Uncovering Performers in Fundamental International Small Cap

1. What inefficiencies exist in the international small cap space?
With thousands of stocks in the international small cap universe and far fewer institutional investors focused on these companies compared to domestic small cap companies, ours is a largely inefficient asset class.

This has led to a dearth of sell-side coverage. For example, a typical non-U.S. small cap stock has less than half the number of sell-side analysts covering it than a U.S. small cap stock and a fraction of the coverage of a U.S. large cap stock. This lack of scrutiny has contributed to larger earnings surprises—both positive and negative—for international small caps compared to U.S. and international large caps. This “opens the door” for active fundamental investors to gain an information edge in order to identify misunderstood and highly undervalued international small cap investments.

2. How does your investment approach capitalize on this inefficiency?
We capitalize on these inefficiencies in two ways. First, we systematically and objectively screen the entire non-U.S. small cap universe to arrive at a smaller number of companies that are attractively valued and have demonstrated a history of consistent growth with strong financial metrics such as free cash flow conversion and healthy balance sheets.

Second, we perform rigorous, independent research to identify high quality companies that are under-researched and under-owned by our competitors. We only invest in a company if it has relative upside to our estimate of intrinsic value of at least 50%. While we screen the entire universe, our demanding hurdles for portfolio inclusion mean we own a focused portfolio of companies we truly understand, and in which we have high conviction.