Podcast: Are you ignoring these 13,000 growth opportunities?

Brian Levitt:

Welcome to Greater Possibilities from Invesco, where we put concerns into context and opportunities into focus. I'm Brian Levitt.

Jodi Phillips:

And I'm Jodi Phillips. And today in studio, we have David Nadel. David is a senior portfolio manager for the global equities team at Invesco, focusing on small and mid-cap international companies. Okay, Brian, so is now the time for international investing?

Brian Levitt:

Well, I guess if I had a dollar for every time somebody asked me that question, Jodi.

Jodi Phillips:

Yes. What would you have?

Brian Levitt:

Oh, I'd have a few dollars.

Jodi Phillips:

Okay. So you get this question quite a bit then, I'm assuming. So where does this question rank. Is it right up there with: Should I own bitcoin, and what's the US going to do about its debt?

Brian Levitt:

Yeah, those are the big ones. Those are the Mount Rushmore, they're on the Mount Rushmore of questions. I guess we have to come up with a fourth one. But yeah, those are the questions.

Jodi Phillips:

Something about artificial intelligence, I'm sure.

Brian Levitt:

Okay, we'll add that.

Jodi Phillips:

Yeah. Look, it's understandable.

Brian Levitt:

That'll go in the Teddy Roosevelt spot.

Jodi Phillips:

It's understandable though, that's a really popular question for you. Right? The so-called lost decade of US equity performance, 2000, 2009, had investors looking elsewhere trying to figure out what to do next. But then the decade after that favored US stocks. So yeah, investors are wondering about what comes next and if it's the time to do something differently.

Brian Levitt:

Well, I do have a theory about this and I'm sure that David will as well.

Jodi Phillips:

All right. What's your theory?

Brian Levitt:

Well, at first, these things tend to go in cycles. So I think what's critical to note is that the past decade wasn't lost in international the way 2000 through 2009 was lost in the US. It did generate positive returns. But the under-performance was similar to what the US experienced versus international in the so-called aughts. Is that what we call it, the aughts, the 2000s?

Jodi Phillips:

Sure. We still haven't figured that out. Have we? But yeah, I guess to your point, to everything there is a season.

Brian Levitt:

Yeah, turn, turn, turn. It's a very strong dollar environment, and each time it looked like non-US assets would participate, a US policy decision or something unexpected would disrupt it.

Jodi Phillips:

Unexpected, like a trade war and a pandemic, that kind of unexpected?

Brian Levitt:

Yeah.

Jodi Phillips:

Yeah.

Brian Levitt:

Exactly, and the Fed raising rates a few times in a slow growth environment.

Jodi Phillips:

So you mentioned strong dollar environment, Brian. So as we all know, a strong dollar environment means that returns generated overseas by US investors translates into fewer dollars when that money is brought home. So I guess to put a little bit of a finer point on the original question, is the strong dollar environment finally over?

Brian Levitt:

Well, let's see what David says. But it does tend to happen when policy cycles, policy tightening cycles end, money can then start to look for other opportunities where valuations are more attractive.

Jodi Phillips:

And we may finally be at the point where the Fed stops raising rates and we can all start anticipating an easing cycle.

Brian Levitt:

Oh, that's the fourth question.

Jodi Phillips:

There you go. That's the Mount Rushmore question. We got it.

Brian Levitt:

When's the Fed going to be done? All right, so we got the four, bitcoin, US debt, international investing. And when's the Fed going to be done?

Jodi Phillips:

Perfect, there it is.

Brian Levitt:

There it is.

Jodi Phillips:

All right. So now we've got that settled. Let's bring David on to discuss the opportunities that he sees in international stocks, especially in that small and mid-cap space and where money might flow as investors look for opportunities in a potentially new dollar regime.

Brian Levitt:

David, welcome.

David Nadel:

Good to be here.

Brian Levitt:

So you have the answer to all four of the questions on Mount Rushmore.

David Nadel:

Possibly.

Brian Levitt:

Possibly.

David Nadel:

We can handle them one at a time.

Brian Levitt:

We can go one at a time. Well, let's start with your wheelhouse, then we'll see your thoughts on crypto. No, we're not doing crypto today, Jodi.

Jodi Phillips:

No, okay, good. I'll refrain.

Brian Levitt:

Thank goodness. So when you look at investors' portfolios, I have to imagine they're pretty overweight, the United States, whether that's by design or just performance that we've seen in recent quarters or years. Correct?

David Nadel:

Yeah. I mean, I think you're exactly right. It's a combination of design, which probably put those investor portfolios overweight the US in the first place. And then the relative performance of the US, out-performance of the US over international during the past decade has stretched that to kind of garish levels of imbalance. And therefore, it's elevated the risks at multiple levels. So if you think about, for example, our benchmarks or the benchmark for global SMID companies, in the last 10 years, that's moved from about a 45% US weight to a 60% US weight. All 10 of the top 10 positions, companies in that benchmark are US stocks.

Brian Levitt:

And that's because it's a market cap weight. It doesn't rebalance.

David Nadel:

Exactly, exactly. And so dynamics like that I think create kind of overlapping risks for investors, where if one of those risks doesn't hurt them, another one is very likely to hurt them. You have valuation risk because these companies are much more expensive, the US companies, than the international ones. And you have the risk of these being very crowded trades, so that the companies that make up the benchmark are very heavily invested in, and when people exit, it may not be pretty. And the dollar and US outperformance are all basically cyclical. To your point, Brian, that you mentioned earlier, they trade leadership. And it's looked like for the last 20 years, it's looked like roughly sort of a 10-year cycle. But there's no magic to that.

Brian Levitt:

Nothing magic, right. And when you think about that underperformance, I mean, in the conversation I had with Jodi, I had categorized it as any time it looked like international was really going to get going, I remember years like 2016 into 2017, I remember 2019, something happened that disrupted it. Right? It was trade wars or pandemics. Is that an accurate way to think about it?

David Nadel:

Yeah, I think that's right. I mean, investors react, US investors at least I think suffer from significant home country bias, and so the devil that they know is more comforting than the devil they don't know. International equities is the devil that they don't know, which is understandable. But I mean, I will say, abroad, it would be unthinkable to have the level of home country bias that US investors have. If you're a UK manager, you're not going to be 60% in UK equities and 40% in everything else. But it is understandable because the US economy is so broad and the leading economy of the world. So yeah, let's leave it there.

Brian Levitt:

So Jodi, do you have your portfolio structured based on the Mississippi River, so half is, 70% of companies headquartered to the east and 30 the west, or anything like that?

Jodi Phillips:

Interesting. I'll have to check. I'm not really sure how that allocation works out. David, you mentioned the devil you know, the devil you don't know when it comes to US investors. And so do US investors tend to see international small and mid-cap in particular as a distinct asset class the way they do in the US? Right? What do allocations tell us about that viewpoint?

David Nadel:

So Jodi, I think US investors see international SMID cap in all the wrong ways. They not only do not see it as an asset class, as indicated by their allocations, which are less than 1% to international SMID, versus around 14% for US SMID, again, massive home country bias.

Brian Levitt:

Less than 1%.

David Nadel:

Less than 1%. But I think they also see international SMID as very high risk, high volatility. And international SMID is higher standard deviation, higher volatility than international large. But when you look at risk adjusted returns, because the returns historically have been so much better from international SMID versus international large, those risk adjusted returns are better. So when you look at things like Sortino ratios or Sharpe ratios, you're looking at an asset class which is producing very attractive risk adjusted returns. But again, investors are not really treating it even as an asset class in the first place, even though the opportunity set of international SMID is twice the size of US SMID. It's twice the number of companies in the benchmark, and so it really is an asset class. Right? But if you're thinking about asset classes from the vantage point of how US equity investors are allocating, it doesn't look like an asset class, less than 1%, which creates a tremendous opportunity.

Brian Levitt:

I think I have more Beanie Babies in my portfolio than people have. Right? Those things are going to make money. We're getting there.

Jodi Phillips:

Eventually. Keep holding, keep holding onto them, Brian.

Brian Levitt:

Keep holding. Define Sortino ratio real quick.

David Nadel:

So Sortino ratio is sort of a better version of the Sharpe. I mentioned the Sharpe as well.

Brian Levitt:

Which is return per unit of risk.

David Nadel:

Exactly. The Sharpe is return per unit of risk, where risk is defined as both upside and downside, whereas the Sortino ratio eliminates the upside risk, because people talk about risk and volatility, but they actually never complain about it when it's on the upside.

Brian Levitt:

I think they just assume volatility means downside.

David Nadel:

Yeah, the bad stuff, so that's what the Sortino ratio does, it's your kind of more specific and fine-tuned version of a Sharpe ratio, where it's eliminating... It's not punishing returns for upside. It's only punishing them for downside.

Brian Levitt:

So if I come up with one that's just upside, can I call it the Levitt ratio? Does that exist?

David Nadel:

Yeah, that'd be a great plan. I think a lot of people would be fighting you for the name rights on the upside only ratio.

Jodi Phillips:

So then with an asset class like that and a space like that, the way you described it, for an active manager, such as yourself, then that seems like it would be a particularly good space to find opportunities. How do you think of it in that way?

David Nadel:

Yeah, that's exactly right, Jodi. So it's a very large universe. It's really inefficient. I mean, we're looking at something like 13,000 companies that have market caps between $300 million and $10 billion outside the US. That's a lot of companies. And as I mentioned-

Brian Levitt:

That's small to mid.

David Nadel:

That's small to mid, yeah. As I mentioned, again, this is a much larger opportunity set than US. You have a very large portion of the companies that have no analyst coverage whatsoever, even among the private ... Among the more prominent companies within the asset class, it's common to have much less coverage than for example, a prominent company in US SMID. So it is a place where active managers have consistently added value, and that really distinguishes international SMID as an asset class versus other equity asset classes. So if you think about rolling returns, which we love to use because rolling returns really represent a true investor experience as opposed to, no one invests on January 1 and sells on December 31st, or ridiculous periods like that.

So if you look at rolling returns, three year returns, five year returns, 10 year returns, international SMID active management in growth has added on average about 330 basis points of out-performance per year for three year rolling periods over the benchmark. And if you look at five year periods, it's more like 250 basis points, 10 year periods, it's more like 180 basis points.

Brian Levitt:

That's a lot.

David Nadel:

And that's per year. So even on the 10-year basis, 180 basis points of outperformance per year for 10 years, that's going to make a huge difference in people's returns. And it's the reason that there really is not a viable benchmark strategy for international SMID. In other words, for asset allocators to get exposure to this asset class, they're almost certainly going to go with active. You look at the portion of assets of the asset class that are in passive strategies, it's tiny.

Brian Levitt:

David, you talk about looking at thousands and thousands of companies. What are you looking for? And what type of themes emerge in the portfolio that have you very excited?

David Nadel:

Yeah. So Brian, what we're looking for, I mean, our strategy is very much about high quality compounders. So we're looking for companies that can grow regardless of what the economy is doing. In other words, acyclical growth. And we're looking for companies that generate consistently high levels of profitability, particularly internal rates of return, so things like returns on capital, but those derived from let's say high profit margins, which in turn tends to derive from very strong pricing power. So what that essentially means is that we invest in a lot of industry leaders. We're often invested, about a third of our portfolio I like to describe as global number one businesses, meaning that they have the undisputed world leading market share in what they do. This is a little counterintuitive I would say for investors to hear about SMID cap companies.

Brian Levitt:

Small and mid, yeah.

David Nadel:

Because in the US, a SMID cap company is rarely a global leader. You can be a $4 billion company in the US and sell to a single state in the country, like California, or Massachusetts, or something. On the international stage, it's a much tougher and more demanding standard. So if you're coming from a small country, you don't have a large home market. You have to figure out how the whole world works. You have to adopt basically global standards. And so these are really battle tested businesses. And it's not surprising in that context that a lot of international SMID companies become global number ones.

Brian Levitt:

Can you give an example without necessarily mentioning the company? Just talk about what they do and how they've grown to that place.

David Nadel:

Sure. I mean, there are so many. I'll talk to you about a couple of our investments. So one company makes transducers. Transducers are devices that basically regulate the amount of electricity flow, so they would be used in something like an elevator, for example, to have a very consistent flow. This is a small market globally. It's something like a billion dollar market total in terms of sales. This is a tiny market. Right? We're talking about niche businesses here. But this company has about a 50% share of the global market, so that's one example. Another company literally invented the cochlear implant. I don't know if you're familiar with...

Brian Levitt:

I am very familiar. One of my best friend's sons wears the cochlear implants. It's unbelievable.

David Nadel:

Yeah. It is totally an unbelievable technology because it literally gives the gift of hearing. And you mentioned a son…

Brian Levitt:

And speech, right?

David Nadel:

And speech, right, because without the hearing, you're really at a disadvantage. And you mentioned it's a son, probably a young child, the typical, or maybe a growing child. But the typical beneficiary of a cochlear implant is a child.

Brian Levitt:

He was a baby.

David Nadel:

A baby, yep. And this is a technology that will last the life of the child. And it requires a lot of software updates, so there's about a third of this company's revenue and even more of their profit is coming from recurring revenue. That's another thing we really like to look for in our businesses, high portions of recurring revenue. We like these businesses to just compound. And you can literally with this company run a discounted cashflow per patient because you're going to get the lifespan of that patient 75 year lifespan of beneficiary of a cochlear implant.

But essentially what we're looking for, I mean, maybe those give you a couple of illustrations, but companies that are going to ... They're built to last. They have a capacity to suffer. They are going to do well in any sort of an economic environment. A lot of them tend to be quite kind of, I might say boring or almost hum drum type of B-to-B (business-to-business) companies that are below the radar. I mean, another one of our prominent holdings does steam systems. No one even thinks about steam systems. But two thirds of Nestle's expenditures on energy are for steam. It's a mission-critical service that the company is providing. And that's typical of our holdings, is mission-critical. So when things get tough, their customer, which is a corporation rather than an individual, is very unlikely to cut that service.

And so what you'll see in our strategy is kind of a de-emphasis on consumer discretionary because we find that consumers in the small and mid-cap space are quite fickle. We rather deal with a corporate buyer, much more reliable. Everything we're doing is we try to de-risk the portfolio at the level of each company, so we have extremely high conviction in each company we invest in to the level that we would be comfortable having the entire portfolio in any of our individual holdings.

Brian Levitt:

Wow, that's a bold statement. And you know management well, you visit them, you kick the tires.

David Nadel:

That's right, yeah. We certainly do all of that fundamental research that is pretty standard across our industry.

Brian Levitt:

But you have good status on your airline, I'm sure.

David Nadel:

Yeah. It's a perk of the job. That's right. But we do a lot more than that, we also do strategic research. We have a person fully dedicated on our team to do strategic research which is talking to former executives at companies, talking to customers, talking to suppliers, understanding the ecosystem of a business. That's work that a lot of other mutual fund managers or management teams don't really do. And so we're getting a really full picture of these companies. Yes, we do visit them on site. Next month, I'm going to Sweden to see companies. The month after that, in October, to the United Kingdom to see companies, hence, those frequent flyer miles. And two people on my team will be in Japan next month seeing companies where I was last September. So yes, we do that work, but I think supplemented by the strategic research, which really adds a nice edge to our process.

Brian Levitt:

Jodi, you willing to be a companion on some of these trips?

Jodi Phillips:

Oh, sure. I could collect some frequent flyer miles, for sure.

Brian Levitt:

I was getting the sense from David he wanted company.

David Nadel:

Definitely, definitely. They're a lot of fun and you learn so much. I mean, it really makes the job so engaging and gratifying to travel and see these companies.

Jodi Phillips:

Oh, sure.

David Nadel:

The idea of being paid to learn is really-

Brian Levitt:

That's not bad.

David Nadel:

It's really a gem of this profession.

Jodi Phillips:

Not at all.

Brian Levitt:

You spent a lot of your childhood paying to learn. Right?

David Nadel:

That's right.

Brian Levitt:

That's nice.

Jodi Phillips:

If I tell you I'm interested in steam systems, does that help? Does that get me a ticket on the plane?

Brian Levitt:

You're big into transducers, aren't you?

Jodi Phillips:

There you go.

David Nadel:

You would be the one out of a million who if you're able to convince someone you're genuinely interested in steam systems. But steam systems are not ... Just to clarify that in case people are picturing a steam engine or something and wondering why you'd invest in a 19th century technology, steam is used in so many processes that are literally day to day processes, so pharmaceutical production. It's a bacteria side, it's a sealant, it's used in beer production, which people can relate to.

Jodi Phillips:

Okay, there you go.

Brian Levitt:

Now we're talking.

David Nadel:

Petrochemicals. It's just got an incredibly broad level of applications, which is why Nestle again, two thirds of their energy outlays are for steam systems. But for us from an investor perspective, you know what's great about steam is it's corrosive. Right? So it means that all these parts need to be replaced, and so they can put in the initial traps and all of that, set up a factory floor with all of these items that look sort of like Charlie and the Chocolate Factory.

Jodi Phillips:

Sure, absolutely.

David Nadel:

Parts wear out, and so that gives them, in the case of this company it's something like 80% of their operating profit comes from recurring revenue. And for us, that's the secret sauce of what we do strategically is when you have this recurring revenue, you can build models that you can rely on for predictable cashflow for years to come. And that tends to result in favorable outcomes for investors over time.

Jodi Phillips:

You've described a pretty wide range of companies. Are there any themes, commonalities that are emerging lately from all those different types of businesses that you're interested? I mean, tech, innovation. Our last episode of this podcast focused on artificial intelligence (AI), which is on the Mount Rushmore now. So are there themes that are kind of gathering from all of these different types of companies that you're looking at?

David Nadel:

Yeah. So Jodi, I would say definitely there are themes that emerge. I mean, I guess the one caveat I'd give is the themes are the result of a bottoms up process, as opposed to being us as a PM (portfolio manager) group saying, "AI is hot. We've got to get exposure to as much AI as possible," that's not how we invest. We want to invest in companies that meet the financial characteristics that are going to result in compounding and more predictable, lower volatility returns for investors. But that having been said, we're happy to invest with companies that are closer to the action on some of these mega themes that are happening in the marketplace, like AI, for example. One way that we benefit from that is through IT consulting companies. So IT consulting companies are kind of an agnostic play on these mega themes. And you never know where an individual mega theme will go. I mean, we all remember disk drives. Do we? I don't know. Maybe not anymore.

Brian Levitt:

Vaguely.

David Nadel:

There have been so many mega trends in technology that people got extremely excited about and send valuations into the stratosphere, and then literally three years later, no one's talking about them. But IT consulting companies are going to be there to advise on those issues in a much more comprehensive way, and benefit regardless of whether the technology is long-lasting, medium cycle, or extremely short cycle and just dies a quick death. So I'm not making a prediction on AI that it's not going to disappear over the next couple months. That's not what I'm saying. I'm saying that we like to align ourselves with businesses that take a more agnostic approach.

And let's see, I mean, other themes I would say value-added distributors are a big part of our portfolio, so these are companies that are involved in the distribution of highly sophisticated products, where they have very close customer relationship with corporate customers, very technical products, so distributors that are not subject to, let's say an Amazon effect at all because this is stuff that requires a lot of consultation and a lot of implementation. So value-added distributors are a theme. Businesses, and those are businesses which have tremendous pricing power, great in an inflationary environment. They can immediately pass through inflationary increases to their cost structure onto the customers.

I'd say medical devices are a theme that we come back to repeatedly. I mentioned the company that created the cochlear implant. But there's many medical device companies that we own. In the SMID cap space, medical device companies are a natural fit because they will often have a very large portion of recurring revenue from some sort of backend service. And other areas of health care are less of a fit for us, like pharmaceuticals, because those are typically companies where they'll have one productive drug and then a pipeline. That's too risky for us. Right? We like more certainty. So medical device I'd say is another theme that is recurring in our portfolio.

Brian Levitt:

Okay, so I can listen to you talk all day about bottom up and themes and I'll eat it all up. But for the investors who are listening, who have now dealt with the decade of under-performance of international investing or concerns about geopolitical risks, or regional hot spots outside of the United States that are now sitting here looking at valuations more attractive, you talking about all these really interesting ideas. How do you get them over the hump to think about international? Are there certain catalysts that you would look for as an investor, where you would say this is the type of environment that starts to favor non US dollar assets?

David Nadel:

Yeah. It's hard to identify catalysts with certainty for sure. And we can almost say with some confidence that whatever it is will not be what people predicted. But I think an obvious area that people should be tracking and what will likely be a catalyst is just reversion to the mean with currency because the dollar ... Currency is always a mean reverting phenomenon. And the dollar has reached these points of incredible strength before, only to return to that mean. You saw this in the '80s with Paul Volcker's supercharging of interest rates and then they agreed we can't have a dollar that's strong, and suddenly, it's back to 80 on the DXY (US Dollar Index), the dollar benchmark …

Brian Levitt:

It usually is about the Fed.

David Nadel:

It is usually about the Fed. I think by many measures, we're about 15% to 20% overvalued where we are now on the DXY. And I think a lot of people will recognize that. It's just a question of when you look at long-term charts, that's certainly what's implied. And you're seeing rates higher from a lot of regimes around the world, a lot of other currency, so the US is not the only place where yield is possible in terms of the currency. So I think that's one catalyst.

I also think international SMID cap companies have historically been much more profitable than US SMID cap companies, much higher margins, higher internal rates of return, and by the way, stronger balance sheets too. But they haven't had the level of margin expansion since the global economic crisis that US stocks have had, so I think there is also, we see it in our holdings, the potential for incremental margin expansion. Again, these are already more profitable, but they have scope to get even more profitable with higher margins and higher returns, so that could be a catalyst.

I think on the geopolitical stage, seeing how some of these economies integrate and manage immigration is going to be an important catalyst. I am personally optimistic about Europe's absorption of immigrants and that tends to be a catalyst for growth and innovation. When countries like Sweden, which are a fraction of our size, are taking more immigrants on an absolute basis by a factor, by a multiple than the US is, from certain countries, you're going to get an impact. And in the short-term, that can be a little volatile or a little rough, and there's cultural chafing and sometimes things that are even worse than that. But over the long-term, you're getting a whole new base of more motivated workers and people that are going to innovate. And I think Europe's already been through a lot of the tougher period of the immigration boom. And I don't think that's going to end because global warming means more immigration. It's just going to continue. This is going to be a secular issue, and by that way, an important issue for the US to figure out as well. I'm not sure we're doing a great job with that yet.

But a lot of these countries in Europe, where we're heavily invested at least in terms of the headquarters for countries, a lot of them are in Europe, about 60% of the portfolio. I think they are going to benefit from that less expensive labor force and hungrier labor force.

Jodi Phillips:

All right. Well, Brian, it looks like our time is winding down. And since we promised we wouldn't ask any bitcoin questions, I guess we can't go there. So is there anything else, Brian, that you have on your list while we have David here?

Brian Levitt:

My last question would be, so you had talked about the exposure to Europe. Where else is the exposure in your portfolio? Do you ever think specifically about the country? It sounds like it's always from the bottom up. And do you have exposure to emerging markets?

David Nadel:

Yes. So the bottom line is we are companies, not countries, in terms of how we invest, so it is very much the bottom up. The way I'd like people to think about our approach and the way I think about it is really more in terms of revenue exposure than…

Brian Levitt:

Geographic.

David Nadel:

… than the exposure of the listing of the company, the stock exchange it's listed on, or where the headquarters are. Again, we're invested in so many of these world leading businesses, either global number ones, or let's say global number two, but they're multinational businesses. If you're providing a mission-critical service, everyone in the world wants to work with you, and that means emerging market companies want to be your customer as well, so that's how our companies interact with the world. So from a perspective of kind of cumulative revenue in the portfolio, we probably have about 30% exposure roughly to the emerging markets, so quite substantial, and that again is what matters.

If you look at the portfolio from the perspective of headquarter, we probably only have about 7% emerging markets. But this is very deliberate because we rather, all other things being equal, we rather get the world-class corporate governance that you're going to get investing in a European company, particularly north of the Alps in Europe, global number one, those types of corporate governance standards selling to China rather than investing in a local player in China where corporate governance on average is much lower. That's just an objective assessment, that's not a controversial statement. And so that's kind of how we go about it, we'd rather ...

For a market like Russia, for example, we much rather invest in a Finnish company that sells to Russia than invest in a Russian equity. Why? Because Finnish corporate governance standards are completely different. The Finns have been trading with the Russians for hundreds of years. They know them a lot better than we do. But I don't really want to get exposure to the Russian corporate governance and kind of the capricious approach to shareholders' rights, et cetera, et cetera. But we don't mind having exposure to the Russian consumer. So Finland, that's the answer.

Brian Levitt:

Right. Finland's the answer. Well, we could listen to you all day, but we'll let you get back to your regularly scheduled program.

David Nadel:

It's been a pleasure, Brian. Jodi, thank you.

Brian Levitt:

And thank you so much for joining us.

Jodi Phillips:

Thank you.

David Nadel:

Thank you.

Jodi Phillips:

So that brings us to the end of another Greater Possibilities Podcast, but the conversation doesn't stop here.

Brian Levitt:

It does not. Visit invesco.com/brianlevitt, to read my latest commentaries. And of course, you can follow me on LinkedIn and on Twitter at Brian Levitt.

Jodi Phillips:

And if you missed any of that, that information is on our podcast page. Thanks for listening.

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As with any comparison, investors should be aware of the material differences between active and passive strategies. Unlike passive strategies, active strategies have the ability to react to market changes and the potential to outperform a stated benchmark. Other differences include, but are not limited to, expenses, management style and liquidity. Investors should consult their financial professional before investing.

All data sourced to Invesco as of July 31, 2023, unless otherwise noted.

From 2000 through 2009, the S&P 500 Index lost 9% while the MSCI All Country World Index gained 37%. From 2010 through 2019, the S&P 500 Index gained 256% while the MSCI All Country World Index gained 71%. Those are total returns sourced from Bloomberg as of August 2023.

Past performance does not guarantee future results. An investment cannot be made into an index.

The MSCI All Country World Index is an unmanaged index considered representative of large- and mid-cap stocks across developed and emerging markets.

References to the growing weight of US stocks in global benchmarks and the number of US companies in the Top 10 positions is from FactSet Research Systems, based on the MSCI All Country World Index as of June 30, 2023.

US investors’ allocations to international versus US small and mid-cap stocks is from Morningstar as of June 30, 2023.

According to Bloomberg, there were about 12,800 non-US small and mid-cap companies with market caps from $300 million to $10 billion, as of June 30, 2023.

References to returns, Sharpe ratios and Sortino ratios are from Morningstar data from July 1, 2007, through July 31, 2023. Over monthly rolling 10-year periods:

• International small and mid caps had an average annual return of 5.89%, compared to 4.47% for international large caps.
• International small and mid caps had an average Sharpe ratio of 0.40, compared to 0.33 for international large caps.
• International small and mid caps had an average Sortino ratio of 0.60, compared to 0.49 for international large caps.

International small and mid caps represented by the MSCI All Country World ex USA SMID Index, which captures mid and small cap representation across developed and emerging markets, minus the US.

International large caps represented by the MSCI All Country World ex USA Large Index, which captures large cap representation across developed and emerging markets, minus the US.

References to the opportunity set, profitability, and balance sheets of international SMID versus US SMID are based on the MSCI All Country World ex USA SMID Index versus the Russell 2500 Index as of June 30, 2023. Sourced from FactSet Research Systems.

The Russell 2500® Index, a trademark/service mark of the Frank Russell Co.®, is an unmanaged index considered representative of small- and mid-cap US stocks.

References to international small and mid cap active management outperforming the benchmark is from Morningstar as of June 30, 2023. Active managers represented by the Morningstar Foreign Small/Mid Growth category. There were 129, 115, and 82 funds within this category for the three-, five- and 10-year periods, respectively. Benchmark performance represented by the MSCI All Country World ex USA SMID Index.

The Sharpe ratio is a measure of risk-adjusted performance calculated by dividing the amount of performance a portfolio earned above the risk-free rate of return by the standard deviation of returns. The Sortino ratio differs from the Sharpe ratio in that it only considers the standard deviation of the downside risk, rather than upside and downside risk.

Standard deviation measures a portfolio’s or index’s range of total returns in comparison to the mean.

Return on capital measures the profitability of a company by dividing earnings by capital employed.

Internal rate of return is the annual rate of growth that an investment is expected to generate.

The US Dollar Index, or DXY, measures the value of the US dollar relative to the majority of its most significant trading partners.

A basis point is one hundredth of a percentage point.

Nestle is not a holding of Invesco International Small-Mid Company Fund as of July 31, 2023.

Holdings are subject to change and are not buy/sell recommendations.

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