A Deep and Diverse Investment Universe

A broad, diverse investment universe may not be the first image that comes to mind when thinking of international small-cap stocks. But international small-caps hail from a diverse group of 46 countries, providing access to a wide range of local, regional and global businesses that are often leaders in their respective industries. And these companies outnumber their U.S. counterparts by more than 2:1, with twice the total market value of U.S. small caps.


International Small-Cap Stocks Greatly Outnumber Their U.S. Counterparts
Compared with U.S. Small Cap Stocks Graph

Sources: FactSet, as of 6/30/19. “U.S. Small-Cap” is represented by the Russell 2000 Index, and “International Small-Cap” by MSCI ACWI ex USA Small Cap Index. Diversification does not ensure a profit or protect against market loss.


A History of Strong Performance with Lower Volatility

International stocks and small-cap stocks both hold reputations for higher volatility. Investors may be surprised to learn, then, that international small-caps have provided strong performance with lower volatility than U.S. small-caps, and only marginally higher volatility than international large-caps.  

 

International Small Caps Have Performed Well without Outsized Volatility
Average of Monthly Rolling 10-Year Periods from 5/31/94 through 6/30/19
International Small Caps Have Performed well without Outsized Volatility Graph

Source: FactSet, as of 6/30/19. 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. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment. “U.S. Large-Caps" is represented by the Russell 1000 Index; “International Large-Caps" by the MSCI ACWI ex USA Large-Cap Index; "U.S. Small-Caps" by the Russell 2000 Index and “International Small-Caps" by the MSCI ACWI ex USA Small Cap Index. Standard deviation measures the risk or volatility of an investment’s return over a particular time period; the greater the number, the greater the risk. Based on the oldest common inception date - 5/31/94.


Potential for Portfolio Diversification

U.S. large cap stocks generally comprise the core of an investor’s equity allocation. International small-cap stocks have a history of low correlations to U.S. large caps, making them an appealing choice for diversifying an overall equity allocation.

Lower correlation to U.S. larger caps than either international large-caps or U.S. small-caps

Correlation of  monthly returns to U.S. Large Cap, 5/31/94 - 6/30/19

Lower correlation to U.S. larger caps than either interntational large-caps or U.S. small-caps

Source: Royce & Associates as of 6/30/19. [RE1]  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. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment. Correlation is a statistical measure of how investment returns move over time in relation to one another. Correlation coefficients range from +1 (positive correlation) to 0 (no correlation) to -1 (inverse correlation). Diversification does not assure a profit or protect against market loss.

 


Opportunities in Active Investing

The sheer number of companies makes international small caps a natural fit for active investment managers, who have greater flexibility to search out companies at attractive values. Consider that more than 30% of international small-cap companies were receiving little or no analyst coverage versus 15% for domestic small caps.1


Less Analyst Coverage Creates Inefficiencies...
Less Analyst Coverage Creates Inefficiencies graph

Source: Royce & Associates, Morningstar, as of 6/30/19. International small-cap companies represented by the MSCI ACWI ex USA Small Cap; domestic small caps by the Russell 2000.


...Which Can Lead to Outperformance Versus the Index
Monthly Rolling Average Annual Return 5-Year Periods From 5/31/94 through 6/30/19
Monthly Rolling Average Annual Return 5-Year Periods From 5/31/94 through 6/30/19

Sources: Royce & Associates, Morningstar. There were 267 US Fund Foreign Small/Mid Blend Funds tracked by Morningstar with at least five years of performance history as of 6/30/19. The performance data and trends outlined in this presentation are presented for illustrative purposes only. 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. Historical market trends are not necessarily indicative of future market movements in the MSCI ACWI ex USA Small Cap. Active management does not ensure gains or protect against market declines. Outperformance does not imply positive results.

 

Read the Investment Insight
Steve Lipper Portfolio Manager from Royce and Associates

Diversifying the Power of International Small Caps

The case for a strategic allocation to international small cap is well supported by historical data.

Featured Strategy

Royce International Premier Fund

Service Class (RYIPX)

Featured Strategy

Royce International Premier Fund

Service Class (RYIPX)

  • Focuses on a limited number of “premier” non-U.S. small-cap companies (generally market caps up to $3 billion) with discernible competitive advantages, high returns on invested capital, and sustainable, moat-like franchises
  • Seeks to identify companies with notable strengths in industry structure, competitive positioning, operational efficiency, financial track record, and corporate governance
     

 

1 Source: Royce & Associates, Morningstar, as of 3/31/19. International small cap companies represented by the MSCI ACWI ex USA Small Cap; domestic small caps by the Russell 2000.

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. Small- and mid-cap stocks involve greater risks and volatility than large-cap stocks. Any information, statement or opinion set forth herein is general in nature, is not directed to or based on the financial situation or needs of any particular investor, and does not constitute, and should not be construed as, investment advice, forecast of future events, a guarantee of future results, or a recommendation with respect to any particular security or investment strategy or type of retirement account. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies should consult their financial professional.

Investments in small-cap and mid-cap companies involve a higher degree of risk and volatility than investments in larger, more established companies.

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.

The MSCI ACWI ex USA Large Cap Index is an unmanaged, capitalization-weighted index of global large-cap stocks, excluding the United States. Index returns include net reinvested dividends and/or interest income.

The MSCI ACWI ex USA Small Cap Index is an unmanaged, capitalization-weighted index of global small-cap stocks, excluding the United States. Index returns include net reinvested dividends and/or interest income.