International Equity Strategies

Corporate performance has been strong as global economies resume normalized activity. We have seen strength in the cyclical areas of the economy, while at the same time companies with leading business models and practices have continued to press their structural competitive advantage.

This has driven positive momentum for the market this year, and companies with strong returns and differentiated positioning have enjoyed even stronger corporate and stock market performance on balance. While we do not expect the backdrop to change materially, we do point out two primary areas of intermediate-term focus for global equity investors: China policy and regulation risk, and the inflation outlook.

China Policy and Regulation Risk: While we continue to find China’s long-term growth and corporate performance opportunities attractive, our investability framework has identified greater political and regulatory uncertainty. We believe the market may have become too sanguine regarding China’s country risk, with the equity risk premium (ERP) as low as that of many developed markets late last year. With the recent market correction, it has risen back to its long-term average. In many of our investment strategies, we have cut our China weightings materially, by many cases in half from prior high levels.

Inflation Outlook: As economies reopen, we expect the 2020 experience will reverse. We believe that goods production challenges and longer delivery times could be resolved within months, not years, and that goods price inflation will likely return to the muted pre-COVID rates. Services prices, on the other hand, could move sharply higher as restaurants, theatres, and travel reopen. We may even see pockets of quite large price increases, as supply will not be able to adjust instantly to all the pent-up demand. The argument that such isolated, temporary pockets of price pressures will translate into sustained, higher annual inflation in the medium term does not, however, consider supply adjustment. We expect the supply responses to play out in the coming quarters to meet demand levels.

Considering both risks and opportunities, our current outlook calls for growth continuing to slow on a sequential basis, supply chains resuming their historic efficiency, and peaking corporate profit margins moderating. Coming from historically high valuations, we would expect only modest outcomes for equities over the coming quarters.

Pembroke International Growth Fund

The Pembroke International Growth Fund modestly underperformed the MSCI ACWI ex-US Small Cap Index during the fourth quarter of 2021. Underperformance was primarily driven by the negative impact of an overweight allocation to the health care sector, coupled with weaker stock selection within the information technology sector.

During the fourth quarter, information technology exposure was increased through the purchase of Fortnox “FNOX SS”). Consumer Discretionary exposure also increased through the purchases of Crompton Greaves Consumer Electricals (“Crompton IN”) and Minda Industries (“MNDA IN”). This was offset by a reduction to industrials exposure through the liquidations of Latour (“LATOB SS”) and Belimo (“BEAN SW”).

From a geographic perspective, notable adjustments were increases to the UK and Emerging Asia, offset by a decrease to Japan. The portfolio’s weighting in emerging markets approximated 25% at the end of the period.

Two stocks that made positive contributions to returns of the Fund in the fourth quarter

Industrials stock selection was bolstered by Addtech (“ADDTB SS”). Addtech is a differentiated distributor and manufacturer of technical products for a wide variety of industrial end markets. The company has well diversified end markets that continue deliver impressive sales and earnings growth through a combination of consistent organic growth and strategic acquisitions.

Real Estate stock selection was positively enhanced by the leading self-storage company Safestore (“SAFE LN”). The CEO of the company continues to deliver on his operational plan of concentrating on smaller regions with greater focus on execution. Safestore also keeps on improving its growth profile thanks to accretive acquisitions, and its strengthen digital platform.

Two stocks that made negative contributions to returns of the Fund in the fourth quarter

Information technology sector weakness was primarily due to Rakus (“3923 JP”), a digitalization software company that provides expense management, digital documentation, and email-related services to small and medium sized enterprises (SMEs) in Japan. After strong gains in the third quarter, the share price was hampered in later September and early October alongside Japanese small cap growth peers. Growth drivers for Rakus include a supportive regulatory backdrop, labour friction and demographics, and “winner takes most” type of end markets that enable multiple winners of an underpenetrated total addressable market (TAM).

An overweight allocation to the health care sector hampered performance primarily due to BICO Group (“BICO SS”). BICO is an early-stage company that has emerged from its initial focus on bioprinting to a global life science tools company. The company participates in the broader bio-convergence market, which offers a multi-decade double-digit growth opportunity. The share price declined amidst disappointing third-quarter numbers caused by unexpected supply chain disruptions impacting shipments.

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