Fondita Finland Micro Cap: Delivering best in class returns since shift in strategy

Equity funds, like any other product, must adapt to changes in market structure, conditions, client preferences, and various other variables to deliver added value to clients and investors. Just over two years ago, we decided to do just that with one of our flagship funds.

The fund in question was Fondita’s oldest and, in many respects, most successful fund: Fondita Equity Spice. This long-only equity fund invested in Finnish equities without particular restrictions on market capitalization. Fondita Equity Spice managed to outperform the broad Finnish market (OMX Helsinki All Share Index) by 370% from its launch in 1997 until June 2022.

However, we wanted to leverage our extensive experience, knowledge, and process at Fondita regarding micro-cap investing, which we had acquired over many years of successfully investing in both Nordic and European Micro-Caps. Considering the current structure and specific features of the Finnish stock market, we felt the need to deliver better risk-adjusted returns for our investors. After extensive background work, we decided that the fund should focus on micro-caps in the Finnish stock market, defined as companies with a market value of less than 800 million EUR. This turned out to be the right call for our clients and investors.

Fondita Finland Micro Cap started its journey in June 2022. Since the launch of this strategy, the fund has returned 8.19%, outperforming the MSCI Finnish Micro-Cap Index by an impressive 19.13% (in EUR terms). Competing Finnish Micro-Cap funds have returned significantly less during this period, and the HEX25 large-cap index has returned only 4.80%. In addition, Fondita Finland Micro Cap has been able to deliver this significant outperformance at a lower volatility than the competition.

The chart below illustrates the fund’s return (%) against the benchmark (1.6.2022-31.8.2024).

This stellar performance has been delivered in a market and time period that has not favoured micro-cap stocks in general. The MSCI European Micro-Cap Index has actually dropped 7.91% since June 2022.

Since the launch of the current micro-cap strategy, the fund has seen four of its holdings acquired with significant premiums. The best contributors to the outperformance have been Kempower (divested), Puuilo, Nixu (acquired), and Musti (acquired). Another important factor driving relative performance is the skill to avoid so-called “laggards” or very poorly performing stocks, and if not avoid, at least divest them in time.

The market should become more favourable for micro-caps as we start seeing interest rate cuts. Lower interest rates usually increase the risk appetite of investors in general, which could lead to larger international investors returning to the Finnish small- and micro-cap segment. Additionally, valuation levels for some Finnish micro-caps are quite depressed, and it would not be surprising to see some of these companies becoming acquisition targets.

Marcus Björkstén
Portfolio Manager for Fondita Finland Micro Cap

_{Disclaimer:
This is marketing communication. The past performance of the investment fund does not provide any guarantee of future results. Read the fund prospectus and KID before making any investment decisions. The fund prospectus and KID are available on English, Finnish and Swedish and can be found on our website under “Reports and documents”.}