Selecting Small- and Mid-Cap International Value Equities
Jonathan Moog, CFA, has several criteria for identifying high-quality small- and mid-cap international value equities with minimal risk.
Moog and his Lizard Investors team concentrate on the international small- to mid-cap space because they believe there are inefficiencies in that market. Even though most investors understand the dynamics of special situations like stock spinoffs and corporate reorganizations, they tend to focus their attention principally on large US firms.
Lizard Investors seeks to fill that gap.
“The reality is there are not many people applying this to some of the places . . . and the size companies we’re looking at,” Moog said during a Take 15 interview with David Larrabee, CFA. “So when you put those two things together, we think that we are one of a select number of firms focusing on those businesses and we think that’s the reason there’s an opportunity, because there are a lot of situations that are attractive, and there are just not a lot of people paying attention.”
Though Lizard Investors tries to pick value stocks, the firm also looks to invest in high-quality companies. Moog wants to see that a company has a large competitive advantage and high returns to capital over time, both good indicators that the equity will be able to compound returns. Businesses should not rely on credit because capital windows can close suddenly in some of the markets Moog invests in. Other countries might have poor corporate governance standards, so Lizard Investors considers the management quality of firms and how they treat minority shareholders.
Ultimately, these fundamentals are more important than short-term performance. Moog believes time arbitrage is the most important investing concept for fundamental investors.
“What we really think about are the structural characteristics of the business and are those stable,” he said. “Because you can have headwinds. A really good business that sells commodities could be facing headwinds for many years.”
International small- and mid-cap investing is fraught with risks. When possible Lizard Investors hedges out currency and other macroeconomic risks. An even bigger concern is corporate governance risk. Moog avoids countries with weak standards, like Russia and many frontier markets, even when there are appealing opportunities. Lizard Investors prefers the better governance and relative safety of more developed emerging markets. If Moog cannot be certain about an investment’s risks, he looks for other opportunities.
“There always is, when you start analyzing a situation, a gray area,” Moog said. “And if we can’t get from the gray area to a definite answer, we’ll ignore it.”
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
Image credit: CFA Institute
