Attractive investment opportunities can be found all over the world and small, well-run international companies can provide investors access to some of these compelling opportunities in today's marketplace. However, despite an increasingly globalized world and ever-growing access to foreign markets, international small cap equities remain broadly overlooked and underinvested. There are a multitude of reasons why investors should consider a dedicated allocation to international small cap stocks. Here are a few:
- There is more opportunity in the international small cap market than investors may realize.
Though the total market cap of the international small cap market is relatively small, it includes roughly twice the number of securities as the international large cap market. These vast investment opportunities vary across a wide range of sectors and countries.
Also, many international small cap companies are not nearly as foreign as one may think. For example, under the vast umbrella of international small caps are well-known companies including Air Canada, DeLonghi, and Saab, as well as parent holding corporations for other well-known brands including Greencore (sandwich provider for Starbucks), Spin Master (Etch A Sketch drawing toys), and Glanbia (Think Thin protein bars).
- International small cap companies offer attractive growth potential and portfolio benefits.
Not only does the international small cap market provide a meaningfully larger number of investment opportunities than the international large cap market, but the asset class has also outperformed over the past 3, 5, 10, 15, and 20 years on a trailing basis. Over those same periods, these absolute returns were achieved with less volatility (i.e., lower standard deviation) than the U.S. small cap market. Further, the international small cap market has displayed a relatively low correlation to U.S. large cap stocks, as compared to most other domestic and international equity markets. A low correlation between asset classes provides the potential for added diversification benefits when included in the construction of a broader portfolio.
- The small cap market is conducive to active management.
Active managers have a great opportunity to generate above-market returns because international small cap stocks are often overlooked. Many international small cap companies have little to no analyst coverage providing research to the investment community, which limits their exposure to investors broadly, and increases the likelihood that the companies and their fundamentals are not commonly understood by many investors. These companies, therefore, may be mispriced by the market. The result of this dynamic is an opportunity for active managers that dedicate their time and resources to this specific asset class to uncover opportunities that may not be seen by the market, which may drive investment returns for investors.
Even among investors who have a dedicated allocation to international equities, many still miss out on the international small cap market. The major international stock index, the MSCI ACWI ex USA Index, is constructed to only include the large cap and mid cap segments of the international stock market, and therefore exposure to international small cap equities often requires a dedicated allocation to the asset class.
We believe the Manning & Napier Rainier International Discovery Series is an option that has the ability to take advantage of these market dynamics. The International Discovery Series seeks to generate long-term capital growth by investing primarily in small- to mid-cap equities traded outside of the U.S. The Fund is sub-advised by Rainier Investment Management, an affiliate of Manning & Napier. Rainier’s investment philosophy is based on the belief that superior investment performance comes from dedicated bottom-up fundamental analysis, especially in the international small cap equity market, where significant opportunity exists for dedicated active managers. The combination of active management and the opportunity set presented may be very attractive for investors looking to maximize long-term capital appreciation.
The Series’ investment strategy is designed to find overlooked investment opportunities in good companies with stable businesses, clear earnings drivers, and sustainable competitive advantages. Using this approach, the Rainier International Discovery Series focuses on uncovering non-U.S. companies that are poised for dynamic growth and are trading at attractive valuations. These companies are generally below $5 billion in market cap at purchase. The Fund does not typically invest in the smallest, highly-illiquid names in the market, which is a reflection of Rainier’s belief in the value of stable businesses with strong competitive advantages. The Fund invests across both developed and emerging markets, as well as in any sector, and is well-diversified, generally holding between 60 to 120 stocks.
For more information about any of the Manning & Napier Fund, Inc. Series, you may obtain a prospectus at www.manning-napier.com or by calling (800) 466-3863. Before investing, carefully consider the objectives, risks, charges and expenses of the investment and read the prospectus carefully as it contains this and other information about the investment company.
Specific company mentions within are for informational purposes only and are not to be considered stock recommendations. Past performance does not guarantee future results.
All investments involve risks, including possible loss of principal. As with any stock fund, the value of your investment will fluctuate in response to stock market movements. Small- and medium-capitalization companies tend to have limited liquidity and greater price volatility than large-capitalization companies. Funds whose investments are concentrated in foreign and emerging market countries may be subject to fluctuating currency values, different accounting standards, and economic and political instability. The value of the Series may be affected by changes in exchange rates between foreign currencies and the U.S. dollar. Investments in emerging markets may be more volatile than investments in more developed markets. Additionally, the Series is subject to portfolio turnover risk as it may buy and sell investments frequently, which may result in higher expenses and an increase in realized capital gains and potential tax implications for shareholders. Please note that diversification does not assure a profit or protect against loss in a declining market.
International small cap markets mentioned within represent the MSCI ACWI ex USA Small Cap Index which is designed to measure a small cap representation across 22 of 23 Developed Markets countries (excluding the U.S.) and 24 Emerging Markets countries. The Index returns do not reflect any fees or expenses. The Index is denominated in U.S. dollars. The Index returns are net of withholding taxes. They assume daily reinvestment of net dividends thus accounting for any applicable dividend taxation. Data provided by Morningstar.
International large cap markets mentioned within represent the MSCI ACWI ex USA Large Cap Index which captures a large cap representation across 22 of 23 developed markets countries (excluding the U.S.) and 24 emerging markets countries. The Index returns do not reflect any fees or expenses. The Index is denominated in U.S. dollars. The Index returns are net of withholding taxes. They assume daily reinvestment of net dividends thus accounting for any applicable dividend taxation. Data provided by Morningstar.
The MSCI ACWI ex USA Index (ACWIxUS) is designed to measure large and mid-cap representation across 22 of 23 Developed Markets countries (excluding the U.S.) and 24 Emerging Markets countries. The Index returns do not reflect any fees or expenses. The Index is denominated in U.S. dollars. The Index returns are net of withholding taxes. They assume daily reinvestment of net dividends thus accounting for any applicable dividend taxation. Index returns provided by Morningstar.
Standard deviation is the variation of returns compared to the average return of the portfolio.
Morningstar, Inc. is a global investment research firm providing data, information, and analysis of stocks and mutual funds. ©2017 Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied, adapted or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information, except where such damages or losses cannot be limited or excluded by law in your jurisdiction. Past financial performance is no guarantee of future results.
The Manning & Napier Fund, Inc. (the Fund) is managed by Manning & Napier Advisors, LLC (Manning & Napier). Manning & Napier Investor Services, Inc. (MNBD), an affiliate of Manning & Napier, is the distributor of the Fund shares. Manning & Napier has contracted Rainier Investment Management, LLC, an affiliate of Manning & Napier and MNBD, to sub-advise the International Discovery Series.
