking on the Relative Return podcast, Braz said: “I see them [small and mid-cap stocks] like inefficient markets.
“There is a very good opportunity to generate alpha. And the reason I think they’re so ineffective is actually the investment opportunity set. There are so many small, mid-sized companies in the world, and because of this, the actual research coverage of them is not as robust.
Braz highlighted several sectors that he finds particularly promising, including aerospace, Japan, infrastructure and Brazil.
The aerospace industry, he stressed, offers a unique opportunity amid ongoing challenges for major players like Boeing and Airbus.
“With all the problems Boeing and Airbus are having, the aftermarket cycle is going to be longer and stronger than expected,” he said.
Additionally, Braz is bullish on the Japanese market, where he has invested in a wide range of businesses, from IT services to fast fashion.
“Japan is a country we have historically invested in and continue to invest in,” he said. “And we own a wide range of businesses, from IT services companies to a bank… so that’s another place we think is interesting, with really attractive valuations for some high-quality businesses.”
He also highlighted that infrastructure investments are gaining ground due to trends such as reshoring and green energy, mentioning specific holdings in the cement and aggregates sector.
Despite the recent volatility, Braz is particularly bullish on Brazil, describing it as a region home to “high quality companies” that are currently trading at attractive valuations.
“We think there are huge opportunities there,” he said, highlighting the potential for long-term growth in a market facing near-term challenges.
When it comes to investment strategies, Braz stressed the importance of in-depth research and global comparisons.
He pointed out that small and mid-cap companies often receive less media coverage from analysts, which creates pricing inefficiencies. The less attention these companies receive, the more opportunities there are for savvy investors to capitalize on their true value, Braz said.
“Apple has over 60 analysts looking after it. The companies we own generally have much less coverage. And so you can really differentiate yourself and do good stock picking in the global small cap sector,” he said.
Although the US market continues to attract attention, Braz highlighted that MFS is currently overweight in the UK and Europe, citing better valuation opportunities in those regions.
Regarding the company’s investment process, he said MFS leverages its extensive global research platform, employing more than 60 analysts to screen a wide range of companies. This approach allows them to find quality, undervalued companies that often go unnoticed.
Braz emphasized the importance of a “bottom-up” investment philosophy, in which decisions are made based on the fundamentals of each company rather than macroeconomic trends.
As Braz succinctly puts it: “If you’re looking to invest in active management, I think there’s no better space than the small and mid-cap sectors.
“We think this provides significant diversification while still maintaining a fairly large active share,” he said.
“Ultimately, we generate strong risk-adjusted returns.”
