Global Small Cap

Portfolio attribution

The Portfolio outperformed the Index during the month. To evaluate stocks in our investable universe, our multi-factor quantitative model employs four bottom-up factor categories – valuation, earnings growth, technical indicators, and competitive strength – and two top-down factor categories assessing macroeconomic and country aggregate characteristics. All of our alpha factor categories delivered positive returns in October. The strategy’s value factors produced positive returns in October, and value remains the best-performing factor in 2023 and over the last twelve months. Our earnings growth and technical factors also posted positive returns last month. Competitive strength generated the highest returns among our bottom-up alpha factor categories in October, and it is the second-best performing factor group over the year-to-date period. Our macroeconomic and country aggregate factors delivered positive monthly returns as countries exhibiting stronger metrics (such as Japan) outperformed those with relatively weaker characteristics (such as Australia). All factor groups remain positive on an inception-to-date basis.

Economic outlook

Excluding Australia, major Developed Market central banks, including the US Federal Reserve Bank, The Bank of England, The European Central Bank and The Bank of Japan, voted to leave rates unchanged at their most recent meetings. The global manufacturing output PMI slipped 0.9 points to 48.9 last month, a level consistent with a 0.5% annual rate contraction in factory output. The standout positive in the October PMIs was the US, with a rise in both the output (+0.5 points) and new orders (+1.4 points) indexes. However, China stepped down, and the Euro area PMI remains stuck at a recessionary level.

According to JP Morgan, mainland China’s global PMI slipped to 48.8 likely reflecting the ongoing drags from the real estate sector and domestic demand weakness and raising questions about the resilience of the end-of-third quarter momentum.

Investment outlook

Though we analyze many different stock selection factors in our alpha model, value factors receive the largest weight on average. As of the end of October, the MSCI ACWI ex USA Small Cap Growth Index traded at a 15.7x forward price-to-earnings (P/E) multiple compared to 9.6x for the MSCI ACWI ex USA Small Cap Value Index, a 63% premium, which is the smallest it has been all year.

Another attractive feature of global small caps is that they exhibit greater valuation dispersion than large caps on both a forward earnings yield and B/P basis. This indicates more information content in the valuation ratios of small caps. In addition to exhibiting greater valuation dispersion, small caps exhibit a higher long-term earnings per share growth trend.

International Small Cap

Portfolio Attribution

The Portfolio outperformed the Index during the month. To evaluate stocks in our investable universe, our multi-factor quantitative model employs five bottom-up factor categories – valuation, sentiment, technical indicators, quality (formerly labelled competitive strength), and corporate events – and two top-down factor categories assessing macroeconomic and country aggregate characteristics. All of our bottom-up alpha factory categories generated positive returns in June and Q2. Our value factors delivered positive returns for the month and the second quarter amidst the backdrop of a continued higher interest rate environment. They are the best-performing factor group over the last twelve months. The strategy’s sentiment factors also posted positive returns for the month and the quarter. Our technical factors were the best-performing alpha factor category in the month and the quarter, and they are the second-best performing factor group over the last twelve months. Our quality factors have also performed very well in the month, quarter, and trailing twelve months. Our macroeconomic and country aggregate factors delivered negative returns in June mostly due to India, which scores poorly on our top-down models, but which had strong returns in the month. All factor groups remain positive on an inception to date basis.

Quarterly Investment Outlook

Though we analyze many different stock selection factors in our alpha model, value factors receive the largest weight on average. As of the end of June, the MSCI ACWI ex USA Small Cap Growth Index traded at a 17.4x forward price-to-earnings (P/E) multiple compared to 10.6x for the MSCI ACWI ex USA Small Cap Value Index, a 65% premium, leaving ample room for potential value outperformance.

We believe another attractive feature of international small caps is that they generally exhibit greater valuation dispersion than large caps on both a forward earnings yield and B/P basis. This indicates more information content in the valuation ratios of small caps. In addition to exhibiting greater valuation dispersion, small caps generally exhibit a higher long-term earnings per share growth trend.

International Value Select

Portfolio Attribution

The Portfolio underperformed the Index during the month, due primarily to stock selection. Portfolio holdings in the banks, insurance, and pharmaceuticals & biotechnology industry groups detracted from relative performance. Holdings in the technology hardware & equipment and consumer durables & apparel industry groups, as well as an underweight position in the automobiles & components industry group, offset some of the underperformance compared to the Index. The largest detractor was rolling stock, signaling, & services provider for the rail industry, Alstom SA (France). Additional notable detractors included paints & coatings producer, Akzo Nobel (Netherlands), and pharmaceutical & consumer healthcare company, GSK Plc (United Kingdom). The top contributor to return was electronic equipment manufacturer, Samsung Electronics Co., Ltd. (South Korea). Other notable contributors included business software & services provider, SAP SE (Germany), and pharmaceuticals & biotechnology company, Roche Holding AG (Switzerland).

Quarterly Investment Outlook

Monetary tightening in many of the world’s economies is slowing economic growth, albeit with long and variable lags. While central banks have largely tamed inflation, high absolute prices for goods and services are causing voter dissatisfaction in many countries. In the US, the much-anticipated reductions in interest rates have yet to materialize, and the prolonged period of elevated rates pose risks to leveraged sectors such as real estate. The European Central Bank is currently expected to cut rates further this year, but political uncertainties cloud the eurozone’s economic outlook. In China, property market restructuring and amplified trade sanctions are expected to encumber economic recovery.

Narrow, momentum-led markets and political risks are creating investment opportunities. As markets concentrate enthusiasm for generative AI in a cohort of chipmakers, we believe client fundamental portfolios have exposure to lesser-known beneficiaries of this technology cycle, across building, delivery, and deployment phases. In Europe, we added to select financials as post-election sell-offs made valuations, in our view, more attractive. Fading bullishness for the Japanese market has also created potentially promising valuations. We also remain focused on long-term rewards from operational restructuring, aiming to invest in companies poised for earnings growth and shareholder returns ahead of market recognition.

International Opportunities

Portfolio Attribution

The Portfolio underperformed the Index during the month, due primarily to stock selection. Portfolio holdings in the banks, semiconductors & semi equipment, and insurance industry groups detracted from relative performance. Holdings in the automobiles & components, technology hardware & equipment, and consumer durables & apparel industry groups offset some of the underperformance compared to the Index. The largest detractor was rolling stock, signaling, & services provider for the rail industry, Alstom SA (France). Additional notable detractors included paints & coatings producer, Akzo Nobel (Netherlands), and pharmaceutical & consumer healthcare company, GSK Plc (United Kingdom). The top contributor to return was integrated circuit manufacturer, Taiwan Semiconductor Manufacturing Co., Ltd. (Taiwan). Other notable contributors included business software & services provider, SAP SE (Germany), and pharmaceuticals & biotechnology company, Roche Holding AG (Switzerland).

Quarterly Investment Outlook

Monetary tightening in many of the world’s economies is slowing economic growth, albeit with long and variable lags. While central banks have largely tamed inflation, high absolute prices for goods and services are causing voter dissatisfaction in many countries. In the US, the much-anticipated reductions in interest rates have yet to materialize, and the prolonged period of elevated rates pose risks to leveraged sectors such as real estate. The European Central Bank is currently expected to cut rates further this year, but political uncertainties cloud the eurozone’s economic outlook. In China, property market restructuring and amplified trade sanctions are expected to encumber economic recovery.

Narrow, momentum-led markets and political risks are creating investment opportunities. As markets concentrate enthusiasm for generative AI in a cohort of chipmakers, we believe client fundamental portfolios have exposure to lesser-known beneficiaries of this technology cycle, across building, delivery, and deployment phases. In Europe, we added to select financials as post-election sell-offs made valuations, in our view, more attractive. Fading bullishness for the Japanese market has also created potentially promising valuations. We also remain focused on long-term rewards from operational restructuring, aiming to invest in companies poised for earnings growth and shareholder returns ahead of market recognition.

Within EM, the Indian general election concluded in June with the Narendra Modi-led Bharatiya Janata party (“BJP”) losing its standalone majority in the lower house. However, the party retained a majority as part of the National Democratic Alliance. While this result initially disappointed the market, Indian stocks rebounded as the BJP indicated that it would remain committed to investing in infrastructure and instituting reforms. Moreover, Prime Minister Modi’s cabinet appointments were largely holdovers from his last cabinet, allaying concerns that the alliance partners were exerting significant influence over these appointments. We remain confident in our India exposure due to valuation support—the portfolio’s Indian stocks currently trade at significant price-to-earnings discounts versus the MSCI India Index. In South Africa, elections appear to be progressing in a business-friendly manner. The African National Congress formed a government of national unity with center-leaning parties. While we believe the new government is well-positioned to address the country’s economic challenges – low growth, fiscal deficits, and poor infrastructure – it remains to be seen if the leaders will be able to implement effective policies in these areas. We continue to monitor South Africa’s economic environment. Also in EM, growth upgrades appear attractive in Taiwan and South Korea. In contrast, the growth outlook for Mexican and Brazilian stocks has slumped. Economic growth rates in these countries have been falling and the US Federal Reserve’s hawkishness has prevented them from more aggressively lowering their domestic interest rates to spur growth.

Emerging Markets Equity

Portfolio Attribution

The Portfolio outperformed the Index in June 2024. We use both bottom-up “stock-specific” and top-down factor categories to seek to forecast alpha for the stocks in the Portfolio’s investable universe. Our technical (price momentum), growth, competitive strength, and corporate events factors were positive indicators in June. Valuation was a negative indicator during the month. Our top-down currency factor was a positive indicator while country/sector aggregate and macroeconomic were negative indicators in June.

Quarterly Investment Outlook

The Indian general election concluded in June with the Narendra Modi-led Bharatiya Janata party (“BJP”) losing its standalone majority in the lower house. However, the party retained a majority as part of the National Democratic Alliance. While this result initially disappointed the market, Indian stocks rebounded as the BJP indicated that it would remain committed to investing in infrastructure and instituting reforms. Moreover, Prime Minister Modi’s cabinet appointments were largely holdovers from his last cabinet, allaying concerns that the alliance partners were exerting significant influence over these appointments. We remain confident in our India exposure due to valuation support—the portfolio’s Indian stocks currently trade at significant price-to-earnings discounts versus the MSCI India Index. In South Africa, elections appear to be progressing in a business-friendly manner. The African National Congress formed a government of national unity with center-leaning parties. While we believe the new government is well-positioned to address the country’s economic challenges – low growth, fiscal deficits, and poor infrastructure – it remains to be seen if the leaders will be able to implement effective policies in these areas. South Africa was the largest country underweight in the Portfolio as of quarter-end due to valuation and top-down considerations. We continue to monitor South Africa’s economic environment.

After appearing less attractive for much of 2023, earnings growth upgrades for EM equities are currently more attractive than those in ex-US developed markets. Within EM, growth upgrades appear attractive in Taiwan and South Korea. In contrast, the growth outlook for Mexican and Brazilian stocks has slumped. Economic growth rates in these countries have been falling and the US Federal Reserve’s hawkishness has prevented them from more aggressively lowering their domestic interest rates to spur growth. Within EM more broadly, we continue to identify, in our view, attractive investment opportunities in small cap companies. Historically, our investment process has uncovered EM small cap stocks with alpha potential. The Portfolio’s allocation to small cap stocks remains near the high end of the historical range.

Global Value Equity

Portfolio Attribution

The Portfolio underperformed the Index during the month, due primarily to stock selection. Portfolio holdings in the semiconductors & semi equipment, capital goods, and health care equipment & services industry groups detracted from relative performance. Holdings in the consumer durables & apparel industry group, as well as an underweight position in the financial services and telecommunication services industry groups, offset some of the underperformance compared to the Index. The largest detractor was rolling stock, signaling, & services provider for the rail industry, Alstom SA (France). Additional notable detractors included paints & coatings producer, Akzo Nobel (Netherlands), and design-to-distribution business process services technology company, TD SYNNEX Corp. (United States). The top contributor to return was electronic equipment manufacturer, Samsung Electronics Co., Ltd. (South Korea). Other notable contributors included enterprise management software provider, Oracle Corp. (United States), and business software & services provider, SAP SE (Germany).

Quarterly Investment Outlook

Monetary tightening in many of the world’s economies is slowing economic growth, albeit with long and variable lags. While central banks have largely tamed inflation, high absolute prices for goods and services are causing voter dissatisfaction in many countries. In the US, the much-anticipated reductions in interest rates have yet to materialize, and the prolonged period of elevated rates pose risks to leveraged sectors such as real estate. The European Central Bank is currently expected to cut rates further this year, but political uncertainties cloud the eurozone’s economic outlook. In China, property market restructuring and amplified trade sanctions are expected to encumber economic recovery.

Narrow, momentum-led markets and political risks are creating investment opportunities. As markets concentrate enthusiasm for generative AI in a cohort of chipmakers, we believe client fundamental portfolios have exposure to lesser-known beneficiaries of this technology cycle, across building, delivery, and deployment phases. In Europe, we added to select financials as post-election sell-offs made valuations, in our view, more attractive. Fading bullishness for the Japanese market has also created potentially promising valuations. We also remain focused on long-term rewards from operational restructuring, aiming to invest in companies poised for earnings growth and shareholder returns ahead of market recognition.

International Value Equity

Portfolio Attribution

The Portfolio underperformed the Index during the month, due primarily to stock selection. Portfolio holdings in the banks, pharmaceuticals & biotechnology, and insurance industry groups detracted from relative performance. Holdings in the technology hardware & equipment and consumer durables & apparel industry groups, as well as an underweight position in the automobiles & components industry group, offset some of the underperformance compared to the Index. The largest detractor was rolling stock, signaling, & services provider for the rail industry, Alstom SA (France). Additional notable detractors included paints & coatings producer, Akzo Nobel (Netherlands), and pharmaceutical & consumer healthcare company, GSK Plc (United Kingdom). The top contributor to return was electronic equipment manufacturer, Samsung Electronics Co., Ltd. (South Korea). Other notable contributors included business software & services provider, SAP SE (Germany), and pharmaceuticals & biotechnology company, Roche Holding AG (Switzerland).

Quarterly Investment Outlook

Monetary tightening in many of the world’s economies is slowing economic growth, albeit with long and variable lags. While central banks have largely tamed inflation, high absolute prices for goods and services are causing voter dissatisfaction in many countries. In the US, the much-anticipated reductions in interest rates have yet to materialize, and the prolonged period of elevated rates pose risks to leveraged sectors such as real estate. The European Central Bank is currently expected to cut rates further this year, but political uncertainties cloud the eurozone’s economic outlook. In China, property market restructuring and amplified trade sanctions are expected to encumber economic recovery.

Narrow, momentum-led markets and political risks are creating investment opportunities. As markets concentrate enthusiasm for generative AI in a cohort of chipmakers, we believe client fundamental portfolios have exposure to lesser-known beneficiaries of this technology cycle, across building, delivery, and deployment phases. In Europe, we added to select financials as post-election sell-offs made valuations, in our view, more attractive. Fading bullishness for the Japanese market has also created potentially promising valuations. We also remain focused on long-term rewards from operational restructuring, aiming to invest in companies poised for earnings growth and shareholder returns ahead of market recognition.