Seeks superior total and risk-adjusted returns from a diversified portfolio of non-U.S. small-cap companies
At a Glance
Our International Small Cap strategy pursues long-term capital appreciation by investing in growing, attractively valued non-U.S. companies with market capitalizations below $5 billion. It offers investors access to under-researched companies with high return potential in growing segments of non-U.S. markets. The strategy aims to exploit inefficiencies in the asset class by identifying long-term investment themes and selecting individual companies using our free-cash-flow valuation methodology. Our bottom-up security selection and risk management process leads to a portfolio of 125-175 stocks.
The International Small Cap Opportunity
Epoch’s Distinct Investment Philosophy and Approach
The bedrock of our philosophy is that the growth and applications of free cash flow represent the best predictor of long-term shareholder return. As a result, our security selection process is focused on free-cash-flow metrics and capital allocation as opposed to traditional accounting-based metrics such as price-to-book and price-to-earnings. We look for a consistent, straightforward ability to generate free cash flow and to allocate it effectively among internal reinvestment opportunities, acquisitions, dividends, share repurchases and debt pay downs. An essential factor is the evaluation of each company’s management team to confirm their commitment to transparency and building shareholder value. The companies uncovered by this process have inherently less volatility due to their ability to generate cash flow.
This strategy combines a top-down, theme-based approach with fundamental bottom-up research. Broad themes are identified (e.g., a growing middle class of consumers in emerging markets) and companies that should benefit from that theme are subject to fundamental research based on our free-cash-flow valuation methodology. We develop an investment thesis as we assess the sources of the company’s long-term value creation and management’s ability to nurture it. We scrutinize management’s track record of allocating capital, looking for those with the discipline to use free cash flow to maximize return on investment, thereby creating shareholder value. Once a stock has been purchased, we continually revisit our thesis and sell the stock if our price target is reached, there is a change in business conditions or the company’s strategy or we see another investment with a better risk-reward profile.
While the portfolio is constructed from the bottom up, decisions are made with consideration of the macro context. Epoch’s Investment Policy Group, composed of senior members of our different strategy groups, provides insight and guidance on the global market environment and macroeconomic and industry trends.
We analyze risk as part of the portfolio construction process to monitor portfolio volatility and better ensure the delivery of the strategy’s goals. A senior member of the Quantitative Research and Risk Management team is a co-portfolio manager on every strategy managed by Epoch so that portfolio managers are aware of unintended biases and the effect individual securities may have on the portfolio. The portfolio is diversified across sectors and the sizes of individual positions are limited.