Are International Small Caps on Your Investment Map?
What international small caps may bring to a globally diversified portfolio.
Investors considering international equities may want to consider the potentially attractive growth and diversification opportunities offered by international small caps.
The Bigger Meaning of International Small Cap
Large, Diverse Asset Class
There are more than twice as many international small caps as domestic small-caps, providing ample opportunity for active managers to search for mispriced stocks. International small caps also offer access to local, regional, and global businesses hailing from a diverse group of countries that collectively account for 75% of global GDP.
International small cap: An expanded opportunity set
Source: Bloomberg, as of 3/31/18. U.S. small caps represented by the Russell 2000 Index. Non U.S. small caps represented by the Russell Global Ex US Small Cap Index. The Russell Global Ex US Small Cap Index is constructed to provide a comprehensive and unbiased barometer for the global small-cap equity universe ex US small caps. It is completely reconstituted annually to accurately reflect the changes in the market over time.
Solid Performance History
International small caps have a solid long-term performance track record relative to international large caps, U.S. large caps and U.S. small caps.
Relative performance since the inception of the MSCI EAFE Small Cap Index
Average Annual Total Returns since December 31, 2000 (%)
Source: Bloomberg, as of 3/31/2018. Past performance is no guarantee of future results. This chart is for illustrative purposes only and does not represent an actual investment. Unmanaged index returns do not reflect any fees, expenses or sales charges. Indexes are unmanaged and investors cannot invest directly in an index.
Surprising Volatility and Correlation
Over the long term, international small caps have had a lower standard deviation than U.S. small caps and have also shown a lower correlation to U.S. large caps than either international large caps or U.S. small caps.
Standard Deviation & Correlation of monthly returns since 12/31/00
Source: Bloomberg, as of 3/31/2018. Past performance is no guarantee of future results. This chart is for illustrative purposes only and does not represent an actual investment. Unmanaged index returns do not reflect any fees, expenses or sales charges. Indexes are unmanaged and investors cannot invest directly in an index. Standard deviation is a statistic used as a measure of the dispersion or variation in a distribution, or dataset, from its mean, or average; it measures the volatility of an investment’s return over a particular time period; the greater the number, the greater the volatility. Correlation is a statistical measure of the relationship between two sets of data. When asset prices move together, they are described as positively correlated; when they move opposite to each other, the correlation is described as negative or inverse. If price movements have no relationship to each other, they are described as uncorrelated.
Why should investors consider maintaining a small but consistent allocation to this often-overlooked asset class? The answer is simple: superior risk-adjusted returns with very low correlation to traditional equities.
International small caps have attractive attributes and active managers are well positioned to uncover the best that this underutilized asset class has to offer.
Royce co-CIO Francis Gannon explains why he thinks select small-cap cyclicals look well positioned to lead in the months ahead.
Are International Small Caps On Your Investment Map?
Featured Small-Cap Funds
IMPORTANT INFORMATION: Past performance is no guarantee of future results. Performance shown excludes sales charges, if any. Had sale charges been included, performance would be lower. The "% Change" column(s), indicate a change in the Net Asset Value (NAV) or Market Price from the previous business day. All investments involve risk, including loss of principal. Please see each product’s web page for specific details regarding investment objective, risks, performance and other important information. Review this information carefully before you make any investment decision. Additional share classes and products may be available.
All investments involve risk, including possible loss of principal. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges.
Equity securities are subject to price fluctuation and possible loss of principal.
Small-cap stocks involve greater risks and volatility than large-cap stocks.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.
Active management and diversification do not assure a profit or protect against market loss.
The MSCI EAFE Small Cap Index measures the performance of small cap stocks in European, Australasian, and Far Eastern markets.
The MSCI EAFE Index is an unmanaged index of equity securities from developed countries in Western Europe, the Far East, and Australasia.
The Russell 1000 Index measures the performance of the 1,000 largest companies in the Russell 3000 Index, which represents approximately 92% of the total market capitalization of the Russell 3000 Index.
The Russell 2000 Index is an unmanaged list of common stocks that is frequently used as a general performance measure of U.S. stocks of small and/or midsize companies.