CIO Message: Investing on Tilted Ice
The recent men’s Olympic gold medal hockey match between the United States and Canada drew 26 million viewers, becoming the most-watched sporting event in North American history to begin before 9 a.m. For early risers across the continent, the lost sleep proved well worth it.
For much of the contest, the flow of play told a very different story than the final scoreboard. Canada dominated possession and outpaced the United States in shots on goal by roughly 2-to-1, creating sustained stretches in which the “ice was tilted” in their favor, one team consistently controlling play in the offensive zone, limiting the opponent’s ability to generate offense. Despite playing much of the game on their heels, the United States prevailed in overtime on the strength of exceptional goaltending and a measure of good luck.
The analogy of playing on tilted ice, with the slope working against us, resonates deeply with how we have felt investing in high-quality foreign small- and mid-cap growth stocks over much of the past five years (2021–2025), a period shaped by three defining headwinds:
1. A market driven by low-quality sectors. Low-quality sub-industries, comprising just 21.4% of the MSCI ACWI ex USA SMID Cap Indexi, accounted for approximately 65.6% of total index return over the five-year period. These industries, including capital goods, infrastructure, defense, equipment manufacturing, energy, metals, mining, materials, and utilities, are predominantly capital-intensive, low-margin businesses that generate modest returns on assets, and are typically the types of businesses our investment process is designed to avoid. These sectors have been significant beneficiaries of the A.I. data center buildout, and many of their stocks have risen sharply, in many cases by more than 1,000%.
Exhibit 1
Source: MSCI, December 31, 2025
2. Returns concentrated in an unusually small number of winners. Beyond the dominance of low-quality sectors, the concentration of returns within the MSCI ACWI ex USA SMID Cap Index has been remarkable even at the individual stock level. Of the 8,579 stocks in the index, just 324 companies, representing a mere 3.8% of the index, accounted for 100% of its total return over the period, and a disproportionate share of those winners were concentrated in the very same capital-intensive, low-quality sectors noted above. The remaining 96.2% of stocks, in aggregate, contributed nothing. Furthermore, 54% of stocks in the index lost money over this five-year period. This was not a rising tide lifting most boats; it was an extraordinarily narrow set of winners, largely drawn from a single corner of the market, carrying the entire index, while most companies treaded water or declined outright. In this environment, maintaining fundamental discipline while generating competitive returns was nearly impossible without abandoning the very principles that define our process.
3. A stark and persistent gap between growth and value. Over the five-year period, the performance gap between growth and value within the foreign SMID universe was extraordinary. The MSCI Foreign SMID Growth Indexii returned +22.0% while the MSCI Foreign SMID Value Indexiii returned +57.4%, a spread of more than 35%. When Morningstar category returns are introduced, representing average peer returns, the divide widens further still. The Morningstar Foreign SMID Growth Categoryiv returned just +2.1%, lagging its own index equivalent by 20%, while the Morningstar Foreign SMID Value Categoryv returned +70.5%, exceeding its index equivalent by nearly 13%, a total spread in category returns of 68.4%.
Exhibit 2
Data Source: Source: MSCI, Morningstar Direct, December 31, 2025vi
And the divergence hasn’t resolved. Through the first two months of 2026, the Morningstar Foreign SMID Growth Category underperformed the growth index equivalent by an additional -4%. Over the trailing twelve months ending February 28, 2026, the category trailed its index equivalent by -13.8%, a two-decade low, against a long-run average of +0.58%.
The practical implication is significant: across both pure growth and blended benchmarks, index returns have overstated what growth managers like Grandeur Peak have been able to achieve, leaving investors at risk of overestimating the underperformance of managers like us relative to what was realistically obtainable.
The dislocation between index and category also has an important valuation implication. If index returns are overstating the investment returns being realized in foreign SMID growth markets, they are also likely understating the relative value of the underlying stocks. The same environment that has made life so difficult for growth managers, and that has driven category outflows to historic extremes, has quietly created a compelling opportunity. The degree of mispricing that has accumulated in foreign SMID growth equities leads us to believe this asset class offers the most attractive relative value opportunity available in public equity markets today and arguably represents the most attractive entry point we have ever observed.
Sustained underperformance within foreign SMID growth markets has taken a real toll on investor patience. According to Morningstar, outflows from US-based Foreign SMID Growth funds since 2022 have been unprecedented. The exodus reflects two related frustrations: the lackluster returns that growth managers have delivered, and the false promise implied by index returns that better outcomes were achievable without taking concentrated, low-quality bets that hinge heavily on an A.I. dominant outcome. Unfortunately, we believe redemptions are happening at precisely the wrong moment, as the underlying mispricing in the asset class becomes increasingly pronounced and the case for staying the course grows stronger by the day.
Exhibit 3
Source: Morningstar Direct, December 31, 2025
The scale of these redemptions reflects, at least in part, a measurement problem. When index returns diverge significantly from category returns, the index ceases to be a reliable proxy for obtainable returns. In such environments, we believe investors should place greater weight on category returns as the more grounded measure of what active managers have been able to deliver, and against which periodic investment performance should be evaluated.
We are confident that the tilted ice, which has sloped decidedly in favor of value stocks, will eventually level out and may, at some point, begin to tilt in favor of growth. The rally in lower-quality, capital-intensive businesses has been sustained by momentum and thematic enthusiasm, but that can only persist for so long. Elevated valuations must ultimately be validated by strong fundamentals: higher realized earnings, improving margins, and sustainable long-term growth. Where those fundamentals fail to materialize, we expect the market to correct course. And when it does, the high-quality, fundamentally sound businesses we favor stand to be the primary beneficiaries. Patience, in environments like this one, is not merely a virtue. It is the strategy.
Sincerely,
Randy Pearce
Chief Investment Officer, Grandeur Peak Global Advisors
An investor should consider investment objectives, risks, charges, and expenses carefully before investing. To obtain a Grandeur Peak Funds prospectus, containing this and other information, visit www.grandeurpeakglobal.com or call 1-855-377-PEAK (7325). Please read it carefully before investing.
The performance data quoted represents past performance. Current performance may be lower or higher than the data quoted above. Past performance is no guarantee of future results. The investment return and principal value of an investment will fluctuate so that the investor’s shares, when redeemed, may be worth more or less than their original cost. For performance information current to the most recent month-end, please call 1-855-377-PEAK (7325).
RISKS: Investing in small and micro-cap funds will be more volatile and loss of principal could be greater than investing in large cap or more diversified funds. Investing in foreign securities entails special risks, such as currency fluctuations and political uncertainties, which are described in more detail in the prospectus. Investments in emerging markets are subject to the same risks as other foreign securities and may be subject to greater risks than investments in foreign countries with more established economies and securities markets. Diversification does not eliminate the risk of experiencing investment loss.
A Fund’s direct or indirect investments in foreign securities, including depositary receipts, involve risks not associated with investing in U.S. securities that can adversely affect the Fund’s performance. Foreign markets, particularly emerging markets, may be less liquid, more volatile, and subject to less government supervision than domestic markets.
The adviser’s judgments about the growth, value or potential appreciation of an investment may prove to be incorrect or fail to have the intended results, which could adversely impact the Fund’s performance and cause it to underperform relative to other funds with similar investment goals or relative to its benchmark, or not to achieve its investment goal.
Grandeur Peak Funds are distributed by Northern Lights Distributors, LLC (Member FINRA/SIPC). Northern Lights Distributors, LLC, is not affiliated with Grandeur Peak Global Advisors or its affiliates. ©2025 Grandeur Peak Global Advisors, LLC.
[i] The MSCI ACWI ex USA Smid Cap Index is designed to measure the equity market performance of small and mid-cap companies across developed emerging markets globally, excluding the United States.
[ii] The MSCI Foreign SMID Growth Index represents the growth style segment of the small and mid-cap equity universe in markets outside the United States. Securities are classified as growth based on characteristics such as higher long-term earnings growth expectations, short-term earnings growth, and sales growth, and are weighted on a free float-adjusted market capitalization basis in accordance with MSCI index methodology.
[iii] MSCI Foreign SMID Value Index represents the value style segment of the small can mid-cap equity universe in markets outside the United States. Securities are classified as value based on characteristics such as high book-to-price, high earnings-to-price, and high dividend yield, and are weighted on a free float-adjusted market capitalization basis in accordance with MSCI index methodology.
[iv] Morningstar Foreign SMID Growth Category. Foreign small/mid-growth portfolios invest in international stocks that are smaller, growing faster, and higher-priced than other stocks. These portfolios primarily invest in stocks that fall in the bottom 30% of each economically integrated market (such as Europe or Asia ex-Japan). Growth is defined based on fast growth (high growth rates for earnings, sales, book value, and cash flow) and high valuations (high price ratios and low dividend yields). These portfolios typically will have less than 20% of assets invested in U.S. stocks.
[v] Morningstar Foreign SMID Value Category. Foreign small/mid-value portfolios invest in international stocks that are smaller and less expensive than other stocks. These portfolios primarily invest in stocks that fall in the bottom 30% of each economically integrated market (such as Europe or Asia ex-Japan). Value is defined based on low valuations (low price ratios and high dividend yields) and slow growth (low growth rates for earnings, sales, book value, and cash flow). These portfolios typically will have less than 20% of assets invested in U.S. stocks.
[vi] Morningstar Foreign SMID Blend Category. Foreign small/mid-blend portfolios invest in a variety of international stocks that are smaller. These portfolios primarily invest in stocks that fall in the bottom 30% of each economically integrated market (such as Europe or Asia ex-Japan). The blend style is assigned to portfolios where neither growth nor value characteristics predominate. These portfolios typically will have less than 20% of assets invested in U.S. stocks.