Kissing frogs in Europe: look for the small-cap hidden champions

Global Fund Manager, Standard Life Investments reported that its European Smaller Companies Fund (SICAV) hit the five year mark and now sits at the top of the Morningstar Offshore Europe Small-Cap Equity Sector.

Since it was launched on 26 September 2007 the fund, managed by Ken Nicholson, has generated a return of 22.8% (institutional share class) versus a sector average of -20.2%. The fund has also achieved top quartile performance over one, two, three and four years, Standard Life said in a press note.

The strong performance has gained further recognition amongst the independent rating agencies. The fund has been awarded a bronze rating for the first time by Morningstar OBSR based on their confidence in the manager and investment process. It also has a Gold rating from Standard & Poor’s, and Citywire has awarded Nicholson with an AA rating.

Ken Nicholson, wo has managed the fund since its launch, explained he invests in a concentrated portfolio of around 40 stocks of which 28 percent are currently listed in Sweden and Germany.

According to his experience, within the European smaller company field there are a number of ‘hidden champions’ which are market leaders in their field, but generally unknown and under-researched by many analysts due to their small market capitalisation.

“When it comes to small caps, you have to kiss a lot of frogs to find a prince among them. But I love the feeling when I come away from a visit to a company and know that we’ve uncovered a real gem.”

“Europe has a number of world class companies operating in many sectors if you look beyond the headline problems of the euro,” Nicholson suggested. “Some businesses are market leaders, with a large proportion of sales outside Europe and proven ability to withstand macroeconomic headwinds. They are reporting strong earnings and benefiting from growth in global markets such as Japan, the US and Emerging Markets, and in some cases from a weaker euro.”

In his opinion, investors have recently turned a blind eye to Europe and small caps in particular, at a time of increased volatility and challenges for smaller businesses. “But I think people are starting to wake up to the exciting opportunities the market is now offering.”