International Small Cap Growth Commentary

December 31, 2009

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 532 basis points for the quarter. In addition, the Strategy outperformed the MSCI World ex USA Small Cap Index by 984 basis points during that same period.  

At quarter end, the Strategy’s two largest underweightings versus the Benchmark were in the Industrials and Financials sectors.  A combination of the Strategy’s underweight allocation and stock selection in both the Industrials and Financials sectors contributed to return. As a result of accelerating sales and increased earnings growth rates, the Strategy’s two largest overweightings versus the Benchmark were in the Information Technology and Consumer Discretionary sectors. The Strategy’s stock selection in those sectors contributed to return; however, the overweight allocation to the Consumer Discretionary sector detracted from return. The Consumer Discretionary sector was the biggest contributor to return, while the Telecommunication Services sector was the largest detractor from the Strategy’s return.

From a country perspective, the Strategy’s largest overweightings versus the Benchmark were in China, Hong Kong and Brazil, and the largest underweightings were in Japan, the United Kingdom and India. Within China, Hong Kong and Brazil, the overweight allocation contributed to return; however, stock selection in China detracted from return. The Strategy remains overweight in China, Hong Kong and Brazil due to their strong earnings growth outlook. Within Japan and the United Kingdom, both stock selection and an underweight allocation contributed to return; however, the underweight allocation and stock selection in India detracted from return.

Japan and Germany were the top contributors to return during the quarter.  Within Japan, the Strategy benefitted from a substantial underweight to the region versus the Benchmark.  Japan continues to remain an area of lackluster performance; however, the Strategy modestly increased its allocation as select companies became attractive. The Strategy reduced its exposure to Germany and maintains a neutral weight relative to the Benchmark. Stock selection within Germany benefitted Strategy performance.

Holdings in Australia and Taiwan detracted most from the Strategy’s return. Stock selection within both countries detracted from Strategy return. The Strategy reduced exposure to Taiwan during the quarter and is now underweight the region relative to the Benchmark. Despite stock selection that detracted from return within Australia, the Strategy was able to identify several attractive growth ideas and modestly increased exposure to the region.

Driehaus Capital Management (the “Adviser”) believes the markets will continue to look for growth, execution, visibility, and more importantly sustainability as we move into 2010. This will result in a transition away from the macro driven reflex/reflation rally to more of a “stock-pickers” market, rewarding company specific fundamentals and growth. 

As we move into the new year, the Adviser has been opportunistically adjusting the Strategy’s emerging market exposure given the substantial moves some of those markets made in 2009. Additionally, the Adviser has been modestly increasing exposure to Japan as individual stocks start to gain traction in that region.  The Adviser continues to believe many of the themes of 2009 will be the driving factors as we head into the new year. Those include:  select technology (mostly software, hardware, semi-conductors and internet/consumer services providers); domestic consumption companies in the emerging markets (consumer goods, real estate, education services, etc.); trade down/recession beneficiaries in developed markets, and stimulus/infrastructure spending beneficiaries globally (such as railroad equipment suppliers in Europe, China, and the United States); energy (energy services and alternative energy) and various commodities (coal, copper, and gold). 

NOTES

Sources: Driehaus Capital Management LLC, FactSet, Morgan Stanley Capital International and Standard & Poor’s Global Industry Classification Standard, Russell Indices, and the Wall Street Journal.

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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