Appendix: Supporting analysis

1. Tracking error chart

2. Review of the investment mandate

The Dimensional product disclosure statement (PDS) applicable to Q4 2021 was dated 26 May 2020. The stated objective of the trust is:

The investment objective of the Trust is to provide long-term capital growth by gaining exposure to a diversified portfolio of small companies associated with approved developed markets (excluding Australia).

The Trust is not managed with the objective of achieving a particular return relative to a benchmark index. However, to compare the performance of the Trust with a broad measure of market performance, reference may be made to the MSCI World ex Australia Small Cap Index (net div.).

The CIC has frequent dialogue with the fund manager, and we are satisfied there has been no change to the strategy/mandate without our knowledge.

3. Investigation with the fund management team

The trusts performance commentary (NZD class) for the quarter states:

The trust returned 26.7% over the year, leading the MSCI World ex Australia Small Cap Index by 3.8%. The exclusion of stocks with the lowest profitability and highest relative prices and high asset growth drove outperformance.

Global equities had a strong year, with the MSCI All Country World IMI Index rising 25% in 2021. Compared to 2020, equity investors had a fairly smooth ride in 2021. The standard deviation of returns was just 7% compared to over 15% in 2020. Headline themes in 2021 included meme stocks, economic reopening, inflation, and new regulations and priorities from Chinese authorities. Australian stocks returned 17.5% for the year, outperforming emerging markets, but underperforming other developed markets. Globally, small caps lost to large caps, but value beat growth, and stocks with high profitability outperformed those with low profitability.

The interaction of premiums was particularly impactful this year. While small caps underperformed large caps, the underperformance was driven by poor returns to small cap growth stocks with low profitability. Small value stocks and small cap stocks with high profitability generally outperformed their growth and low profitability counterparts, benefitting the Dimensional portfolios invested in small caps.

Small cap stocks with high asset growth were down more than 12%. Further, small cap stocks with the lowest profitability and highest relative prices were down over 5%. Other small caps returned 27.1%. The exclusion of these two sets of small caps from the portfolio drove outperformance.

Once again, this highlights the key drivers of relative performance were stock specific allocations where the main positive attribution is spread over potentially dozens of companies – the underweights to high asset growth and low profitability small companies resulting in overweights to a number of better performing companies not represented in the benchmark. Accordingly, the following size and price to book attributions, do not explain a high proportion of the performance difference.

4. Attribution Analysis

Allocation attribution by size finds a cumulative impact of 0 bps

Table 3

Allocation attribution by price to book for the Global Small Company Trust relative to MSCI World ex Australia Small Cap Index

Allocation attribution by price to book (value tilt) finds a cumulative impact of +9

5. Analysis of risk exposure

We note the change in relative price to book during the December quarter, as at the end of December, this marks the point where the trust had the greatest relative price to book ratio compared to the benchmark. The CIC will monitor this throughout 2022, if a clear trend emerges we will discuss this with Dimensional. However, we expect this month to be a blip and for this measure to return to the -5% range.

Figure 4

Weighted average total market capitalisation (NZD million) of trust and benchmark

Source: Consilium

Figure 5 – Weighted average total market capitalisation of trust relative to benchmark

Source: Consilium

As noted with the relative price to book, the relative market capitalisation of the trust compared to the benchmark increased significantly in the month of December. As with the relative price to book, we will continue to monitor this in 2022, and if we identify any trends we will discuss the findings with Dimensional.

Disclaimer: The material contained in or attached to this report has been prepared based upon information that Consilium NZ Limited believes to be reliable, but may be subject to typographical or other errors. Consilium has taken every care in preparing this information, which is for client education purposes only. Although the data has been sourced from publicly available information and/or provided by the investment managers, we are not able to guarantee its accuracy. Past performance, whether actual or simulated, is no guarantee of future performance. This document does not disclose all the risks of any transaction type described herein, and the recipient should understand any terms including relevant risk factors and any legal, tax and accounting considerations applicable to them.

One or more of the author(s) of this report invest in the analysed security. The author(s) do not know of the existence of any conflicts of interest that might bias the content or publication of this report. Compensation of the author(s) of this report is not based on any outcome of this report.