This £99m vehicle is run by Aberdeen’s pan-European equity department in line with the asset manager’s team approach to running funds. Its objective is to invest in firms at the small-cap end of the European market, which it defines as those with a market cap of less than €5bn (£3.5bn).
Co-manager Phil Webster notes there is a quality bias in the portfolio. He explains: “We spend a lot of time talking about the pricing power of businesses, management, business models, competitive advantage and the intellectual property that companies have. Coupled with that, cashflow and balance sheets are important to us from a process perspective.”
He acknowledges there is a top-down overlay, with the 17-strong team spending a considerable amount of time “on the ground” in Europe, but he adds that it is bottom-up stockpicking that “drives the output”.
While the portfolio is fairly concentrated, typically holding between 40 and 50 companies, Mr Webster says that may be increased in the future. “I think that’s something we’re looking at in terms of diversifying the fund a bit more,” he notes.
“There are 1,400 names in the Euromoney [Smaller European Companies ex UK] index, and you’re taking quite a lot of active risk by holding 1 to 1.5 per cent positions. Most of the holdings are pretty active within this index, so you have to be aware of that when you’re constructing [the portfolio]. We’re benchmark aware, but we tend not to talk about the benchmark too much, it’s very much about the performance through the cycle.”
Mr Webster points out the team’s focus is on researching and meeting companies. He averages 140 of these meetings a year. “We do all the analysis work, build our models and look at competitors, so all the diligence is done by the managers. I think that’s why we have reasonably active positions in what we’re doing – we believe in the long-term fundamentals of these businesses.”
While holdings remain in the fund for several years, the recent earnings season has given the team a chance to revisit some of their positions and make adjustments. He notes: “Valuations are at the forefront of our thinking, and companies like Fielmann have been reduced to about a 1.5 per cent position. It’s a sound business [that] sells glasses in Germany, but valuations are getting stretched. The economic backdrop is tough in the industrial space and valuations are at the top end of our range, so these sorts of companies have been nudged back.”
The key investor information document shows the fund is considered higher risk, sitting at level six on the risk-reward spectrum, with ongoing charges of 0.89 per cent for the ‘I’ accumulation clean-fee share class.
The fund has lagged the Investment Association European Smaller Companies sector average return in both the short and long term, data from FE Analytics shows. In the past 12 months to November 13, the vehicle delivered just 2.2 per cent compared with the sector average of 14.3 per cent. The portfolio has fared much better across 10 years, having generated an 89.1 per cent return, although it is still far behind the sector average of 153.3 per cent.
Mr Webster attributes this “disappointing” performance to the product’s quality bias. He explains: “We feel well placed in terms of the names we have. I think we could say the size range hasn’t helped and that’s something we’re looking at addressing because we are slightly bigger in average market cap. Some of the [stocks] we’ve owned have done particularly well and we’ve let some of them run up to slightly bigger market caps, [which] we call ‘running the winners’.”
He explains the team is likely to begin recycling some of the capital out of those names that are in the €3bn market-cap range into smaller-cap businesses that “we feel have good long-term prospects for the next three to five years”.
Oil and gas software business Aveva has done well for the fund recently, while Norway-based Kongsberg Gruppen has detracted from performance. Mr Webster notes: “It’s well invested and it’s a business we think will do well in three- to five-year cycles. We’re just riding out a tougher period with it at the moment.”
EXPERT VIEW
Oliver Stone, head of research and deputy portfolio manager, Fairstone Private Wealth
The team focuses on buying quality stocks at a reasonable price and has a research process underpinned by a disciplined evaluation of companies through direct visits. Value is determined by analysis of quality and price – quality in terms of management, balance sheet and corporate governance, and price in terms of key financial ratios. Unfortunately, a good 2011 aside, the fund has struggled in the short, medium and long term versus the peer group, underperforming in both absolute and risk-adjusted terms and exhibiting generally higher levels of volatility and maximum drawdown.
