International Small Cap Growth Commentary
June 30, 2010
Market News
The global market was plagued with macroeconomic issues such as sovereign debt concerns, total debt/Gross Domestic Product (GDP) levels both at the consumer and government level in developed economies and questions regarding the sustainability of the global growth recovery. In addition, global leading indicators peaked and began to turn down during the quarter. Governments in many emerging market countries tightened their monetary policies due to overheating and inflation concerns.
Detractors & Contributors
The Driehaus International Small Cap Growth Composite (the “Strategy”) outperformed its benchmark, the MSCI All Country World Index ex-USA Small Cap Growth (the “Benchmark”), by 303 basis points for the quarter. In addition, the Strategy outperformed the MSCI World ex USA Small Cap Index (the “Index”) by 416 basis points during that same period.
At quarter end, the Strategy’s two largest underweights versus the Benchmark were in the Industrials and Materials sectors. The Strategy’s underweight in the Materials sector detracted from return; however, the underweight in the Industrials sector and stock selection in the Materials sector contributed to return. As a result of accelerating sales and increased earnings growth rates, the Strategy continued to be overweight to the Consumer Discretionary and Information Technology sectors. The Strategy’s overweight in those sectors detracted from return; however, stock selection in both sectors contributed to return with holdings in the Consumer Discretionary being the biggest contributor to return for the quarter. Both the Consumer Discretionary and Consumer Staples sectors contributed positively to performance mostly due to increased domestic demand/consumption in emerging markets. The stock selection in the Financials sector was the largest detractor from the Strategy’s return.
From a country perspective, the Strategy’s largest overweights versus the Benchmark were in China and Brazil, and the largest underweights were in Australia and France. Within China, the overweight allocation detracted from return, however, stock selection contributed to return. Within Brazil, the overweight allocation contributed to return and stock selection modestly detracted from return. The Strategy remains overweight those countries due to their strong earnings growth outlook. In Australia and France, stock selection detracted from return, however, the underweight allocation contributed to return.
Stock selection in Japan and Canada were the top contributors to return during the quarter. Japanese names impacted performance positively mostly due to stock selection in the Information Technology and Industrials sectors tied to strong growth in China and recovering growth in the U.S. Over the quarter, the Strategy increased its allocation to Japan where it maintains an overweighting. Canada was a strong performer driven by both technology/services and energy investments. In emerging markets, particularly South Africa, Taiwan and Mexico positive stock selection was driven mostly by domestic consumption themes (retail, healthcare and staples) and technology.
Holdings in Germany detracted most from the Strategy’s return due to poor performance by technology investments. The Strategy further reduced its exposure to Germany and maintains an underweight position relative to the Benchmark.
Portfolio Positioning and Outlook
Within emerging markets, the Strategy continues to be positioned more in domestic demand driven companies as opposed to export driven companies as we believe the growth outlook is more sustainable. As mentioned, we are focusing on Consumer Discretionary and Consumer Staples names both lead by the rising middle class and increasing domestic consumption growth in emerging markets, namely China and Brazil.
Technology on a broad-level, (personal computer upgrade cycles, semiconductor capital equipment cycles, software, services and smartphone proliferation) is attractive as corporations in these industries globally have record cash levels and near record profitability levels. We believe these types of companies may increase productivity and enhance profitability.
We will continue to be underweight the Materials/Commodities and Industrials sectors given the increasing global growth concerns and slowing growth and tightening monetary polices in emerging markets as these areas continue to face cyclical headwinds.
We continue to be significantly underweight the Financials sector, not only because we believe that there are many macro economic headwinds facing the sector, but also because of the dearth of good growth names in the small cap universe from a bottom-up perspective.
NOTES
Sources: Driehaus Capital Management LLC, FactSet, Morgan Stanley Capital International and Standard & Poor’s Global Industry Classification Standard, Morgan Stanley Capital International
The performance numbers represent a composite of international small cap growth accounts managed by Driehaus Capital Management LLC. These numbers are estimated for the period as all underlying accounts have not yet been reconciled. All rates of return include reinvested dividends and other earnings and are net of fees and brokerage commissions. The performance data shown above represents past performance and does not guarantee future results. Current performance may be lower or higher than the performance data quoted.
The Morgan Stanley Capital International All Country World ex USA Small Cap Growth Index (MSCI AC World ex USA Small Cap Growth Index) is a market capitalization-weighted index designed to measure equity performance in 47 global developed markets and emerging markets, excluding the U.S and is composed of stocks which are categorized as small capitalization stocks.
The Morgan Stanley Capital International World ex USA Small Cap Index (MSCI World ex USA Small Cap Index) is composed of stocks which are categorized as small capitalization stocks. The MSCI World ex USA Index is a market capitalization-weighted index designed to measure equity performance in 22 global developed markets, excluding the U.S.
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