“The international small-cap asset class has produced the best sharp ratios, which means it has among the lowest correlations with U.S. large caps,” he said, adding that the category has produced excellent absolute and risk-adjusted returns.
Nadel is the co-manager of Royce International Premier, a fund that had recently returned some 8.7 percent a year over the past five years versus 5.1 percent in the Morningstar benchmark. Nadel said international small-cap investing is less likely to spook clients.
He argued that foreign small caps “are much less volatile than U.S. small caps.” Royce Associates, in the paper, also said that the time seems good for international small caps.
Among the other compelling reasons to consider allocating to international small caps “is the timeliness of the opportunity,” the paper said.
“The trailing 10-year return for international small caps is significantly below its long-term average. A regression to the mean of absolute returns would result in more favorable performance,” the paper states.
Nadel argued that the time is right because, over the past eight years, “international equities have tended to underperform U.S. equities.”
Despite international equities overall strong performance during most rolling 10-year periods, “over the past eight-year periods you haven’t missed much,” he said. That means now is a good time to enter, he added.
Nadel also argued that many of the factors that have helped U.S. equities have diminished, including the strength of the U.S dollar.