A cautious optimism about the global economy, especially within the US, fostered the strong market gains in 2013, with investors anticipating earnings gains that might materialize when consumer and corporate confidence would translate into higher capital investment, more hiring, and higher consumer spending. But, importantly, there was evidence that investors looked to equities primarily to find current cash returns that have all but disappeared in fixed income markets, and neither wanted nor expected companies to expand their hiring or their capital investment. We believe that despite the current market obsession with near-term cash returns, the positive consensus coalescing around general corporate health, recuperating banking systems, and declining sovereign fiscal and debt burdens should eventually result in stronger capital spending growth in developed economies for new plants, new technology infrastructure and productivity enhancements, and for more research and development. That in turn could beget more hiring, and so optimism around job and income growth is also rising.
Irrespective of where we are in the economic or market cycle, our steadfast focus is on identifying small companies with sustainable competitive advantages and long-term growth potential. The portfolio’s sector and geographical exposures are one way to understand the results of our efforts. Our bottom-up stock selection process has led the portfolio to diverge significantly from the MSCI All Country World ex-US Small Cap Index in certain areas, including large overweights to both cyclical and relatively defensive sectors and comparatively small exposures to Financials and Materials. Because we do not actively determine these broad allocations from the top down, our weightings are an indication of where we see the greatest numbers of opportunities among individual companies that meet our criteria for quality and growth. Another way of viewing the portfolio—one that corresponds well with our research-intensive, bottom-up approach—is to consider themes that connect our investments across different sectors. Two notable themes in the portfolio to highlight are: 1) companies focusing on selling specialized “critical components” that are vital for the functioning of larger systems; and 2) companies using e-commerce technologies in creative ways to disrupt their industries.
We build diversified portfolios of high-quality, growing companies identified through fundamental research.