International and Global Equity Strategies


July 2023


The global economy has shown resilience in the first half of the year, with headline inflation peaking and corporate earnings surprising to the upside. The US market momentum was largely driven by mega-cap technology and enthusiasm around artificial intelligence. As for regional banking stress, it has subsided, with the American Federal Reserve providing increased liquidity when necessary and net lending volumes remaining healthy.

Outside of the US, particularly in Japan and Europe, market performance has been more broadly based. However, in the US, there have been signs of a shift from a focus on large-cap technology to small-cap and sectors that were left behind. This broadening effect is consistent with inflationary pressures beginning to subside and growth stabilizing as far as market participants are concerned.

In the second half of the year, Gross Domestic Product (GDP) growth and corporate earnings expectations are somewhat disconnected, with projections for GDP growth being raised, while earnings estimates have been revised down. The Federal Reserve and central banks also remain vigilant in their fight against inflation, signalling potential for further rate hikes despite headline inflation peaking in most regions.

Real wage growth adjusted for inflation has also turned positive in both the US and Europe, supporting domestic demand growth and consumption growth. In this context, GDP growth within the US is expected to continue at current or slightly better levels.

In China, the recovery is expected to be slower than originally projected due to low consumer confidence, high youth unemployment and a weak property market. The potential for government stimulus and improved US-China relations remain key factors driving equities in the near term. For the moment, performance has been primarily driven by State-Owned Enterprises and AI-themed names.

International Growth Strategy

Pembroke’s International Growth Strategy outperformed the MSCI ACWI ex-US Small Cap Index during the year-to-date period, amid strong relative performance in the first quarter of 2023. From an attribution perspective, favourable allocation effects across sectors, coupled with positive stock selection within the Health Care and Consumer Discretionary sectors, more than offset weaker stock selection within Consumer Staples and Industrials.

Two stocks that made positive contributions to returns of the strategy over the past 12 months

Health Care stock selection was bolstered by Abcam (“ABCM.US”). Abcam is a leading producer and distributor of life sciences reagents that are fundamental to scientific research. Abcam participates in a market with strong competitors, and consistent new product launches are a requirement to maintain a competitive edge. Abcam’s platform and ongoing relationships with life sciences researchers enable the company to see growing areas of interest in the research community, and product launches can be tailored appropriately. The share price strengthened in June after the company disclosed the possibility of a strategic transaction. The comprehensive process will begin immediately and will evaluate a broad range of options to maximize shareholder value, including a potential sale of the company.

Consumer Discretionary stock selection was positive due to Jumbo (“BELA.GA”). Jumbo is a variety discount retailer operating 82 stores across Greece (52% of sales) as well as southern-central Europe (Romania is its second market). The appeal of Jumbo is its unique assortment. Key categories are seasonal, home products and toys. The strong returns profile and long-track record of success can be attributed to operational execution (excellent merchandizing, cost discipline, working capital management, etc.). They started off the year strong by delivering 40% sales growth in January-February following a 14% increase in financial year 2022. Strong earnings and subsequent upgrades drove share price expansion year-to-date.

Two stocks that made negative contributions to returns of the strategy over the past 12 months

Partially offsetting these effects was weaker stock selection within Consumer Staples, driven by Sichuan Swellfun (“600779.CH”). Sichuan Swellfun was established in 1993, but traces its origins to China’s oldest baijiu distillery, with more than 600 years of history dating to the late Yuan and early Ming dynasties. It is a national strong flavour baijiu brand, with well-known high-end positioning. The share price softened on lower first-quarter results, slow demand recovery, and slower payments from distributors as the company focuses on reducing inventories.

Stock selection was also weaker within Industrials, primarily due to Technopro (“6028.JT”). Technopro is a leading Japanese engineering staffing company with a focus on the IT engineering segment. The company’s core business of technical staffing is expected to see structural growth within Japan’s temporary staffing market. Technopro has achieved double-digit revenue growth, through a combination of successful recruiting and an active price management strategy. The share price softened due to weaker results, as higher than expected cost increases from labour hiring offset revenue rise.

Global Equity Strategy

Pembroke’s global equity strategy is a diversified strategy with exposure to Canadian, U.S., and international developed and emerging equity markets. The intent of the managers is to maintain diversification by region, by market capitalization size, by managers, and by passive and active strategies. The strategy is benchmarked against a custom index comprised of a 64% weight in the MSCI All Country World Index (ACWI) and a 36% weight in the S&P/TSX Composite Index.

In the second quarter of 2023, the strategy generated positive absolute returns, but was behind its custom benchmark, which was up slightly more. Over the period, the strategy experienced positive contribution across the board from all its underlying funds, except for the Guardian Capital Global Equity Fund, which was down in the quarter. In addition to the detraction from the GuardCap Fund, the relative underperformance was driven by the strength of seven mega cap stocks contributing to more than two thirds of the returns in the MSCI ACWI portion of the benchmark. Conversely, the negative relative results were partially offset by the strategy’s Canadian equity allocation, in which all three actively managed funds as well as the exchange-traded funds (ETFs) outperformed their respective component in the benchmark over the period.

During the twelve-month period ending June 30, 2023, the strategy rebounded from its lows to end the period significantly higher and slightly behind its benchmark. All of the strategy’s geographic equity allocations and underlying funds contributed to absolute returns. On a relative basis, Canadian and International equities outperformed, while U.S. equities underperformed their respective components of the benchmark.

The global equity strategy invests in passive exchange-traded funds to achieve exposure to certain large capitalization liquid equity markets. At the end of the period, the strategy held four equity market ETFs: the iShares Core S&P500 ETF, the iShares S&P/TSX 60 Index ETF, the iShares Core MSCI EAFE ETF and the iShares Core Emerging Markets ETF.

In total, the strategy’s allocation to passively managed ETFs was approximately 28% at the end of June 2023. By region, about 37% of the strategy was allocated to Canada, 35% to the U.S., 11% to Europe, 2% to Japan, and 14% to other regions. By sector, the strategy’s top exposures include the Industrials,  Financials, Information Technology, and Consumer Discretionary sectors.


Back to Top of Page


Other Articles Of Interest


This report is for the purpose of providing some insight into Pembroke and the Pembroke funds. Past performance is not indicative of future returns. Any securities listed herein, are for informational purposes only and are not intended and should not be construed as investment advice nor is it a recommendation to buy or sell any particular security. Factual information has been taken from sources we believe to be reliable, but its accuracy, completeness or interpretation cannot be guaranteed. Pembroke seeks to ensure that the content of this document is correct and up to date but does not guarantee that the content is accurate and complete and does not assume any responsibility for this. Pembroke is not responsible for decisions or actions taken or made on the basis of information contained in this document.