China’s economy, the powerhouse of Asia (and purveyor to much of the world), continues slowing in the wake of a big stock market crash this past June. Europe is now embroiled in a growing refugee crisis, in the wake of a drawn-out Greek/European Union economic and fiscal standoff. Little wonder that equity markets almost everywhere have taken a hit lately. And equity funds have largely reflected this volatility. But there are some exceptions, notably the multi-year FundGrade A+ Award-winner (2011-2014) Investors International Small Cap Fund.
That hit is certainly reflected in recent international equity fund returns. On average, these funds returned 8.0% for the one-year period ended September 30, 2015, but that was what remained after a -4.9% loss in the last six months. The year started well but fizzled under the weight of bad news.
Not so for the Investors International Small Cap Fund. Despite almost all of its assets (97%) being invested in Europe and Asia – the two afflicted regions – it remains a top equity performer over both long and short terms, with a one-year return of 29.9% (versus the 8.0% category average) and a 10-year average annual compound return of 8.9% (versus 3.1%). Canadian equities averaged -7.6% and 3.8% respectively by comparison.
Indirect China, Europe exposure
Looking ahead, portfolio manager Martin Fahey, head of European equities at I.G. International Management Ltd. in Dublin, Ireland, says those recent developments won’t affect the fund adversely. “Any exposure we have to China is indirect – a lot of companies have exposure to China. And we’re underweighted in sectors and stocks with exposure to China, such as mining, so it’s not a big part of our portfolio, although we have started looking. We like Japan and continue to have a big exposure there.”
About Europe, too, Fahey is sanguine. “There is no direct impact on the fund,” he says. “The biggest impacts will be on the economies of Greece and Germany [which are currently bearing the brunt of the refugee influx], and the initial impact will likely be negative. They’ll need resources, and an administration. They need to develop a coordinated approach to the problem, and that hasn’t been done to date. But longer term it could be positive for Europe. Germany is short of workers, and there are certainly a lot of experienced people coming [into the country].”
Bottom-up stock picking
Meanwhile, Fahey continues to apply his bottom-up stock-picking expertise to a sizeable universe of small-cap European and Asian firms (up to C$4.8 billion in capitalization, sometimes more), while keeping an eye on top-down developments. “It’s a bit of both,” he says of his investment style. “We’re bottom up but we pay attention to the top down too.
“We look for companies that will be bigger in three to five years, with attractive valuations and strong management, but on the other hand we also look at major forces such as commodity prices, for example, or health care trends,” Fahey explains. “We don’t try to fit the fund to the top-down [factors], and we don’t feel we have to replicate the index.”
The result is a portfolio of names mostly unfamiliar to Canadians. Fahey cites, as a favored example, Germany (Hanover)-based TUI Group, described on the company’s website as “the world’s number-one tourism business,” a fast-growing operator of six airlines comprising more than 130 aircraft, 300 hotels with 210,000 beds, 13 cruise liners, and travel agencies worldwide.
Another favored name is Dublin-based Dalata Hotel Group, the largest hospice operator in Ireland. “They have a few hotels in England too,” says Fahey. “We’ve owned this stock for a while. They’re a good company with good management, and the [stock] price has been rising dramatically.”
The fund’s other names may similarly ring few bells here but the collective result is loud and clear – a 29.9% annual return in a year when the average Canadian equity fund delivered a dismal -7.6% makes a compelling case for non-correlative overseas diversification.
Olev Edur is an experienced financial and business journalist and a frequent contributor to the Fund Library.
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