Opportunities in European smaller companies

Europe is home to some incredibly impressive smaller companies that are developing world leading technologies to transform how we live.

Many of these innovative businesses are growing rapidly and can make tremendous investments if you get in early and benefit when the stock market catches up to the story. However, there’s a very good chance that you won’t have heard of them unless you’ve invested in a specialist European smaller companies fund.

Here, we take a look at this exciting area, highlight the impact leading names are having on the global stage, and reveal which investment funds are worth considering.

Why invest in the sector?

Ollie Beckett and Rory Stokes, the managers of the Janus Henderson European Smaller Companies fund, believe there are plenty of reasons to invest in this area.

“Smaller companies have the potential for higher growth, and with more opportunity for future growth than their larger counterparts,” they said. Small cap names, they pointed out, are often younger companies at an early stage in their development, with room to expand geographically or into adjacent markets.

“In comparison, large cap peers often operate in mature industries and have already expanded their operations globally,” they said. “These large cap stocks can become reliant on charging higher prices, reducing their costs or taking market share.”

Is now the right time?

Ollie and Rory believe European smaller companies are at “their lowest valuations in the past decade”, making them attractive. “The universe of smaller companies within Europe offers a highly diverse and vibrant mix of growing businesses,” they said.

The managers also argue that many European companies are already considering sustainability issues and stand to benefit from the global push towards such green issues.

“With strong balance sheets, solid earnings and less well-covered companies prone to being mispriced, we believe that European smaller companies can provide a significant opportunity for active stock pickers,” they added.

Research is the key

Ben Griffiths, manager of the T. Rowe Price Responsible European Smaller Companies Equity fund, believes fundamental research is crucial in uncertain times. “European smaller companies have pulled back sharply this year, but they are still not cheap,” he said. “Recent developments are likely to put pressure on costs, supply chains, and demand, weighing on corporate earnings.”

His fund is an actively managed, diversified growth portfolio of around 70 to 100 small and mid-cap pan-European companies. The focus is on those that can sustain above-average, long-term earnings growth and selling at reasonable prices.

Companies to avoid

Ben also avoids sectors or companies whose activities may be considered harmful to the environment and/or society. This means businesses involved in areas such as controversial weapons, tobacco production, coal production, adult entertainment, and direct gambling operations won’t appear in the fund.

Geographically, the fund has 43.8% of assets in the UK, followed by 9.9% in Germany, 7.5% in Italy, and 7.3% in Switzerland*. However, it also has exposure to a host of other countries, including Spain, France, Sweden, Austria, Netherlands, Luxembourg, Denmark, and Ireland*. Ascential, the UK media business, is his top holding with a 2.9% share of assets under management, followed by Austrian bank BAWAG*.

Recently, Ben has made some changes to his portfolio. “We continued to seek and add to high-quality franchises that offer an improved exposure to cyclical factors at a lower valuation, most notably within industrials and business services,” he said.

Broad country exposure

The Barings Europe Select Trust, which is run by four co-managers – Nicholas Williams, Colin Riddles, Rosemary Simmonds, William Cuss – has broad country exposure. France has the largest weighting of 15%, according to the most recent factsheet, followed by Italy with 13%, the Netherlands on 10.6%, and the 10.3% in Switzerland**.

The fund also has holdings from Sweden, Denmark, Finland, Germany, and Spain, along with broad sector exposure**. Industrial goods have the lion’s share at 30.1%, followed by 21.3% in financials, 19.5% in consumer goods, 11.6% in business providers, 6.2% in basic materials, and 5.9% in technology**.

Interesting companies

Meanwhile, the top 10 holdings of the Trust include names with which many UK investors may not be familiar, such as Topdanmark, a Danish insurer**. Then there is Huhtamaki Oyj, a Finnish consumer packaging company; Amplifon, the Italian hearing aid maker; British insulation specialist SIG; and SPIE, the French multi-technical services provider**.

There is a similarly broad mix of companies among the largest holdings of the Jupiter European Smaller Companies fund run by Mark Heslop and Phil Macartney. The top 10 names in the fund account for 32.4% of assets under management*. They include companies hailing from a variety of sectors.

Its largest position is the 4% in Elis SA, a French multi-service provider; followed by Swiss technology firm Comet Holding AG; and IMCD, the Dutch distributor of speciality chemicals*. Swiss financial services provider VZ comes next; followed by Italian bank Fineco; Allfunds, the UK fund distribution network; and Brunello Cucinelli, the Italian luxury fashion brand*. Overall, Switzerland has the most significant country allocation on 22.8%, followed by 18.4% in Italy, 13.2% in France and 11.6% in Germany*.

*Source: fund factsheet, 31 July 2022
**Source: fund factsheet, 30 June 2022