Emerging Markets

Finding ‘unloved’ opportunities in a uncertain market

With the dark cloud of economic uncertainty hanging over Washington, one could make a solid case for the Advisory Research International Small Cap Value Fund Ticker:(ADVIX), which limits exposure to the U.S. dollar by investing primarily on foreign exchanges.

With the dark cloud of economic uncertainty hanging over Washington, one could make a solid case for the Advisory Research International Small Cap Value Fund Ticker:(ADVIX), which limits exposure to the U.S. dollar by investing primarily on foreign exchanges.
“If you just want to look at trends and where we stand right now, it doesn’t bode well for the dollar,” said Jonathan Brodsky, who manages the fund at Advisory Research Inc., a $6.5 billion asset management firm.
“When the market is questioning things from a macro perspective, we feel our high-quality bias is an advantage,” he added. “We’re looking for low-leverage companies that are profitable, and they tend to be unloved and misunderstood by the market.”
As an example of the quality of the portfolio, the average debt-to-equity ratio of the companies in the fund is 35%, representing low leverage.
The fund was launched in March 2010 and is modeled after a separate-account strategy Mr. Brodsky has been managing since 2006. It is currently about 40% allocated to Asia and 30% in Europe, with the remaining 30% spread over other developed and emerging markets.
The basic idea behind the bottom-up strategy is to break away from the broad market correlations found in most market indexes and the growing raft of exchange-traded funds.
Mr. Brodsky concentrates on companies with market caps that range from $200 million to $7 billion; the portfolio, comprising about 65 stocks, currently has a media market cap of $2 billion.
About a quarter of the fund is directly or indirectly exposed to the emerging markets, but the investments are made through developed market exchanges.
For example, Banco Latinoamericano de Comercio Exterior SA Ticker:(BLX) is a Panama-based multinational bank that specializes in trade finance for commodity producers.
The stock is traded on the New York Stock Exchange, where only about 5% of the stocks in the portfolio trade.
The majority of the stocks in the fund are locally listed on developed-market exchanges, which diversifies away from U.S. dollar-denominated securities.
From its March inception through the end of last year, the fund gained 13.6%, which compares with a 6.8% gain by the MSCI EAFE Index over the same period.
From inception through yesterday, the fund had gained 17.5%, while the index had gained 11.5%.

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