European smaller-caps – still the catch-up trade?

15/01/2018

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​As global economies emerged from the financial crisis at the start of the decade, the US and UK pulled ahead of its European cousins. Earnings for European companies lagged; growth teetered on the edge of deflation; the region’s politicians toiled with Grexit and Brexit and much in between.

But 2017 has seen a switch in fortunes – investors have started to recognise the tangible improvements in Europe’s economic backdrop, setting the stage for a catch-up trade. Gross domestic product growth seems to have gained traction, and company profit margins are improving. Europe is seeing the biggest rise in earnings in developed markets. Where the US and UK have become victim to populism, Europe has largely rejected it (recent concerns over Germany and Catalonia aside). This economic improvement has given the European Central Bank (ECB) President Mario Draghi the confidence to prepare the market for a withdrawal of the unprecedented quantitative easing (QE) program, most likely in the latter part of 2018.

The euro has also strengthened, and is now at levels last seen before the ECB commenced QE in the spring of 2015. This currency strength has been bad news for larger European companies, which have performed less well in recent months; their earnings tend to be harvested from across the globe, leaving them at the mercy of currency swings. Smaller companies, where we are invested, tend to have more of a domestic focus and so have been less affected by a stronger euro.

Small but mighty

We are cognizant of the risks that come with investing in much smaller firms: they are more susceptible to market swings than bigger businesses and their shares can be difficult to trade in large amounts. But as investors in larger companies in Europe have struggled to find value amid renewed enthusiasm for European shares, they have reset their sights further down the scale, targeting mid-sized businesses, which in turn have become more expensive. It means the smaller companies end of the market offers the best value, in our view, and it is an area that we have a long history of seeking exciting growth opportunities for our investors.

Seeking strong capital growth

We look for businesses with good management teams where we believe that their long-term growth potential can be realised, either by addressing something that is not working internally, or continuing to grow their earnings strongly, regardless of geopolitical uncertainties. Our strategy is broadly focused on three areas of investment: value, self-help and ‘growth at the right price’ (GARP).

Value is key to our investment strategy – we look for companies where we believe the market has not yet recognised the value of its assets, whether that comes from its leadership in a particular field, the quality of its products or technological advantages. GARP businesses are those where we believe that earnings can grow more vigorously than their peers or the wider market, but where this trajectory has not yet been recognised by the market, and therefore already reflected in the price of shares. Turnaround, or ‘self-help’ businesses are those that are unloved by the market but have the capacity to improve or recover, primarily through internal change.

Overlooked and undervalued?

Alma Media is a media owner of regional, local and free circulation newspapers for print – an old industry – and the market is pricing it as such. But what the market, in our view, should be focusing on is what the business is really about: online websites that deal in used cars, used equipment and in real estate – an area where it is a market leader. Axel Springer, a similar outfit in Germany, provides guidance in this respect, with the market placing significantly more value on its operations. In our opinion, other investors will catch up with this thinking.

Pharma prospects

Founded in 1993, Zur Rose is in the business of online drugs, operating a prescription mail order service under its DocMorris brand in Germany, as well as a market-leading online pharmacy in Switzerland under its Zur Rose brand.

Pharmacy is a market ripe for disruption in Europe: small, relatively high value non-perishable packages are extremely well-suited to e-commerce, which remains a very under-developed market for the industry, considering the 125,000 bricks-and-mortar pharmacies across Europe. What is more, the German market has recently been prised open by a European Court of Justice ruling and we believe market leader DocMorris will be a key beneficiary.

Self-help

Van Lanschot (VL) is the oldest independent bank in the Netherlands, dating back to 1737. It is in the business of private banking, asset management and merchant banking. Back in April 2016, the management team presented a new strategy designed to reinvigorate the firm’s private banking arm. At the time the division earned around half of VL’s revenues, yet accounted for only 7% of total profits, indicating poor efficiency and an enormous scope for self-improvement. As part of its forward-looking strategy, VL is attempting to become more asset-light, while building up its capital ratios and returning cash to shareholders wherever possible. Its return on equity – a measure of profitability – is poor at present; we believe it should be much higher.

European smaller caps are still playing catch-up
 
All-in-all 2017 was a good year for European equities, and in particular European smaller caps. But we think they have much further to go: European firms have yet to catch-up to their counterparts in other developed markets, leaving greater potential to achieve a higher level of growth, on a relative basis. It is important to remember that, as noted above, there are additional risks involved in small-cap investing, but – in our view – 2018 should continue to see a range of attractive investment opportunities in this part of the marketplace, for the astute investor. 

 

Glossary

Deflation: a decrease in the price of goods and services across an economy.
Quantitative easing (QE): when a central bank print money to buy assets and stimulate the economy.
Capital ratios: the amount of liquid assets a financial institution holds against its risk operations.
Return on equity: the amount of net income relative to shareholders’ invested equity.
Grexit: a term coined to describe the potential withdrawal of Greece from the eurozone (the group of countries that use the euro as their primary currency).
Brexit: a term used to describe the UK’s departure from the European Union.
Catch-up trade: Where companies that have previously underperformed start to close the gap with those areas that have outperformed.
Smaller caps: Described here as companies with a market value of €4 billion or less.
 
 
This article represents the views of the authors at the time of writing. References made to stocks, sectors or asset classes do not constitute or form part of any offer or solicitation to issue, sell, subscribe or purchase them. Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

The information in this article does not qualify as an investment recommendation.

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Important information

Please read the following important information regarding funds related to this article.

Janus Henderson Horizon Pan European Smaller Companies Fund

This document is intended solely for the use of professionals and is not for general public distribution.

The Janus Henderson Horizon Fund (the “Fund”) is a Luxembourg SICAV incorporated on 30 May 1985, managed by Henderson Management S.A. Any investment application will be made solely on the basis of the information contained in the Fund’s prospectus (including all relevant covering documents), which will contain investment restrictions. This document is intended as a summary only and potential investors must read the Fund’s prospectus and key investor information document before investing. A copy of the Fund’s prospectus and key investor information document can be obtained from Henderson Global Investors Limited in its capacity as Investment Manager and Distributor.

Issued in Europe by Janus Henderson Investors. Janus Henderson Investors is the name under which investment products and services are provided by Janus Capital International Limited (reg no. 3594615), Henderson Global Investors Limited (reg. no. 906355), Henderson Investment Funds Limited (reg. no. 2678531), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), (each registered in England and Wales at 201 Bishopsgate, London EC2M 3AE and regulated by the Financial Conduct Authority) and Henderson Management S.A. (reg no. B22848 at 2 Rue de Bitbourg, L-1273, Luxembourg and regulated by the Commission de Surveillance du Secteur Financier). We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

Past performance is not a guide to future performance. The performance data does not take into account the commissions and costs incurred on the issue and redemption of units. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change. If you invest through a third party provider you are advised to consult them directly as charges, performance and terms and conditions may differ materially.

Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment.

The Fund is a recognised collective investment scheme for the purpose of promotion into the United Kingdom. Potential investors in the United Kingdom are advised that all, or most, of the protections afforded by the United Kingdom regulatory system will not apply to an investment in the Fund and that compensation will not be available under the United Kingdom Financial Services Compensation Scheme.

Copies of the Fund’s prospectus and key investor information document are available in English, French, German, and Italian. Articles of incorporation, annual and semi-annual reports are available in English. Key Investor document is also available in Spanish. All of these documents can be obtained free of cost from the local offices of Janus Henderson Investors: 201 Bishopsgate, London, EC2M 3AE for UK, Swedish and Scandinavian investors; Via Dante 14, 20121 Milan, Italy, for Italian investors and Roemer Visscherstraat 43-45, 1054 EW Amsterdam, the Netherlands. for Dutch investors; and the Fund’s: Austrian Paying Agent Raiffeisen Bank International AG, Am Stadtpark 9, A-1030 Vienna; French Paying Agent BNP Paribas Securities Services, 3, rue d’Antin, F-75002 Paris; German Information Agent Marcard, Stein & Co, Ballindamm 36, 20095 Hamburg; Belgian Financial Service Provider CACEIS Belgium S.A., Avenue du Port 86 C b320, B-1000 Brussels; Spanish Representative Allfunds Bank S.A. Estafeta, 6 Complejo Plaza de la Fuente, La Moraleja, Alcobendas 28109 Madrid; Singapore Representative Janus Henderson Investors (Singapore) Limited, 138 Market Street, #34-03 / 04 CapitaGreen 048946; or Swiss Representative BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, 8002 Zurich who are also the Swiss Paying Agent. RBC Investor Services Trust Hong Kong Limited, a subsidiary of the joint venture UK holding company RBC Investor Services Limited, 51/F Central Plaza, 18 Harbour Road, Wanchai, Hong Kong, Tel: +852 2978 5656 is the Fund’s Representative in Hong Kong.

Information on this document is on Janus Henderson Investors’ best endeavours.

Specific risks

  • Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • This fund is designed to be used only as one component in several in a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested into this fund.
  • The Fund could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Fund.
  • If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
  • Changes in currency exchange rates may cause the value of your investment and any income from it to rise or fall.
  • If the Fund or a specific share class of the Fund seeks to reduce risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or detrimental.
  • Shares of small and mid-size companies can be more volatile than shares of larger companies, and at times it may be difficult to value or to sell shares at desired times and prices, increasing the risk of losses.

Risk rating

Janus Henderson Pan European Smaller Companies Fund

This document is intended solely for the use of professionals and is not for general public distribution.

The Janus Henderson Fund (the ""Fund"") is a Luxembourg SICAV incorporated on 26 September 2000, managed by Henderson Management S.A. Any investment application will be made solely on the basis of the information contained in the Fund’s prospectus (including all relevant covering documents), which will contain investment restrictions. This document is intended as a summary only and potential investors must read the Fund’s prospectus and key investor information document before investing. A copy of the Fund’s prospectus and key investor information document can be obtained from Henderson Global Investors Limited in its capacity as Investment Manager and Distributor.

Janus Henderson Investors is the name under which investment products and services are provided by Janus Capital International Limited (reg no. 3594615), Henderson Global Investors Limited (reg. no. 906355), Henderson Investment Funds Limited (reg. no. 2678531), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), (each registered in England and Wales at 201 Bishopsgate, London EC2M 3AE and regulated by the Financial Conduct Authority) and Henderson Management S.A. (reg no. B22848 at 2 Rue de Bitbourg, L-1273, Luxembourg and regulated by the Commission de Surveillance du Secteur Financier).

Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment.

Past performance is not a guide to future performance. The performance data does not take into account the commissions and costs incurred on the issue and redemption of units. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change. If you invest through a third party provider you are advised to consult them directly as charges, performance and terms and conditions may differ materially.

The Fund is a recognised collective investment scheme for the purpose of promotion into the United Kingdom. Potential investors in the United Kingdom are advised that all, or most, of the protections afforded by the United Kingdom regulatory system will not apply to an investment in the Fund and that compensation will not be available under the United Kingdom Financial Services Compensation Scheme.

Copies of the Fund’s prospectus and key investor information document are available in English, French, German, and Italian. Articles of incorporation, annual and semi-annual reports are available in English. Key Investor document is also available in Spanish. All of these documents can be obtained free of cost from the Fund’s registered office in Luxembourg: 2 Rue de Bitbourg, L-1273 Luxembourg”, in Germany: Janus Henderson Investors, Tower 185, Friedrich-Ebert-Anlage 35-37, 60327 Frankfurt am Main, in Austria: Bank Austria Creditanstalt AG, Am Hof 2, 1010 Wien, in Spain: offices of the Spanish distributors, a list of which may be obtained at www.cnmv.es (Janus Henderson Fund is registered with the CNMV under number 259); in Belgium: Belgian Financial Service Provider CACEIS Belgium S.A., Avenue du Port 86 C b320, B-1000 Brussels; in Singapore: Janus Henderson Investors (Singapore) Limited, 138 Market Street #34-03/04 CapitaGreen, Singapore 048946; and in Switzerland from the Swiss representative: BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, CH-8002 Zurich who are also the Swiss Paying Agent.

Please note that Isle of Man investors will not be protected by statutory compensation arrangements in respect of the Janus Henderson Fund. We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

Information on this document is on Janus Henderson Investors’ best endeavours.

Specific risks

  • Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • This fund is designed to be used only as one component in several in a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested into this fund.
  • The Fund could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Fund.
  • If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
  • Changes in currency exchange rates may cause the value of your investment and any income from it to rise or fall.
  • If the Fund or a specific share class of the Fund seeks to reduce risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or detrimental.
  • Shares of small and mid-size companies can be more volatile than shares of larger companies, and at times it may be difficult to value or to sell shares at desired times and prices, increasing the risk of losses.

Risk rating

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