The European Smaller Companies Trust Fund Manager Commentary – August 2022

Macro backdrop

August saw a sharp reversal of the gains seen in the early summer with European small cap equities falling almost 7%. This was fuelled by heightened uncertainty as investors continued to wrestle with central bank narratives, geopolitics and economic data.¹

Trust performance and activity

The best performer over the month was the internet of things (IoT) company U-Blox. We bought this stock earlier in the year based on what we saw as a depressed valuation at the time. Since then, we have seen demand improve (despite a weakening semiconductor cycle): the order book as of end of June 2022 almost doubled compared to a year ago.² Other positive contributors included energy stocks, with energy security remaining top of the political agenda. We also had good returns from Criteo, an online advertising business which has done well to reinvent its product offering following the introduction of stricter rules by web/mobile service providers. Sports nutrition company Glanbia also added to returns as the company announced results showing its management turnaround to be on track, and despite a weakened consumer the company has benefited from a growing market and strong brand loyalty.

Amongst the main detractors was TKH, the international technology company specialising in innovative solutions a cross manufacturing, vision technology and connectivity. The market continued to penalise the shares like a cyclical stock which we think fails to take into account the high-tech transition the company has achieved over the last decade, as well as the various (defensive and cyclical) end markets the company services. Manz was also weak as the company lowered guidance on delays to battery projects, but long term we think the company is well-placed in the e-mobility transition and we decided to increase the fund’s holding.

Activity involved returning to Swissquote following a large price correction. The exchange company had been earning above average returns on crypto trading but expectations in this area have now been rebased and the remainder of the business is a unique asset. Elsewhere, we sold Portuguese Telecom Nos (where we took profit), bike retailer Bike24 (a failed investment) and education business Prisa (where the full investment case looks to be much longer dated).

Outlook/strategy

The rest of the year will likely be volatile and despite further GDP growth and earnings downgrades we believe that opportunities will present themselves to add to existing positions or enter new names where valuation and fundamentals disconnect. Things are bleak. However, this has become the consensual view and many share prices are now at levels we might expect in a severe recession. In addition, we are starting to see large government intervention in retail energy markets which could potentially lift the depressed mood, short term at least.

¹Source: Bloomberg as at 31st August 2022

Glossary Expand

Cyclical stocks – Growth investing Companies that sell discretionary consumer items, such as cars, or industries highly sensitive to changes in the economy, such as miners. The prices of equities and bonds issued by cyclical companies tend to be strongly affected by ups and downs in the overall economy, when compared to non-cyclical companies.

Valuation metrics – Metrics used to gauge a company’s performance, financial health and expectations for future earnings e.g. price to earnings (P/E) ratio and return on equity (ROE).