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Think small, think international

Timely insights on the issues that matter most to investors.

The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Eaton Vance disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Eaton Vance are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Eaton Vance fund. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Past performance is no guarantee of future results.

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      By Aidan Farrell, Director of Global Small Cap Equity, Eaton Vance Advisers International Ltd.

      London - In today's environment, there is a greater willingness among investors to take a fresh perspective in allocating to niche asset classes in order to broaden their sources of return and diversification. International small-cap equity is a sector with the potential to deliver in both of these areas.

      The sector has rebounded strongly this year, exhibiting a turnaround from a challenging 2018 both in absolute terms and relative to international large caps. Periods of underperformance versus large-cap peers have been infrequent and short-lived in the past and so may represent an opportunity for investors to revisit what is often considered to be an overlooked asset class.

      The outsized returns of international small caps are best judged over the longer term. Looking back over the last 10 years, ended March 31, 2019, the sector outperformed its large-cap peer, with annualized total returns of 12.7% compared to 9.4%. For asset owners, that outperformance, both in absolute and risk-adjusted terms, is part of what grants the sector long-term appeal. (Please see accompanying chart.)

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      Diversification is another draw. In the universe of publicly traded companies, international small caps arguably present one of the largest, most diverse and least researched segments of the equity market. In our view, these characteristics represent fertile territory for alpha generation and are best exploited by allocating to an investment team both experienced in and dedicated to small-cap investing.

      Bottom line: We believe the international small-cap equity sector will remain a well-placed investment domain for attractive alpha generation in the years to come owing to the sector's breadth and diversity of opportunity as well as the information inefficiencies affecting the sector.