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) -4.7%-4.0%-1.5%9.1%7.8%8.3%
Strategy (net) -4.8%-4.2%-2.1%8.4%7.0%7.3%
MSCI ACWI ex USA Small Cap -6.4%-12.4%-10.2%7.4%6.2%6.6%
QTD YTD 1 year3 years5 years Since inception
Strategy (gross) -4.7%-4.0%-1.5%9.1%7.8%8.3%
Strategy (net) -4.8%-4.2%-2.1%8.4%7.0%7.3%
MSCI ACWI ex USA Small Cap -6.4%-12.4%-10.2%7.4%6.2%6.6%
QTD YTD 1 year3 years5 years Since inception
Strategy (gross) 0.8%0.8%9.3%11.7%9.3%9.1%
Strategy (net) 0.6%0.6%8.6%11.0%8.5%8.1%
MSCI ACWI ex USA Small Cap -6.4%-6.4%0.4%10.7%8.3%7.7%
QTD YTD 1 year3 years5 years Since inception
Strategy (gross) 0.8%0.8%9.3%11.7%9.3%9.1%
Strategy (net) 0.6%0.6%8.6%11.0%8.5%8.1%
MSCI ACWI ex USA Small Cap -6.4%-6.4%0.4%10.7%8.3%7.7%
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 April 30, 2022)

Benchmark: MSCI ACWI ex USA Small Cap
Asset Allocation
Strategy
Stocks 98.7%
Cash 1.3%
Strategy Characteristics
Strategy Benchmark
No. of holdings 130 4334
Weighted avg. market cap (US $MM) $2,430 $1,907
FY2 price/earnings 6.3 11.8
Price/book value 1.0 1.4
Dividend yield (%) 4.9 2.6
TOP 10 ACTIVE HOLDINGS
Security Country Active weight*
Interfor Canada 2.1%
POSCO INTERNATIONAL Corp. South Korea 1.9%
Sojitz Corp. Japan 1.9%
Whitecap Resources Canada 1.8%
JB Hi-Fi Ltd. Australia 1.7%
SSAB Sweden 1.7%
Gigabyte Technology Co., Ltd. Taiwan 1.7%
ASR Nederland NV Netherlands 1.6%
SHIMAMURA Co., Ltd. Japan 1.6%
National Aluminium Co. Ltd. India 1.5%

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 15.1% 20.3%
Materials 14.9% 11.9%
Information Technology 12.8% 11.3%
Financials 11.8% 11.1%
Consumer Discretionary 10.3% 11.0%
Energy 7.6% 3.8%
Equity Funds 7.5% 0.0%
Real Estate 6.0% 11.0%
Consumer Staples 5.2% 5.8%
Communication Services 3.0% 4.0%
Utilities 2.8% 3.8%
Health Care 1.7% 6.1%
TOP 10 COUNTRIES
Country Strategy Benchmark
Japan 16.9% 17.9%
Canada 9.9% 7.5%
Australia 8.9% 7.1%
Taiwan 8.8% 5.4%
South Korea 8.0% 4.0%
United Kingdom 6.3% 11.3%
India 5.7% 5.9%
Multi-National All Country 4.7% 0.0%
Germany 3.6% 3.5%
Brazil 3.3% 1.7%
Regional Allocation
  • Pacific 28.8%
  • Emerging Asia 27.2%
  • Europe – other 19.0%
  • North America 9.9%
  • Multi Region All Country 4.7%
  • Emerging Latin America 3.8%
  • Multi Region Developed 2.1%
  • Developed Middle East 1.4%
  • Emerging Europe, Middle East, Africa 1.2%
  • Multi Region Emerging (ETF) 0.7%

Commentary (As of April 30, 2022)

Highlights

  • Global equities fell in April as the prospect of tighter global monetary policy, the war in Ukraine, and additional Covid-related lockdowns in China all weighed on sentiment. International smaller capitalization (“cap”) equities, as measured by the MSCI ACWI ex USA Small Cap Index (“Index”) slightly underperformed international large cap equities in April.
  • Except for China, central bank authorities globally are aiming to tighten monetary policy amid substantially above-target inflation without tipping their respective economies into recession.
  • Though we analyze many different stock selection factors in our alpha model, value factors receive the largest weight on average.

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. Returns to our value factors were positive in April, and value is now the best-performing factor group in in 2022 YTD and over the last twelve months. The strategy’s earnings growth alpha factors had positive returns in April, and they are the second-best-performing factor group over the past twelve months. Of our alpha factor groups, our technical factors delivered the highest returns in April. Our competitive strength factor category delivered positive returns for the month but are roughly flat over the past twelve months. 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 negative returns in April as countries exhibiting superior metrics underperformed those with relatively weaker macroeconomic and aggregate characteristics. All factor group returns remain positive from inception of the Strategy (10/20/14) to the end of April.

Investment outlook

Though we analyze many different stock selection factors in our alpha model, value factors receive the largest weight on average. Despite the value rally earlier in the first quarter, the MSCI ACWI ex USA Small Cap Growth Index (“Small Cap Growth Index”) still traded at a 17.6x forward price-to-earnings multiple compared to 10.6x for the MSCI ACWI ex USA Small Cap Value Index (“Small Cap Value Index”), a 66% premium. Following the recent May rate hike, it seems likely that the Fed will continue to raise policy rates and reduce the size of its balance sheet for the remainder of 2022. It is seeking to reduce inflation expectations without significantly damaging economic growth. If successful, higher interest rates should continue to pressure longer-duration growth stocks and favor 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].