How to Invest in International Small Caps
Increased diversification and a large opportunity set for active managers to potentially add value are just a couple of reasons why international small caps tend to make sense in client portfolios. If you’re considering allocating to the space, now you’re probably weighing the pros and cons of various products and investment approaches.
As mentioned in a previous blog (Reasons for International Investing), we believe active management can capture market inefficiencies and generate excess return compared to passively managed index funds. But one reason there are so few active managers and so many indexers is that the sheer number of companies to assess and choose from is daunting.
We believe that a proven quantitative process is the most appropriate way to actively manage an international small cap portfolio. LMCG uses a factor-based quantitative investment methodology to sort through thousands of securities – attempting to identify those companies with the highest potential upside appreciation.
Contrast our approach with that of a stock picking fundamentally-driven research process in the international equity space, which is much more resource-intensive.
Analysts traveling globally to see factories, meet management on site, and interview suppliers and customers (all practices that are typically touted by fundamental managers) becomes virtually impossible without a significant investment in resources and time... all while striving to maintain objectivity.
The map in the exhibit below, and corresponding country list to the left, shows just how Herculean this challenge can be.
Source: FactSet as of 12/31/2018
Employing quantitative methods allows the opportunity set to be as broad as possible, and we believe the broader the opportunity set, the greater the potential value added. Our quantitative models can quickly and efficiently cull thousands of companies down to a more manageable group, allowing us to focus on those companies as we build an international small cap portfolio one stock at a time.
We encourage you to explore other meaningful reasons to invest in the international small cap asset class in our research paper 4 Reasons to Invest in International Small Cap.
IMPORTANT RISKS AND INVESTMENT CONSIDERATIONS
Equity Risk. The Fund’s equity holdings, including common stocks, may decline in value. The value of a security may decline for a number of reasons, which are detailed in the prospectus.
Foreign & Emerging Markets Investing Risks. As a result of political or economic instability in foreign countries, there can be special risks associated with investing in foreign securities, including fluctuations in currency exchange rates, increased price volatility and difficulty obtaining information. In addition, emerging markets may present additional risk due to potential for greater economic and political instability in less developed countries.
Small Cap Risk. The Fund’s investments in small capitalization companies may be less liquid and their securities’ prices may fluctuate more than those of larger, more established companies.
There can be no guarantee that any strategy (risk management or otherwise) will be successful. All investing involves risk, including the potential loss of principal.