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
Download Profile Sheet Download Flash Report Download Quarterly Review Risk Disclosures
Contact Us

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) 4.1%4.1%-4.2%11.0%2.5%7.1%
Strategy (net) 3.7%3.7%-5.0%10.1%1.7%6.2%
MSCI ACWI ex USA Small Cap 4.5%4.5%-9.2%7.5%1.8%5.4%
QTD YTD 1 year3 years5 years Since inception
Strategy (gross) 4.1%4.1%-4.2%11.0%2.5%7.1%
Strategy (net) 3.7%3.7%-5.0%10.1%1.7%6.2%
MSCI ACWI ex USA Small Cap 4.5%4.5%-9.2%7.5%1.8%5.4%
QTD YTD 1 year3 years5 years Since inception
Strategy (gross) 15.7%-9.9%-9.9%4.8%2.2%6.7%
Strategy (net) 15.5%-10.5%-10.5%4.1%1.4%5.8%
MSCI ACWI ex USA Small Cap 13.4%-19.6%-19.6%1.5%1.1%5.0%
QTD YTD 1 year3 years5 years Since inception
Strategy (gross) 15.7%-9.9%-9.9%4.8%2.2%6.7%
Strategy (net) 15.5%-10.5%-10.5%4.1%1.4%5.8%
MSCI ACWI ex USA Small Cap 13.4%-19.6%-19.6%1.5%1.1%5.0%
Fund 20222021202020192018201720162015
Strategy (gross) -9.9%22.3%4.3%21.6%-20.4%36.4%4.6%6.1%
Strategy (net) -10.5%21.5%3.6%20.7%-21.2%35.1%3.6%5.0%
MSCI ACWI ex USA Small Cap -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
20222021202020192018201720162015
-9.9%22.3%4.3%21.6%-20.4%36.4%4.6%6.1%
-10.5%21.5%3.6%20.7%-21.2%35.1%3.6%5.0%
-19.6%13.4%14.7%22.9%-17.9%32.1%4.3%3.0%

Portfolio (as of February 28, 2023)

Benchmark: MSCI ACWI ex USA Small Cap
Asset Allocation
Strategy
Stocks 98.6%
Cash 1.4%
Strategy Characteristics
Strategy Benchmark
No. of holdings 135 4319
Weighted avg. market cap (US $MM) $1,926 $1,799
FY2 price/earnings 6.9 11.9
Price/book value 0.9 1.3
Dividend yield (%) 5.2 3.0
TOP 10 HOLDINGS
Security Country Active weight*
Centrica United Kingdom 2.0%
SSAB Sweden 2.0%
Electric Power Development Co., Ltd. Japan 1.9%
KPIT Technologies Ltd. India 1.9%
Sojitz Corp. Japan 1.9%
POSCO INTERNATIONAL Corp. South Korea 1.8%
SHIMAMURA Co., Ltd. Japan 1.8%
JB Hi-Fi Ltd. Australia 1.7%
Power Finance Corp. Ltd. India 1.7%
Simplo Technology Co., Ltd. Taiwan 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 18.3% 20.7%
Financials 15.9% 11.3%
Information Technology 12.5% 11.1%
Materials 11.8% 11.7%
Consumer Discretionary 10.5% 11.5%
Energy 7.2% 4.1%
Utilities 5.4% 3.3%
Real Estate 5.3% 9.6%
Consumer Staples 4.8% 6.1%
Health Care 4.6% 6.9%
Communication Services 2.2% 3.8%
TOP 10 COUNTRIES
Country Strategy Benchmark
Japan 20.7% 20.4%
Australia 9.3% 6.6%
Canada 8.0% 7.2%
Taiwan 7.6% 5.5%
United Kingdom 7.4% 10.1%
South Korea 7.2% 3.7%
India 5.7% 5.6%
Thailand 3.7% 1.0%
China 3.6% 2.6%
Italy 3.6% 2.4%
Regional Allocation
  • Pacific 33.2%
  • Emerging Asia 30.3%
  • Europe – other 22.4%
  • North America 8.0%
  • Emerging Europe, Middle East, Africa 4.5%
  • Emerging Latin America 0.3%

Commentary (As of February 28, 2023)

Highlights

  • The new year’s optimism for global equity markets appeared to wane in February, as stubborn inflation led investors to anticipate greater interest rate hikes.
  • February inflation measures for Europe exceeded estimates, prompting markets to discount a more forceful policy response from the European Central Bank (“ECB”). Euro area core inflation, which excludes volatile price categories including energy and food, rose a record 5.6% year-over-year.
  • The Turkish stock market was halted mid-month due to the devastating earthquake that struck the southern and central part of the country. The market fell in the immediate aftermath of the earthquake but recovered quickly.

Portfolio attribution

The Portfolio modestly 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 competitive strength – and two top-down factor categories assessing macroeconomic and country aggregate characteristics. In February, the strategy’s value factors produced positive returns, and value is the best-performing bottom-up factor year-to-date and over the last twelve months. Following a challenging January, our earnings growth and technical factors also posted positive returns last month. The strategy’s competitive strength factors also generated positive monthly returns. Our macroeconomic factors were positive indicators in February as countries exhibiting superior macro metrics generally outperformed those with relatively weaker characteristics. However, returns to our country aggregate factors were flat for the month. All factor group returns remain positive from inception of the strategy (10/20/14) to the end of February.

Investment outlook

The Turkish stock market was halted mid-month due to the devastating earthquake that struck the southern and central part of the country. The market fell in the immediate aftermath of the earthquake but recovered quickly. Although we have seen downward revisions to GDP growth because of the earthquake, we remain overweight Turkey due to other attractive macroeconomic and bottom-up characteristics. Moreover, the four Turkish stocks that we currently own are a mixture of exporter and consumer staples companies, and they have not seen significant earnings downgrades.

Though we analyze many different stock selection factors in our alpha model, value factors receive the largest weight on average. With expectations for the U.S. Fed’s terminal rate still increasing, we believe that an elevated cost of capital should translate into a continued preference for value stocks. As of the end of February, the MSCI ACWI ex USA Small Cap Growth Index traded at a 16.9x forward P/E multiple compared to 10.1x for the MSCI ACWI ex USA Small Cap Value Index, a 68%premium. International small caps exhibit greater valuation dispersion than large caps on both a forward earnings yield and price-to-book basis, indicating more information content in the valuation ratios of small caps. In addition to exhibiting greater valuation dispersion, small caps exhibit a higher long-term EPS 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].