Global Small Cap Investing: Unconstrained Opportunities

Transcription

1 May 2013 Global Small Cap Investing: Unconstrained Opportunities Andrew G. Flynn, Partner, CFA

2 Globalization: What Does it Mean? International integration arising from the interchange of world views, products, ideas and other cultural aspects. Economic Sociocultural Migration Knowledge Dissemination In other words, markets, economies, companies, and people are more connected than ever before. Source: IMF. 2

3 Globalization: Dizzying Array of Opportunities 3

4 Globalization: Dizzying Array of Opportunities 4

5 Globalization: Dizzying Array of Opportunities 5

6 Globalization: Dizzying Array of Opportunities 6

7 Globalization: The Signs Abound The world s fastest growing continent: Aspiring Africa The Economist, March 3, 2013 China s economic growth a world worry Associated Press, July 13, 2012 Luxury brands follow the money to Asian countries New York Times, June 30, 2011 Japan quake to hit supply chain for rest of 2011 IT Channel, June 22, 2011 Stocks at Cyclical Highs on U.S. Optimism Financial Times, March 16, 2013 Europe s woes leave BRICs exasperated Financial Times, March 10,

8 Globalization: The Consumer Footprint is Changing World Population (Billion People) Below Consuming Class Consumer Class World Consumption $T Developed Developing Source: McKinsey Global Institute. 8

9 Globalization: Country of Domicile Revenue Source Corporate revenue growth is increasingly driven by overseas demand. The key exception is in emerging markets. 100% 90% 80% 70% 60% 50% 40% 30% 20% As a result global revenue exposure is broader than 10% reflected in the Index. 0% Company Revenue Summary US Dev ex-us EM Total Index EM Dev x US US Source: MSCI, Factset. As of February

10 As a Result: Correlations are Increasing Investing globally is not necessarily about diversification anymore Average Correlation of MSCI Standard Regional Indices Rolling 36 Months It s about finding the best companies MSCI Indices Pacific Ex Japan Japan Europe ex UK United Kingdom United States Canada Emerging Asia (begins 1989) Emerging Latin America (begins 1989) Emerging EMEA (begins 1998) Sources: JP Morgan, MSCI, Factset. 10

11 Global Output is Less Dependent on the U.S. Contribution to Global GDP The US is only 19% of the global economy in purchasing power parity terms. Emerging markets economies have gained significant share of global GDP. 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% US Dev ex-us EM Source: IMF. Contribution to Global GDP in purchasing power parity terms. 11

12 Global Equity Opportunity Set Emerging markets also represent a larger percentage of global market cap, while the US has declined. 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Percentage of Global Market Cap US Dev ex-us EM Sources: Factset., MSCI. 12

13 Challenging Traditional Allocations U.S. home market bias belies the broad global equity opportunity set. Alternatives HFOF 1% Cash 3% R/E 2% Other Alts 12% Non-US 1% US 34% Equity Fixed Income US 32% Non-US 14% Global 1% Source: Callan Associates, December 31,

14 Global Equity Managers Gaining Some Traction $30 US Tax Exempt Initial Fundings ($B) Specialist global managers have been increasingly utilized to manage across geographies, bridging the geographic divide within the traditional allocation structure. $25 $20 $15 $10 $5 $ International Global Emerging Markets International Small Cap Sources: InterSec Research. 14

15 What About Global Small Cap? Global equity mandates typically emphasize mid and large cap companies, ignoring the small cap universe. All Cap 51% Mid Cap + SMID Cap 2% Small Cap 6% Large/Mega Cap + Mid Large Cap 41% Source: evestment Alliance. Includes 724 active, long-only Global Equity products as of 12/31/12. 15

16 Small Companies Can Also Have Global Footprints GN Store Nord A/S Geographic Segment Revenues 2012 Global hearing aid and headset company ~ $3.5 billion market cap Headquartered in Ballerup, Denmark ROW 22% Europe 35% N. America 42% Source: Bloomberg, company financials. 16

17 # companies The Global Small Cap Opportunity The investable small cap universe has grown significantly in the last 10 years, primarily outside of the US. 6,000 5,000 4,000 3,000 Global Equity Universe $250M-$5B Total Market Cap 2,000 Growth in emerging markets 1,000 small cap has been staggering. 0 US Dev ex-us EM December 2002 December 2012 Source: evestment Alliance. Includes active, long-only Global Equity managers as of 12/31/12. 17

18 Annualized Return (%) The Global Small Cap Opportunity Historical efficient frontiers based on MSCI Small Cap indices highlight the benefits of broadening small cap exposure outside of the US. Global Small Cap Efficient Frontiers - 10 Years Ended 3/31/ % EM Small Cap % Global Small Cap 100% Developed ex-us Small Cap 100% US Small Cap Annualized Standard Deviation (%) Sources Factset. Efficient frontiers of MSCI ACWI Small Cap, MSCI World ex-us Small Cap, MSCI US Small Cap and MSCI EM Small Cap. 18

19 The Global Small Cap Opportunity The wide dispersion of annual returns presents opportunities to add value through unconstrained fundamental research and strategic analysis. MSCI Small Cap Regional Performance - Calendar Year Returns (%) Pacific ex-japan Europe ex-uk US Emerging Markets Japan UK Canada Sources: Factset and Callan Associates (Periodic Table format). 19

20 The Global Small Cap Opportunity A global small cap manager has a broader sector opportunity set from which to choose. 100% 90% % 70% 60% 50% % 30% % 10% % MSCI AC World Small Cap Index MSCI World ex-u.s. Small Cap Index MSCI U.S. Small Cap Index MSCI Emerging Markets Small Cap Index Consumer Financial Industrials Healthcare IT and Telecom Resources Sources: Factset. 20

21 Implementing Small Cap Lacking a holistic viewpoint, plan sponsor small cap allocations have tended to resemble a sum of the parts approach that heavily favors the US. Emerging markets small cap is often overlooked by dedicated international managers, many of whom utilize developed market benchmarks such as EAFE Small Cap. U.S. Small Cap Managers International Small Cap Manager Emerging Markets Small Cap?. 21

22 Global Sector Viewpoint and Security Selection Applying a global sector lens to the small cap universe enhances the security selection opportunity. Integration of research across regions facilitates the expression of a portfolio team s highest conviction investment ideas. Hypothetical Global Small Cap Portfolio Structure US World x-us EM Consumer % Healthcare % Industrials % Financials % Technology % Resources % 48% 22% 30% 100%. 22

23 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Percent Percent Growth of $1 Global Small Cap Security Selection Case Study In evaluating the quality characteristics and growth prospects of Consumer Discretionary companies, we focus on: Brand strength and competitive landscape Rate of e-commerce migration and marketplace acceptance (new) Capital intensity and returns on invested capital Case Study: Rightmove Dominant 80% share in UK residential property website market Persistent product innovation driving steady pricing gains Asset light model generates exceptional return profile Highly capable and proven management team Operating Performance Metrics As of March 31, 2013 Historical Performance As of March 31, $4.5 $4.0 $3.5 $3.0 $2.5 $2.0 $1.5 $1.0 $0.5 $0.0 0 Operating Margin Year Growth Trend Rightmove PLC MSCI AC World / Media -IND Rightmove PLC MSCI AC World / Media -IND Source: FactSet. Past returns are no guarantee of future performance. For illustrative purposes only. This should not be considered investment advice to buy or sell any security. 23

24 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Percent Growth of $1 Global Small Cap Security Selection Case Study In evaluating the quality characteristics and growth prospects of Healthcare and related services companies, we focus on: Consistency of growth and margin profile Alignment of value proposition amongst customers and service providers allowing for shared success and high retention rates Lower capital intensity Superior growth profile Case Study: Healthcare Services Group Inc. Higher barriers to entry given national scale and local delivery service model Growing diversification Superior return profile and consistent dividend growth 18 Operating Performance Metrics As of March 31, 2013 $4.0 Historical Performance As of March 31, $ $ $ $ Year Avg ROIC 5 Year Avg Sales Growth Healthcare Services Group Inc. MSCI AC World / Commercial Services & Supplies -IND Healthcare Services Group Inc. MSCI AC World / Commercial Services & Supplies -IND Source: FactSet. Past returns are no guarantee of future performance. For illustrative purposes only. This should not be considered investment advice to buy or sell any security. 24

25 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Percent Growth of $1 Global Small Cap Security Selection Case Study In assessing the quality characteristics and growth prospects of Telecom companies, we focus on: Stable regulatory backdrop High market share and brand strength Capital intensity and returns on invested capital Case Study: Safaricom Ltd. Superior growth profile Dominant 82% wireless revenue market share in Kenya Stable pricing premium through product differentiation and unique mobile payment network Highly capable management team with proven track record of success across EMEA Operating Performance Metrics As of March 31, 2013 Historical Performance As of March 31, ROIC Sales Growth 5Yr Avg $1.8 $1.6 $1.4 $1.2 $1.0 $0.8 $0.6 $0.4 Safaricom Ltd. MSCI AC World IMI / Wireless Telecommunication Services -IND Safaricom Ltd. MSCI AC World IMI / Wireless Telecommunication Services -IND Source: FactSet. Past returns are no guarantee of future performance. For illustrative purposes only. This should not be considered investment advice to buy or sell any security. 25

26 Think Outside the Box The benefits of small cap investing are widely accepted by plan sponsors, but traditional geographic divides lead to sub-optimal portfolio structures. Pursuing small cap opportunities in a geographically unconstrained approach should appeal to investors seeking to move beyond traditional boundaries. Finding the best companies is what matters.. 26

27 Biography Andrew G. Flynn, Partner, CFA Andy is a Portfolio Manager on the William Blair Global Small Cap Growth strategy. He also conducts research on non-us small cap Technology, Media and Telecom Services stocks. Prior to joining the International team in 2007, Andy focused on domestic Consumer and Industrial companies at William Blair for two years. Before joining the firm, Andy was employed as a Senior Equity Analyst and Portfolio Manager at Northern Trust specializing in mid and small capitalization growth companies. Prior to that he worked as a Senior Equity Analyst at Scudder Kemper Investments and began his career at Fidelity Investments as a Research Assistant. Andy is a Chartered Financial Analyst, and a member of the CFA Institute and the CFA Society of Chicago. Education: B.A., Economics, University of Kansas; M.B.A., Finance emphasis, University of North Carolina at Chapel Hill. 27

28 Disclosure This material is provided for information purposes only and is not intended as investment advice or a recommendation to buy or sell any particular security. Any discussion of particular topics is not meant to be comprehensive and may be subject to change. Data shown does not represent the performance or characteristics of any William Blair product or strategy. Any investment or strategy mentioned herein may not be suitable for every investor. Factual information has been taken from sources we believe to be reliable, but its accuracy, completeness or interpretation cannot be guaranteed. Past performance is not indicative of future results. Information and opinions expressed are those of the author and may not reflect the opinions of other investment teams within William Blair & Company, L.L.C. s Investment Management division. Information is current as of the date appearing in this material only and subject to change without notice. 28