International Small Cap Q&A
International Small Cap Fund Portfolio Manager Todd Edwards answers the most pressing questions about the asset class.
Why is it important to have an allocation to international small cap?
Cambiar views the international small cap market to represent a meaningful alpha opportunity for investors, given the relative inefficiencies that exist in the asset class. In contrast to larger cap companies, many international small cap companies are often overlooked, whether this pertains to “buy-side” analysis or “sell-side” coverageI. As a result, the asset class is likely both under-allocated and underappreciated. However, there is a very large number of stocks that fit into the small cap category, many of which we believe are high-quality companies. The more volatile trading patterns that exist in the international small cap space provide additional opportunities for active managers that can take advantage of the price dislocations via positive stock selection.
The international small cap asset class is considerably more disparate in nature vs. the large cap market – the latter of which is often dominated by a few large leaders. For example, the large cap Consumer Staples sector is heavily influenced by a few companies such as Nestle and Unilever. The opportunity set within smaller cap Consumer Staples is considerably larger – providing unique opportunities for differentiated stock selection.
What are the key attributes you look for in an investment candidate?
Cambiar’s investment approach in the international small cap space is the same stance that exists firm-wide, whether in international or domestic, small cap or large cap. Our team is focused on finding great companies with good stories that also happen to be trading at reasonable valuations. The Cambiar order of operations (i.e., starting with quality vs. low valuations) can assist in minimizing false positives that can result from being overly focused on low-valued stocks that may be cheap for a reason. The emphasis on quality is a desired characteristic regardless of market capitalization, but we believe to be incrementally more important in the smaller cap space. The term ‘quality’ can take on different meanings for different investors. Cambiar defines quality in both measurable and qualitative terms: strong balance sheets, low debt levels, reasonably consistent profitability, defensible franchise and shareholder-friendly management teams who have a track record of success. After refining our ‘wish list’, it then becomes a function of patience; i.e., waiting for the company to reach an actionable price level.
Were there any significant changes made in the portfolio, given the increased market volatility that took place in 2020?
2020 was certainly a volatile year for the global equity markets, and the international small cap space was no exception. The Cambiar International Team has managed through a number of volatile periods in the not-too-distant past, and similarly we are sticking to our “playbook” as we navigate the current COVID crisis. The approach in down markets seen in the first quarter of 2020 is to rigorously review the portfolio, looking for weak points as well as areas where the market may have overreacted. Slow and steady tends to be more productive than being overly reactive to questionable price signals; that said, it is crucial to be able to sell stocks when the investment case is no longer realistic. Similarly, it is important to maintain (and eventually increase exposure) in positions where we believe the market is excessively pessimistic. Events such as the global virus sell-off presented numerous opportunities to buy great companies at compelling valuations. Cambiar certainly took advantage of the dislocation to add new names, while we also sold stocks that were unlikely to fare well in the current environment. Importantly, the quality measures in the portfolio stayed quite strong (and in some sectors improved), and we are constructive on the portfolio’s prospects in 2021.
Can you provide some insights on performance of the International Small Cap Fund in 2020?
On an absolute return basis, the International Small Cap Fund was playing catch-up for most of the year, given the pandemic-induced drawdown in 1Q. The strong rally in the last three months of the year enabled the Fund to post a positive full-year return for our shareholders, as well as outperform the benchmark. Stock selection remains the key driver to Fund performance. On this basis, the 4Q outperformance was particularly encouraging, as the gains were generated by both newer positions initiated during the year in addition to recovering share prices from underperformers earlier in the year that we remained committed to holding. While it was certainly a bit of a rollercoaster, 2020 reflects the opportunities that exist in the international small cap equity asset class. Looking at the following table, it is worth noting that the Fund has been a top decile performer (as determined by Morningstar) over a longer arc – which speaks to the persistence of the Cambiar discipline.
What is your outlook for the international small cap market in 2021?
We believe the prospects for 2021 are compelling – for the international small cap equity asset class and more specifically the Cambiar International Small Cap Fund. The combination of strong fiscal and monetary stimulus around the world and the roll-out of vaccination programs should sets up 2021 to be a year of recovery and normalization. This backdrop we believe should bode well for both international (after some years of U.S. outperformance) and small cap (as risk aversion falls, riskier asset classes tend to outperform).
The positional adjustments made throughout the year in the International Small Cap Fund should enable the strategy to perform well in the expected recovery; this positive shift in performance dynamics began in the 4th quarter, and we believe will into the new year. In effect, we feel this is a portfolio that contains the desired combination of high-quality and compelling valuations. The global transition to normalization should allow company fundamentals and stock selection to win the day, which provides the basis for Cambiar’s optimistic outlook for the year ahead.
| PERFORMANCE | |||||
| 4Q20 | 1 Year | 3 Year | 5 Year | Since Inception | |
| Cambiar International Small Cap Fund | 21.27% | 12.59% | 6.39% | 10.28% | 8.38% |
| MSCI EAFE Small Cap | 17.28% | 12.34% | 4.85% | 9.40% | 9.24% |
| Inception Date 11.18.2014. All returns greater than one year are annualized. As of 12/31/20, expense ratios are 4.75% (gross); 1.00% (net). Fee waivers are contractual and are in effect until March 1, 2021. Absent these waivers, total return would be reduced. The performance quoted represents past performance and is no guarantee of 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 the 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. The Fund imposes a redemption fee of 2.00% on shares held less than 180 days. Your return will be lower if a redemption fee is applied to your account. | |||||
To determine if a Fund is an appropriate investment for you, carefully consider the Fund’s investment objectives, risk factors, charges and expenses before investing. This and other information can be found in the Fund’s summary or full prospectus, which may be obtained by calling 1-866-777-7227 or by visiting our website at www.cambiar.com. Please read the prospectus carefully before investing.
Risk Disclosures
Mutual fund investing involves risk, including the possible loss of principal. In addition to the normal risks associated with investing, 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 involve heightened risks related to the same factors as well as increased volatility and lower trading volume. In addition to the normal risks associated with investing, investments in smaller companies typically exhibit higher volatility. The funds may invest in derivatives, which are often more volatile than other investments and may magnify the Fund’s gains or losses. A company may reduce or eliminate its dividend, causing loses to the fund. Diversification may not protect against market risk. High short-term performance of the fund is unusual and investors should not expect such performance to be repeated.
The MSCI EAFE Small Cap Index (net) represents the 85th to 99th percentile of stocks found in the MSCI EAFE. The MSCI indices are compiled by Morgan Stanley Capital International. Index returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index.
©2021 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. The Morningstar RatingTM for funds, or “star rating”, is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product’s monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The Morningstar Rating does not include any adjustment for sales loads. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods. CAMFX was rated against 95 Foreign Small/Mid Blend funds over a three year period and 85 over a five year period. With respect to these Foreign Small/Mid Blend funds CAMFX received a rating of 5 stars for the three year and 5 stars for the five year period, respectively. Past performance is no guarantee of future results.
IDisclosure: The following indices were used to represent their respective asset class for all charts. U.S. Large-Cap – Russell 1000, U.S. Small-Cap – Russell 2000, International Large-Cap – MSCI EAFE, International Small-Cap – MSCI EAFE Small Cap. All charts are as of 12.31.2020.
As of 12.31.20 the International Small Cap Fund had a 0.0% weighting in Nestle and Unilever. Holdings subject to change. Current and future holdings subject to risk.
This material represents the Fund manager’s opinion and is an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice or a specific recommendation of securities.
Cambiar Funds are distributed by SEI Investments Distribution Co. (SIDCO), which is not affiliated with Cambiar Investors LLC or its affiliates.