It has been another eventful year for investors in European smaller companies.
Markets were shaped by shifting US tariff policies, concerns around economic growth, developments in artificial intelligence, and geopolitical tensions in the Middle East, resulting in significant volatility throughout the period.
Performance
Despite this backdrop, European smaller companies delivered a positive year overall.
ESCT delivered a net asset value total return of 16.8%, comfortably ahead of the benchmark return of 12.4%.
The share price total return over the period was 15.3%.
Performance drivers
Artificial intelligence became one of the year’s defining investment themes, as investors increasingly focused on simplistically identifying AI winners and losers.
Some companies benefited from growing enthusiasm around AI-related investment, while others came under pressure despite continuing to demonstrate strong business fundamentals.
This created both opportunities and challenges for the portfolio.
Sector contributors
Information technology was the largest contributor to performance.
Several holdings benefited from growing demand for the chips, networking equipment, and technology infrastructure needed to support AI, cloud computing, and data centers.
Strong contributors included SUSS MicroTec, Smartoptics Group, PVA TePla, Exxon, and ams OSRAM.
Financials also made a positive contribution.
A number of banks and financial services companies across Europe delivered strong results, including Banco Comercial Português, Alpha Bank, CrediaBank, Optima, FlatexDEGIRO, and Van Lanschot Kempen.
Performance detractors
Despite technology being the strongest performing area overall, some holdings were negatively affected by concerns that AI could disrupt their businesses.
Companies such as Karnov, IONOS, Adesso, and HBX came under pressure as investors questioned how AI might affect future demand for their products and services.
We believe these businesses continue to have strong franchises and are actively adapting to technological change.
In fact, we were able to take advantage of the AI loser sell-off to increase our position size in web hosting solutions IONOS and mobile gaming company MTG, leading to subsequent significant gains.
Beyond the companies affected by the AI theme, some holdings also detracted from performance, including Norway’s Envico, which was impacted by delays to legislation supporting its reverse vending machine business.
And Germany’s Jungheinrich, a forklift manufacturer, also faced challenges from softer demand and increased Chinese competition.
Lastly, rising oil and gas prices boosted energy company share prices, which was a modest headwind for performance as we were underweight the sector.
Portfolio changes
During the year, we continued to focus on identifying companies where we see attractive long-term growth potential, strong competitive positions, and valuations that do not fully reflect their prospects.
This led us to increase exposure to a number of opportunities, particularly in Sweden, where valuations are very attractive for the first time in many years.
At the same time, we exited several holdings following takeovers or where we believed capital could be deployed more effectively elsewhere.
We acquired Swedish house builder JM, which we believe is well-placed to benefit from a recovery in the Swedish housing market, particularly in Stockholm.
And Asmodee, a Swedish-listed company behind some of the world’s most popular board games and trading card brands.
Other Swedish businesses we added included cancer treatment software provider RaySearch Laboratories, organ transplant technology company XVIVO, and vehicle accessory manufacturer Thule.
These companies operate in attractive niche markets and, we believe, are well-positioned for long-term growth.
Alongside new investments, we exited several companies following takeover activity and other corporate events.
These included Spanish credit insurer Grupo Catalana Occidente, which was sold after the company was taken private by its controlling family.
We also exited Irish Dalata Hotel Group following its acquisition by private equity, and Greek stock exchange operator Hellenic Exchanges after a takeover transaction.
Finally, we sold German pharmaceutical company Dermapharm after the founder effectively acquired control of the business.
Outlook
Since the financial year-end, concerns around economic growth and geopolitical tensions in the Middle East have continued.
Despite that, we still find attractive opportunities across European smaller companies.
Europe is home to many innovative businesses that are leaders in specialist fields, spanning areas such as technology, industrial automation, medical technology, and advanced manufacturing.
We remain particularly encouraged by opportunities linked to AI-related investment, where a number of European companies are benefiting from growing demand for the products and services that support the technology’s development.
More broadly, we believe valuations across parts of the European smaller companies market remain attractive, particularly given the quality and growth potential of many businesses in the sector.
Our focus remains on identifying underappreciated companies with strong fundamentals, durable growth prospects, and the potential to create value for shareholders over the long term.