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

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) 12.8%12.8%69.1%3.9%10.4%9.0%
Strategy (net) 12.6%12.6%67.9%3.1%9.4%8.1%
MSCI ACWI ex USA Small Cap 5.6%5.6%70.4%7.0%10.8%8.9%
QTD YTD 1 year3 years5 years Since inception
Strategy (gross) 12.8%12.8%69.1%3.9%10.4%9.0%
Strategy (net) 12.6%12.6%67.9%3.1%9.4%8.1%
MSCI ACWI ex USA Small Cap 5.6%5.6%70.4%7.0%10.8%8.9%
QTD YTD 1 year3 years5 years Since inception
Strategy (gross) 12.8%12.8%69.1%3.9%10.4%9.0%
Strategy (net) 12.6%12.6%67.9%3.1%9.4%8.1%
MSCI ACWI ex USA Small Cap 5.6%5.6%70.4%7.0%10.8%8.9%
QTD YTD 1 year3 years5 years Since inception
Strategy (gross) 12.8%12.8%69.1%3.9%10.4%9.0%
Strategy (net) 12.6%12.6%67.9%3.1%9.4%8.1%
MSCI ACWI ex USA Small Cap 5.6%5.6%70.4%7.0%10.8%8.9%
Fund 202020192018201720162015
Strategy (gross) 4.3%0.0%0.0%0.0%0.0%0.0%
Strategy (net) 3.6%0.0%0.0%0.0%0.0%0.0%
MSCI ACWI ex USA Small Cap 14.7%22.9%-17.9%32.1%4.3%3.0%
Strategy (gross)
Strategy (net)
MSCI ACWI ex USA Small Cap
202020192018201720162015
4.3%0.0%0.0%0.0%0.0%0.0%
3.6%0.0%0.0%0.0%0.0%0.0%
14.7%22.9%-17.9%32.1%4.3%3.0%

Portfolio (as of February 28, 2021)

Benchmark: MSCI ACWI ex USA Small Cap
Asset Allocation
Strategy
Stocks 96.4%
Cash 3.6%
Strategy Characteristics
Strategy Benchmark
No. of holdings 130 4234
Weighted avg. market cap (US $MM) $1,995 $2,072
FY2 price/earnings 8.4 15.3
Price/book value 1.1 1.5
Dividend yield (%) 3.5 1.9
TOP 10 ACTIVE HOLDINGS
Security Country Active weight*
Yang Ming Marine Transport Corp. Taiwan 2.0%
Korea Petrochemical Ind Co., Ltd. South Korea 2.0%
Kindred Group Plc Sweden 2.0%
EVRAZ Plc United Kingdom 2.0%
Royal Mail Plc United Kingdom 1.9%
BE Semiconductor Industries NV Netherlands 1.9%
Mineral Resources Ltd. Australia 1.9%
ASR Nederland NV Netherlands 1.8%
Metcash Ltd. Australia 1.7%
JB Hi-Fi Ltd. Australia 1.7%

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 17.2% 20.7%
Consumer Discretionary 15.3% 12.6%
Financials 14.7% 10.7%
Information Technology 14.6% 12.4%
Materials 10.6% 10.9%
Real Estate 5.9% 10.2%
Health Care 5.9% 7.3%
Communication Services 5.7% 4.2%
Consumer Staples 4.4% 5.5%
Utilities 1.5% 3.3%
Energy 0.7% 2.4%
TOP 10 COUNTRIES
Country Strategy Benchmark
Japan 14.6% 19.3%
United Kingdom 9.6% 12.6%
Taiwan 9.4% 5.1%
South Korea 8.7% 4.1%
Australia 7.9% 6.1%
Canada 6.7% 6.4%
Netherlands 5.3% 2.0%
China 5.3% 3.1%
Sweden 4.7% 5.1%
Germany 4.0% 3.8%
Regional Allocation
  • Europe – other 30.6%
  • Emerging Asia 28.7%
  • Pacific 27.2%
  • North America 6.7%
  • Emerging Latin America 2.0%
  • Emerging Europe, Middle East, Africa 1.2%

Commentary (As of February 28, 2021)

Highlights

  • Worldwide, new Covid-19 infections dropped in February and with the vaccination rollout gathering pace, optimism for an eventual end to the pandemic drove equity markets higher. International smaller capitalization (“cap”) equities, as measured by the MSCI ACWI ex USA Small Cap Index (“Index”) outperformed international large caps in February.
  • Bond yields rose as market participants price in higher future growth and inflation expectations. With the lagged effect of sizable global monetary and fiscal spending, this upward pressure on long-term bond yields will likely persist.
  • 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-book value basis, indicating more information content in valuation ratios for these equities.

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.

From a sector perspective, Portfolio holdings in materials, industrials, and information technology contributed the most to performance relative to the Index. Portfolio holdings in the healthcare, communication services, and energy sectors offset a portion of the performance. Relative performance for the month can be mostly attributed to stock selection. The largest contributor to performance was online gambling company, Kindred Group Plc (Sweden). Additional top contributors included marine transportation services provider, Yang Ming Marine Transport Corp. (Taiwan), plastics & polymers manufacturer, Korea Petrochemical Ind Co., Ltd. (South Korea), textile manufacturer, Hyosung TNC Corp. (South Korea), and steel & iron distribution company, EVRAZ Plc (United Kingdom). The largest detractor from performance was video game developer, GungHo Online Entertainment, Inc. (Japan). Additional top detractors included retailer, JB Hi-Fi Ltd. (Australia), industrial conglomerate, Dogan Sirketler Grubu Holding AS (Turkey), pharmaceutical company, Australian Pharmaceutical Industries Ltd. (Australia), and technology hardware and equipment company, Daiwabo Holdings Co., Ltd. (Japan).

Investment outlook

Though we analyze many different stock selection factors in our alpha model, value factors receive the largest weight on average. Although value was under significant pressure in 2020, it has proven resilient in recent months. We believe there is far more “catching up” to come. As of February 28, the Small Cap Growth Index traded at a 24.4x forward price-to-earnings multiple compared to 13.8x for the Small Cap Value Index, a 77% premium. We believe that value’s relative performance should improve as inflation expectations increase, the yield curve steepens, COVID-19 vaccine distribution accelerates, and economies reopen.

While value receives the largest weight on average, 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 many points in time, our portfolio has exhibited more attractive metrics relative to the Index across all factor categories simultaneously.

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-book value 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].