The return potential of European small and mid caps

Benchmarking does not play a role at Lupus alpha. Our portfolio managers have the freedom to deviate from consensus and thus exploit market opportunities.

Information inefficiencies represent opportunities

Market inefficiencies are essential for above-average returns. The more particular the market segment, the greater the chance of maximizing returns by gaining an information advantage.

Bottom-up approach exploits information gaps

The primary objective throughout the small- and mid-cap segment is to unearth the most attractive equities – 'hidden champions' and true 'cash cows'. As well as analyzing the business models of each prospective investment, Lupus alpha's specialist Small & Mid Cap team relies upon findings from first-hand company visits and management assessments.

European small and mid caps give investors access to the entire economic value chain. In the European equity universe, smaller companies account for around 90% of all listed stocks and about 24% of total market capitalization. Many of them are hidden champions: companies with a focused business model that dominate their niche as global market leaders, enjoying strong bargaining and pricing power. These firms’ robust competitive positions are reflected in attractive margins, enabling them to emerge stronger from recessions and often even gain market share during crises. They typically generate a high proportion of international revenues, making them well-positioned even in a cooling European economy. Many benefit from megatrends such as digitalization, robotics, artificial intelligence, climate change, or autonomous mobility. Their sector diversity represents one of the greatest opportunities in European small caps. Information inefficiencies, strong corporate growth, upgrades to higher equity segments, or acquisitions by large caps can drive significant price momentum and alpha opportunities for active managers.

Traditionally Higher Valuations
Small caps have traditionally been valued higher than large caps due to their stronger growth potential. Since 2000, European small caps have outperformed large caps by around 360 percentage points (as of December 2025). This is due not only to their business models and growth prospects but also to the empirically proven small-cap premium, which compensates for lower trading liquidity.