The Cambiar International Small Cap Fund is constructed by Cambiar’s eight person international investment team and is designed to capitalize on investment insights previously limited in scope by the parameters of the Cambiar International Equity Fund.
The Fund employs an equal-weight portfolio construction approach. We believe this approach enables the strategy to maintain a more focused portfolio relative to peers, while also mitigating stock-specific risk via uniform position sizes.
Todd L. Edwards, PhD
The performance data quoted represents past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost and current performance may be lower or higher than the performance quoted. Expense ratio is 9.45% (gross); 1.41% (net). Cambiar Investors, LLC has contractually agreed to reduce fees and reimburse expenses in order to keep net operating expenses from exceeding 1.15% of the average daily net assets of each of the Fund’s share classes until September 1, 2017. Absent these waivers, total return would be reduced. The MSCI EAFE Small Cap® Index is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the U.S. & Canada.
The Fund charges a 2.00% redemption fee on redemptions of shares held for less than 180 days.
|Top 10 Holdings||% Weight|
|Global Logistic Properties||2.6|
|% of Total||26.4|
|Holdings Subject to Change|
|Attributes||Cambiar||MSCI EAFE Small Cap|
|Market Cap Wtd Avg||2.9 B||2.2 B|
|Market Cap Median||2.6 B||1.2 B|
|Sector Weights||Cambiar||MSCI EAFE Small Cap|
|Top 5 Countries||Cambiar||MSCI EAFE Small Cap|
Market Review (12.31.2016)
Global equity markets posted mixed returns for the final quarter of 2016. U.S. stocks were the bright spot in the quarter, as investors reacted positively to the pro-growth agenda put forth by the Trump Administration. International equities missed the invite to the party put on by their U.S. counterparts, with most non-U.S. markets incurring modest negative returns for the quarter. Emerging Markets was hit the hardest, with the MSCI Emerging Markets Index returning -4.2%. Despite their 4Q setback, EM stocks were one of the top-performing markets (outside of the U.S.) in 2016; top EM contributors were Brazil and Russia. One non-U.S. market that was positive for the quarter was Japan, as a stronger dollar/weaker yen was viewed as supportive for Japanese stocks. Japanese equities have rebounded strongly in the second half of 2016, after struggling for the first six months of the year. Cambiar’s International and Global Funds have varying allocations to Japan – mostly a function of the opportunity set and relative risk/reward for the underlying investment strategy.
Bottom-Up vs Top-Down Investing
One takeaway from 2016 was the extent to which stock prices were buffeted by big picture events that took place around the globe – to the point where company-specific fundamentals were a distant second in importance. Examples included the reach-for-yield trade, the Brexit event in June, Donald Trump’s victory in November, and the OPEC production cut in December. Although the market’s response to such events moderated as the year progressed, investment manager performance was impacted (to varying extents) by positioning of one’s portfolio going into these episodes. Given the event-driven year that was 2016, Cambiar’s view on bottom-up vs. top-down investing is a timely discussion.
The Cambiar International and Global Equity Funds are predominantly managed using a bottom-up approach; our analysts seek to identify high quality businesses that are nearing an inflection point in their business that we believe is not being recognized or properly valued by the market. This ‘beat to the spot’ approach is based on a rigorous in-house research process. As part of this research effort, the Cambiar team will often consider relevant macro variables that may be a part of a top-down discipline. But the key is the order of the process; i.e., the macro is one factor in the Cambiar buy/sell decision, vs. the macro leading the decision. Where relevant, it is Cambiar’s preference for macro factors to have a positive (or neutral) impact to the investment case; e.g., a higher oil price deck will be a positive for the strategies’ energy holdings, just as steepening yield curves will be beneficial for many of our financial positions. A change in the macro can also be a negative leading indicator; the precipitous drop in oil prices during the second half of 2014 was a red flag for a related decline in margins/earnings within the sector.
Perhaps the bigger takeaway for our clients is that Cambiar attempts to take a 360-degree view when evaluating the companies in our portfolio – from both a risk and reward perspective. The bottom-up will almost always trump the top-down, but the objective is to base portfolio decisions on an unbiased assessment on all data that can impact the investment case for the companies.
International Small Cap Fund
Small cap international equities declined in the fourth quarter, as the non-U.S. markets were weighed down by speculation that the new Trump administration may impose tariffs on imports as well as rework longstanding trade deals. The Cambiar International Small Cap Fund was not immune to the selling pressure.
Given the broad-based selling pressure, most economic sectors closed lower in the quarter, with defensives and rate-sensitives (Telecom, Health Care, Real Estate) leading the decliners. Only 3 of 11 sectors ended the quarter with a positive gain, Energy, Materials and Financials. The International Small Cap Fund was exposed to each of these outperforming sectors, although stock performance was mixed (i.e., Energy contributed, Materials and Financials detracted). While Cambiar has grown more constructive on the global supply/demand outlook (and thus an upward bias towards oil prices), implementing this more bullish stance in the portfolio is more challenging – given a smaller opportunity set in the international small cap space. Cambiar’s energy allocation currently represents approximately 3% of the portfolio – essentially in line with the index.
In reviewing contributing factors to Cambiar’s outperformance for the quarter, strong stock selection in the Consumer Discretionary was a notable highlight; stock performance in this sector was also a positive on a full year basis. As consumer confidence increases, this uptick in sentiment – in combination with an improving employment picture and subsequent buying power – has the potential to be a tailwind for discretionary companies. Cambiar’s focus in this sector is to identify unique franchises that span the spectrum of offerings and income levels – from high end/luxury goods to a discount store operator.
Cambiar also registered a positive contributor via the portfolio’s positioning in the Real Estate sector. The International Small Cap Fund benefited from both a relative underweight to this lagging sector, as well as outperformance from the portfolio’s Real Estate companies. While Cambiar’s has historically maintained a lower allocation to Real Estate vs. more traditional sectors, our team has been able to identify select holdings that we believe are trading at a discount to their anticipated earnings power over the next 1-2 years, and possess a combination of assets or return drivers that are being overlooked by the market.
As discussed, international small cap financials were positive in the quarter, although returns in the sector did not keep pace with larger cap banks and related financials. Although sentiment towards the sector improved in the second half, financials were one of the poorest performing sectors on a full year basis – pressured by very low (or negative) interest rates, and related loan growth metrics. Cambiar is emboldened by the steepening of global yield curves that have begun to take place, and we anticipate that financials are poised to benefit from an improving macro backdrop in 2017. The most recent announcement by ECB President Mario Draghi to “extend and taper” appears to be another example of a major central bank implicitly recognizing that modest yield curve steepening supports financials and promotes economic quickening.
Detractors in the quarter included below-benchmark stock performance as well as an overweight allocation in Health Care, as well as the portfolio’s higher weighting in Consumer Staples, which lagged relative to more cyclical segments of the market. Additionally, both of these sectors were negative contributors on a full-year basis. Given the higher volatility that accompanies small cap investing, more exaggerated moves on a stock-by-stock basis are to be expected (relative to large cap companies). Unfortunately, this took place to the portfolio’s detriment with a handful of Cambiar’s health care and staples holdings. Cambiar was able to offset these decliners with corresponding gains in other sectors of the portfolio – that said, we look forward to reporting improved performance in Health Care and Consumer Staples in 2017.
On a regional/country basis, the Fund has an overweight position in the United Kingdom, and Japan remains the largest individual country allocation (averaged 26% in Q4). Buy/sell activity in the quarter was in line with historical trading levels; Cambiar had five new purchases and four liquidations. There was nothing thematic with regards to the new companies entering the portfolio as our five purchases represented four sectors, and in our sale decisions, the majority of names liquidated were strong performers that had reached or were approaching price targets.
2016 marks the fourth consecutive year (and six out of seven) in which U.S. stocks have outperformed international equities. This seemingly persistent one-way trade flies in the face of classic diversification tenets, and has likely resulted in a pronounced home country bias in many client portfolios.
Perhaps it is the embedded mean reversion tendencies in us, yet Cambiar is reasonably optimistic about the outlook for international equities in 2017 – on both an absolute basis as well as relative to U.S. markets. While market valuations are approaching cyclical highs in the U.S., international stocks remain reasonably priced relative to forward earnings estimates. Additional tailwinds include improving global growth and steepening yield curves. In our view, the global business cycle has a number of years left to go; if anything, it is probably time for many of the world’s economies to play catch up to the U.S. If we are correct in this outlook, international equity markets should also be poised to outperform.
That being said, we are certainly cognizant of the risks, not only that the global economy disappoints on the growth side and deflationary issues (i.e., falling bond yields) return to the fore, but also that inflation may gather force. This latter scenario would likely require more tightening than expected from the Fed, which together with a strong dollar could cause problems for global equities. It is also important to see some follow-through from international markets on earnings – particularly in Europe. Although Cambiar anticipates solid improvement on this front, a failure to produce a meaningful earnings rebound is an additional risk. As always, we are looking first and foremost for compelling investments to own on behalf of our clients; at this juncture, we continue to find abundant opportunities.
Mutual fund investing involves risk, including the possible loss of principal. In addition to the normal risks associated with investing, investments in smaller companies typically exhibit higher volatility and international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involved heightened risks related to the same factors as well as increased volatility and lower trading volume. There can be no assurance that the Fund will achieve its stated objectives.
To determine if a Fund is an appropriate investment for you, carefully consider the Fund’s investment objectives, risk factors and charges and expenses before investing. This and other information can be found in the Fund’s prospectus which can be obtained by clicking here or calling 1-866-777-8227. Please read it carefully before investing. There is no guarantee that the Funds will meet their stated objectives.
Performance data quotes are past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost and current performance may be lower or higher than the performance quoted. For performance data current to the most recent month-end, please call 1-866-777-8227.
Price/Earnings F1Y is a calculation that divides the current share price by the estimates of earnings in the next four quarters. Debt/Equity - Long Term is a calculation that takes interest bearing, long-term debt divided by shareholder equity. EPS Growth - Long Term is a calculation that takes the company’s estimated profits for five years divided by the outstanding shares. Active share is a holdings-based measure of active management representing the percentage of securities in a portfolio that differ from those in the benchmark index. Alpha is a measure of risk-adjusted performance. Beta is a measure of risk in relation to the market or benchmark. The Sharpe Ratio is a direct measure of reward-to-risk and is calculated by subtracting the risk free rate from the rate of return for a portfolio and dividing the result by the standard deviation. Standard Deviation is a statistical measure of historical volatility; a measure of the extent to which numbers are spread around their average. R-Squared measures how closely a portfolio’s performance correlates with the performance of a benchmark index. These calculations are not a forecast of the Fund’s future performance.
MSCI EAFE (Europe, Australia, Far East) Small Cap Index is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the U.S. & Canada. Benchmark returns are net of withholding taxes. Index returns assume reinvestment of dividends and capital gains, and assume no management, custody, transaction or other expenses. The MSCI EAFE Small Cap Value Index captures small cap securities exhibiting overall value style characteristics across Developed Markets countries around the world, excluding the US and Canada. The value investment style characteristics for index construction are defined using three variables: book value to price, 12-month forward earnings to price and dividend yield. The MSCI EAFE Small Cap Growth Index captures small cap securities exhibiting overall growth style characteristics across Developed Markets countries around the world, excluding the US and Canada. The growth investment style characteristics for index construction are defined using five variables: long-term forward EPS growth rate, short-term forward EPS growth rate, current internal growth rate and long-term historical EPS growth trend and long-term historical sales per share growth trend. The Nikkei 225 Index is a price-weighted equity index, which consists of 225 stocks in the 1st section of the Tokyo Stock Exchange. Individuals cannot invest directly in an index.
Cambiar Funds are distributed by SEI Investments Distribution Co., 1 Freedom Valley Dr Oaks, PA 19456, which is not affiliated with the Advisor. Cambiar Funds are available to US investors only. Strategies included within the Institutional Investor offer are not mutual funds and are not affiliated with SEI Investments Distribution Co.