Seeking diversified exposure to international small cap companies

The international small cap strategy invests primarily in common stocks of companies with smaller market capitalizations located in developed and emerging markets outside the US. The portfolio normally invests at least 80% of its total assets in equity securities of companies with smaller market capitalizations. Smaller market capitalization companies are companies with market capitalizations that do not exceed the highest market capitalization of a company within the portfolio’s benchmark, the MSCI ACWI ex USA Small Cap Index (Gross), at the time of purchase. Some of these companies, although small by US standards, might be large companies in their local markets. The portfolio may continue to hold securities of a company that appreciate above the smaller market capitalization threshold and thus may from time to time hold less than 80% of its total assets in equity securities of companies with smaller market capitalizations. The portfolio may invest in a wide range of industries.

Benchmark
MSCI AC World ex USA Small Cap
Inception
November 30, 2014
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Strategy overview

The portfolio managers discuss our International Small Cap strategy.

Portfolio managers

Quantitative Portfolio Manager
Head of Quantitative Research
Quantitative Portfolio Manager
Quantitative Portfolio Manager
Quantitative Portfolio Manager

Performance

QTD YTD 1 year3 years5 years Since inception
Strategy (gross) 2.0%2.0%24.1%12.9%11.3%9.2%
Strategy (net) 1.9%1.9%23.2%12.2%10.6%8.3%
MSCI ACWI ex USA Small Cap -1.7%-1.7%6.6%1.4%6.4%5.9%
QTD YTD 1 year3 years5 years Since inception
Strategy (gross) 2.0%2.0%24.1%12.9%11.3%9.2%
Strategy (net) 1.9%1.9%23.2%12.2%10.6%8.3%
MSCI ACWI ex USA Small Cap -1.7%-1.7%6.6%1.4%6.4%5.9%
QTD YTD 1 year3 years5 years Since inception
Strategy (gross) 9.6%29.7%29.7%12.7%12.7%9.0%
Strategy (net) 9.4%28.8%28.8%12.0%11.9%8.2%
MSCI ACWI ex USA Small Cap 10.2%16.2%16.2%2.0%8.4%6.1%
QTD YTD 1 year3 years5 years Since inception
Strategy (gross) 9.6%29.7%29.7%12.7%12.7%9.0%
Strategy (net) 9.4%28.8%28.8%12.0%11.9%8.2%
MSCI ACWI ex USA Small Cap 10.2%16.2%16.2%2.0%8.4%6.1%
Fund 202320222021202020192018201720162015
Strategy (gross) 29.7%-9.7%22.3%4.3%21.6%-20.4%36.4%4.6%6.1%
Strategy (net) 28.8%-10.3%21.5%3.6%20.7%-21.2%35.1%3.6%5.0%
MSCI ACWI ex USA Small Cap 16.2%-19.6%13.4%14.7%22.9%-17.9%32.1%4.3%3.0%
Strategy (gross)
Strategy (net)
MSCI ACWI ex USA Small Cap
202320222021202020192018201720162015
29.7%-9.7%22.3%4.3%21.6%-20.4%36.4%4.6%6.1%
28.8%-10.3%21.5%3.6%20.7%-21.2%35.1%3.6%5.0%
16.2%-19.6%13.4%14.7%22.9%-17.9%32.1%4.3%3.0%

Portfolio (as of January 31, 2024)

Benchmark: MSCI ACWI ex USA Small Cap
Asset Allocation
Strategy
Stocks 98.5%
Cash 1.5%
Strategy Characteristics
Strategy Benchmark
No. of holdings 171 4365
Weighted avg. market cap (US $MM) $2,550 $1,841
FY2 price/earnings 7.8 12.5
Price/book value 1.0 1.4
Dividend yield (%) 4.4 2.8
TOP 10 HOLDINGS
Security Country Active weight*
Power Finance Corp. Ltd. India 2.0%
KPIT Technologies Ltd. India 1.9%
Simplo Technology Co., Ltd. Taiwan 1.8%
Radiant Opto-Electronics Corp. Taiwan 1.8%
Mitsubishi Motors Corp. Japan 1.7%
Bper Banca Italy 1.7%
Sojitz Corp. Japan 1.7%
Electric Power Development Co., Ltd. Japan 1.6%
Sankyo Co., Ltd. Japan 1.4%
SSAB Sweden 1.4%

A “weighted average” measures a characteristic by the market capitalization of each stock. Price/book ratio is the weighted average of the price/book ratios of all the stocks in a portfolio. The P/B ratio of a company is calculated by dividing the market price of its stock by the company’s per-share book value. The price/earnings ratio is the weighted average of the price/earnings ratios of the stocks in a portfolio. The FY2 P/E ratio is a forward P/E ratio using a next-twenty-four months EPS estimate in the denominator.

*Active defined as Portfolio weight minus MSCI ACWI ex USA Small Cap Index weight. Holdings are subject to change.

SECTOR WEIGHTS
Sector Strategy Benchmark
Industrials 18.6% 21.1%
Information Technology 16.2% 11.9%
Financials 15.5% 11.3%
Consumer Discretionary 13.5% 11.9%
Materials 8.5% 11.1%
Consumer Staples 6.3% 6.3%
Energy 4.9% 4.0%
Utilities 4.8% 3.1%
Real Estate 4.4% 9.1%
Communication Services 2.7% 3.7%
Health Care 2.2% 6.6%
Equity Funds 0.8% 0.0%
TOP 10 COUNTRIES
Country Strategy Benchmark
Japan 26.1% 22.2%
Taiwan 10.2% 6.4%
United Kingdom 8.3% 9.6%
India 7.9% 8.1%
Australia 6.6% 6.1%
South Korea 5.6% 3.6%
Canada 5.2% 6.5%
Turkey 4.7% 0.7%
Italy 4.5% 2.1%
Spain 2.5% 1.2%
Regional Allocation
  • Pacific 35.1%
  • Emerging Asia 27.1%
  • Europe – other 23.3%
  • North America 5.2%
  • Emerging Europe, Middle East, Africa 5.1%
  • Emerging Latin America 1.9%
  • Multi Region All Country 0.8%

Commentary (As of January 31, 2024)

Highlights

  • International smaller capitalization (“cap”) equities, as measured by the MSCI ACWI ex USA Small Cap Index (“Index”), outperformed international large caps in January.
  • Following various economic releases showing more tepid inflation, yields on the US 10-year treasury fell by around half a percentage point in both November and December as many market participants have come to believe that the U.S. Federal Reserve has completed its policy rate hikes.
  • Historically, small caps have generally outperformed large caps following periods of falling interest rates and easing financial conditions.

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, sentiment, technical indicators, and competitive strength – and two top-down factor categories assessing macroeconomic and country aggregate characteristics. All of our bottom-up alpha factor categories delivered positive returns in January. The strategy’s value factors once again produced positive monthly returns, and value remains the best-performing factor over the last twelve months. Our sentiment and technical factors also posted positive returns last month, and returns for both are positive on a last-twelve-months basis as well. Competitive Strength generated positive returns in January, and it is the second-best performing factor group over the last twelve months. Our country aggregate factors delivered positive monthly returns as countries exhibiting more attractive characteristics (such as Japan) outperformed those with relatively weaker characteristics (such as China). However, our macroeconomic factors generated negative returns due to that model’s poor calls on India and Korea. All factor groups remain positive on an inception-to-date basis.

Quarterly Investment Outlook

Following various economic releases showing more tepid inflation, yields on the US 10-year Treasury fell by around half percentage point in both November and December as many market participants have come to believe that the U.S. Federal Reserve has completed its policy rate hikes. Historically, small caps have generally outperformed large caps following periods of falling interest rates and easing financial conditions.

Though we analyze many different stock selection factors in our alpha model, value factors receive the largest weight on average. Even if the U.S. Federal Reserve is finished hiking policy rates, interest rates are likely to remain elevated for some time, and a higher cost of capital should translate into a continued preference for value stocks. As of the end of December, the MSCI ACWI ex USA Small Cap Growth Index traded at a 16.9x forward price-to-earnings (P/E) multiple compared to 10.1x for the MSCI ACWI ex USA Small Cap Value Index, a 68% premium.

We believe another attractive feature of international 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.

The market commentary expresses the portfolio managers’ views as of the date of this report and should not be relied on as research or investment advice regarding any stock. These views and the portfolio holdings and characteristics are subject to change. There is no guarantee that any forecasts made will come to pass. The securities identified and described above do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that an investment in the securities identified was or will be profitable. Past performance does not guarantee future results. For a description of our performance attribution methodology, or to obtain a list showing every holding's contribution to the overall account's performance during the quarter, please contact our product manager, Kevin Moutes, at 310-231-6116 or [email protected].