John C. Fenley: Westcore International Small-Cap Fund

John C. Fenley, portfolio manager for the Westcore International Small-Cap Fund (WTIFX), is a believer in small wonders.

A 22-year veteran in the world of stock picking, Mr. Fenley has been running the fund since 2003, concentrating on what he refers to as “the most inefficient asset class,” which happens to contain hidden gems in Australia, the United Kingdom and Japan that U.S. institutional investors don’t know exist.

“It’s an interesting asset class: You don’t know a lot of names and there’s a little of the unknown,” Mr. Fenley said. “There’s lots of upside for our client base to take advantage of.”

Representing Westcore Funds’ only global offering, the 13-year-old International Small-Cap Fund has $184.6 million in assets and has garnered four stars from Morningstar Inc. and five stars from S&P Capital IQ. Lipper Inc. named the fund a winner in its five-year category;.

The fund had a total return of 1.56% for the five-year period ended May 30 and a total return of 20.55% for the three-year period ended May 30, according to data from Morningstar.

“ONE OF THE BEST’

“Its performance has been one of the best out of the international equity funds we cover in 2010 and 2011,” said Todd Rosenbluth, a mutual fund analyst at Capital IQ. “International markets were strong in 2010, but they were weak the year after. [The fund’s performance] is a credit to the stock selection and the risk controls that appear to be in this portfolio.”

Mr. Fenley, who shares portfolio management duties with Jeremy A. Duhon, points to his team’s deep research as a key factor behind the fund’s success. Out of the thousands of companies in the universe of the Morgan Stanley Capital International Europe, Australasia and Far East Index, the team whittles down its list of potential investments to 100, using a six-factor screen for quality and growth.

Those factors are: double-digit growth of operating income per share over the last five years, double-digit return on investment capital, strong balance sheets, free cash flow, performance consistency (a company’s ability to perform regardless of interest rates and other outside factors) and a preliminary evaluation.

TRAVELING SHOES

After putting 11,000 companies through those six screens, the team will emerge with 300 stocks that “become our travel itinerary” for ground-level research, Mr. Fenley said.

“Jeremy and I travel a lot, interview people at the companies and talk about the factors behind their growth and economic sensitivity,” he said. “Those discussions eliminate two-thirds of the companies, and we end up with 100.”

Even among the companies that make the cut, there may be some that have all the fundamentals but aren’t at the right price at that moment, Mr. Fenley added.

Once companies are selected, they tend to remain in the portfolio. The fund’s turnover rate is 27%, compared with an average 69% for international small-/midcap-growth funds, according to Lipper.

Indeed, the winners aren’t names many Americans would recognize. Cardno Ltd., an Australian company that specializes in infrastructure around the world, and Aussie debt collection agency Credit Corp. Group Ltd., are among the largest holdings in the fund.

“None of our Australian stocks are resource-oriented; they have the qualities of great companies,” Mr. Fenley said. Cardno, for instance, has become a major global player, working on projects such as the BP PLC oil spill in the Gulf of Mexico.

“RISK-CONSCIOUS’

Credit Corp., meanwhile, has cash flow that makes it an easy buy, Mr. Fenley added. Even amid global economic uncertainty, companies with more cash on the balance sheet continue to be attractive picks, he said.

“The appeal of these funds is that you’re getting exposure to international small-cap securities, and doing so in a risk-conscious way,” Mr. Rosenbluth said.

“When you go into traditional small-cap,” he said, “you get greater earnings volatility, but that’s not happening in this fund — that’s why it’s performed well.”

It makes sense that such a fund would opt to pick companies in developed nations rather than emerging markets.

LIQUIDITY IMPORTANT

“While a small-cap manager is attempting to find the next big winner, they need to make sure they have liquidity as well,” said Tom Roseen, head of research services at Lipper.

“If one invests in more-obscure countries, one runs the risk of investing in a less liquid market,” he added. “Small-cap by definition is less liquid already, so I can see the preference for more-developed markets.”

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