EAM Global Small Companies Fund – Quarterly Update
What were the key drivers for the EAM Global Small Companies portfolio in the December Quarter 2023?
When we look at the key drivers for the strategy, the fund was about flat in Aussie dollar terms versus the Index, which returned about a 5.5%. But when we break down the performance for the quarter, the underperformance really came in in one month – December, and in one country – the United States.
The big news in December came from the US Federal Reserve and the pivot in their language showing the market that maybe the end of the interest rate hiking cycle is over, and maybe even, we’re going to get lower interest rates going forward. That was the really big news in the quarter and that communication unleashed a massive rally in small cap stocks, particularly in the United States. But it was led by companies with low momentum, companies with the lowest Returns on Investment (ROI). Companies that were negative earning growers, non-earners and with the highest beta. A very low-quality tinge to the market rally we saw in December.
From that perspective, it was very difficult environment for our Informed Momentum style given that large reversal and that low quality rally in the United States in December.
Moreover, when we look at our performance from a risk attribution perspective, it was affected by our underexposure to value. Generally, momentum and value are negatively correlated – when value does well, momentum usually doesn’t and that’s what we saw in the December quarter. On top of that, an exposure to energy was a further detractor from our performance.
How’s the portfolio positioned?
During the December quarter, we saw much more trend, much more momentum in the Emerging Markets. We found a lot of opportunities in Taiwan and in India. We’re finding more opportunities just at the margin in financials, healthcare and information technology and less so in energy and consumer staples. That’s really been the change intra quarter.
With our style and our informed momentum process, we’re always looking for the beginnings of new trend and it’s very adaptable through time – we’re very active in terms of applying our process – constantly repositioning the portfolio to where we’re finding strength and identify new trends and away from weakness.
Has this position changed during the quarter?
The discipline to actively moving towards high momentum and away from weaker trends really results in a in a very adaptable process through time and shifting the portfolio towards strength and away from weakness.
During the December quarter, we saw much more opportunity at the margin, we found it more in emerging markets, particularly India and Taiwan. We are also seeing a little bit of a turnaround in the United States.
From a sector perspective, we’re finding tremendous opportunities and trend in financials, in healthcare and in information technology with everything AI, so we feel pretty good about the position of the portfolio and the opportunities that we see going forward, always looking for trend.
Why should investors consider your strategy now?
There are three key things that we believe it is a great time to invest in this particular strategy at this particular time.
Number one, we believe that small caps may be poised to do better given what’s happening with global central banks given that it seems we are towards the end of the interest rate cycle. Or maybe even see some interest rates going down for the foreseeable future. From historical perspective, that has generally been a good time to invest in small caps. So number one, we think it’s a good time for small cap in general.
Secondarily, particularly for our style in this fund, we have gone through a pretty dramatic underperformance cycle for momentum and that’s a key exposure in our strategy. For the last 18 months, we’ve seen momentum have some pretty difficult performance. And again, if history is any guide, after this kind of market volatility we’ve been in for the last 18 months and as things are normalised and trends emerge, generally that’s when momentum does well.
And we’re very positive, not only in terms of small caps, but for our informed momentum style in particular at this moment.
The third and probably most important reason that we’re optimistic going forward, comes from a stock by stock opportunity perspective.
We’re seeing a broadening out of markets, a broadening out of strength and so we find a lot of opportunities across countries, across industries and across sectors. More so than what we’ve seen in the most recent past.
In short, there are three main reasons why we believe now is a good time to invest in our strategy:
The part of the small caps cycle we are in.
Momentum as a style poised to come back if history is any guide.
And then lastly, just the opportunities that we see from a stock by stock perspective.
The text has been edited for clarity.
The document contains general information only. Reference to either individual securities or other investments should not be considered as investment advice. We strongly encourage you to obtain professional advice before making an investment in securities that have been mentioned. Documents you should consider prior to making an investment could include the relevant Product Disclosure Statement and the accompanying Target Market Determination. If you would like further information on financial products that SG Hiscock & Company Ltd (AFSL 240679) is the investment manager for, contact the Client Services team on 1300 133 451, visit the website www.sghiscock.com.au or contact your financial adviser. Any investment is subject to risk, including possible loss of income or capital invested.