International Small Cap Equity
Our aim is to outperform the benchmark* over three to five year rolling periods.
*The benchmark for the strategy is either the S&P EPAC Small Cap Index or the MSCI EAFE Small Cap Index
The strategy has a core investment style with a growth bias. The investment strategy uses a bottom-up, fundamental, research-based approach. The portfolio manager and analysts seek to identify those companies that have compelling business models, strong management teams, attractive valuation levels and favorable long-term growth prospects. The portfolio of approximately 125 to 175 stocks is diversified by region, country and type of company. It contains companies that typically exhibit solid return and growth characteristics, stronger than average balance sheets and cash flow attributes, and valuations broadly similar to or below those of the universe.
Our dedicated small cap resources consist of a lead portfolio manager and co-portfolio manager, and a team of regional small cap specialists and analysts located globally. The team draws on Schroders’ numerous firm-wide global resources, including the large-cap Focus List analysts, Global Sector Specialists, an ESG Team, the Data Insights Unit, and macro-economic research.
Schroders believes that the identification of mispriced companies with solid characteristics (visible growth and sustainable returns) is the key driver of excess portfolio returns. We also believe that rigorous, locally based fundamental research is critical to taking advantage of investment opportunities in small companies, as these companies remain, generally, under researched. Consequently, Schroders’ investment approach focuses on the fundamental attractions of an individual company’s business model, as well as the potential for above-market growth at a reasonable valuation.
Stock selection is at the core of our international process. We take a long-term, fundamentally driven, research-based approach.
Stage 1. Reduction of a universe of 5000+ companies to what we term our effective “Schroder Universe” of approximately 1500 stocks (see Figure 1). This universe is determined primarily through the use of screens. Besides screening for liquidity, we also use factor screens. Reflecting our investment philosophy, these quantitative screens rank stocks in the total universe based on growth, quality and value criteria.
Stage 2. Refine the universe of some 1500 stocks to a closely researched universe of approximately 600. This select group becomes the focus of our in-house proprietary research program, incorporating in excess of 1500 direct company meetings annually. Each company is subjected to a thorough assessment of its business model, seeking to identify high quality companies offering above average and relatively visible earnings growth (i.e., a business model that is not overly reliant on an economic or business cycle over which management has relatively little control). The generic factors our research focuses on encompass both quantitative factors (e.g., growth prospects, market position, source of sustainable competitive advantage, balance sheet structure) and qualitative assessment, most critically of company management. We also favor companies that we believe are strategically well positioned in growth industries with meaningful barriers to entry, and where we believe management to be of high quality and to have a motivating equity stake in the company concerned.
Stock Selection - Figure 1
An explicit output of this research is a fair value target for closely followed stocks, typically determined by a P/E relative using our own forecasts for earnings on a 2- to 3-year time horizon (other calculations may also be used, e.g. a DCF calculation for more conceptual business models, or an assessment of trade/realizable NAV valuation). We purchase those stocks that appear to have the greatest appreciation potential to fair value and where we can identify some short-term catalyst which we think is likely to cause that value to be realized, such as new product introductions or business mix shifts to more profitable areas.
Final stage. The regional specialists are responsible for stock selection within each region bloc (Pan-Europe, Japan and Asia ex Japan) within a regional framework agreed by the International Small Cap Investment Committee (ISIC). The Committee is chaired by Luke Biermann as Lead Portfolio Manager. We do not expect to derive more than around 20% of excess returns from regional allocation per se (which may include currency hedging on an opportunistic basis), but see regional allocation as a way in which we can place emphasis on regions where the prospects for smaller companies look most attractive. The ISIC reviews the whole portfolio, monitoring the overall sector positioning, and ensuring that the balance of risks and return is within expectations. These team meetings are the key means by which the strong regional knowledge of the specialists is applied within a consistent portfolio context.
The end result of our stock selection process is a moderately well diversified portfolio, typically of approximately 125 to 175 stocks. Stocks held typically exhibit superior return and growth characteristics, stronger than average balance sheets and cash flow attributes, and valuations broadly similar to those of the universe.
- Bottom-up stock selection the primary source of added value
- Focus on companies’ long-term growth prospects – approx. 3-year horizon
- Seeks undervalued securities with catalyst for appreciation to fair value
- Rigorous risk management at the security and country level
- Separate Accounts
- Commingled Vehicle