Our oldest European fund turns 10 years! The fund was founded on the 19th of May 2009 and is today managed by portfolio managers Kenneth Blomqvist and Tom Lehto. Both portfolio managers have a long experience of European equities, Tom since 1991 and Kenneth since 2003.
How was the stock market during the period when the fund was launched?
The fund was started just after the financial crisis, at a time when all macroeconomic indicators pointed to recession globally. However, the stock market had bottomed out in the winter of 2009 and investors were beginning to expect better times ahead. During that period there was still a fear that some companies would not succeed and go bankrupt and the stock market priced in historically low corporate profitability and growth. Accurate analysis of the companies was thus of the utmost importance during this time. During that period, the entire small business segment in Europe was depressed and the long-term investor could find lots of quality stocks at bargain prices. With an open mind you could find companies with good growth potential and hidden values. A potential that was clearly greater than among the large cap stocks already then.
What types of companies does the fund invest in?
The fund focuses on finding profitable quality companies with a proven business model, which means both growth and good profitability as well as strong cash flows. It is important that the companies are driven by some form of structural long-term growth drive. We have a preference for companies that have an active owner who has been involved in the founding of the company or the company’s development over a longer period of time and where the management are also shareholders. This often leads to the company making decisions favourable in the long-term instead of short sighted changes of direction due to short-term trends. We see this as beneficial for the company and the fund's long-term investment. A new investment often stays in the fund for over 5 years and some holdings have been in the fund since the beginning.
Which companies have proven to be the best contributors?
The fund's best contributor is the German eye care technology company Carl Zeiss, whose growth is driven by an aging population and growing middle class in Asia and China. The share price has risen by approx. 640% since the investment was made (as of 17.5.2019). The Swiss dental equipment company Straumann is also one of the fund's best contributors since the start of the fund. The company’s share price has risen by approx. 700%. The German ticket and event company CTS Eventim, whose growth is driven by a strong digitization trend in the company's markets, is also one of the fund's best contributors. The share price has risen by approx. 600%. What all these companies have in common is that they are market leaders in their niches and are driven by structural growth factors.
What about the returns?
The fund's return has been about 242% since the start (as of 17.5.2019), giving an annualized return of 13.7% per annum (as of 17.5.2019). In comparison, the STOXX 200 Small index, representing the underlying small cap market, increased by 195% during the same period. European small cap companies continue to look interesting as investment objects, as these companies are driven by better growth opportunities. This should lead to better profits growth, which in turn leads to better share price development compared to large cap companies over time.
What about the future for European small caps? Who should invest in the fund?
We see that smaller quality companies continue to be attractive for acquisition, which often entails a premium versus the current share price and thus a positive contribution to the fund's return. Since the start of the fund, six companies in the fund have been acquired by their competitors. Within the European small cap segment, we still find interesting niche players with a good market position at a valuation level attractive for the long-term investor. The fund is suitable for investors with a long-term perspective that want to take part in the European small cap growth story, both in the domestic market as well as globally.