The chart below shows how the Morningstar Foreign Small/Mid Growth category’s trailing 5-year annualized return has compared to that of 18 other Morningstar public equity categories at year end over the past 25 years.
In 2022, the foreign small/mid growth category’s trailing 5-year return ranked second to last for the first time on record. For each of the past three calendar years (2023–2025) and year-to-date in 2026, the category has ranked dead last, which is also unprecedented.
This begs the question: are foreign small cap growth stocks fundamentally broken? We can confidently answer: NO. The underperformance has primarily been driven by flows, not fundamentals, as investors have abandoned the category in search of higher returns in private markets and highly speculative, AI-related investments. The foreign small/mid growth category has seen net outflows for four consecutive years (2022–2025), with redemptions deepening each year to roughly $18 billion in 2025 alone — the largest annual outflow on record, exceeding even the redemptions seen during the 2008 financial crisis.
When underperformance is flow-driven rather than fundamentally driven, it often creates rare opportunities to capture very attractive, absolute and risk-adjusted returns. We believe that is the case in foreign small cap growth today.
Baron Rothschild is famously credited with the advice, “The time to buy is when there’s blood in the streets.” If you’re looking for undervalued stocks, look no further than foreign small cap growth stocks.
Foreign Small/Mid Growth peer 5-Year Annualized Relative Return versus other public equity peer categories
This post is for information and educational purposes only and expresses our opinion and view of the market and is not a recommendation to transact in any securities.