Eaton Vance Global Small-Cap Strategy - offering exposure to 'compounders' and 'improvers'
The Eaton Vance Global Small-Cap Strategy offers exposure to a broadly diversified portfolio of global, high quality, small cap companies.
The investment philosophy is based on a belief that superior returns can be generated by identifying, valuing and investing primarily in two types of companies - those which exhibit the characteristics of defendable structural growth ('compounders') and those which are benefiting from structural change ('improvers'). The breadth and relative inefficiency of the small cap universe provides fertile territory in which to pursue this philosophy and, in doing so, the aim is to achieve long term capital appreciation and market-beating returns.
Characteristics of Compounders (Structural Growers)
• Strong barriers to entry
• Clear competitive advantage(s)
• Scalability of business
• Differentiation of products and services
• Industry or niche benefiting from structural growth
Characteristics of Improvers (Structural Change)
• Positive agents of change identified
• New senior management
• Product development
• Corporate structure
"Quality, Valuation, and Time": Q&A with Aidan Farrell, Director of Global Small-Cap Equity at Eaton Vance
- What percentage of a balanced portfolio do you feel Australian super funds should consider investing in global small caps?
Analysis carried out by Douglas Funds Consulting in conjunction with Heuristic Investing Systems suggests that an unhedged global small-cap allocation up to a total strategic asset allocation weighting of 5% is likely to improve the return/risk trade-off a typical Australian balanced portfolio that includes Alternatives (hedge funds and private equity).
- What do you see are the main advantages of global small caps compared with ‘All Caps’ or large-cap indices?
I believe there are two main advantages. The first is the ability to focus solely on the most inefficient area of the stock market. For an equity strategy targeting alpha generation through bottom-up stock selection, this is the most fertile area to focus on. The second is that, with a sole focus on small-cap investing at the individual stock level, you really only need to be concerned about what you own as opposed to also having to focus on what you don’t own. Take the example of the MSCI World Index, where Apple is currently the largest constituent at 2.29%. If a portfolio manager decides to be underweight and is proven wrong, that can be painful. If Apple continues to rise, the problem becomes more pressing.
Turning to the MSCI World Small Cap Index, the largest constituent has a weight of only 0.17%. If this stock is not held and happens to perform well, the cost to the fund is minimal, and the stock will eventually exit the small cap index, therefore ceasing to be a problem. The top 10 constituents of the MSCI World Index represent a combined weight of 10.8% versus 1.51% for the MSCI World Small Cap Index. Stock concentration risk is therefore more pressing for large-cap investors than small cap.
News reports on this product
Director of Institutional Business - Aust and NZ
Tel: +612 8229 0201 / +61 (0)488 011 324