Some Closing Thoughts
The follow on question to ‘why invest in international small caps’ is naturally an inquiry of the optimal way to do so.  As gleaned from our comments above, we believe active management in this space is superior to indexing.  But one reason there are so few active managers and so many indexers, is that the sheer number of companies to assess and choose from is daunting.  

We believe that a proven quantitative process is the most appropriate way to actively manage an international small cap portfolio. LMCG utilizes a factor-based quantitative investment methodology to sort through thousands of securities – attempting to identify those companies with the highest likelihood of upside appreciation.

Contrast our approach with that of a stock picking fundamentally-driven research process, which is much more resource-intensive.  Analysts traveling to see factories, meeting management on site, interviewing suppliers and customers – all practices that are typically touted by fundamental managers – become virtually impossible without a significant investment in resources and time … all while striving to maintain objectivity.

The map in Exhibit E below, and corresponding country list to the left, show just how Herculean this challenge can be.


Employing quantitative methods allows the opportunity set to be as broad as possible, and we believe the broader the opportunity set, the greater the potential value added.  Our quantitative models can quickly and efficiently cull thousands of companies down to a more manageable group, allowing us to focus on those companies as we build the portfolio one stock at a time.

John Harrington is managing director of investments at LMCG Investments.

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