Global Small-Cap Equity Fund

September 30, 2024

Market Context

• The global small-cap market (Morningstar Developed Markets Small Cap Index) rose 7.4% in Canadian dollar terms in the third quarter.
  
• Financial services, real estate, communication services, and consumer stocks were areas of strength, while energy and technology stocks were weak.
  

Portfolio Specifics

• The portfolio is currently invested in 50 companies. 22 are based in the U.S., 11 in Europe, 7 in Japan, 5 in the U.K., 3 in Australia, and 2 in South America.
• The fund had a strong quarter, gaining 7.1%, and is up 10.9% year-to-date. Our industrial holdings, which comprise the largest component of the portfolio (35%), were an area of strength. Our financial services and consumer investments also performed well, while the technology sector cooled off and our holdings were down.
  
• Our top performers included U.S. industrials Regal Rexnord (maker of electric motors), EMCOR Group (mechanical and electrical construction services), and First Advantage (employment background screening), all of which gained roughly 20%. Loar Holdings (aerospace components), a smaller position which was purchased last quarter, was also a standout, rising 40%. Overseas financial services companies Rakuten Bank and St. James’s Place were strong contributors, as were food distribution/retailing specialists Kobe Bussan and Performance Food Group.
  
• While mega-cap technology stocks have been the market leaders over the past several quarters, their smaller counterparts have experienced more volatility and investor scrutiny. This was evident in the quarter with JFrog (software) and Synaptics (human interface hardware), which were penalized by investors for reporting results that were slightly below targets. Onto Innovation (semiconductor inspection tools), Totvs (software), and MACOM Technology Solutions (semiconductor components) also traded lower despite turning in solid operating results. Our manager, TimesSquare Capital, continues to like the outlooks for these businesses.
  
• Three new stocks were purchased, all in Japan, a country where TimesSquare continues to see compelling opportunities. Azbil Corporation makes building automation software and sensors. The company is growing steadily in Asia and is well positioned to benefit from the ongoing demand for new data centers in the region. Timee Inc. is the developer of a popular job matching app that is helping address the country’s labour shortage. And Integral Corporation is one of only a few Japanese private equity firms, which is benefiting from its local expertise.
  
• Five stocks were sold to fund the purchases and trim our total number of investments.
  

Positioning

• The fund invests in businesses with a clear competitive edge that offer products and services the world needs. A record of consistent sales and profit growth is important, as is a management team that has experience and integrity.
  

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