. . . from the archives at FundAlarm
These profiles have not been updated. The information is only accurate as of the original date of publication.
November 1, 2007
FundAlarm Annex – Fund Report
Objective
The Driehaus International Small Cap Growth Fund seeks to maximize capital appreciation. The Fund invests primarily in equity securities of smaller capitalization non-U.S. companies exhibiting strong growth characteristics. The fund invests at least 80% of its net assets in the equity securities of non-U.S. small capitalization companies, currently that is companies whose market capitalization is less than $2.5 billion at the time of investment.
Adviser
Driehaus Capital Management LLC, which was organized in 1982 to provide investment advice to high net worth individuals and institutions. As of July 31, 2007, it managed approximately $4.4 billion in assets. Driehaus runs three other mutual funds: Emerging Markets Growth (closed to new investors), International Discovery, and International Yield Opportunities (new in 2007).
Managers
Howard Schwab and David Mouser. Schwab is the lead manager here and was the lead manager for the Driehaus International Opportunities Fund, L.P., the predecessor limited partnership from its inception in August, 2002 until it transformed into this mutual fund. Schwab is also a co-manager of the Driehaus Emerging Markets Growth Fund and, for several months, helped manage the Driehaus International Equity Yield Fund. Mr. Mouser has “certain responsibilities” for investment decision-making on fund, “subject to Mr. Schwab’s approval,” just as he did with the limited partnership.
Management’s Stake in the Fund
Technically none, since the fund began operation after the date of the last SAI.
Opening date
September 17, 2007. If you don’t like that date, you could choose July 1, 2001 (the date on which Schwab began managing separate accounts using this strategy) or August 1, 2002 (the date that they launched the International Opportunities Fund, L.P., whose assets and strategies the mutual fund inherits). Technically you might also choose February 26, 2007, the date that the fund was “established as a series of Driehaus Mutual Funds” but apparently had no assets or investors. It’s a little confusing, but it does offer a certain richness of data.
Minimum investment
$10,000 for regular accounts, $2,000 for IRAs. The minimum subsequent investment for regular accounts is high, at $2,000, but it’s only $100 with an automatic investment plan. In any case, it’s a lot more affordable for most of us than the $20 million minimum required for a separate account that uses this same strategy.
Expense ratio
1.16% on assets of $205.8 million, as of July 2023.
Comments
DRIOX represents an interesting case for investors. It’s a new fund but it’s directly derived from two predecessor entities. There are separately managed accounts with combined assets of $210 million and there was a Limited Partnership with assets of $100 million, both managed by the same guys with the same strategies. But they were also managed under very different legal structures (for example, the L.P.s don’t have to pay out distributions the way that funds are required to do) for very different sorts of clients (that is, folks with $20 million or more to invest). In addition, Driehaus runs two other mutual funds with different management teams but with the same investment discipline.
In general, all Driehaus managers are growth guys who look for companies which have:
- Dominant products or market niches
- Improved sales outlook or opportunities
- Demonstrated sales and earnings growth
- Cost restructuring programs which are expected to positively affect company earnings
- Increased order backlogs, new product introductions, or industry developments which are expected to positively affect company earnings
They also consider macroeconomic and technical information in evaluating stocks and countries for investment.
What might we learn from all of that data? Driehaus makes gobs of money for its investors.
- The International Small Cap Growth separate accounts have returned 36.9% annually since inception. Their benchmark has returned 13.5% over the same period.
- The International Opportunities LP returned 36.75% annually since inception. Its benchmark returned 27.3% over the same period.
- Emerging Markets Growth fund (DREGX) has returned 22.3% annually since inception. Its benchmark returned 13.6%. Over the past five years it has returned 44.2% annually, while its Morningstar peer group returned 36.7%.
- International Discovery fund (DRIDX) has returned 22.2% annually since inception. Its benchmark returned 7.2%. Over the past five years it has returned 34.4% annually, while its Morningstar peer group returned 24.0%.
While I’m generally not impressed by big numbers, those are really big performance advantages, delivered through a variety of investment vehicles over a considerable set of time frames.
There are two risks which are especially relevant here. The first is that Driehaus is a very aggressive investor. Morningstar classifies Emerging Markets Growth and International Discovery as having Above Average risk. Both of the funds have turnover rates around 200%. That aggressiveness is reflected in considerable swings in performance. International Discovery, for example, has the following peer ranks:
| Year | Morningstar Peer Rank, Percentile |
| 2003 | 22 |
| 2004 | 97 |
| 2005 | 1 |
| 2006 | 90 |
| 2007 | 1 |
Emerging Markets shows the same saw-tooth pattern, though in a tighter range:
| Year | Morningstar Peer Rank, Percentile |
| 2002 | 66 |
| 2003 | 14 |
| 2004 | 48 |
| 2005 | 14 |
| 2006 | 4 |
| 2007 | 31 |
The performance data for the International Small Growth separate accounts makes the strategy’s strengths and limits pretty clear. They calculate “capture ratios,” which are essentially volatility estimates which measure performance in rising and falling markets separately. A score of 100 means you rise (or fall) in synch with the market. A score of 110 up and 130 down means that you rise 10% more than the market when it’s going up and fall 30% more when it’s going down. Here are the most recent capture ratios, as of 9/30/07:
3 Years |
5 Years |
|
Upside |
179.28 |
179.66 |
Downside |
139.51 |
110.01 |
Which is to say, it rises 80% more in good times and drops 40% more in bad than does the market. You don’t want to be here when the rain is falling.
The second risk is Driehaus’s penchant for closing and/or liquidating funds. Driehaus had a bunch of other funds that they seem to have liquidated: Driehaus International Growth (DRIGX), Driehaus European Opportunity (DREOX) and Driehaus Asia Pacific Growth (DRAGX), all of which died in 2003. The very successful Emerging Markets Growth fund just closed to new investors.
Bottom Line
For investors with $10,000 to spare and a high tolerance for risk, this might be as good as bet for sheer, pulse-pounding, gut-wrenching, adrenaline-pumping performance as you’re going to find.
Fund website
http://www.driehaus.com/DRIOX.php
