Oct 19, 2026 · 47 min
Small-cap value challenges the dominance of AI megacaps
The Case for Buying Small Caps Now
After years of neglect, UK small caps may offer stronger prospective returns if valuations and market leadership begin to rotate.
- 1Emerging funds can exploit capacity limits, high conviction, and fewer legacy constraints than larger established vehicles.
- 2Small-cap value combines attractive starting valuations with active ownership opportunities, but takeovers and private equity shrink the public universe.
- 3An AI-led market rotation could redirect capital toward neglected small caps, though a broad economic shock would undermine the trade.
Don't miss
Simon Evan-Cook and Stuart Widdowson debate whether small-cap value could become an anti-AI trade or suffer alongside the wider market.
The brief
Merryn Somerset Webb asks whether years of neglect have created an opening for UK small caps, emerging funds, and value investors as enthusiasm for AI megacaps faces scrutiny.
Simon Evan-Cook argues that smaller funds can outperform because capacity constraints, high conviction, and stronger incentives give newer managers room to act decisively.
Stuart Widdowson explains how Odyssean built a concentrated small-company portfolio from a clean slate, using value, quality, and management-led improvement as filters.
The central valuation debate is whether small caps possess a distinct advantage or simply tend to be cheaper; historically, small-cap value has been the strongest category.
The standout tension arrives in the anti-AI trade: a rotation could reward neglected small-cap value, but a wider economic shock would likely pull everything lower.
Takeovers, private equity, and higher interest rates have reduced the public small-cap universe, yet the guests see signs that its long downturn may be ending.
What was said on this episode
25 statements · 21 positive · 3 negative · 1 neutral
Global small caps are cheap and could gain from valuation mean reversion, excluding the UK.
“small caps generally, particularly small caps, are very cheap. UK is an outlier within that. If you believe in reversion to mean there's still upside on rating.”
Listen at 2:13
Money could rotate from concentrated AI stocks into neglected assets if the shift is purely rotational.
“there's no reason I think that movement of money out of the massive concentration in AI stocks into all the stuff that's been neglected for three years can't happen as well.”
Listen at 2:26
Smaller companies will outperform larger companies over time.
“smaller companies will rise more than larger companies over time.”
Listen at 4:32
Small-company markets are less efficient, enabling skilled managers to generate more alpha.
“that part of the market is also less efficient. So you can make more alpha because you're more likely to find a company that everybody else has ignored”
Listen at 4:39
Neglected small companies can be materially undervalued or grow manyfold.
“a company that is materially undervalued and that can potentially, even if it's not undervalued, still grow by 10, 20, even 50 times.”
Listen at 4:53
New investment trusts can be more agile because they start without legacy constraints.
“you can be really agile. You start day one with a clean piece of paper, no legacy.”
Listen at 13:02
Buybacks and M&A are offsetting fund outflows and creating positive small-cap share-price momentum.
“buybacks and m&a is more than compensating for small outflows and actually good news is is is actually creating positive momentum in share prices”
Listen at 16:20
Small caps appear to be nearing the end of their forced-selling phase.
“small cap is towards the end of the clearing phase.”
Listen at 16:44
Global small caps are among the cheapest assets available today.
“small caps are some of the cheapest assets around, quite the small caps are the cheapest assets around in the world today.”
Listen at 21:05
Small-cap forward returns could be attractive over the next decade after inflation.
“the forward returns from these points post-inflation that potentially very attractive for the next 10 years.”
Listen at 21:15
US mega-cap returns may only slightly exceed inflation over the next decade.
“the forward returns from the mega caps in the US. appear to only potentially just be beating inflation for the next 10 years.”
Listen at 21:20
European and UK small caps could deliver inflation plus 5–7% annually over ten years.
“there's no reason to think that over the next 10 years that they can't keep delivering you inflation plus. five six seven percent”
Listen at 23:09
A skilled fund manager could add another one or two percentage points to returns.
“if you put a great fund manager on top of that then maybe you can add another one or two”
Listen at 23:21
Small-cap value has historically been the best-performing asset class in UK data.
“the very best asset class you can be in is small cap value.”
Listen at 24:52
Small-cap value substantially outperforms other assets over long periods.
“Small cap value over long periods smokes everything else.”
Listen at 24:57
Odyssean favors companies that can improve through management action regardless of market conditions.
“we particularly like companies that have the potential to improve themselves through some sort of management action irrespective of what's going on in the market.”
Listen at 25:35
Odyssean bought Zotefoams at roughly 60% of its real asset value.
“we think we've probably got in at around 60 percent of the the real asset value”
Listen at 29:08
Odyssean reduces holdings when forecast annualized returns fall below 15% or alternatives are better.
“if that annualized return goes below 15% or isn't as good as other things in the portfolio or other things we want to buy, we reduce or move it on.”
Listen at 31:08
Higher debt costs make private-equity takeovers harder to justify and reduce their risk to small caps.
“where the cost of debt is now, it's much harder to justify taking companies private. So I don't see so much risk from private equity.”
Listen at 36:35
Private-equity activity and small-cap market conditions are cyclical over the medium to long term.
“medium to long-term. I think these things do go in cycles.”
Listen at 37:30
A strong IPO market could emerge in three or four years.
“It wouldn't surprise me if we have a boomy IPA market in three or four years' time.”
Listen at 38:31
After active UK equity sellers are exhausted, small caps could rebound with little buying pressure.
“at some point, the last one of those will have left. And as Stuart mentioned earlier, at that point, then suddenly it's not going to take very much to get things moving the other way, I believe anyway.”
Listen at 39:20
Simon’s selected funds have generally performed when needed during AI-related market weakness.
“the funds we have picked by and large have delivered in the moment when we wanted them to deliver”
Listen at 41:22
A non-crisis AI rotation could redirect capital into neglected assets.
“if it's purely a rotation rather than an economic event or a war or something worse, there's no reason I think that movement of money out of the massive concentration in AI stocks into all the stuff that's been neglected for three years can't happen as well.”
Listen at 42:54
Global small caps are cheap and have valuation upside, while the UK is an exception.
“small caps generally, particularly small caps are very cheap. UK is an outlier within that. If you believe in reversion to mean there's still upside on rating.”
Listen at 43:21
Statements are attributed to the speaker as said on the episode and reflect their view at the time, not PodLume's. They are not advice.
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