The managers of CC&L Global Alpha have shown a knack for picking global small-cap stocks, and they take care to build a portfolio that emphasizes this stock selection expertise. The result has been a strategy that has consistently delivered outperformance since the firm was founded in 2008. Given that it's targeting investment in smaller, typically less-established companies, though, the risk in this fund could be significant, and it should be a supplement to, rather than act as, a core global equity allocation.
Robert Beauregard, chief investment officer and one of three co-founders of Global Alpha Capital Management, has led the charge on this strategy since 2008. With 30 years' experience in the industry, he was previously the head of small cap equities at Natcan Investment Management for close to 10 years. He has generated market-beating results in both positions.
A small team of three portfolio managers and one analyst support Beauregard. While lighter on experience than Beauregard, the four bring a diverse range of backgrounds to bear. Portfolio manager Qing Ji, for instance, was born and studied in China and had stints as a banker in Switzerland, Singapore and Canada. Portfolio manager Serge Depatie previously held senior roles at three biotech startups, and portfolio manager David Savignac studied Spanish in Mexico. Analyst Sain Godil rounds out the team. He too has a unique background. Before getting into the industry, he founded a clothing company in India. This practical and global experience helps the team better understand the companies it invests in.
To that end, the team focuses its efforts on identifying companies with above-average sales growth and profit margins but below-average debt levels, and that trade at reasonable valuations. Sales growth needs to be secular, driven by an identifiable long-term investment theme like an aging population or e-commerce. These themes all fit into five over-arching buckets including innovation, consumer products, environment, demographics and outsourcing. After finding attractive companies, the team wants a 50% discount to its target price three-to-four years out before buying. To help identify and control risk, the managers also evaluate companies on environmental, social and governance issues and incorporates their findings into their valuation work, rewarding companies with good practices and punishing those with poor practices.
Portfolio construction is an area of strength. Because the team wants its stock picks to account for the majority of the fund's outperformance, it selects a diversified basket of between 55 and 70 stocks with a wide array of exposure to countries, currencies and sectors. For instance, as of February 2018, the fund has exposure to stocks in 17 of 23 countries and all 11 sectors within the MSCI World Small Cap Index. Because they aim to keep relative country and sector risk low, they also limit deviations from the index weight. The largest sector overweight versus the index, for example, was in consumer discretionary at 2.3 percentage points, while the biggest sector underweight is currently in materials at 2.5 percentage points. Being aware of the benchmark's weightings keeps these exposures from dictating performance. Indeed, according to Morningstar attribution, almost all of the fund's added value since inception has come from stock selection.
The team also adheres to strict market-cap limits, ensuring the portfolio remains true to its small-cap mandate. To this point, the portfolio consistently plots in the small-growth segment of the Morningstar Style Box. Part of the manager's sell discipline involves selling names when their market cap rises above the upper limit in the index, which helps ensure this small-cap orientation. The fund's growth characteristics are similarly consistent. On the whole, companies in the portfolio have had higher sales growth and profitability than the index. The team's overall discipline has led to an impressive level of consistency in the portfolio and lets the managers do what they do best: picks stocks.
In fact, since the fund's first full month in July 2014 through February 2018, the F share class has returned 13.5%, annualized, which beats all but a couple of peers, and beats the MSCI World Small Cap Index by 20 basis points. The strategy's record, which dates back to August 2008, is more impressive -- a version of the strategy available as a separate account gained 14.6% annualized, gross of fess, compared to the index's 11.8%. Given the team's stock-picking acumen and smart portfolio construction, we expect similar outperformance to be achievable in the future.
Consistency of performance is one of management's goals, and they have delivered here too. Dating back to its inception in 2008, the strategy has outperformed in every calendar year except two. In 2013 it lagged the index by a bit more than one percentage point, and in 2017 it trailed by less than half a percentage point. Going forward we think it's reasonable to expect this fund to continue to perform well relative to its benchmark in most market environments.
The fund charges a management-expense ratio of 2.38% for its commission-based Series A share class and an MER of 1.33% for its fee-based Series F share class. After factoring in the trading-expense ratio, both share classes rank a little below the median fund of their respective distribution channels. The MER for Series A and Series F have declined by 14 and 9 basis points, respectively, from 2015 as the fund has grown in size. This positive trend has increased the competitiveness of the fund's fee.
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