Hi, I'm Tom Banks, and I'm a Portfolio Manager at Federated Hermes.
Why should investors consider international small caps now?
I think investors should always consider international small caps. I believe it is an asset class that has several unique attributes, and to simplify it, I'm going to break it down into an acronym that I created called DIG. The D stands for diversification, the I, inefficiencies, and G, growth. So starting with D, diversification, international small cap, by definition, is a very diverse asset class. Just look at our own benchmark. It's got 45 countries in it and 5,000 constituents or companies. This gives managers plenty of opportunities to find undervalued assets and the next generation of growth leaders. I, inefficiencies. It's been well-documented that international small caps have the least amount of analyst coverage. When I look at the companies that we're investing in, oftentimes, there's one, two, maybe three analysts at most covering the security. This creates inefficiencies in the market and gives managers an opportunity to potentially invest in businesses when they're trading well below their intrinsic value if our forecasts differ materially from the market's forecasts. And finally G, growth. International small caps, oftentimes, they're early on in their business cycle, and they're also, a lot of these companies have long-term structural tailwinds. A lot of these companies are operating in industries or markets where, take a consumer company, for example, where the per capita consumption in that specific market is still a fraction of where it is in the United States. So these long-term demographic tailwinds provide investors an opportunity to invest in some of the better long-term growth opportunities. I know when I look at our portfolio, a lot of the companies we're investing in, we see at least a decade of double digit sales and profit growth potential.
Disclosure: Views are as March 12, 2021 and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector. Past performance is no guarantee of future results. Diversification does not guarantee a profit nor protect against loss. International investing involves special risks including currency risk, increased volatility, political risks, and differences in auditing and other financial standards. Prices of emerging-market and frontier-market securities can be significantly more volatile than the prices of securities in developed countries, and currency risk and political risks are accentuated in emerging markets. Small company stocks may be less liquid and subject to greater price volatility than large capitalization stocks. Federated Global Investment Management Corp. 21-10037 (3/21)