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) 5.3%22.3%22.3%15.8%11.0%9.3%
Strategy (net) 5.1%21.5%21.5%15.0%10.1%8.3%
MSCI ACWI ex USA Small Cap 0.7%13.4%13.4%16.9%11.6%9.0%
QTD YTD 1 year3 years5 years Since inception
Strategy (gross) 5.3%22.3%22.3%15.8%11.0%9.3%
Strategy (net) 5.1%21.5%21.5%15.0%10.1%8.3%
MSCI ACWI ex USA Small Cap 0.7%13.4%13.4%16.9%11.6%9.0%
QTD YTD 1 year3 years5 years Since inception
Strategy (gross) 5.3%22.3%22.3%15.8%11.0%9.3%
Strategy (net) 5.1%21.5%21.5%15.0%10.1%8.3%
MSCI ACWI ex USA Small Cap 0.7%13.4%13.4%16.9%11.6%9.0%
QTD YTD 1 year3 years5 years Since inception
Strategy (gross) 5.3%22.3%22.3%15.8%11.0%9.3%
Strategy (net) 5.1%21.5%21.5%15.0%10.1%8.3%
MSCI ACWI ex USA Small Cap 0.7%13.4%13.4%16.9%11.6%9.0%
Fund 2021202020192018201720162015
Strategy (gross) 22.3%0.0%0.0%0.0%0.0%0.0%0.0%
Strategy (net) 21.5%0.0%0.0%0.0%0.0%0.0%0.0%
MSCI ACWI ex USA Small Cap 13.4%14.7%22.9%-17.9%32.1%4.3%3.0%
Strategy (gross)
Strategy (net)
MSCI ACWI ex USA Small Cap
2021202020192018201720162015
22.3%0.0%0.0%0.0%0.0%0.0%0.0%
21.5%0.0%0.0%0.0%0.0%0.0%0.0%
13.4%14.7%22.9%-17.9%32.1%4.3%3.0%

Portfolio (as of December 31, 2021)

Benchmark: MSCI ACWI ex USA Small Cap
Asset Allocation
Strategy
Stocks 98.7%
Cash 1.3%
Strategy Characteristics
Strategy Benchmark
No. of holdings 125 4384
Weighted avg. market cap (US $MM) $1,942 $2,196
FY2 price/earnings 6.7 13.9
Price/book value 1.0 1.6
Dividend yield (%) 3.8 2.1
TOP 10 ACTIVE HOLDINGS
Security Country Active weight*
Interfor Canada 2.2%
Royal Mail Plc United Kingdom 2.2%
Canfor Canada 2.1%
Coretronic Corp. Taiwan 2.0%
EVRAZ Plc United Kingdom 2.0%
Gigabyte Technology Co., Ltd. Taiwan 2.0%
ASR Nederland NV Netherlands 2.0%
SSAB Sweden 2.0%
Sojitz Corp. Japan 1.9%
Kawasaki Kisen Kaisha, Ltd. Japan 1.9%

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 19.5% 20.6%
Information Technology 16.1% 12.5%
Financials 14.3% 10.5%
Materials 13.6% 11.1%
Consumer Discretionary 11.3% 11.9%
Real Estate 6.1% 10.7%
Energy 5.0% 2.7%
Consumer Staples 4.5% 5.4%
Health Care 4.2% 6.9%
Communication Services 3.0% 4.4%
Utilities 1.3% 3.3%
Equity Funds 0.0% 0.0%
TOP 10 COUNTRIES
Country Strategy Benchmark
Japan 18.9% 18.4%
Taiwan 10.0% 5.5%
United Kingdom 9.1% 12.3%
Canada 8.4% 6.7%
South Korea 8.3% 4.0%
India 7.1% 5.4%
Australia 6.2% 6.7%
Sweden 4.5% 5.1%
Germany 2.6% 3.6%
Italy 2.5% 2.0%
Regional Allocation
  • Emerging Asia 31.0%
  • Pacific 28.8%
  • Europe – other 25.9%
  • North America 8.4%
  • Emerging Europe, Middle East, Africa 1.6%
  • Emerging Latin America 1.6%
  • Developed Middle East 1.5%

Commentary (As of December 31, 2021)

Highlights

  • Global equities rallied in December, capping off the third consecutive calendar year of strong positive returns.
  • Concurrent with the easing of Covid-related restrictions, we anticipate the pressures from tangled supply chains and tight labor markets to lessen in 2022. As developed market central banks attempt to combat inflationary trends stoked by supply bottlenecks and massive amounts of stimulus, we await gradual increases in policy rates in most regions.

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. Our value factors were the best-performing factor group in December and the fourth quarter. Value was also our second best-performing alpha factor group for the full year. The strategy’s earnings growth alpha factors delivered positive returns in December and the fourth quarter, and they are the best-performing factor group in 2021. Our technical factors also delivered positive returns in December and the fourth quarter. Our competitive strength factor category delivered slightly negative returns for the month but generated the second-best returns in the fourth quarter as a whole. These factors have a quality tilt to them but offer good diversification to other bottom-up factors, particularly value. Our macroeconomic and country aggregate factors delivered positive returns in December and the fourth quarter, as countries exhibiting superior metrics (such as Sweden and the United Arab Emirates) outperformed those with relatively weaker macroeconomic characteristics (such as Brazil and Poland). All factor group returns remain positive from inception of the strategy (10/20/14) to the end of December.

Investment outlook

Though we analyze many different stock selection factors in our alpha model, value factors receive the largest weight on average. Despite December’s value rally, the MSCI ACWI ex USA Small Cap Growth Index (“Small Cap Growth Index”) traded at a 21.3x forward price-to-earnings multiple compared to 11.2x for the MSCI ACWI ex USA Small Cap Value Index (“Small Cap Value Index”), a 91% premium. At 11.2x forward price-to-earnings, the Small Cap Value Index is also trading below its 10-year average, which makes it an exception in today’s high-valuation backdrop. Based on the Federal Open Market Committee’s (FOMC’s) December meeting minutes, it seems increasingly likely that the U.S. Federal Reserve (“Fed”) will pursue additional Quantitative Tightening (“QT”) by reducing the size of its balance sheet more aggressively than previously thought. This is in addition to the multiple planned rate hikes expected in 2022. The U.S. 10-year Treasury yield has recently moved higher, and higher interest rates should continue to pressure growth stocks. Coupled with the current valuation mismatch, we believe there is far more “catching up” to come for value stocks.

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].