The International Small Cap Fund seeks long-term capital appreciation, adding value versus the MSCI EAFE Small Cap Index using a bottom-up quantitative approach to investing. The investment philosophy is based on the belief that there are market inefficiencies that can be exploited by identifying stocks with attractive valuations that also have good growth prospects and high quality of earnings. By selecting stocks ranked highly on a variety of metrics which are based on fundamental investing principles, the team seeks to diversify the sources of alpha in the Fund’s portfolio to achieve more stable returns and weather different market environments.
Quantitative tools help manage risk to avoid unwanted style tilts. Stocks in the portfolio are roughly equal-weighted. The result is a diversified, core portfolio, with exposure to both value and growth styles and invested across small cap stocks.
Our universe includes all stocks that are in the MSCI EAFE Small Cap Index and international small cap stocks with market capitalizations within the range of the Index — generally less than or equal to $7 billion — with adequate liquidity. The universe is approximately 2500 securities.
We start with aligning stocks by proprietary peer groups or Region-Industries, enabling our stock selection model to compare stocks consistently based on how certain industries operate around the globe. For example, some stocks are grouped by industry, regardless of what country they are in because the industry is more global in nature. Others are segregated further into regions or countries because they behave differently based on their geographic location.
The next step is to assess individual stocks attractiveness within Region-Industries according to their alpha generating attributes (“alpha factors”), using our proprietary stock selection model.
Financial data is collected for all stocks in the universe and factors are calculated for each stock on a daily basis. Factors are then normalized within Region-Industries. These groups are based on statistical analysis that some industries are more regional while others are clearly more global. The overall attractiveness of a stock versus its peers is based on three broad categories of factors: Market Dynamics, Value, and Quality.
- Market Dynamics – ranks stocks versus their peers on earnings growth prospects and relative strength.
- Value – evaluates stocks on relative value versus their peers using valuation measures such as Price/Book, Price/Earnings, Dividend Yield and Cash Flow/Price.
- Quality – a company’s earnings quality is assessed as well as its operating efficiency and use of capital.
These factors are approximately equal-weighted and aggregated together to create an overall score for an individual stock called an “alpha.” The top quintile of stocks in each Region-Industry as sorted on “alpha” are considered candidates for purchase. Stocks currently held which have migrated to the fourth or fifth quintile are considered for sale.
In selecting among the top quintile alpha stocks available for purchase within each Region-Industry, we use proprietary portfolio construction tools to do “what if” analysis and evaluate different trade scenarios to see how they contribute to each Region-Industry’s alpha and risk profile as well as the trade’s contribution to the overall portfolio profile. We expect that, under normal circumstances, the Fund’s portfolio will hold approximately 90 to 125 stocks, will be diversified across industries, sectors and countries, and generally will be equal-weighted across alpha factors (Market Dynamics, Value and Quality).
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.
Market Events Risk. Turbulence in the financial markets and reduced liquidity in equity, credit and fixed-income markets may negatively affect issuers, which could adversely effect the Fund.
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.
Investors should consider the investment objectives, risks, and charges and expenses of the Fund carefully before investing. The prospectus contains this and other information about the Fund. You may obtain a prospectus by calling (877) 591-4667. The prospectus should be read carefully before investing.
Foreside Fund Services, LLC.