International Small Cap Opportunity
At a Glance
- Primary Benchmark: MSCI EAFE Small Cap (net) Index.
- Universe: Approximately 11,500 publicly traded securities with a market cap between $100 million and $3 billion and sufficient liquidity, including developed & emerging countries and all 10 macro sectors.
- Our portfolios typically invest in 80-120 securities from developed & emerging markets diversified across all market sectors & capitalizations.
- We expect to add value primarily through stock selection.
- Our annual turnover generally ranges from 50%-70%.
Objective
We strive to outperform the total return of the S&P/Citigroup EPAC EMI over a full market cycle of 3-5 years.
Typical Investment Guidelines
| Factor | Guideline |
| Stock Weightings At Purchase |
1%-3% |
| Maximum Stock Weighting |
5% |
| Maximum Industry Weighting |
15% |
| Maximum Sector Weighting |
35% |
| Maximum Emerging Markets Exposure |
15% |
| Maximum Single Country Exposure |
50% |
Investment Process Summary
Stock selection for our International Small Cap Opportunity portfolios entails both quantitative and fundamental analysis. Our screening process identifies those stocks that are trading below normal valuation and have low expectations, while our fundamental research highlights those firms that have the catalysts in place to spur a return to normal valuation.
Quantitative Screening
We consider non-U.S. companies with market capitalizations between $100 million and $3 billion. Specifically, we compare a company's current P/E, P/B, and P/CF ratios to its own historical averages, its sector's historical averages and its country's historical averages. We assign each security ten percentile valuation scores—nine based on the combination of the three ratios and three metrics and an overall ranking (the overall score is the equal-weighted average of the first nine). Securities must have an average score of 50% or higher (trading below normal valuation) to qualify for further evaluation. Companies that score less than 50% (trading above normal valuation) are excluded from further analysis.
Company Elimination
We then eliminate stocks with characteristics associated with poor performance, such as declining quality of financial characteristics, high product risk factors, deteriorating competitive position, discomfort with management, or accelerating industry deterioration.
Fundamental Analysis
In-depth fundamental analysis is performed on our remaining universe of high quality companies selling below normal valuation levels. The goal of our fundamental analysis is to develop a deep understanding of these businesses in order to identify the key drivers of their valuation and profitability. We focus on uncovering the scope and likelihood of recovery in the longer term, as opposed to developing specific short-term earnings forecasts.
Portfolio Construction
Individual holdings generally range between 0.5% and 2% of portfolio assets (at cost) with a maximum of 3% (at market). Positions are weighted based upon upside potential, downside risk, our fundamental conviction, the impact on diversification, and client-directed guidelines.
Sell Discipline
A security is reviewed for sale if:
- It appreciates to our target price, which is set at the valuation of the dynamic intrinsic value of the business;
- The reward/risk tradeoff of a new investment is more favorable than that of the existing holding, or
- Essential steps toward a successful recovery fail to materialize (within the allotted 18-month timeframe), causing a fundamental change in the security's upside potential.
