Expanding valuation multiples have been useful fund strategy tools and played a primary role as stock-market drivers in recent years. As time goes on, however, multiples will have less room to rise and investors will have to rely more on improving fundamentals. Here’s a fund well suited for such an environment.
After gaining more than 38 per cent this past year, CI GLOBAL SMALL COMPANIES FUND will likely earn more modest returns in coming years. As for the fund’s managers, they expect stock-market returns will average in the mid-single-digits these next several years.
Of course, you would hope a small-cap fund such as this one to post above-average gains over the long term. That’s because its objective is to seek maximum long-term growth from investments in small- to mid-capitalization companies around the world. And it’s these types of companies that tend to outperform their larger-cap counterparts over time.
CI Global Small Companies’ portfolio adviser is Epoch Investment Partners, Inc., a New-York-based investment management firm that pursues a value-based, bottom-up strategy. Led by Wall Street veteran William Priest, who has more than 45 years of industry experience, Epoch seeks companies with growing free cash flow that is used in an intelligent manner. This consists of enhancing shareholder value through cash dividends, stock buybacks, debt reduction, internal investment or appropriate acquisitions.
Fund strategy has paid off
Mr. Priest and his associates have successfully applied this investment approach to CI Global Small Companies for more than a decade now. This past decade, the fund’s compound annual growth rate is 6.8 per cent, which is in the top quartile of the global small/mid-cap equity category. Over the 10 years, the fund has performed in the top half of the category in six years.
The fund has also performed favorably versus its peers in each of the past five-, three- and one-year periods. Over the past year, it has gained 38.2 per cent, to rank in the second quartile of the category. Relative returns over this time were helped by stock selection in the financials and industrials sectors.
Indeed, industrials stocks are currently overweighted in the portfolio, with a 23.4-per cent weighting. So is the consumer-discretionary sector, with an 18.7-per cent weighting. These sectors stand to gain provided the U.S. housing and manufacturing industries continue to improve.
In fact, the fund’s managers consider the U.S. to be among the most attractive developed markets. That’s why the fund currently has about 51 per cent of it assets invested in the U.S. Europe, where economic conditions are more mixed, is also an important destination for the fund’s investments. The fund has sizable investments in the U.K., Italy, Germany and Switzerland.
Managment expects that future stock returns will depend more on company fundamentals than the recent expansion in valuation multiples. But it believes that its free-cash flow investment approach is well suited for this environment. We agree. But don’t expect gains to be as robust as they have been this past year.
CI Global Small Companies is a buy for investors who want to invest in smaller foreign companies with high growth potential and can tolerate higher risk.
Sectors make the difference
There’s little doubt that being heavily invested in the right market sector can enhance results, at least temporarily. That’s why some funds seem to outperform the pack or their benchmarket indices at certain times.
In the final quarter of 2013, for example, CI Global Small Companies gained 8.8 per cent before fees, compared with a 7.4-per cent increase in the MSCI World Small Cap Index. Management attributed part of this outperformance to stock selection in the industrials sector, which at 22 per cent of the portfolio, was one of the fund’s largest overweight positions.
Problem is, market loyalty to a sector can change abruptly. If the stocks you own have questionable value, the sector they’re in may no longer be enough to save them.