On January 14, 2019, Grandeur Peak announced the partial reopening of four of their funds: Global Opportunities, International Opportunities, Global Reach and Emerging Markets Opportunities funds. The first three had been hard closed, while the last had been soft-closed. Under the terms of the reopening, the funds are open to additional purchases by existing shareholders but also to new shareholders willing to purchase the funds directly from Grandeur Peak Funds at www.grandeurpeakglobal.com. Financial advisors and retirement plans with clients in one of these funds will be able to continue investing in the fund for both existing as well as new clients.
Long-term investors should take this opportunity seriously.
For those unfamiliar with the firm, Grandeur Peak was started by a small group of Wasatch Funds professionals who left to launch a boutique dedicated to global small- and micro-cap investing. It is a challenging universe which few managers enter, which large investment firms avoid because the strategies are so tightly capacity constrained, and which ETF sponsors avoid because of technical issues (for example, trading volume) in some foreign markets make it impossible to construct a scalable index.
Grandeur Peak quickly distinguished itself for its discipline, exceptional performance and remarkably healthy culture. Part of that discipline was to know, even before they were launched, how many funds the firm would have and at what level of assets each fund would close. Each of the first four funds closed fairly quickly and Global Micro-cap closed on the day it launched. Only the two Stalwarts funds, originally offered out of respect for financial advisors who needed continued access and populated with “alumni” stocks from the other funds, remained open to new investors. It was unclear that any of the funds would ever become available to the general public again.
All of that changed with the brutal international sell-off that began in 2018. International stocks fell harder and faster than US stocks, emerging markets fell harder and faster than developed markets, small caps fell harder and faster than large, and emerging markets micro-caps … well, don’t ask.
In almost all instances, the Grandeur Peak funds fell farther, sometimes substantially farther than their peers. Below we report the relative performance of each Grandeur Peak fund against its Lipper peer group. In each case, the performance is annualized; for example, over the past five years, Emerging Markets Opportunities – the first fund in the table – has averaged 1.8% more per year than its peers over the past five years but 4.9% less per year over the past two.
|Q4||1 year||2 year||3 year||5 year||Since inception|
|Open to existing fund shareholders and new direct shareholders:|
|Emerging Markets Opportunities (GPEIX/GPEOX)||-0.8||-4.7||-4.9||-4.0||1.8||1.8|
|Global Opportunities (GPGIX/GPGOX)||0.0||-4.3||1.0||-0.5||1.7||2.9|
|Global Reach (GPRIX/GPROX)||0.5||-1.9||1.7||0.3||2.6||2.4|
|International Opportunities (GPIIX/GPIOX)||0.0||-3.2||-0.1||1.0||1.5||3.1|
|Remains open to new and existing shareholders (no change in status):|
|International Stalwarts (GISYX/GISOX)||0.1||0.9||1.8||3.0||n/a||3.7|
|Global Stalwarts (GGSYX/GGSOX)||0.2||-1.2||2.4||0.9||n/a||1.9|
|Remains hard closed (no change in status)|
|Global Micro Cap (GPMCX)||2.1||-4.0||0.6||0.2||n/a||1.4|
Why the sudden decline? Grandeur Peak founder Robert Gardiner wrote a remarkably long, thoughtful Letter to Investors about the firm’s recent performance travails as well as a series of remarkably satisfying developments at the concern. Concerning the former issue, he wrote:
Beyond being in an out-of-favor segment of the market, we have faced two additional major headwinds. First, a weighting headwind with our significant overweight to Emerging Markets across all portfolios and our underweight to the US market in our global portfolios – this has been a seven-year headwind for us, but particularly strong in 2018. Second, a style headwind, as momentum investing has significantly outpaced value investing this year.
Over coffee once, our friend and colleague Sam Lee, president of SVRN Asset Management, suggested that Grandeur Peak embodies “the Platonic ideal” of a fund company. That is, anything that they could do right, they did. In January 2019, he reflected a bit on the causes of the recent slippage and a potential response.
My main thought: One of the biggest and most persistent detractors of Grandeur Peaks’ performance has been an overweight to EM/foreign relative to U.S. for their global funds. This is arguably an unforced error as the relative performance of US v foreign stock has historically exhibited a lot of trendiness. GP managed to overcome that drag with heroic stock-selection skills. If you dislike GP’s persistent foreign bias, you can neutralize it yourself by overweighting US stocks in your portfolio.
The question is, what should an investor do? Mr. Gardiner answered that from the perspective of the insiders who have personally invested millions in the Grandeur Peak funds: there’s blood in the streets, buy!
Investors are clearly fearful of Emerging Markets right now, and our current opinion of value-oriented, international small-cap companies is that they are highly attractive.
We view selloffs like this as not only an opportunity to buy our favorite companies at better valuations in the portfolios, but also a chance to invest more of our firm’s balance sheet, and our personal assets, in the Grandeur Peak Funds. The firm has recently added to its position, and we will likely continue to increase our investment if the market goes farther south. Individually, and as a firm, we are heavily invested in our own funds because we are confident in our potential to succeed over the long run.
The Grandeur Peak strategy is founded on the observation that the most compelling values, if not the most stable returns, are found in the tiniest niches: small and microcap value stocks, often in frontier and emerging markets. The fact of volatility goes with the territory.
Bottom line: The Grandeur Peak folks are not committing to keeping the funds open long and they have a tradition of closing on quite short notice. We view this as a limited time opportunity to explore the possibility of working with the most successful investors in a hard-to-access niche. It would be prudent for folks interested in moving parts of their portfolios away from developed market, large cap stocks which might be entering a multi-year swoon, to reach out to Grandeur Peak and take time to better understand the opportunity while it is still available.
MFO has profiled five Grandeur Peak funds. Links to each of those are available on our fund index page.
By way of full disclosure, I hold three Grandeur Peak funds in my personal portfolio. Those are Emerging Market Opportunities, Global Reach and Global Micro-cap. My style is to set my investments on auto-pilot, so I have been making small, consistent investments in the funds whenever possible and will continue to do so. David