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Japan Looks Attractive for the First Time in a Long Time

Liping Cai, CFA, is a Portfolio Manager and Senior Research Analyst at Grandeur Peak Global Advisors, LLC. Ms. Cai is a Portfolio Manager of the Grandeur Peak Global Reach Fund, Grandeur Peak Global Explorer Fund, and Grandeur Peak Emerging Markets Opportunities Fund. She is also a Senior Research Analyst with a specialty focus on the health care sector globally. Ms. Cai joined the company in 2013. Prior to joining Grandeur Peak, she spent six years on the equity research team at William Blair & Company specializing in the health care, retail and the real estate sectors, most recently heading up the firm’s China-based research team. From 1999 to 2006, Ms. Cai worked in the health care field for Fair Isaac Corporation as a Health Care Strategy Consultant; Abbott Laboratories as Senior Market Analyst; Biogen Idec as a Summer Marketing Associate; and Genentech, now Roche, as a Research Associate. Ms. Cai earned a B.S. in biological sciences and biotechnology from Tsinghua University in Beijing, an M.S. in chemistry and biochemistry on full scholarship from the University of Delaware, and an MBA in finance and health industry management from Northwestern University. She is a CFA charterholder.

SECTOR — GENERAL INVESTING TWST: Please share a brief introduction to the funds you manage with a view to your strategy, approach and goals.

Ms. Cai: I help to manage both the Global Reach Fund and also the Emerging Markets Opportunities fund.
The Global Reach Fund is sector based, and is managed by a team where we have a number of sector PMs. We look for the most attractive high-quality companies within each sector, and it’s a global fund.
The Emerging Markets Opportunities Fund was launched 10 years ago in 2013. And this fund is focused on high-quality names in the emerging and frontier markets with a micro- to mid-cap focus.

TWST: Can you share a view to how both of these funds have performed over the past year or so relative to the overall domestic market and global markets?

Ms. Cai: So, unfortunately, both funds have trailed the bench, which is the MSCI ACWI Small Cap Index that we use for the Global Reach Fund. And we use the MSCI Emerging Market Small to  Mid Cap (SMID) Index as our bench for the Emerging Market Opportunities Fund. And we have trailed that one as well. The reason for that is mainly that we think our quality growth bias hasn’t done well in general in the market. But in our view, we believe in our approach over the long term, but here today, it hasn’t done well in terms of returns. TWST: Give us a closer look at the structure and composition,
the geographies of these funds, as well as your approach. and goals. Ms. Cai: The Global Reach Fund has about 300 holdings. It’s
a long-list fund, and over 70% of our holdings are outside of the U.S., with an average market cap around $2.4 billion. And in the Emerging Market Opportunities Fund, we have 108 holdings today.
In terms of the geography exposure for the Global Reach Fund, our largest geography weight is in Europe. We have about one-third of our exposure in Europe, and then the second largest geography is the U.S. That’s around 30% as well. And then we have China, India, Japan, Korea after that.
In the Emerging Market Opportunities Fund, about one-third of our exposure in that fund is in the Greater China area, including Taiwan, Hong Kong and Mainland China. And after that, we have what we call the resource rich countries, including Brazil and Central America. And after that is Central Asia, which mainly includes India.
And our approach to both funds in terms of how we select investment is very similar. We begin with a quantitative screening process where we look at financial trends and the health of each company in the investment universe.
And then after the initial screening, we do a bottom-up fundamental analysis to identify growth companies that we believe to be best in class among their global peers. And this process includes rigorous due diligence as we analyze the company, industry, competitors, customers and suppliers.
If a name passes this initial screening, we utilize the experience and insights of our full team to evaluate.
Finally, we build earnings models to forecast the key drivers and the expected earnings growth. If a company is attractively priced, we will initiate a position. Otherwise, it gets cataloged on one of our watch lists for review at a later date.

TWST: Have these countries been impacted by the current global tensions in the Ukraine and the Israeli war?

Ms. Cai: Our holdings overall don’t have that much exposure to the Middle East conflict. In terms of the Ukraine and the Russia war, we did have some IT services companies that had impact to their workforce. And in terms of the Israel war, we don’t have that much exposure, so there has been very limited impact there.
But we did have a number of IT services companies who have workforces either in Ukraine or Russia. So yes, there were significant impacts on those companies during that time when the war first started, but those companies have since recovered.

TWST: Which country, or area, is currently home to the best investment opportunity — with companies that present growth opportunity ahead? And where should investors be lightening up?

Ms. Cai: We are very excited about Japan. The market there has fallen apart, and valuations are looking very attractive for the first time in a very long period. And historically, growth companies in Japan always look very expensive. And so, we have been underweight Japan for a long time.

“And in the Emerging Opportunities Fund, we think India is looking too expensive to us now. It has been one of the top performing countries this year, but things are just getting too expensive. And in Brazil, on the contrary, we think there’s still very good, long-term potential.”

But now, this year, the Japanese yen has depreciated around 20% so far, and a lot of the stocks have come down. So valuations are looking a lot more reasonable. That’s the geography we are excited about today for Global Reach.
And in the Emerging Opportunities Fund, we think India is looking too expensive to us now. It has been one of the top performing countries this year, but things are just getting too expensive. And in Brazil, on the contrary, we think there’s still very good, long-term potential. Stocks there are a lot more reasonable in terms of valuation.
So we are spending more time looking at Brazilian opportunities and we have been trimming back on India.

TWST: How do you go about searching the globe for companies to include in these funds? Where do you begin? What are the filters and screens you use to assess and then accept a name into your fund?

Ms. Cai: We use quantitative screening, as I described earlier. That’s when we look at our financial matrix, so it’s the starting point. Then once we have a group of companies that look interesting to us, we study each company on our own, reading sell-side reports and annual reports and talking to the company management.
And we don’t just study the company itself. We also study the industry, its competitors, and try to understand the competitive advantages of the company, including its approach to sustainability. Talking with the management team is the big part of it, because for global companies, non-U.S. companies, understanding the quality of the management team is very critical.
So we do a lot of work on both the quantitative side, building a model, but also qualitative evaluation of each company.

TWST: Do you ever have boots on the ground? Do you travel to the country?

Ms. Cai: Yes, sure. That’s a big part of what we do. In fact, that’s how we differentiate ourselves compared to our peers. We travel extensively. On average, each of the 25 analysts on the team travels four times yearly, and globally to different countries, including India, China, Southeast Asia and Korea, everywhere in Europe. 
And we travel to visit companies on site to meet the management team in person and to see their facilities. That’s a big part of how we get to know the companies and the management team better. And also we visit with their peers. And we talk to local asset managers to get their feedback.
So it’s a very intensive approach and process to identify these companies.

TWST: Are there any management teams that you’ve been particularly impressed with? Or any new technologies where you see the most opportunity ahead?

Ms. Cai: We like to stay aware of new technologies and new products, but we don’t try to chase the hot themes per se, because we are valuation sensitive. One example is the obesity drug GLP-1, that’s a big theme in health care today. Another example is AI in tech.
But a lot of companies are sometimes miscategorized into these themes and you see stocks up 200%, 300%. And so we don’t try to chase them. We do our own work, and we identify companies that could be a long-term play to these themes in the long run.

TWST: How often do you typically rebalance portfolios in these funds? How often do you buy or sell a name?

Ms. Cai: So it’s on a one-by-one basis. Each situation is different. On average, our turnover is 30% annually. And we buy and sell based on the QVM matrix that we use internally, so we look at the quality, valuation, and momentum of each name. And if one or more components of this matrix is broken, or it’s breaking out, then we can either sell or buy. But we evaluate each name individually.

TWST: You pointed to Japan as one of your favorite areas. How is India doing?

Ms. Cai: India has been doing great. We have actually trailed there in terms of performance compared to the bench, and that’s because of our sensitivity to valuation. However, our holdings have done very well, but we haven’t been able to keep up with the bench because the bench has just been going kind of crazy.
We are seeing a lot of names that are trading for 50, 60 times trailing p/e, and they’re only growing 10% to 15% a year. So it is no surprise that we are trailing in terms of performance in that geography. But we also understand the primary reason, and we don’t regret our choices.
So India has been doing great, but it’s just looking too expensive to us. And we have actually been trimming back there.

TWST: Given the current tensions with China, do you still hold companies there?

Ms. Cai: We do. Actually, we are overweight China in both of these funds. We think, on a relative basis, we have actually shifted a little bit of our approach and strategy towards China. But we are still overweight and we still think China is a country that’s too important to ignore.
And we still see good long-term potential there, and continue to have a favorable view, but we have trimmed back on positions where we think there’s more geopolitical exposure. We are more prudent in terms of which names we like to own in this geography.

TWST: Generally speaking, are there any particular geographies that are most tied to the U.S. market in terms of inflation, possible recession impacts, etc.?

Ms. Cai: Yes, probably Europe. They look more like the U.S. in terms of rates and the post-COVID scenario and during COVID the behavior in the macro was similar.

TWST: As you look into the coming year, what worries you?
And do you see any tailwinds that might boost any of these markets?

Ms. Cai: Where interest rates are headed is also on our mind. We are not sure how things are going to evolve. We have been debating and thinking about whether the U.S. is going to have a soft landing or hard landing given where rates are, and how long that’s going to sustain the market.
And so we are more worried about our consumer names. We have been looking through our portfolio to make sure we own names that can do well if there is a setback or a recession for the economy.

TWST: And where do you advise caution?

Ms. Cai: Probably around the U.S. consumer, we think that’s
where we’d be cautious. Also, very high valuation geographies like India, and then China too. There’s just lots of uncertainty. So, although we still have the long-term favorable view, we are for sure more cautious and more prudent when we look at investment targets.

TWST: What are your concluding thoughts? When considering an investment in either one of these funds, what do you point to that potential investors should consider as most important?

Ms. Cai: I think the most important thing is that they look at the overall style of the companies that we hold there, and how diversified the funds are. And to evaluate whether our investment style fits with what they are looking for. 
We are focused on the long-term prospects of these companies and we don’t look at just this year and next year. But we hold quality companies that we believe are going to outperform the market in the next five to 10 years. So that’s the time horizon we focus on. And we believe these companies will come out stronger if there is something like a macro recession.
So investors should think about whether they like exposure to emerging markets, and whether they agree with this time horizon.

TWST: So overall would you say this is a good entry point or should investors watch and wait?

Ms. Cai: We like the next five- to 10-year picture of these funds and these holdings, so we are more optimistic. And our view is that the relative valuations of global and small cap are attractive at this point. And, given the long-term historic norms, they are attractively priced considering where the pricing and valuations have been historically. So we think there’s a significant underappreciation of that.

TWST: Thank you. (VSB)

Portfolio Manager & Senior Research Analyst
Grandeur Peak Global Advisors, LLC

© 2023 The Wall Street Transcript, 622 3rd Avenue, New York, NY 10017 Tel: (212) 952-7400 •

The objective of all Grandeur Peak Funds is long-term growth of capital.

An investor should consider investment objectives, risks, charges, and expenses carefully before investing. To obtain a Grandeur Peak Funds prospectus, containing this and other information, visit or call 1-855-377-PEAK (7325). Please read it carefully before investing.

RISKS: Investing in small and micro-cap funds will be more volatile and loss of principal could be greater than investing in large cap or more diversified funds. Diversification does not eliminate the risk of experiencing investment loss. Investing in foreign securities entails special risks, such as currency fluctuations and political uncertainties, which are described in more detail in the prospectus. Investments in emerging markets are subject to the same risks as other foreign securities and may be subject to greater risks than investments in foreign countries with more established economies and securities markets. There is no guarantee that any investment strategy will achieve its objectives, generate profits, or avoid losses.

Information in this report reflects the opinions of management as of November 30, 2023. There is no assurance that the process discussed will consistently lead to successful investing. These statements should not be relied upon for any other purpose. There is no guarantee that the market forecasts discussed will be realized.

*Portfolio holdings are subject to change at any time. References to specific securities should not be construed as recommendations by the Fund or its Advisor. Current and future holdings are subject to risk.

The MSCI ACWI Small Cap Index is designed to measure the equity market performance of small-cap companies across developed and emerging markets globally.

The MSCI Emerging Markets SMID Cap Index is designed to measure the equity market performance of small and mid-cap companies across emerging markets.

Weighted Average Market Cap: The average market capitalization of companies held by the fund, weighted in proportion to their percentage of net assets in the fund.

Earnings Growth: A company’s ability to report net income per share over a period of time.

Trailing P/E: The trailing 12-month Price/Earnings (P/E) of the portfolio, calculated as a weighted harmonic average.

Grandeur Peak Funds are distributed by Northern Lights Distributors, LLC (Member FINRA). Grandeur Peak Global Advisors, LLC is not affiliated with Northern Lights Distributors, LLC.