Why should investors currently also take a look at the smaller stocks from Europe?
Almost each of the four technology giants Apple, Amazon, Google and Facebook once started out quite small. Some of them even in a garage. The so-called hidden champions in Europe are among the most innovative companies, which are often in the technology sector. As niche providers, they along with their products are the leaders in this market. If one looks at the major technology trends, such as robotics, artificial intelligence, automation, e-commerce and 3D printing, it is clear that we are on the verge of a structural change. With an investment in European small & mid caps investors can be part in this “fourth industrial revolution” and benefit from the innovations that will turn the small companies of today into the giants of tomorrow.
Can the “fourth industrial revolution” play a role in any other sector?
In addition to companies from the technology sector, topics such as big data or Cloud applications are becoming more important in other industry sectors too, for example the pharmaceuticals and biotechnology sectors. With the help of special software products, individual diagnoses are now possible, which lead to new and improved methods of treatment. If one takes a closer look at the automotive sector it shows that more and more added value is being generated by the suppliers than by the car manufacturers themselves. Behind the suppliers are many global market leaders from the SME sector. Growth drivers are, for example, CO2 reduction, e-mobility, autonomous driving and car sharing, of which we expect more innovations over the next few years.
How do you manage to find earnings performers among the European hidden champions?
It is important for us to detect trends and then make targeted investments in those small and medium-sized companies that hold a key position with their products. For this purpose Europe offers us a very broad investment spectrum spanning various sectors and industries. At the same time country-specific features are important sometimes. For example, Denmark has a strong life sciences market, the Norwegian market is of course marked by the oil industry, whereas the German hidden champions have a strong position in mechanical engineering and the automotive industry.
You are on the track of small companies from the second and third tiers. Are you pursuing a particular investment strategy?
For more than 15 years, we entirely focused on stock picking and active portfolio management when making our investment decisions. We have the advantage that we know every company and industry by heart in which we invest inside out. The team has around 1,000 management contacts a year and so gains a very good insight into the decision-makers’ way of thinking and the companies’ future direction.
European small & mid-caps offer a wide range of opportunities. What about the risks?
Since the financial crisis the topic of risk and risk management has become even more particularly important for investors. In this regard smaller stocks have the advantage that they diversify at two levels. Firstly, through the diversification of cyclical and defensive stocks. Alongside this the overall global political climate plays a much smaller role. Company-specific factors dominate. For this very reason we look at the companies closely. It can generally be seen that a mixture of small & mid caps reduces the overall risk in a diversified portfolio. Overall, based on the STOXX® Europe TMI Small Index, small & mid caps have been far less volatile than large caps in the STOXX® Europe 50 Index since the beginning of the century.
Over the past few years small & mid caps have performed better than many large caps. In view of this trend, is there still room for improvement?
I am convinced that small and mid-cap equities will also perform better in future in the long term than blue chip equities. Second and third tier stocks offer access to the full breadth and depth of economic value added. Moreover the earnings growth for smaller stocks is often higher than for large caps. In addition small & mid caps are benefiting from the current good mood in Europe.