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

Strategy overview

The portfolio managers discuss our International Small Cap strategy.

Portfolio managers

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

Performance

QTD YTD 1 year3 years Since inception
Strategy (gross) 9.9%-23.5%-18.9%-3.1%2.2%
Strategy (net) 9.8%-23.7%-19.4%-4.0%1.2%
MSCI ACWI ex USA Small Cap 12.2%-20.3%-13.2%-1.8%2.2%
QTD YTD 1 year3 years Since inception
Strategy (gross) 9.9%-23.5%-18.9%-3.1%2.2%
Strategy (net) 9.8%-23.7%-19.4%-4.0%1.2%
MSCI ACWI ex USA Small Cap 12.2%-20.3%-13.2%-1.8%2.2%
QTD YTD 1 year3 years Since inception
Strategy (gross) -30.4%-30.4%-24.5%-5.5%0.4%
Strategy (net) -30.5%-30.5%-25.1%-6.3%-0.5%
MSCI ACWI ex USA Small Cap -28.9%-28.9%-20.8%-4.5%0.1%
QTD YTD 1 year3 years Since inception
Strategy (gross) -30.4%-30.4%-24.5%-5.5%0.4%
Strategy (net) -30.5%-30.5%-25.1%-6.3%-0.5%
MSCI ACWI ex USA Small Cap -28.9%-28.9%-20.8%-4.5%0.1%
Fund 20192018201720162015
Strategy (gross) 21.6%-20.4%36.4%4.6%6.1%
Strategy (net) 20.7%-21.2%35.1%3.6%5.0%
MSCI ACWI ex USA Small Cap 22.9%-17.9%32.1%4.3%3.0%
Strategy (gross)
Strategy (net)
MSCI ACWI ex USA Small Cap
20192018201720162015
21.6%-20.4%36.4%4.6%6.1%
20.7%-21.2%35.1%3.6%5.0%
22.9%-17.9%32.1%4.3%3.0%

Portfolio (as of April 30, 2020)

Benchmark: MSCI ACWI ex USA Small Cap
Asset Allocation
Strategy
Stocks 98.0%
Cash 2.0%
Strategy Characteristics
Strategy Benchmark
No. of holdings 131 4170
Weighted avg. market cap (US $MM) $1,426 $1,607
FY2 price/earnings 8.1 12.7
Price/book value 1.0 1.2
Dividend yield (%) 4.1 2.7
TOP 10 ACTIVE HOLDINGS
Security Country Active weight*
Pharma Mar SA Spain 2.0%
King Yuan Electronics Co., Ltd. Taiwan 1.9%
Huaxin Cement Co China 1.8%
ASR Nederland NV Netherlands 1.8%
HASEKO Corp. Japan 1.8%
Radiant Opto-Electronics Corp. Taiwan 1.8%
JB Hi-Fi Ltd. Australia 1.8%
Simplo Technology Co., Ltd. Taiwan 1.7%
Centamin Plc United Kingdom 1.7%
BE Semiconductor Industries NV Netherlands 1.6%

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
Information Technology 17.6% 12.3%
Industrials 14.2% 18.8%
Health Care 13.2% 8.7%
Real Estate 12.1% 11.8%
Financials 11.7% 9.6%
Consumer Discretionary 8.4% 11.4%
Consumer Staples 6.7% 6.8%
Materials 6.1% 10.6%
Communication Services 4.1% 4.3%
Utilities 3.5% 3.4%
Energy 0.4% 2.3%
TOP 10 COUNTRIES
Country Strategy Benchmark
Japan 19.4% 21.4%
United Kingdom 10.8% 12.6%
Taiwan 8.3% 4.5%
China 6.0% 2.5%
Netherlands 5.8% 1.9%
Sweden 5.7% 4.7%
Brazil 5.2% 2.1%
Germany 4.8% 4.4%
Australia 4.8% 5.4%
Canada 4.7% 6.8%
Regional Allocation
  • Europe – other 37.2%
  • Pacific 27.5%
  • Emerging Asia 23.4%
  • Emerging Latin America 5.0%
  • North America 3.1%
  • Emerging Europe, Middle East, Africa 1.7%

Commentary (As of April 30, 2020)

Highlights

  • After the severe shock of the COVID-19 pandemic in March and the subsequent emergency relief measures provided by monetary and fiscal authorities worldwide, global equities rebounded in April.
  • Market participants have typically anticipated the benefits (and liquidity surge) of monetary and fiscal stimulus. Equity markets’ sharp rebound in April suggests the short-term bottom of the current crisis was around March 23, when governments and central banks around the world enacted massive stimulus programs.
  • As of April 30, the MSCI ACWI ex USA Small Cap Growth Index (“Growth Index”) traded at a 18.3x forward price-to-earnings multiple compared to 11.3x for the MSCI ACWI ex USA Small Cap Value Index (“Value Index”). This 62% premium is well above the 27% average premium over the last 15 years. We believe that value’s relative performance should improve once COVID-19 uncertainty abates, especially given the discount offered by value stocks currently, and feel comfortable with our large active exposure to value.

Portfolio attribution

The Portfolio underperformed 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 quality –and two top-down factor categories assessing macroeconomic and country aggregate characteristics.

From a sector perspective, Portfolio holdings in the real estate, health care, and industrials sectors detracted most from performance relative to the Index. Holdings in the information technology, financials, and communication services sectors offset a portion of the underperformance. Relative performance for the month can be mostly attributed to stock selection. The largest detractor from performance was food and beverage distributor, Metcash (Australia). Additional top detractors included real estate developer, CORESTATE Capital Holding SA (Germany), property developer, Hammerson Plc (United Kingdom), solar energy company, Daqo New Energy (China), and consumer electronics manufacturer, JVCKenwood Corp. (Japan). The largest contributor to performance was consumer electronics store, JB Hi-Fi Ltd. (Australia). Additional top contributors included precious metals miner, Centamin Plc (United Kingdom), semiconductor services provider, BE Semiconductor Industries NV (Netherlands), biopharmaceutical company, Pharma Mar SA (Spain), and electronics manufacturer, Radiant Opto-Electronics Corp. (Taiwan).

Investment outlook

Though we analyze many different stock selection factors in our alpha model, value factors receive the largest weight on average. As of April 30, the MSCI ACWI ex USA Small Cap Growth Index (“Growth Index”) traded at a 18.3x forward price-to-earnings multiple compared to 11.3x for the MSCI ACWI ex USA Small Cap Value Index (“Value Index”). This 62% premium is well above the 27% average premium over the last 15 years. We believe that value’s relative performance should improve once COVID-19 uncertainty abates, especially given the discount offered by value stocks currently, and feel comfortable with our large active exposure to value. However, the sheer breadth of the international small cap universe means that the typical tradeoffs in portfolio characteristics do not necessarily apply. In addition to value, we look for favorable growth, momentum, and quality characteristics. We believe that at most points in time our portfolio has exhibited more attractive metrics relative to the Index across all factor categories simultaneously.


Similarly, we observe an unusually large valuation premium for DM relative to EM smaller cap equities. DM smaller cap equities, as measured by the MSCI Worldex-USA Small Cap Index, currently trade at a 39% forward price-to-earnings multiple premium to EM smaller cap equities, as measured by the MSCI Emerging Markets Small Cap Index, much higher than the 10-year average of 29%. This premium partly explains the Portfolio's overweight position in EM.


Smaller cap equities are currently exhibiting a higher long-term earnings-per-share growth trend than larger cap equities. Additionally,international smaller cap equities have exhibited greater valuation dispersion than larger cap equities on both a forward-earnings-yield basis and a price-to-bookvalue basis, indicating more information content in valuation ratios for these equities. This characteristic has allowed us to construct a portfolio with lower valuation ratios relative to the Index without, in our view, compromising quality.

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].