Hedge funds

Why Should an Investor Consider International Small-Caps?

Why Should an Investor Consider International Small-Caps? by Royce Funds

With approximately 25,000 international companies in our chosen asset class, we believe active management suits our search for businesses with the quality metrics that we typically look for in our domestic investments—high returns on invested capital, strong balance sheets, and sizable market shares.

See the video here.

Why Should an Investor Consider International Small-Caps?

Francis Gannon: So let’s start off by talking about why an investor should consider putting international smaller companies into a portfolio.

David Nadel: Well, I think, first of all, you’re increasing your opportunity set in an uncorrelated asset class. So there are about three times as many small-cap companies outside the U.S. as there are in the U.S.

I think the international small-caps market is home to a lot of high-quality, world-class companies, and don’t forget that a billion-and-a-half market cap company in many markets outside the U.S. can be a global number one in its niche. It’s a little less likely in the context of the U.S. small-cap world.

Francis: And how important is active management within that world that we operate in?

David: I think active management is crucial. The large universe of international small-caps companies, and there are about 25,000 companies that have market caps of $5 billion and less outside the U.S., that universe is filled with a lot of very low-quality companies, and a challenge with passive management is you’re kind of buying the whole market, which typically is going to include anywhere from a quarter to a third of companies that are losing money.

So if you’re more of a quality focused investor that’s interested in high returns on invested capital, strong balance sheets, self-funding businesses, high market shares—all those types of things—I think active management can add quite a bit of value.

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