Strategy Description: The Cantor Fitzgerald 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 six-member portfolio management team averaging 30 years of experience and 21 years of tenure with the firm. Originally founded in 1995, Smith Group became a part of Cantor Fitzgerald in 2021.

Performance: The portfolio climbed 6.2% in Q1, beating the 4.7% gain of the benchmark. At the sector level, Industrials accounted for a large portion of the outperformance, followed by the Financials sector. Communication Services was the largest detractor. From a regional perspective, Developed Asia was the lead contributor due to strong stock selection in Japan. Emerging Asia was the second largest contributor thanks to outperformance by Taiwanese and Chinese holdings, partially mitigated by underperformance in South Korea. Developed Americas was the only region with negative stock selection this quarter. Allocation effect was neutral from both a sector and region perspective.

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.

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 all three of elements of the Smith Group Composite Model have outperformed the rest of the universe over the past 12 months. The Growth Outlook model had the strongest positive price differentiation, followed by Valuation and Earnings Quality.

Economic/Market Comment: The global economy has demonstrated remarkable resiliency through the many challenges of the past few years, avoiding a recession. According to the IMF’s most recent forecast (April) , the global economy is expected to grow by 3.2% during 2024 and 2025, which is the same pace seen in 2023. This is an upgrade to 2024 estimates from the IMFs January 2024 and October 2023 outlook. Despite an improvement in expectations, the pace of growth is weighed on by still high borrowing costs and the withdrawal of fiscal support as well as Russia’s war in Ukraine, weaker growth in productivity and decreasing globalization.

Earnings Trends: Earnings growth for the median ACWI ex-US company is expected to be a robust 12.1% in 2024, up slightly from the 11.3% estimate at the beginning of the year. The developed and emerging worlds continue to see quite significant divergence. Through the quarter, Developed Asia was stable, while Europe and Canada saw a decline in expectations by a few percentage points. From the emerging side however, each region saw sizable increases in sentiment over the past three months. Emerging Asia is still expected to have the highest earnings growth among any region for 2024. From a sector view, Information Technology has pulled ahead and now leads among sectors, followed by Materials, which has marginally softened and is in second after leading last quarter. Energy is still projected to have the lowest growth in 2024 but it is an improvement from the negative growth rates of 2023 (due to the unusually high base in 2022).

Valuation Trends:

All six regions still trade at a discount to their respective ten year averages, and have deepened this discount significantly over the last three months although are not quite to the levels of a year ago. EM Asia retained its rank as the most discounted region relative to its own ten year average due to China’s steep discount. However, the gap between EM Asia and the average region has narrowed considerably.