How does the Swiss SMID equity segment differentiate itself from Swiss Large Caps ?
Like their larger peers, the smaller Swiss companies tend to have a global presence and differentiate themselves from their competitors with an innovative and sometimes niche, product offering. Innovation lies behind the global market share leadership that many of these companies enjoy in the often mission critical products provided to their customers. The large cap segment is dominated by Switzerland’s three largest companies. The SMID index (SPI Extra) is more attractively diversified, with a higher prevalence of Industrials stocks while still offering a strong exposure to Healthcare and Financials.
What factors currently make investing in Swiss SMID attractive ?
With more than 90% of their revenues generated outside Switzerland, Swiss SMID companies rely on the dynamics of global growth. With a higher exposure to Industrials than the large-cap index, the current supportive cyclical global upswing is reflected in stronger earnings expectations for Swiss SMID companies. We continue to see a supportive environment for SMID investment and would recommend taking positions with a medium-term view.
What is your approach to investing in SMID ?
We have the same approach for all our strategies. We differentiate ourselves from our peers by using the same team to manage Swiss and Global equity portfolios. This means that we are especially familiar with the global customers, peers and suppliers of our Swiss SMID companies. Our most important criteria is identifying where a company finds itself along its CFROI (Cash Flow Return on Investment) lifecycle. Correct identification of the positioning of a company along its CFROI lifecycle enables us to discover alpha generating opportunities. We look for companies which are either growing their CFROI rapidly, maintaining it at a high level or companies in a restructuring phase which should eventually allow them to return back to CFROI growth.
How does Swiss SMID screen for Environmental, Social and Governance (ESG) criteria ?
The Swiss equity market naturally has a high level of ESG compliance through its structure. Furthermore, the implementation of the Minder initiative has led to a higher level of scrutiny on questions of corporate governance. We have noticed that by investing in companies with improving or high and stable CFROI, our portfolios naturally have a strong ESG compliance. This is a consequence of the difficulty in improving or maintaining CFROI for a company where the strategy is wilfully damaging to society and the environment and does not respect the basic criteria of corporate governance. UBP’s Swiss & Global franchise engages with companies in which they invest in order to encourage heightened respect for ESG criteria.
The Swiss SMID index has seen a number of companies moving up to the large cap SMI and has lost some other names through M&A activity. How dynamic is the listing of Swiss SMIDs ?
It has indeed been encouraging to see the continued interest in Swiss SMIDs from activist shareholders as well as some companies being bought out by competitors or larger peers. Similarly, we are heartened to see a decent level of IPO activity over the last few years, with some companies offering the characteristics that we find attractive in the Swiss SMID space: those with leading market shares, active in niche technologies behind which they invest generously in R&D. These companies will reinforce the high quality growth potential of this globally exposed equity segment.
Eleanor Taylor Jolidon
Co-Head Swiss & Global Equity Portfolio Management