International Small Cap Fund

Fund Documents Commentary Profile

International Small Cap Fund

Share Class Institutional
Ticker CAMFX
Inception Date 11.18.2014
Minimum Investment       $500,000

2017 Estimatel Capital Gain Distributions

The Cambiar International Small Cap Fund is constructed by Cambiar’s eight person international investment team and is designed to capitalize on investment insights previously limited in scope by the parameters of the Cambiar International Equity Fund.

The Fund employs an equal-weight portfolio construction approach.  We believe this approach enables the strategy to maintain a more focused portfolio relative to peers, while also mitigating stock-specific risk via uniform position sizes. 

  • All new stock positions enter the portfolio at a range of 1.5%-2% (based on liquidity). This construction is designed to reduce excessive stock-specific risk, while allowing for the freedom to participate on the upside.
  • The investable universe for the strategy includes companies typically in the $500 million - $5 billion market cap range
  • The Fund attempts to hold between 40-50 stocks
  • The Fund is diversified across multiple sectors/industries.
  • Country Limits: 25% at cost.
  • Emerging Market Limits: 15% at cost.

Portfolio Managers

ToddE(2016) 

Todd L. Edwards, PhD 

    

AlvaroS(2016)

Alvaro Shiraishi

EM Boat

Morningstar Rating™

Performance Charts

The performance data quoted represents past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost and current performance may be lower or higher than the performance quoted. Expense ratio is 7.93% (gross); 1.15% (net). Cambiar Investors, LLC has contractually agreed to reduce fees and reimburse expenses in order to keep net operating expenses from exceeding 1.15% of the average daily net assets of each of the Fund’s share classes until March 1, 2019.  Absent these waivers, total return would be reduced. The MSCI EAFE Small Cap® Index is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the U.S. & Canada.

The Fund charges a 2.00% redemption fee on redemptions of shares held for less than 180 days. 

Portfolio Profile (as of 3.31.2018)

Top 10 Holdings % Weight
Schoeller-Bleckman 3.1
Embraer 2.8
Kakaku.com 2.6
Scout24 2.6
Advanced Semiconductor 2.5
Remy Cointreau 2.4
Sohgo Security Services 2.4
Euronext  2.4
BOC Aviation 2.4
Trend Micro 2.4
% of Total 25.6
Holdings Subject to Change  
Attributes Cambiar      
Price/Earnings F1Y 15.4
Price/Book 2.1
Debt/Equity 0.6
EPS Growth 12.3
Market Cap Wtd Avg 3.7 B
Market Cap Median 3.2 B
Sector Weights   Cambiar     
Consumer Discretionary 9.7
Consumer Staples 12.4
Energy 3.1
Financials 13.7
Health Care 10.6
Industrials 14.8
Information Tech 11.8
Materials 5.9
Real Estate 2.3
Telecom Services 0.0
Utilities 3.7
Cash 11.9
Top 10 Countries  Cambiar      
Japan 22.5
United Kingdom 19.9
Italy 9.2
China 7.6
France 7.4
Germany 4.8
Austria 3.6
Brazil 3.2
Taiwan 2.8
Netherlands 2.8

Commentary

Market Review (3.31.2018)

Global equities posted mild losses during the first quarter of 2018.  While there were no significant drivers behind the pullback in stocks, a lack of new upside catalysts and an increase in market volatility led investors to move to the sidelines.  Talk of protectionist policy between the U.S. and China and the resulting negative impact on trade/global growth was an additional uncertainty that weighed on investor sentiment in the quarter.  Throughout the current bull market, any decline in stocks has generally been a good buying opportunity, as losses were quickly erased and stocks moved on to new highs.  Yet the current environment thus far in 2018 appears more cautious, with loss aversion beginning to outweigh upside potential. 

Given where we are in the business/market/valuation cycle, perhaps a more circumspect posture is appropriate.  While Cambiar still sees varying levels of upside in the equity markets, the Goldilocks environment is behind us and security selection/avoidance decisions will take on increased importance in 2018.  The tightening of monetary policy underway in the U.S. may also spark a rotation in market leadership, as the dramatic outperformance in growth stocks appear poised to give way to their value counterparts.  Higher interest rates are also beginning to offer investors an alternative to stocks, while serving as a potential headwind to companies with no earnings and/or leveraged balance sheets. 

Volatility – A New Paradigm or Return to Trend?

In considering the investment climate of 2018, a look back on market conditions in 2017 is helpful.  Last year was in many ways a near-perfect environment for equity investors: a synchronized global economic expansion, continued low-interest rates, favorable corporate earnings, and generally positive economic and political developments.  Entering 2018, change within the market was bound to occur – and as these somewhat inevitable shifts have emerged, so too has volatility.  We believe the following considerations will play a role in market behavior during 2018 (and beyond).

Positive Real Interest Rate   Monetary policy has been the primary tool to promote the global recovery over the past ten years.  With U.S. inflation levels running at close to 2% and with the economy having achieved full employment, the Federal Reserve is now raising rates back to a positive real number.  Assuming at least two more rate hikes in 2018, the resulting Fed Funds rate in the 2.25% range would be a positive real rate of return for the first time this decade.  As the debt and equity markets have become quite comfortable with an extremely low economic cost of capital, the withdrawal of monetary stimulus is bound to exert pressure on asset prices.  While many have anticipated this eventuality, it would be naïve to believe that this process after such a long duration will be a smooth one.  We believe the rise in interest rates as an explanatory variable for the rise in volatility exceeds most other factors.

Real Interest Rate 2018 (web)

Source: Bloomberg.  Formula: US 3 Month Bill - PCE Deflator. 

 

Quantitative Easing (QE) Programs Outside the U.S. are Reaching Their Limits – QE remains to this day a difficult concept to explain.  While it looks like money printing, it is in fact the simultaneous creation of bank reserves and the removal of risk-free instruments from the financial system.  The objective is to urge financial participants out on the risk spectrum.  In this regard, the QE programs of both Japan and Europe have gone further than the U.S. Federal Reserve.  In Japan, the vast preponderance of positive-yielding debt has been bought by the Bank of Japan (BOJ); the BOJ has subsequently expanded their purchase activity into the corporate debt equity (via ETF) markets.  In Europe, the European Central Bank (ECB) is bumping up against ownership limits for sovereign issues.  The result in both cases is a shortage of risk- free bonds of various durations, an essential source of collateral for interbank liquidity.  The resulting reduction in liquidity makes longer-term currency hedging prohibitively expensive for market participants such as major Japanese and European manufacturers – and thus blunts the benefit of QE.  We believe Europe’s improved economic performance means that the ECB will begin exiting QE in 2018, and raising interest rates back into positive territory in 2019.  Japan’s situation is uniquely complicated and we don’t expect QE to end there in 2018; however, given that the QE program is leading to illiquidity and challenges in basic capital market functions, returns appear to be diminishing. 

Tariffs and Trade Wars? – President Trump has shown a clear willingness to approach negotiations through a confrontational style, including the topic of global trade.  Tariffs on steel and aluminum, and possibly on select Chinese manufactures, likely represent negotiating tactics to force some kind of “deal” or reconciliation.  Even so, for this to be an effective tactic, there would need to be some willingness to implement stiff tariffs in certain categories, just to prove that these are serious threats.  As such, there is some risk that these tariffs “reverse” key stimulative benefits of tax reform and the general economic momentum.  Global trade linkages have become deeply integrated – broadly speaking, it would take a lot of regressive tariffs to rupture these relationships.  At the margin, protectionist policy is not a favorable development.  That said, Chinese IP theft, forced technology transfer, and domestic market protections are difficult to defend as reciprocally reasonable trade policies to tolerate in the long term.  Outside the U.S., the EU has proposed a transaction tax on internet businesses, reasoning that these are disruptive to local economies and tend to channel revenue and profits into the cloud and the most favorable tax jurisdictions.  With locally sourced “profits” difficult to quantify, the EU may tax revenue.  Taken in isolation, these may be reasonable responses to the negative externalities posed by online businesses.  As it happens, these are mostly U.S. companies, and the largest ones in the global stock market, and they may earn less money than would otherwise have been the case.

Market Structure – Global equity market ownership is vastly different from the pre-GFC timeframe.  Index funds, sector ETFs, and quantitative strategies have come to predominant markets, in some cases owning an outright majority of certain stocks and their free floats.  On the other side of the markets, active managers have vastly less firepower to deploy as prices move.  The consequence is that small fluctuations in market flows can lead to outsized stock price moves.  Not unlike the unintended consequences of QE detailed earlier, true stock market and individual stock price liquidity (i.e., the amount of money needed to move a stock price) is lower today than in the past.  

International Small Cap Fund

The Cambiar International Small Cap Fund posted an in-line return vs. the MSCI EAFE Small Cap Index for the first quarter.  Positive contributions via sector allocation decisions were essentially negated by stock selection during the quarter. 

Trade activity resulted in Cambiar being a net seller during the quarter, as a number of holdings reached their price targets.  Notable sales included NEX Group (financials) and Ocado (consumer discretionary), which were two of the portfolio’s top performers in the first quarter.  NEX Group rallied on news that the company was being acquired by competitor CME Group – an unanticipated (but always welcomed) event.  UK-based Ocado is an online grocery retailer; in addition to the company’s core business, Ocado also offers its operating system to other retailers looking to increase their e-commerce activity.  Ocado moved higher in 1Q on a number of announced deals for the company’s operating system.  Although price targets may be raised over our holding period, the preference is to lock in gains when appropriate, given the sharper price moves that can take place in the international small cap space.  We would be happy to re-consider Ocado in the future should the stock trade at a more attractive valuation.

At a sector level, the Fund’s holdings in the consumer discretionary, financial and energy sectors were positive contributions to performance for the quarter.    While energy was one the leading laggards in the index for 1Q, Cambiar’s sole energy position was able to buck the trend and posted a positive gain.  Investors sentiment remains negative towards energy, but sector comprised the top relative contribution to performance in the quarter. 

Three sectors where Cambiar was unable to keep pace with the benchmark were consumer staples, utilities and materials. Representing approximately 15% of the portfolio, consumer staples is a meaningful allocation for Cambiar.  While recent weakness in holdings such as Remy Cointreau and Britvic can be attributed to modest profit-taking after a strong 2017, the investment case for agricultural commodity producer Adecoagro has taken longer to materialize.  Adecoagro has been negatively impacted by a combination of higher production costs and lower realized prices for sugar and ethanol, which are key outputs for the company.  Although valuations remain attractive, it is unfortunately for the wrong reason.  We are confident that yields will increase in 2018, and continue to monitor the company’s capital allocation plans, especially with respect to a share buyback program and visibility into their dividend.

While the strong return in international small cap stocks for 2017 resulted in any cash position being a drag on return, Cambiar’s marginally higher cash balance was a positive contributor to performance in the first quarter.  To be clear, Cambiar is not attempting to be tactical with cash; rather, it is a by-product of the team’s buy/sell process.  As we anticipate market volatility to remain elevated, the current dry powder in the portfolio will likely be worked down as pipeline ideas reach desired attachment points.

There were no material changes to the portfolio’s sector or geographic exposures; Cambiar remains diversified across most sectors and regions.  With overweight positions in Healthcare, Consumer Staples and Telecom, the portfolio has a modest defensive tilt; that said, the strategy has also participated in up markets, as evidenced by the trailing one-year return.  At a regional level, the portfolio remains skewed to developed markets, but has been opportunistically participating in Emerging Markets.  Despite Cambiar’s higher quality bias and need for financial transparency (which can be sometimes be a challenge in Emerging Markets), the team has been able to identify a select number of EM companies that meet our investment criteria.

Looking Ahead

Global equities delivered a dream year for investors in 2017 – strong returns with very low volatility.  As we contemplate the outlook for equities in 2018, two key considerations are global growth and valuations.  The acceleration in economic growth across most geographies is unlikely to sharply decelerate in 2018, providing a continued tailwind to corporate profits and stock prices.  And while valuations in the aggregate are not inexpensive, multiples are not at the euphoric levels that often accompany the end of a bull market. 

The more volatile market environment that appeared in the first quarter may be the ‘new normal’ for investors.  An uptick in volatility is not necessarily a bad thing, as the corresponding increase in dispersion across sectors can be beneficial to active managers such as Cambiar.  Additionally, the increase in market volatility should not be misconstrued for an imminent decline in stocks, as underlying corporate fundamentals and profits – a key driver of stock prices – continue to meet (or exceeded) market expectations.  And while the low yield environment that has been supportive for equity valuations throughout the current cycle is being slowly wound down, rates still remain low on an absolute basis.  Net-net – Cambiar anticipates that the overall upward trend in equities will remain intact; however, investors should prepare for a bumpier ride relative to the past 18 months.

As discussed in our 4Q commentary, Cambiar believes that security selection will take on increased importance in outperforming one’s assigned index in 2018, in contrast to the ‘set it and forget it’ approach that accompanies passive investing.  While advocating active management is an admittedly self-serving recommendation, we are pleased to see that our investment strategies are off to a good start vs. their respective benchmarks – with the bulk of the excess return a function of security selection. 

Disclosure

Mutual fund investing involves risk, including the possible loss of principal. In addition to the normal risks associated with investing, investments in smaller companies typically exhibit higher volatility and international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations.  Emerging markets involved heightened risks related to the same factors as well as increased volatility and lower trading volume.  There can be no assurance that the Fund will achieve its stated objectives.

To determine if a Fund is an appropriate investment for you, carefully consider the Fund’s investment objectives, risk factors and charges and expenses before investing. This and other information can be found in the Fund’s prospectus which can be obtained by clicking here or calling 1-866-777-8227. Please read it carefully before investing. There is no guarantee that the Funds will meet their stated objectives.

Performance data quotes are past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost and current performance may be lower or higher than the performance quoted. For performance data current to the most recent month-end, please call 1-866-777-8227.

The Morningstar RatingTM for funds, or "star rating", is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product's monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance.  The Morningstar Rating does not include any adjustment for sales loads.  The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods. CAMFX was rated against 78 Foreign Small/Mid Blend funds over a three year period. With respect to these Foreign Small/Mid Blend funds, CAMFX received a rating of 3 stars. Past performance is no guarantee of future results.

Price/Earnings F1Y is a calculation that divides the current share price by the estimates of earnings in the next four quarters. Debt/Equity - Long Term is a calculation that takes interest-bearing, long-term debt divided by shareholder equity. EPS Growth - Long Term is a calculation that takes the company’s estimated profits for five years divided by the outstanding shares. Alpha is a measure of risk-adjusted performance. Beta is a measure of risk in relation to the market or benchmark. The Sharpe Ratio is a direct measure of reward-to-risk and is calculated by subtracting the risk-free rate from the rate of return for a portfolio and dividing the result by the standard deviation. Standard Deviation is a statistical measure of historical volatility; a measure of the extent to which numbers are spread around their average. R-Squared measures how closely a portfolio’s performance correlates with the performance of a benchmark index.  These calculations are not a forecast of the Fund’s future performance. 

The MSCI EAFE Small Cap index represents the 85th to 99th percentile of stocks found in the MSCI EAFE.  Index returns do not reflect any management fees, transaction costs or expenses.  Individuals cannot invest directly in an Index.  

As of 3.31.2018 the International Small Cap Fund had a 1.4% weighting in Adecoagro, 2.1% in Britvic, 0.0% in NEX Group, 0.0% in Ocado, 2.4% in Remy Cointreau.

This material represents the portfolio manager’s opinion and is an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice or a specific recommendation of securities.

The MSCI EAFE Small Cap Value Index captures small cap securities exhibiting overall value style characteristics across Developed Markets countries around the world, excluding the US and Canada. The value investment style characteristics for index construction are defined using three variables: book value to price, 12-month forward earnings to price and dividend yield.  Individuals cannot invest directly in an index. 

Cambiar Funds are distributed by SEI Investments Distribution Co., 1 Freedom Valley Dr Oaks, PA 19456, which is not affiliated with the Advisor.  Cambiar Funds are available to US investors only. Strategies included within the Institutional Investor offer are not mutual funds and are not affiliated with SEI Investments Distribution Co.