We are pleased to provide you with a quarterly portfolio report for the WCM International Small Cap Growth Fund.
For 2020’s 4th Quarter, the WCM International Small Cap Growth Fund (the Fund) portfolio returned 12.14%*, outperforming the MSCI ACWI ex US Small Cap USD Gross Total Return index (the benchmark) by ~1.58%1. For the trailing twelve months, the Fund is 30.31%* ahead of the benchmark.
2020 Q4 global markets delivered huge gains once again, continuing their torrid run since the March lows. This most recent surge felt a bit different, though, as factors like Value and Low Quality led the way—a notable reversal from Q1–Q3 when Growth and High Quality were the place to be. Amidst this more challenging (relative) backdrop, the Fund was still able to meaningfully outpace the benchmark. While sector allocation detracted and geographic allocation was neutral in Q4, the attribution analysis also revealed that stock selection was strongly positive—whether viewed through the sector or the regional lens—and helped overcome the “style” headwinds. This quarter has spotlighted once again, we believe, the power of WCM’s differentiated stock selection approach, and its application in a high-conviction portfolio.
Keeping an eye on the longer term, the three-year excess return of the WCM International Small Cap Growth Composite, on which the Fund is based, relative to the benchmark now stands at 21.59% (annualized)2, the five-year is 13.80% (annualized)2, and the since-inception (now 6 years) excess is 15.72% (annualized)2.
Sector and region-based attribution showed a positive contribution from selection. Sector allocation was negative, whereas regional allocation was about neutral. Therefore, virtually all of the Fund’s Q4 outperformance came from our picks.
Sector-wise, the primary allocation contributors were our underweight to Real Estate (3rd worst in benchmark), followed by our overweight to Tech (5th best in benchmark). Sector selection was strong, with the leading contributors coming from Industrials, Health Care, Staples, and Tech. By geography, our allocation underweight to Asia/Pacific (worst in benchmark) contributed. Geographic selection was strong, led by our picks in Asia/Pacific and the Americas.
Sector-wise, the primary allocation detractors were our overweight to Health Care (2nd worst in bench), our overweight to Staples (worst in bench), and our underweight to Materials (2nd best in bench). For sector selection, our picks in Real Estate and Financials detracted slightly. Regionally, our allocation underweight to Africa/Middle East (2nd best in bench) detracted slightly. For geographic selection, our holdings in Europe detracted slightly.
In Q4, the simple market factors were largely out of the Fund’s favour: Value outdid Growth and Low Quality outperformed High Quality (“Quality” uses ROE as a proxy).
Continuing their confounding ways, global equity markets surged again in Q4, though there were style/asset class differences this time around. The market narrative was no longer simply Growth over Value. In fact, as noted above (“Other Factors”), the MSCI ACWI ex-US SC Value Index outperformed MSCI ACWI ex-US Small Cap Growth Index by a wide margin. Our analysis suggests that it was actually Momentum that finally gave way—after months of outperformance in 2020—to Value.
And that led us to ponder, how did we manage to keep pace in that kind of backdrop? After digging into the numbers with multiple analytical tools, it ultimately came back to security selection, particularly some good stock picks in Industrials and Healthcare, which offset the headwinds from the factor and sector rotation. That’s why we see the Fund’s result for 2020 Q4 pointing to one of the tangible benefits of a high-conviction portfolio: a few great stock picks can help mitigate temporary “style” headwinds.
Similarly, in our look ahead, we conclude that the Fund is well-positioned for almost any market / economic scenario. Our emphasis on companies with positive moat trajectories, combined with our ‘all weather’ approach to construction, should deliver both downside protection and solid, broad-based returns over the long run.
Buy: Oisix ra daichi, Inc.
Japan-based Oisix ra daichi is a leading online grocery delivery service focused on procuring high-quality ingredients. By targeting Japan’s growing premium grocery market, Oisix enjoys better economics per order than peer services. Oisix has also consolidated the market through strategic acquisitions, thus enhancing its moat.
Source: Oisix ra daichi website (https://en.oisixradaichi.co.jp/story/)
Buy: Global Blue Holding AG
Switzerland-based Global Blue enables value added tax (VAT) refunds, operating primarily in Europe. The company has 70% global market share and should enjoy long-term growth driven by the recovery of international travel, luxury purchases, and the increased adoption of VAT refunds by other nations.
Buy: AI Inside, Inc.
Japan-based AI Inside provides artificial intelligence optical character recognition (AI-OCR) software as a solution (SaaS) to small- and mid-size enterprises (SMEs). AI-OCR allows companies to reduce labor hours by automating the transcription of handwritten documents into digital formats. With Japan’s growing labor shortage, there’s a continuous effort to find ways to improve efficiency via automation, and therefore significant runway for AI Inside.
Buy: Nordnet AB
Sweden-based Nordnet is a savings and investment platform in Scandinavia. Nordnet’s positive moat trajectory is fueled by their simplifying saving and investing for Nordic clients. The company sees strong underlying growth as it nabs share from traditional Nordic banks. These larger incumbents have not prioritized customers seeking savings/investing solutions, nor have they focused on optimizing the clients’ online experience. Nordnet, on the other hand, has.
Buy: PLAID Inc.
Japan-based PLAID is a rapidly growing SaaS vendor. The company’s primary offering is its Karte solution (think of it as Japan’s Adobe Experience). Karte allows companies with e-commerce channels to track customers’ online behaviour so those businesses can improve customer engagement (e.g., via promotions, recommendations, reviews, etc.). This drives higher conversion rates and improved customer satisfaction.
Buy: Nuix Ltd.
Australia-based Nuix is a leading provider of investigative analytics and intelligence software. This software helps organizations process and analyse unstructured and structured data sets primarily for the purpose of satisfying legal and compliance obligations. When companies face litigation, Nuix’s software enables these businesses to efficiently search their databases for critical information. Nuix’s growth tracks the increasing demands of legal discovery efforts, as today there are often millions of pages of electronic communication to analyse in a single trial.
Buy: Docebo, Inc.
Canada-based Docebo allows companies to tap into remote learning solutions for educating and training employees and clients. SaaS companies like Docebo have benefitted from work-from-home conditions forced by the COVID-19 pandemic. For Docebo, we believe this growth is likely to continue, even in a post-COVID world.
Sell: Network International Holdings Plc
UAE-based Network International Holdings sold off significantly—first, due to its exposure to travel and the impact of COVID-19, then more recently from concerns about accounting, an auditor change, and a questionable relationship with their largest client. After losing confidence in the company’s governance controls, we sold our small position.
Sell: Biotage AB
Sweden-based Biotage manufactures and sells equipment and consumables used for purification, filtration, separation, synthesis, etc. by pharma companies, academic institutions, and CROs. We sold Biotage because of our growing concerns about the business’s moat trajectory and runway. The market, notably China, has become much more competitive in consumables going into organic (flash chromatography) and peptide chemistry.
Sell: Nihon M&A Center Inc.
We sold after the name crossed our US$10b market cap limit.
Sell: SimCorp A/S
Denmark-based SimCorp is a leading provider of back- and front-office software solutions for the financial services industry. The company has benefited from managers seeking to cut costs and replace sub-optimal, legacy software systems. Our thesis here has largely played out and our visibility into SimCorp’s moat trajectory is now less clear.
Sell: Keywords Studios Plc
Ireland-based Keywords Studios is still a fine business, but our conviction in the business’s long-term growth story has waned. We targeted Keywords as a source of funds for the Nordnet purchase.
Sell: Elastic NV
We sold after the name crossed our US$10b market cap limit.
Sell: Douzone Bizon Co.
Korea-based Douzone Bizon offers enterprise resource management solutions to SMEs. While Douzone has enjoyed terrific success (its client book is unmatched in Korea), the company’s growth story looks less compelling from here. We exited our position.
Sell: Regional, S.A.B. de C.V.
Mexico-based Regional remains a high-quality SME-focused bank. Like Douzone, we see this thesis as largely played out.
Buy and Manage
We made several strategic trims and adds during the quarter.
Notes: 1Return figures are in AUD, net of fees, subject to rounding, and include the reinvestment of all dividends and income. Past performance is not indicative of future results. 2Based on the WCM International Small Cap Growth Strategy Composite. Return figures are net of fees in AUD, are subject to rounding and include the reinvestment of all dividends and income. Past performance is not indicative of future results.
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