After successfully managing a European Small Cap fund since 2009 Fondita decided some four years ago to continue on that path. In 2017 Fondita launched its fourth fund focusing on smaller listed companies - Fondita European Micro Cap. The idea behind the Fund was the fact that we had come across many smaller micro companies within interesting niches and with attractive growth profiles. Companies that were not that well-known to investors or analysts and where the stock liquidity was limited. These companies looked and still look very attractive to the long-term investor. A perfect match for us at Fondita as we have been analysing small caps since 1997.
The Fund has during its lifetime, despite challenging times on the stock market especially 2018 and 2020, achieved an outperformance of 14.02 percentage points (21.4.2020) compared to the underlying European micro cap market (MSCI European Micro Net EUR Index) and an outperformance of 7.80 percentage points compared to the European large cap market (STOXX600 Net Return EUR) net of fees. The Fund has received four stars out of five by Morningstar. The Fund focuses on companies that are driven by long-term structural growth trends. These companies are often market leaders in their niche, have strong balance sheets and strong cash flow. Profitability and strong balance sheets are essential, especially when investing in the smallest companies on the stock exchange. Many of the Fund’s investments are family owned businesses, which is often a proof of high quality and focus on long-term profitability.
Approximately 1/3 of the Fund is invested in the digitalization theme, a long-term structural growth driver where we see the world becoming more digital every day. Here we see an even stronger trend today due to the ongoing Covid-19 crisis. More and more companies will need to invest in IT, software and digital solutions as the crisis has revealed serious threats to companies as they were not prepared for a situation where the world suddenly had to work from home. Especially in Germany we find many software companies that are specialized in this huge and growing market. These companies find growth both in their home markets and in the rest of Europe.
Another 1/3 of the Fund is invested in healthcare and wellness companies. This is a theme where we see a growing long-term demand as the population of the developed world ages but still wants to live a "normal" life for as long as possible. We also see the growing middle class in Asia and Africa driving this theme for decades to come. In the micro cap space we find many attractive medtech and health service companies that will capitalize on this trend. The rest of the fund is invested in companies that have solutions for industrial companies what comes to automation, the environment and digitalization of production and processes. The Fund does not invest in financial companies or in companies that are dependent on raw material prices. We also avoid companies that tie a lot of capital in their balance sheets like the oil service, shipping or the mining industry.
During this year the Fund has lost ground along with the rest of the global stock market, however the outperformance year to date as of the time of writing is 9.1 percentage points compared to the underlying European micro cap market (MSCI European Micro Net Index). Compared to the European large cap market (STOXX 600 Net Return) the Fund has outperformed by 7.93 percentage points. Since the market bottomed out on March the 16th the Fund has risen by 26.26 % compared to the underlying markets that have risen by 15.22% (MSCI European Micro Net Index) and 14.22% (STOXX 600 Net Return). The main reasons for this outperformance both short and long term are the long-term investment themes mentioned above and our deep focus on the 31 long-term holdings in the Fund. The Fund’s best performers this year have been the diagnostic company Stratec Biotech, the medicine and laboratory expert Medios, the cybersecurity company Secunet, the energy storage company Alfen and the software company Nexus. These are all companies that have a bright future ahead of them. The focus on strong balance sheets also gives these companies the possibility to further strengthen their positions during a crisis like this. For the long-term investor, we see attractive investments in the micro cap space for many years to come, driven by superior revenue and profit growth compared to larger companies.
Text written by portfolio manager Kenneth Blomqvist