Quick Take: The $350-million American Century International Opportunities Fund (AIOIX) has put up some very impressive gains: For the 12-month period ended July, the fund soared 40.2%, easily beating the average international fund, which gained 22.2%. For the three-year period, it rose 21.7% annualized, versus just 2.9% for the peer group. As an asset class, international small caps have had a strong run the past few years.
Lead manager Lynette and her team of analysts scour the globe for small-cap stocks that can deliver high earnings growth. Since Wall Street largely ignores foreign small caps, Schroeder has no recourse but to do her homework, which requires visiting with companies and poring over financial reports and newspaper articles.
Despite the fund’s strong performance, overseas small-cap investing poses risks. Liquidity is often low, leading to high volatility, and corporate governance can sometimes be questionable. While the fund is just slightly more volatility than the peer group, annual turnover is around 200%, over double the peer group average, making the portfolio much more suitable for non-taxable accounts. Management fees on the fund currently run high at 2.00%.
Based on its risk and return characteristics over the last three years, Standard & Poor’s gives American Century International Opportunities its highest overall rank of 5 Stars. However, the fund does not have a long operating history. New York-based Lynette Schroeder has been lead manager on the offering since its inception in June 2001. Schroeder previously managed the Driehaus European Opportunity Fund.
The Full Interview:
S&P: What kind of stocks do you invest in?
SCHROEDER: We look for small-cap stocks anywhere in the world that are exhibiting accelerating growth rates on both the top- and bottom-lines. We want to see some quantifiable evidence of growth. It can come from different sources, such as higher sales volume, better pricing, operating restructuring, or financial restructuring, for example.
S&P: What are your thoughts on holdings that grow too large for the fund?
SCHROEDER: We are committed to keeping this a small-cap fund. Once a holding reaches $1 billion in market cap, we will keep it as long as we like the fundamentals, but we won’t add to our position. The fund currently has an average market cap of about $600 million. We have a number of micro-cap names as low as $200 million. When the size of the fund reaches $500 million, we will likely close it off to new investors in order to maintain its small-cap nature.
S&P: How do you research stocks, given that foreign small caps are largely ignored by Wall Street?
SCHROEDER: Our universe of investible stocks is in the thousands, but our portfolio typically ranges between 85 and 120 positions. We have a team of analysts who follow various global regions. Since there is often a limited amount of information available on these companies we dig for data, we read a lot, we leverage all of our resources, and we make a lot of visits with companies around the world.
S&P: How do you minimize the risks associated with foreign small-cap investing?
SCHROEDER: We control risk by keeping a diversified portfolio. However, we don’t make sector or regional bets. For example, we are currently overweight in Japan relative to our benchmark, the Citigroup Extended Market Index, but we are comfortable with our allocation because of the quality of our holdings there.
S&P: What are some of the advantages of investing in foreign small caps?
SCHROEDER: They have very low correlation with the performance with the U.S. stock market, so they provide a nice diversification in a portfolio. Most of our companies sell only to their local markets, so they are largely immune to such macroeconomic factors as oil prices or interest rates in the U.S.
More importantly, even if the overall global economy is weak, there are always small pockets of strong performance and high earnings growth somewhere on the planet. This is often found in small- and micro-cap companies, which typically provide only one niche product or service. Companies in our fund usually have limited competition, and can dominate a small market niche.