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Investing in Small and Mid-Cap International Equities

Published
Jan 30, 2025
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In this episode of EisnerAmper's Engaging Alternative Spotlight, Elana Margulies-Snyderman, Director, Publications, EisnerAmper, speaks with Tucker Scott, Founding Partner, Bergen Park Capital Management, which manages a small and mid-cap international equities fund. Tucker who spent over 20 years at Franklin Templeton,  shares his outlook for investing in small and mid-cap international equities, including the greatest opportunities, challenges and more.


Transcript

Elana Margulies-Snyderman: 

Hello and welcome to the EisnerAmper Engaging Alternatives podcast series. I'm your host, Elana Margulies-Snyderman, and with me today is Tucker Scott, Founding Partner of Bergen Park Capital Management, which manages a small and mid-cap international equities fund. Tucker, who spent over 20 years at Franklin Templeton, will share with us his outlook for investing in small and mid-cap international equities, including the greatest opportunities, challenges, and more. Hi, Tucker, thank you so much for being with me today. 

Tucker Scott: 

Well, thank you for having me. 

Elana Margulies-Snyderman:

Absolutely, Tucker. So, to kick off the conversation, tell us a little about the firm and how you got to where you are today. 

Tucker Scott: 

Yeah. Well, I founded Bergen Park in 2019 after 20 years in the Templeton organization, and I chose to focus on small and mid-cap stocks outside the U.S. and the reason for that was I managed two funds when I was at Templeton. The first one was the Templeton Global Smaller Companies Fund, which I ran from 1999 to 2007, and we were the top performer in the category during that period and I really had a great time running that fund because there's just a lot of variety. Small caps outside the U.S. are inefficient, and therefore, it's a good place to be an active manager. So, that's why I chose Bergen Park to focus in on non-U.S. small and mid-cap stocks. And we just had our fifth year, sorry, our fifth anniversary, November 1, 2024. And the first five years we were actually the best performing international equity fund out of 250 that were tracked by eVestment, which was part of Nasdaq. So, we were up about 124% versus our benchmark of 36%. So, we're off to a good start, and it is an inefficient asset class, the reason we can do that. 

Elana Margulies-Snyderman: 

Tucker, given your firm's focus on small and mid-cap investing in international equities, I would love to hear your overall high-level outlook for the space. 

Tucker Scott: 

Yeah, so I guess the first point I'll make is that this is actually a relative... This asset class is much bigger than people realize. So, if you look at the world market cap today, the U.S. is 54%, the rest of the world 46%. But the mix in the U.S. is heavily skewed towards large companies and it's the opposite outside the U.S. So, if we look at just U.S. small and mid-cap stocks, and here I'm using a $10 billion market cap as the dividing line, U.S. small and mid is only 6% of global market cap, whereas small and mid-outside the U.S. is actually 15%, worth some $17 trillion or thereabouts. It is an overlooked asset class, but it has actually got quite a bit of market cap in it. Then there are two other points I'd make. One you would call evergreen, it's always true and the other one is true today and represents more tactical opportunity, I think. But the first evergreen point is that this really is an inefficient part of global equities. I've said that a couple of times and it is true. You get shown prices that just would never happen with a $200 billion market cap company. Large caps have so many eyes on them and there's so much money invested; prices just don't get that far out of whack. However, if you're looking at a $400 million market cap stock in Singapore, let's say, you might be one of the only people that actually is trading that stock that particular time that has any real understanding of the business. So, it's just a much thinner market. Because of that, you get prices going far away from value much more often. I think I'll leave it there.  The other point I wanted to make is just that in 2025, we have three very unusual discounts that have developed. I did an analysis, it's probably in December, so a little bit dated, but it's still very true today where I looked at each factor that describes our universe, so that's non-U.S. small and mid-cap and we're value investors, so looking at those three factors. And what I did was I used data going back to the global financial crisis, so starting in 2009 through 2024, and I just looked at how these pairs tend to trade. So, non-U.S. versus U.S., what's a typical valuation discount been over the last 15 years? So, I guess the punch line is after having done that, I then looked and said, how much upside to normal discount are we at today? And the answer is for each factor it's over 40% upside. So, for small and mid-caps, there's 50% upside. Again, just to get back to the way that small caps typically trade relative to large caps. Not saying that there won't still be a discount for non-U.S. stocks, but just a normal discount. And as I said, at least 40% across all three. So, that gives you a sense of how far out of favor it is and how much upside there is for just from a valuation improvement. 

Elana Margulies-Snyderman: 

Tucker, more specifically, what are some of the greatest opportunities you see in your space and why? 

Tucker Scott: 

Well, we really are spoiled for opportunity today. I mean, let me give you a few portfolio statistics. There's 33 stocks in the portfolio today, and the portfolio characteristics are these. The forward P/E, price-to-earnings ratio was only 7x. Now, to get a sense for what that means, you can flip a P/E upside down, put the earnings on the top, and it becomes a yield. We have a 14% earnings yield in the portfolio. So that's kind of like right off the bat, even if we don't grow, that's what return we think we would be able to generate absent growth, but we do have growth. And by the way, the U.S. market is on 23x P/E. We have an enterprise value of five versus the U.S. market today at 16. Our stocks have grown 11% per annum on the top line over the last five years. That compares to 5% for the S&P. So, when you actually stop and think about it, excuse me, we have much better growth, much lower valuation, and far superior balance sheet or far superior capitalization. There's no way to replicate these statistics in really any other part of global equities, perhaps emerging, but certainly not in the U.S. and certainly not in large caps outside the U.S. But in terms of location, small caps really are cheap everywhere today. But our largest weights are in the U.K., Japan, Canada, Hong Kong, China, Singapore, and Mexico. And remember, nobody has really made much money outside the U.S. for going on 15 years now. So most have no real experience that would argue they should be investing outside the U.S. But I just wanted to include one data point, and that is, excuse me, that from 1950 to 2013, non-U.S. and U.S. stocks actually had identical returns. So as recently as 2013, there was no advantage to investing in the U.S. for 63 years. So, the last decade has been something of a true anomaly, and I think the coming decade is going to reward those who think critically and not just those that stay on autopilot. 

Elana Margulies-Snyderman: 

Tucker, on the other hand, what are some of the greatest challenges you face in your investing space and why? 

Tucker Scott: 

Well, I think related to what I just said, we struggle to get the attention of investors. Most are unaware that it's actually a relatively large asset class for starters. But we have so many really compelling high returns, low risk situations, and yet we're still bumping along around $135 million in assets under management where we think we really would like to get up to $2 billion where we would most likely close to new investors. But we just have great... We have really outstanding potential. A key piece of our process is we calculate an expected total shareholder return over a five-year view, and we need at least 100% to qualify. But currently, when we look at our stocks, we actually have a 200% expected total shareholder return over the next five years based on our modeling out fundamentals and assuming normalizing evaluation parameters. So that gives you a sense of, I think, the potential that we see. And we are seeing more trued asset allocators starting to notice, although it's still a trickle. 

Elana Margulies-Snyderman: 

We've covered a lot of ground today and wanted to see what your future plans are or any final thoughts you would like to share with us? 

Tucker Scott: 

Well, we really want to continue our superior track record. This is a business too, but we never want to sacrifice investor returns for growth, but we obviously think we can run quite a bit more money than we have in our management today, and that's a focus for the company is to grow. And I have all my investable wealth in Bergen Park, and we will prioritize investor returns above all else, because I eat what I preach. We're looking at a coming decade that we think will be decidedly different from the last one. We're starting with such a commanding head start in terms of valuation and fundamentals for our stocks that we think it's going to be hard to lose. Yet, it still is hard to drum up interest because people operate on muscle memory. Those that can arrive above autopilot and think critically about the opportunities in front of them are set to really outpace their peers. Yet, we all know there's a lot of group think and herd behavior in the investment world. So, we're proud to have some very savvy institutions invested with us that see what we see, but they remain a minority at this point. And I'll just end with the last time that this part of the market led was 2000 to 2007. When I say this part of the market, I'm talking small foreign value. And just here's the numbers. So, the Templeton fund that I managed at that time was up 144%. The World Index was only up 40%, and Nasdaq was actually down 52% from 2000 to 2007. So, you could actually look at this as a very good diversifier that would complement a U.S.-heavy portfolio. 

Elana Margulies-Snyderman: 

Tucker, I wanted to thank you so much for sharing your perspective with our listeners. 

Tucker Scott: 

Thank you very much for having me. Enjoyed it. 

Elana Margulies-Snyderman: 

Thank you for listening to the EisnerAmper podcast series. Visit EisnerAmper.com for more information on this and a host of other topics. And join us for our EisnerAmper podcast when we get down to business. 

Transcribed by Rev.com

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Elana Margulies-Snyderman

Elana Margulies-Snyderman is an investment industry reporter and writer who develops articles, opinion pieces and original research designed to help illuminate the most challenging issues confronting fund managers and executives.


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