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Insight 24.11.2020

Hidden gems in Swiss & European small caps

Hidden gems in Swiss & European small caps

Small and mid caps have traditionally recorded higher growth rates and investment returns over the long term than large caps: it is easier to generate a dynamic growth rate from a smaller base. Swiss and European small and medium-sized capitalisations – so-called ‘SMID caps’ – also tend to provide investors with ‘pure play’ exposure to major secular growth trends.


Why you should consider our European and Swiss small- and mid-cap solutions for your portfolio

  • Small and mid caps have traditionally provided higher growth rates and investment returns over the long term than large caps.
  • Despite the higher volatility and strong market downturn in the past months due to the pandemic, both the MSCI Europe Small Cap Index and the SPI Extra have experienced strong gains since the market lows seen in March. We can see clear structural, long-term value creation in the Swiss small- and mid-cap market.
  • European and Swiss small caps have indisputable advantages over some of their large competitors and have cemented leading market positions in their respective industries. Especially companies in the technology, healthcare equipment & service and clean tech sectors could benefit from the recent disruption.
  • For both our European small-cap and Swiss small- and mid-cap franchises, we invest in sustainable, quality growth business models: strongly financed, well managed, competitively advantaged companies with high or improving returns that are exposed to strong secular growth drivers in their end markets.
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A selective long-term approach is critical for investing in smaller companies. Low analyst coverage levels and the lack of maturity of the asset class lead to inefficiencies which can enable experienced investors to benefit from attractive entry points for quality growth businesses.

The year 2020 has been dominated by the impact of the coronavirus pandemic on the global economy, on government finances and on corporate earnings, leading to heightened levels of equity market volatility. European small- and mid-cap companies have been no exception to this rule and suffered especially during the first quarter of the year. Nevertheless, the MSCI Europe Small Cap Index has experienced strong gains since the market lows seen in March. Remarkably, despite such a turbulent period for equity investors, the MSCI Europe Small Cap Index has outperformed the MSCI Europe Index by 2.6% since the start of the year.

The Swiss equity market has reflected the solid standing of the country and its companies, outperforming most major global equity markets by limiting the downside while at the same time participating in the upside moves. The SPI Extra, the Swiss small- and mid-cap index, has shown similar resilience compared with major global and regional indices both year-to-date and over the longer run. This comes from the Swiss franc’s safe-haven status, from the independent Swiss National Bank’s experience and ability to absorb outside shocks, and from the economy’s low indebtedness and political stability.

Graph_SMIDs_2.jpg

Sources: UBP, Bloomberg Finance LP, September 2020. Past performance is not a guide for current or future results.

The outperformance of smaller European companies

Part of the explanation for this outperformance by European smaller caps can be gleaned from the polarisation in returns experienced in European equity markets and the sectoral composition of the smaller company universe. More growth-oriented segments of the market, which stand to benefit from long-term trends that have been accelerated under the ‘post-Covid new normal’, have performed strongly. Conversely, those sectors that have seen a disproportionately negative impact on their earnings and cash flows from the continued lockdowns and disruption to operations have lagged. The European small- and mid-cap universe has a higher exposure than large caps to more innovative and disruptive companies in sectors such as technology, healthcare equipment, engineering, clean tech, communication services, and online retail. It also has lower exposure to more traditional ‘old-economy’ areas of the market such as banks, insurance, oil & gas, telecoms, utilities and automotive.


The leadership of Swiss smaller caps

Swiss companies are innovation leaders in various industries, most notably in medical technologies. Close to 700 Swiss companies are specialised in this field, from big players such as Novartis AG, Hoffman-La Roche AG and Lonza Group AG, to listed small or mid-sized companies like Tecan Group AG, Bachem Holding AG and Straumann Holding AG, and a host of privately-owned companies. With such a strong healthcare sector, it is not surprising that in Switzerland smaller companies have emerged or continued to exist, supported among other factors by the talent pool created by the larger companies and by aspirational operational excellence. A number of these small caps have similarly been in a position to contribute to the fight against COVID-19, or to changing habits linked to the pandemic.

Despite its small size in terms of geography, Switzerland ranks fifth in the MSCI AC World with a 3% weighting and a total market capitalisation of over CHF 1.3 trillion (as at May 2020). Swiss equities offer a lower correlation to global equities and are supported by a strong underlying currency, which can benefit investors who seek real returns. Most sectors and companies have adapted to the currency’s strength. The pharmaceutical industry for instance, which accounts for a substantial share of exports, boasts high pricing power, being less affected by short-term economic fluctuations. Some small- and mid-cap names are indispensable to their large global customers and have cemented leading market positions in their respective industries.

How we manage Swiss and European small and mid caps at UBP

The approach of the teams investing in European and Swiss small and mid caps at UBP has always been to invest in sustainable, quality growth business models: strongly financed, well managed, competitively advantaged, value-creating companies with high or improving returns that are exposed to strong secular growth drivers in their end markets.

Through our detailed screening process we seek to actively identify undercovered gems with specific features including strong environmental, social and governance (ESG) credentials, a high and improving cash-flow return on investment (CFROI), or high and productive research & development expenditure. We pick companies that are exposed to a range of enduring secular growth drivers such as technology advancement, healthy living, disruptive industry shifts, solutions for a better planet and consolidation.

Our consistent and balanced allocation to sectors over time and robust stock selection have always been the main driver of performance, enabling us to capture short-term momentum as well as long-term structural drivers.

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Co-Head Swiss & Global Equity Portfolio Management

Eleanor Taylor Jolidon

Eleanor’s experience in the finance field started back in 1993. Since 2004 she has focused on analysing and managing Swiss & global equity. She holds an MA from Trinity College, Cambridge and a DHEE from the College of Europe, Natolin.

European Small- and Mid-Cap Equities - Senior Portfolio Manager

Charles Anniss

After working for 15 years for M&G Investments where he was a fund manager within the company’s equities team, Charles joined UBP in September 2016. He speaks English, French and Spanish.

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