Small- and mid-cap stocks are emerging as the most fertile hunting ground for the alpha generation, according to Eric Braz, portfolio manager at MFS Investment Management.

After 17 years at MFS, Braz is now laser-focused on those stocks, which he believes are ripe for investment due to market inefficiencies.

Speaking on the Relative Return podcast, Braz said: “I watch them [small and mid-cap stocks] such as inefficient markets.

“There is a really great opportunity to generate alpha. And why I think they are so ineffective is actually the range of investment options. There are so many small mid-caps globally and because of that their actual science coverage is not that strong.”

Braz singled out several sectors he sees as particularly promising, including aerospace, Japan, infrastructure and Brazil.

The aerospace industry, he stressed, offers a unique opportunity amid ongoing challenges for major players such as Boeing and Airbus.

"With all the problems Boeing and Airbus are having, the aftermarket cycle is going to be longer and stronger than people expected," he said.

Braz is also optimistic about the Japanese market, where he has invested in a diverse range of companies, from IT services to fast fashion.

"Japan is a place we have historically invested in and continue to do so," he said. "And we own a wide range of companies, everything from IT services companies to a bank ... so that's another place we think is interesting, really attractive valuations in some high-quality companies."

He also pointed out that infrastructure investment is gaining momentum due to trends such as reshoring and green energy, mentioning specific stakes in the cement and aggregates sector.

Despite recent volatility, Braz is particularly bullish on Brazil, describing it as a region with "high-quality companies" currently trading at attractive valuations.

"We think there's a tremendous amount of opportunity there," he said, noting long-term growth potential in a market facing near-term challenges.

When it comes to investment strategies, Braz emphasized the importance of thorough research and global comparisons.

He pointed out that small and mid-cap companies often receive less analyst coverage, creating pricing inefficiencies. The less attention these companies receive, the more opportunities there are for informed investors to take advantage of their true value, Braz said.

“Apple has over 60 analysts covering it. The companies we own usually have much less coverage. And so you can really differentiate yourself and make good stock picks in the global small-cap space,” he said.

While the US market continues to attract attention, Braz pointed out that MFS is currently overweight the UK and Europe, citing better valuation opportunities in those regions.

Turning to the firm's investment process, he said MFS uses its extensive global research platform, employing more than 60 analysts to read a wide range of companies. This approach allows them to find high-quality, undervalued businesses that often go unnoticed.

Braz stressed the importance of a bottom-up investment philosophy, where decisions are made based on the fundamentals of individual companies rather than macroeconomic trends.

As Braz put it succinctly, “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 that provides significant diversification and still yields a fairly significant active share," he said.

"Ultimately, we deliver strong risk-adjusted returns."