Strategy Description: The Smith Group International Equity strategy is a concentrated portfolio of about 40 large and mid-cap non-U.S. companies expected to deliver earnings growth in excess of expectations at a higher frequency than the International Equity universe. The strategy is managed by a 10-member investment team averaging 21-years of experience and 13-years of tenure with the firm. Since the strategy inception on Oct. 1, 2011, the strategy has produced an annualized return of 9.6%, which is 4.3% ahead of the MSCI All Country World Index ex-US.
Performance: The portfolio held steady in the third quarter (–0.1%), outpacing the 3.8% drop in the benchmark. Outperformance was broad-based with only one of the eleven sectors having notable negative excess return. Information Technology, Health Care, and Financials were the top three contributing sectors. Communication Services was the lone detractor of note. Developed EMEA returned to the top contributor spot after the reversal of last quarter. Emerging Asia and Developed Asia regions also made significant positive contributions. Developed Americas (Canada) was the only region that was a meaningful drag. (see pages 4-7 of PDF)
Growth Versus Expectations: Smith Group believes companies that can sustainably grow earnings faster than expected will deliver higher returns over time. In the 11 years since inception of the strategy, non-U.S. companies have not typically exceeded growth expectations. In fact, most have fallen far short. In contrast, Smith Group portfolio companies have done much better over this period. (see page 3 of PDF)
Smith Group Models: The strategy seeks stocks with key fundamental characteristics that are consistent with companies that generate higher than expected growth. Those characteristics are grouped into models that help us in screening and ranking the universe. Top ranked stocks on the Smith Group Composite Model outperformed the rest of the universe over the past year. The Value model had the strongest positive price differentiation, followed by the Earnings Quality model. The Growth Outlook Model was neutral over the 12 month period. (see page 8 of PDF)
Economic/Market Comment: The global economy is slowing but still growing, albeit at the slowest pace in decades. In its October report, the International Monetary Fund adjusted its projection for 2024 economic growth downward slightly to 2.9%, following anticipated growth of 3.0% in 2023. The divergence in growth rates between countries is increasing. The outlook for the United States has improved, while the outlook for China and Developed Europe has worsened. Global inflation continues to decelerate, but is still above targeted rates in most countries.
Earnings Trends: Expectations for 2024 earnings growth for Developed Europe are above where they were a year ago, but ended the quarter slightly below the end of Q2. In contrast, 2024 growth expectations for Developed Asia are well below the estimate from a year ago, but saw improvement during the most recent quarter. On an absolute basis, Earnings growth for the median ACWI ex-US company is expected to be a robust 12.1% in 2024, up from 8.7% estimated for 2023. EM Asia is still expected to be the fastest growing region in 2024 but not by as wide a margin as was the case in 2023. (see page 11-12 of PDF)
Valuation Trends: All six regions continue to trade at a discount to their respective ten year averages, although DM Asia is not far off its average. EM Asia retained its rank as the most discounted region relative to its own 10 year average. DM Americas (Canada) made the biggest shift since the prior quarter, dropping from the second most expensive to the second least expensive. (see page 12 of PDF)