What a difference a few years make - European smaller companies are emerging from the shadows. Paul Burgin asks managers where they are finding the best opportunities
European equities are back in favour, after having been held back by concerns about the continent’s fiscal and political problems, alongside antipathy towards equities in general. European smaller companies, in particular, have fared surprisingly well since the global crisis broke. Managers think they can deliver much more.
The IMA European Smaller Companies sector has bounced around the performance league tables since the financial crisis. The average fund in the sector fell 17.9% in 2011, with only Global Emerging Markets and China/Greater China dropping further.
The year before was better, with the sector delivering almost 26%, similar gains to those seen so far this year. Over five years until the end of October, only investors in the UK Smaller Companies sector have booked a greater average return.
One of the most consistent relative performers throughout has been Ian Ormiston, manager of the £42.4m Ignis European Smaller Companies fund. The fund ranks first over one year, and second over three and five years, according to Morningstar.
His fund has achieved consistent outperformance, despite operating at the lower end of the capitalisation scale.
“There is a risk in moving down the spectrum but the consistency comes from not owning the most exciting companies. We do not invest in preliminary research biotech firms or Norwegian oil services. We tend to buy boring, repeatable and well-financed companies,” says Ormiston.
Many of these stocks remain cheap, partly because they are not well covered by big brokers. Ormiston believes the key is to not be too early an investor, selecting only those companies that are on the verge of being noticed for their incremental growth stories.
When his European small-caps get noticed, the resulting increase in stock price can be impressive. Fingerprint Cards, which makes fingerprint scanners, has risen five-fold this year and ten times since being purchased. The introduction of scanning on new Apple iPhones will lead to a rush of new business as other manufacturers follow suit, according to the manager.
He remains underweight financials as most index stocks are fallen angels from Greece, Italy and Spain. Even so, some small financials are doing far better than others. FBD Ireland, an Irish domestic insurer, will benefit from a recent scandal at RSA. Banca Generali of Italy is a far better asset-gatherer than its competitors.
Ollie Beckett of the Henderson pan-European equities team is also a fan of small-caps, providing liquidity is not an issue. He believes investors outside of Europe have yet to realise just how much has changed and why European smaller companies stocks are on track for further growth.
“It is getting less bad and, at the margin, things are getting better. PMI index data is already better. Spain, Italy and Greece are now running budget surpluses,” he says.
During the spring, he switched to a more domestic focus. Four years of cost cutting has left firms leaner and able to profit from recovering economic growth. Domestic stocks are facing bigger earnings upgrades than their global market counterparts.
He lists kitchen-maker Nobia of Sweden as a good example. It has cut costs and product ranges. New management, imported from Electrolux, is used to low margins and tight cost control. With the housing markets in the UK and Sweden picking up, kitchen sales will improve too.
“The growth margin is up but not at the top line - yet. There will, however, be lots of leverage through P&L and profits when sales rise,” he says.
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