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.
Todd L. Edwards, PhD
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 8.20% (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 September 1, 2018. 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.
|Top 10 Holdings||% Weight|
|% of Total||25.2|
|Holdings Subject to Change|
|Market Cap Wtd Avg||3.6 B|
|Market Cap Median||3.3 B|
|Top 10 Countries||Cambiar|
Market Review (9.30.2017)
Global equities closed higher in the third quarter, fueled by encouraging economic growth data and solid corporate earnings reports. On a style basis, growth stocks continued to outpace their value counterparts (particularly in the U.S.), as low bond yields fell for much of the quarter.
International equities are poised to outperform the U.S. markets for the first calendar year since 2012, a trend that may have some legs to it. While valuations have broadly moved higher on a global basis, Cambiar believes that non-U.S. companies are poised to benefit from a combination of continued earnings recovery, multiple expansion and generally accommodative central bank monetary policy. On a regional basis, we believe Europe remains particularly attractive, as the EU shifts from survive to thrive mode (relatively speaking – Europe in general does not possess the same growth rates as the U.S.).
Energy Stocks - Poised for Improved Returns?
After meaningfully lagging the market for the first six months of 2017, energy stocks rebounded in the third quarter. Is the recent recovery the start of an improving performance trend within the sector, or a short-term bounce that is not likely to be sustained? After having maintained an underweight allocation to energy stocks in 2015, Cambiar has been slowly rotating capital back into the sector. At present, our view is that the energy sector offers an attractive risk/reward – based on our outlook for a stable-to-increasing price deck for oil over the next 12 months.
Why did energy stocks struggle in the first two quarters of the year? After posting a sharp rally in the fourth quarter of 2016 on OPEC’s announced production cuts, the energy sector reversed course in January. Climbing global oil inventories led to increased negative sentiment toward the sector – given the oversupplied market conditions. Despite rebounding in September, energy stocks remain in the red on a year-to-date basis. The decoupling in stock valuations relative to oil prices thus far in 2017 borders on capitulation by investors (see chart).
Source: Bloomberg. WTI (West Texas Intermediate)
Frustration with the pace of the recovery in the current oil market vs. past cycles is sure to be weighing on investor sentiment; that said, we believe the combination of attractive valuations (in what is increasingly becoming a fully/overvalued equity market) and improving fundamentals may result in brighter days ahead for energy stocks.
As with most assets, the oil price is primarily a function of supply and demand. Global oil demand has been strong this year, with industry publications continuing to revise their demand estimates higher. On the other hand, global oil supply growth has not kept pace with demand due to OPEC production cuts as well as underinvestment in many areas of the world outside of the United States.
While the current supply/demand picture is healthy, the spike in oil in storage during the 2014-2016 timeframe resulted in a glut of oil and oil products in storage. As the chart illustrates, U.S. oil inventories have begun to post consistent draws - which essentially means the global oil market is not just back in balance but is actually under-supplied. While there is some work to do in working down the supply bulge and reaching more normal storage levels in the U.S. (~700K barrels), the data is moving in the right direction.
A continued overhang in the bull case for energy stocks is the role of shale production in North America (N.A.); i.e., any uptick in oil prices will result in increased shale activity, thereby capping oil price gains. Yet can N.A. shale fill the potential gap that may occur from lack of new investment in conventional oilfields? Expenditures in new oil finds have been sharply curtailed since the collapse in oil prices three years ago. From our analysis, the big integrated and national oil companies are instead seeking to squeeze more out of their existing assets – which will succeed in providing barrels in the short-term, but at the expense of increasing decline rates. When comparing the barrels lost via a 5% decline rate vs. the incremental shale production estimates, one can create a scenario where shale is a necessary source of supply, vs. the burden tagline that it wears today.
Uncertainties regarding the pace of the recovery remain; however, Cambiar believes these concerns are reflected in the attractive valuations that exist within the sector. Cambiar’s holdings in the sector span the energy stack, including integrated oil companies, exploration and production companies and oil services companies. Many of these companies have undergone significant restructuring – such that improving top-line results have the potential for a disproportionately positive impact on earnings.
International Small Cap Fund
International small cap stocks continued their ascent in the third quarter, and remains one of the top-performing asset classes thus far in 2017. The Cambiar International Small Cap Fund posted a positive return for the third quarter, but was unable to outpace the strategy’s assigned benchmarks. The portfolio’s relative underperformance was primarily a function of stock selection, although sector allocations (including cash) also hindered the strategy from potentially additional upside in the quarter. The Cambiar International Small Cap Fund remains ahead of the index on a year-to-date and one year basis.
Portfolio activity over the period was in line with past quarters; Cambiar executed seven new buys and six sales in 3Q. There was nothing thematic in the new names entering the portfolio; the purchases spanned multiple geographic regions and sectors. The strong market resulted in a number of holdings reaching their price targets – thus the uptick in selling during the quarter.
All sectors within the index finished with gains for the quarter – illustrating the broad-based nature of the market rally. Cyclical sectors such as industrials, materials, technology and energy led the way, with defensive sectors such as consumer staples, telecom and real estate posting modest gains. Within the Fund, the portfolio incurred a rotation of sorts during the quarter – as some of the portfolio’s notable outperformers at a sector level from earlier in the year were subsequent detractors in 3Q. One such example was technology; Cambiar tech holdings were relatively flat to down slightly – vs. a ~10% gain in the index. Given the sharp rally in a holding such as Trend Micro in the first two quarters of 2017, perhaps some giveback was to be expected, as there was no material change in fundamentals.
Another sector that was a detractor in 3Q after strong returns earlier in the year was healthcare. While a number of Cambiar’s healthcare positions posted solid gains in the quarter, these positives were offset by drawdowns in Virbac and Spire Healthcare. Virbac produces a range of medicines and vaccines for the pet and food-producing animal industries. Although the company reported solid sales growth in most regions, a de-stocking trend and pricing pressure in the U.S. negatively impacted margins. Cambiar believes the U.S. issues should improve in 2018, and positive momentum in other segments of Virbac’s business gives us some comfort in continuing to hold. Spire Healthcare is a private healthcare provider in the UK. A portion of the investment thesis for Spire was predicated on the company benefitting from referrals due to supply constraints within the UK’s public health services. Yet this component of the thesis has failed to materialize, and upon review, Cambiar chose to sell vs. continuing to hold.
Highlights in the quarter include positive stock selection with the industrial and consumer discretionary sectors. Individual outperformers included Piaggio (motorcycles/Vespa scooters and mopeds) and GS Yuasa – a Japanese manufacturer of power supply systems, batteries and electrical equipment. While smaller in overall portfolio representation, Cambiar’s holdings in real estate, telecom and energy were also positive contributors to performance in 3Q.
Given the rally in equities, any cash position was a performance headwind. The Cambiar portfolio averaged a mid-single digit cash allocation during 3Q – thus a drag of approximately 48 basis points in the quarter. As evidenced by our trade activity during the quarter, the investment team was able to identify a number of actionable investment ideas; however, we are trying not to chase potential ideas that have moved away from desired attachment points. While not attempting to be tactical in the portfolio’s cash position (it is truly a by-product of the buy/sell decision), some available dry powder may be helpful in the event the international small cap market incurs a pullback from what has been a very strong move over a relatively short timeframe.
There were no notable changes by way of region/country exposures; the Fund continues to maintain relatively balanced exposures on this front. The one regional outlier (vs. the MSCI EAFE Small Cap Index) is Cambiar’s ~15% allocation to Emerging Markets. Participation in EM will vary – depending on valuation, balance sheet strength and management/corporate governance at the company level, as well as a neutral-to-positive outlook for the sovereign. Current EM holdings include a Philippine airline, an Argentine telecom company and a Taiwanese semiconductor company.
Global equities have broadly rallied through the first nine months of 2017, with stock averages in the U.S., Japan, Europe and Emerging Markets all trading at 52-week highs. Given positive economic growth data, low volatility, strong corporate profits and lack of attractive investment alternatives, equities appear to be the best house on the block. Although Cambiar remains optimistic as it relates to our companies, we spend equal amounts of time thinking about what could impair the investment case. Complacency and investing are not a good mix.
As always, Cambiar continues to focus the core of our research on company-specific fundamentals. We will also include macro variables into our analysis, to the extent it is relevant to our bottom-up work. One segment of the market we are monitoring is central bank activity, in particular the U.S. Federal Reserve. The U.S. continues to slowly make progress on normalizing monetary policy; the key consideration is whether the markets will be able to digest higher rates, given the absence of inflation. The moves made by the U.S. Fed have a ripple effect on other markets – potentially jeopardizing what has been a synchronized global growth environment. We are also closely monitoring the energy markets, given the high correlations between oil prices and stock movements over the long-term within the sector.
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.
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. The MSCI All-Country World and World Indices are unmanaged indices compiled by Morgan Stanley Capital International. The MSCI EAFE Value Index captures large and mid cap securities exhibiting overall value style characteristics across Developed Markets countries around the world, excluding the US and Canada. The MSCI EAFE Growth Index captures large and mid cap securities exhibiting overall growth style characteristics across Developed Markets countries around the world, excluding the US and Canada. The MSCI indices returns do not reflect any management fees, transaction costs or expenses. Individuals cannot invest directly in an index. The MSCI indices returns do not reflect any management fees, transaction costs or expenses. Individuals cannot invest directly in an Index. The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market-value weighted index, with each stock's weight in the Index proportionate to its market value. The S&P 500 returns do not reflect any management fees, transaction costs or expenses. The S&P 500 Growth index is market-capitalization-weighted index consisting of those stocks within the S&P 500 Index that exhibit strong growth characteristics. The S&P 500 Value index is market-capitalization-weighted index consisting of those stocks within the S&P 500 Index that exhibit strong value characteristics.
As of 9.30.17 the International Small Cap Fund had a 2.3% in GS Yuasa, 2.2% weighting in Piaggio, 0.0% in Spire Healthcare, 2.2% in Trend Micro and 1.9% in Virbac.
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.
MSCI EAFE (Europe, Australia, Far East) 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. Benchmark returns are net of withholding taxes. Index returns assume reinvestment of dividends and capital gains, and assume no management, custody, transaction or other expenses. 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.