Interview with portfolio managers Kenneth Blomqvist and Tom Lehto about the current market situation (COVID-19)

Fondita European Micro cap, Fondita Healthcare, Covid-19

2020-04-08

How has the fund performed in the current market situation (Covid-19)?

Kenneth Blomqvist, portfolio manager of Fondita European Micro Cap

During the stock market turbulence following the spread of Covid19, the fund has also lost ground. Despite this, the fund has fared better than micro and small cap stocks in Europe. The main reason for this is the fund's significant exposure to software, information technology and healthcare-related companies. These companies should all have a more stable demand for their products and services, despite a weaker economic environment. The fund's focus on investing in local niche players, who are market leaders in their segments, combined with a focus on strong balance sheets and stable cash flows, has paid off during the turbulence. At the time of writing, the fund has lost 20.2% since the beginning of the year, compared with the MSCI European Micro Cap Net Return Index and the Stoxx 200 Small Cap Net Return Index, which lost 28.4% and 26.2% respectively. The European large cap index Stoxx 600 Net Return Index has lost 22.6% during the same period.

Tom Lehto, portfolio manager of Fondita Healthcare

In general, it can be said that almost all stocks have come down since the last week in February when the situation escalated into a worldwide pandemic. Healthcare stocks have generally performed better compared to other sectors as demand for their products and services has in many cases increased in contrast to other sectors. Fondita Healthcare has decreased by 15.3% since the beginning of the year and by 11.7% in March.

Which companies in the fund would you like to highlight that have performed exceptionally well during this time?

Kenneth Blomqvist, portfolio manager of Fondita European Micro Cap

The fund's best contributor this year and during the past month has been the fund's biggest holding - the medicine distributor and laboratory expert Medios. The company is the market leader in the fragmented German market and is one of the leading consolidators in a market that is governed by strict legislation and high barriers of entry. We see that the company will continue to show strong growth and increased profitability in the coming years. At the time of writing, the share price stands at just under 5% from its highest listing in February. Over the past month, two more investments have shown positive returns. These are software company Datagroup and diagnostics equipment manufacturer Stratec Biomedical. Datagroup's products facilitate, among other things, their clients’ possibilities to continue operations remotely in situations like this. Stratec's products are critical in diagnosing various diseases.

Tom Lehto, portfolio manager of Fondita Healthcare

Although the healthcare stocks as a whole performed well, there are major differences in how share prices have developed within the sector. One theme has been which company that will develop a vaccine against the virus. There are many companies working on it but as investors it is extremely difficult to know which company will succeed first and take the whole pot. We have chosen to overweight the Swiss company Lonza, which manufactures the instruments that all researchers need when examining, for example, cell structures and different viruses. Lonza's share price rose during March. Another company that fared well is Danish Coloplast. The company's main products are ostomy bags and catheters. These are products that patients need on a daily basis regardless of lockdown measures.

Which companies in the fund have fared worse and why?

Kenneth Blomqvist, portfolio manager of Fondita European Micro Cap

The fund's main focus is investing in companies with strong balance sheets and strong cash flows. One of the fund's weaker holdings lately has been the bicycle manufacturer Accell, a company that is in the midst of a restructuring phase and as a result has a balance sheet and cash flow that is below the fund's average. However, we see that this is a temporary dilemma and that the measures now being implemented in the company should strengthen the company's position in the future. Another holding that has shown weaker development is the German industrial technology company Dr Hönle. The company is affected negatively by lower smartphone sales globally as a result of Covid19. Here we see a high probability that sales will return when the crisis is over. As such, we are still happy to own the company in the coming years.

Tom Lehto, portfolio manager of Fondita Healthcare

Under the current circumstances people are staying home to avoid exposure to the virus. Therefore, all unnecessary interactions are postponed. Good examples are dental visits and visits to doctors due to hearing problems. This is reflected in the share prices of companies such as Straumann and Coltene, both of which sell dental products. Demand for hearing aids has also decreased, affecting companies such as GN Store Nord. This is of course temporary, and the stock prices will recover as we see the pandemic subsiding and people start moving about again.

How do you think the companies' future will be affected by this?

Kenneth Blomqvist, portfolio manager of Fondita European Micro Cap

We see that this year is by and large a lost year where many companies will see their sales and earnings drastically deteriorate. Thus, 2020 will be a "gap year" for most companies in terms of earnings development. However, it should be remembered that one year for a company is a very short time when you consider the company's entire life cycle. Thus, we see that 2021 will be a more normal year for all companies. We see that today's events will lead to further investments in healthcare and digitization, themes that the Fund continues to have exposure to.

Tom Lehto, portfolio manager of Fondita Healthcare

In the short term, we will see reduced production and lower profits in some of the companies. In the slightly longer term, the companies will not be affected as the long-term driving forces of an aging population and improved welfare will drive the companies' growth.

Have new opportunities opened up in the market and the companies as a result of this crisis?

Kenneth Blomqvist, portfolio manager of Fondita European Micro Cap

Crises like this always provide opportunities for the strong players within their segments. In a situation like this we see that many companies with a strong balance sheet and good profitability could further strengthen their positions, acquire weaker competitors and take market shares. When the environment becomes more favourable, they can then capitalize on their strengthened position.

Tom Lehto, portfolio manager of Fondita Healthcare

What has developed a lot during the crisis is how people communicate. The digitalisation trend with video calls will surely continue even after the crisis, which can save money for both patients and healthcare companies.

Is it worth investing in European small caps right now?

Kenneth Blomqvist, portfolio manager of Fondita European Micro Cap

History has shown us that over time small cap stocks show clear outperformance compared to large cap stocks. In crisis situations, small cap stocks tend to show weaker development, which creates buying opportunities for the long-term investor. European small caps look attractive today in terms of valuation and future growth potential. Today, balance sheets are undoubtedly stronger than during the 2008-2009 financial crisis, which means that we can sleep well at night.

Tom Lehto, portfolio manager of Fondita Healthcare

Timing is always virtually impossible when investing. No one can say how long the pandemic will go on and whether stock prices will continue to decline. But if you look up and into the future, we will probably get past the pandemic and the stock prices will recover. Often this happens before everything is back to normal. Therefore, this is a good investment opportunity for the long-term investor, which for example I myself will utilize through an additional investment in the fund.

 

 

 

Tom    kenneth

Tom Lehto                               Kenneth Blomqvist

 

 

 

 

 

 

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