International Small Caps Now

International Small Caps Now

Thoughts on Brexit, tariffs, and the need to look beyond a company's home country to understand the true scope of its business.

Has Brexit helped or hurt international managers?

Brexit has been a big headline grabber, and it’s been something that we’ve been paying attention to for quite a while.

It’s created both challenges and opportunities. But what we’ve seen over time is that investors can benefit from U.K. companies being bought out -- with the acquirer typically a U.S. company.

This is a part of a bigger picture in terms of volatility in the markets that we actually like in a way. It doesn’t feel great when it happens, but in retrospect, those moments of volatility are where you’re able to build positions bigger or start new positions that otherwise would be too expensive.

Do investors place too much emphasis on where a company is headquartered?

I think in the small-cap space, a lot of investors do overemphasize the importance of headquarters relative to the business mix. The stereotype of small-cap companies is that they are single-country businesses...that since they’re a U.K. company, they must sell to U.K. consumers. 

But the fact that they’re domiciled in whatever country you want to name doesn’t mean that’s where their business mix is coming from.

Are you concerned about the potentially negative effect of tariffs and trade wars?

Tariffs and trade wars have been grabbing headlines over the last several months. If you think about the type of businesses that get caught in the crosshairs of tariffs and trade wars, they tend to fall into two big buckets. One is commodities -- think steel, aluminum, soybeans. Another is high-profile consumer brands, where it’s going to hurt to have these things slapped with tariffs. But we have not seen a whole lot of impact to the operating performance of the companies that we favor.

How do you view the Russian market?

Investing in Russia is a little bit of a quandary. On the one hand it’s a very appealing market from a top down perspective -- the biggest market in greater Europe, at least by population. It’s growing, the economy’s actually doing pretty well. Their debt levels both at a consumer level and at a government level are a fraction of what they are here. So that seems appealing.

The challenge with Russia is corporate governance and shareholders’ rights.  But it is possible to get exposure to the market via non-Russian companies that do business there, ideally ones with strong corporate governance and market positions. You would also like to see a management team that’s known the Russian markets for a long time. I think it is another example where it's worth remembering that there’s a difference between a company's source of revenue and country of origin.


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