Global Small Cap
Global Small Cap Fund Update
March Quarter 2008
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Download the Global Small Cap Fund Update
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This update is for the BlackRock Global Small Cap Fund (formerly known as the Merrill Lynch Global Small Cap Fund).
The performance shown in the Fund Update is the gross performance of the fund. To view the net performance of the fund or of the different unit classes of the fund download the Fund Performance Report or visit Fund Performance.
Gross performance returns and benchmark performance shown do not include expenses, fees or tax. Net performance returns are prepared on an exit-to-exit fee basis which includes all ongoing fees and expenses.
- While exports to developed economies have slowed, exports between emerging markets have been strong, and domestic demand within these economies has been significantly stronger than in the developed world. However, if the US falls into a deeper and more prolonged period of weakness than anticipated, we believe economic decoupling will be tested.
- Equity valuations are fair, however downside risks exist as earnings estimates are being revised downwards and the potential for higher inflation could result in higher interest rates and multiple contractions.
- We expect market volatility to remain high due to fear and uncertainty among investors.
- We expect that the Fed will continue its accommodative policies to ease liquidity and credit issues and to stimulate growth. The European Central Bank and Bank of Japan are likely to remain on hold with rates, although the Bank of England is more likely to cut rates. Within emerging economies, there is a greater likelihood of policy tightening to contain inflation risks. Prevailing interest rate differentials are also likely to keep the dollar weak, despite the Euro and Pound being overvalued.
- Overall, we have been reducing cyclical exposure in our portfolios for more than a year and are currently positioned fairly defensively. We are finding attractive opportunities in select industries, but believe balanced portfolios, from both geographic and sector perspectives, are risk-appropriate and caution is warranted.
Fund Positioning
Sector weights shifted in some areas during the quarter consistent with our investment process. On a relative basis, we widened our underweights to consumer discretionary and information technology and narrowed our underweight to financials. Additionally, we increased our weighting to consumer staples and energy and reduced materials from overweight to and underweight.
Geographically, the Fund is underweight Europe, overweight North America, and our Asian allocation is in line with the benchmark. Emerging Markets represent a modest underweight to the benchmark overall, but we are more favorable on the Pacific Rim within this classification.
Positive contributions for the quarter:
- Sector allocation was the primary source of alpha generation during the quarter, while stock selection contributed positively as well.
- Sector allocation effects were positive across eight of ten economic sectors, with the most significant contributions coming from overweights to consumer staples, energy, and materials and underweights to consumer discretionary and information technology.
- Stock selection also contributed positively to relative results. The most meaningful contribution came from the materials sector, particularly due to positioning among fertilizers and agricultural chemical names. Strong results within consumer staples also had a significant contribution to outperformance.
- Individual stocks contributing most significantly to outperformance included agricultural chemicals companies Taiwan Fertilizer Co. Ltd. and Yara International ASA and gold miner Kinross Gold Corp. Kurita Water Industries Ltd., a manufacturer of water treatment equipment, also contributed positively during the period.
Detractors for the quarter:
- Weaker results within information technology, financials, industrials, and consumer discretionary stock selection detracted from performance.
- Stocks that detracted most significantly from performance over the quarter included Software company Autodesk Inc. and REXCAPITAL Financial Holdings Ltd., which provides equipment and services to the Chinese lottery market.
Performance review
Global Small Cap Fund
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Gross returns
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Benchmark returns*
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Out-performance^
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3 Month
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-9.45%
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-12.08%
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2.63%
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6 Month
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-8.56%
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-14.64%
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6.08%
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1 Year
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-5.13%
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-16.66%
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11.53%
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2 Year (pa)
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-6.82%
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-7.72%
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0.90%
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3 Year (pa)
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8.17%
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5.86%
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2.31%
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5 Year (pa)
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13.28%
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11.93%
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1.35%
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*Benchmark is S&P/Citigroup EMI Global Index (in AUD) from 15 March 2007. Prior to this benchmark was S&P/Citigroup Global Equity Indices Extended Market Index World ex Australia (unhedged in AUD).
Hedged Global Small Cap Fund
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Gross returns
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Benchmark returns*
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Out-performance^
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3 Month
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-8.39%
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-10.51%
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2.12%
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6 Month
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-8.68%
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-14.39%
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5.71%
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1 Year
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1.08%
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-10.83%
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11.91%
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2 Year (pa)
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1.23%
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0.64%
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0.59%
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3 Year (pa)
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13.42%
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11.28%
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2.14%
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5 Year (pa)
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22.12%
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20.97%
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1.15%
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*Benchmark is S&P/Citigroup EMI Global Index (hedged in AUD) from 15 March 2007. Prior to this benchmark was S&P/Citigroup Global Equity Indices Extended Market Index World ex Australia (hedged into AUD).
Past performance is not necessarily a guide to future performance.
^Shows the difference between Gross return and Benchmark return.
Gross performance figures quoted are calculated with no allowance for management fees, operating expenses or tax on income. Long-term performance shows the potential volatility of returns over time.
Global Small Cap Fund Portfolio as at 31/3/2008*
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Top 10 International shares
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Kurita Water Ind
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Industrials
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Japan
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Siam Comm Bank
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Financials
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Thailand
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Kinross Gold Corp
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Materials
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Canada
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Goodyear Tire
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Consumer Discretionary
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USA
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Bumi Resources
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Energy
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Indonesia
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Intertek Test Services
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Industrials
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United Kingdom
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Geo Group Inc
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Consumer Discretionary
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USA
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Petrohawk Energy
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Energy
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USA
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Taiwan Fertilizer
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Materials
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Taiwan
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Atwood Oceanics Inc
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Energy
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USA
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*These compositions are representative of the asset pool. Slight variations do occur between the unit classes.
Investment objective
The BlackRock Global Small Cap Fund seeks to maximise capital growth through exposure to a globally diversified portfolio of shares of quality small and mid-capitalisation companies listed on international stock exchanges.
Fund strategy
The investment process is driven by extensive, bottom-up industry and stock research. The research process centres firstly on industry sub-sectors, in order to assess the attractiveness of these sectors on a world-wide basis, and to provide context for company analysis. The second stage of the research process focuses on fundamental company research to identify those stocks that offer above-average investment potential.
The portfolio construction process starts with the establishment of a strategic framework for investing. This framework is comprised of the team's points of view on industry, stock, style and market risks. Portfolio strategy is dynamic and reflects the team's ongoing industry and company research, and its financial market observations. Stocks are selected on the basis of the team's bottom-up fundamental analysis.
From time to time the Fund may take active currency positions relative to the benchmark.
Designed for investors who…
- Seek investment opportunities that are not readily available or are under-represented in the Australian market.
- Seek the potential for higher long-term capital growth from such international investment opportunities.
- Have a long-term investment horizon and a tolerance for significant volatility in investment returns in the short-term.
- For the hedged version, seek to reduce the impact on A$ returns on those investments that result from currency exposure.
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