For small- and mid-cap managers, unearthing undiscovered and under-researched gems is hard enough in one market, but doing it on a global scale is a whole different ball game.
While you might expect larger firms with considerable research resources to dominate the International S/Mid Growth category, our risk-adjusted ranking shows that smaller, more nimble firms are well represented in the sector over the past three years, with the likes of Grandeur Peak Global Advisors, TimesSquare Capital Management and Kayne Anderson Rudnick Investment Management all featuring in the top 10.
The returns in international small- and mid-caps are eye-watering. Over five years, three of the managers in our top 10 produced triple digit performance, with one achieving a total return of 136%.
These top fund managers have one hunting ground in common – Japan. The land of the rising sun appears to host a number of innovative companies that are shaking up their industries. Most of these managers have the island nation as their top country allocation.
Small but flexible
Citywire AAA-rated Nadel and AAA-rated Rayner have more than 50 years’ experience between them. Nadel has been on the fund for six years, over which time he has developed a high conviction approach, with around 50 holdings in the portfolio and a focus on companies with market caps of less than $3 billion.
‘We’re seeking to build a portfolio of very high-quality, world-class businesses – those that are acyclical growers, that can generate plentiful free cash, and that have a genuine and defensible moat,’ Nadel said in a recent commentary.
Like many of their peers, Japan is the duo's top country allocation with an overweight position of 22.5%. The UK is next with 9.2%. While industrials is their top sector allocation at 24.6%, their healthcare bet, at more than 19%, is particularly noteworthy; it is three times the allocation on the Russell Global ex-US Small Cap benchmark.
Among the fund’s most eye-catching holdings are Japanese corporate outsourcing services group Relo and an Indian non-banking financial company called Bajaj Finance, which offers consumer finance and wealth management services.
From the smallest to the biggest fund in our ranking, Oppenheimer’s International Small-Mid Company fund currently has $8.4 billion in assets under management and has been managed by Rezo Kanovich for almost six years.
Once again, Japan and the UK top the fund’s country allocations at 21% and 16% respectively. In his latest commentary, Kanovich said he tended to focus on sectors where there was greater differentiation, larger barriers to competition and more organic growth potential.
‘Healthcare is the largest of these. Although our weight in healthcare is large, averaging about 25% in the second quarter, it is also diverse,’ the AA-rated manager wrote.
‘It isn't merely a collection of biotechnology companies. During the quarter, the portfolio's average industry weights within the sector were healthcare equipment at 7.19%, healthcare supplies at 0.66%, biotechnology at 5.47%, life sciences tools and services at 4.88%, and pharmaceuticals at 6.85%.’
Kanovich’s top holding, Swiss chemical and biotech firm Lonza Group, has been in the portfolio since 2012 and has risen fourfold over that period. ‘Today, the company provides an integrated solutions platform to the pharma industry and we find its prospects still have significant appeal,’ he said.