Looking further a field

Hungarian banks, chewable tobacco and other exotics are part of the stuff of global stock stories that excite these specialist managers.

While you can never look back, there’s still a view that international small caps are unfolding in value where the schoolyard is so much bigger.

At a retail level in Australia it’s a narrower field, with products offered by the likes of Goldman Sachs, Merrill Lynch, Schroder Investment and ING. These funds may be holding up to 150 stocks compared with 40-60 stocks in the local versions.

As chief investment officer for ING’s Optimix, a fund of fund manager, Emanuel Calligeris gets to see what leading fund managers are up to in the space. Right now he overviews the Global Smaller Companies fund, which is managed through Wellington and Lazard Asset Management and is about to appoint two more managers for diversification purposes.

“Our criteria is less than US$2 billion and on the lower end it’s above US$500 million. In the universe we’re using there’s 6,500 companies — everything below that is micro cap.

“You’re talking smart companies with maybe one or two products and high barriers to entry, so the returns to their niche can’t be easily duplicated. For example, you may have biotechs such as Waste Connections, even US-listed exchange NASDAQ, then there’s Esprit, Timberland and Puma (all US).”

He adds: “In medical devices, we have Elekta.com [advanced radiation oncology and neurosurgery solutions], a multi-million dollar set up.”

As an asset class in the year to September 30, Australian equities did well because of resource and materials, but international small caps returned 21.42 per cent over the year while large caps only delivered 10.62 per cent unhedged. “The valuation discrepancy can be large and some parts can be overheated while others can be cheap, so that’s why we like the seven-year time horizon,” Calligeris said.

“We say get the manager to actively select stocks and be good at it. US stocks make up half of our index; but we don’t have hard limitations on geography because we want the managers to find the world’s best stock stories,” he adds.