Why European micro companies are interesting from an investment perspective

Investing in the smallest companies on the stock market is a passion for us at Fondita. Back in 1997, when the fund company was founded, the first small cap fund Fondita Nordic Small Cap was launched. Today 26 years later Fondita manages no less than five small and micro cap funds. Thus, we can say that managing small cap funds is part of Fondita’s DNA.

Today, Fondita European Micro Cap, turns six years old, and on this occasion we would like to give you an insight into the management of funds focusing on the smallest companies in the stock market and the type of investments that will drive the fund in the coming years. Fondita European Micro Cap has given a return of 41.8% net of fees since the fund’s launch six years ago, compared to the MSCI Europe Micro Net Return which returned 35.4% over the same period. The fund’s best investments over the years have been medical technology company Eckert & Ziegler, digital security company Secunet, software company Adesso, insulation materials manufacturer Steico and software company Nexus.

Why do we find micro companies so interesting from an investment perspective? Firstly, these small companies that we have analyzed are hopefully the large companies of the future, i.e. as a rule, the smaller companies on the stock exchange are growing much faster than the big global players, which means that profit growth should be higher, which should also mean better share price performance. At least that is what history has taught us. These companies are often technological leaders in their niches and typically focus on a few product areas and services and have a high degree of innovation. In many cases, they are also entrepreneurial companies where a founder or the entrepreneur himself has invested a large part of his wealth in the company. The smallest companies on the stock market are often “underanalyzed” and followed only by few investors and analysts. This gives those of us who focus on these 100 percent an opportunity to search for and find unknown gems that, in the future, may be much larger companies than they are today. For us as investors, it is therefore interesting to build up a portfolio of the smaller companies on the stock market, where we see good growth opportunities in the long term.

Today, after a historically weak year for small companies in 2022, European and Nordic Small and Micro company stocks look attractive from a historical perspective, both in terms of their own valuation and relative to large company stocks.

For Fondita’s small cap funds, we see mainly four strong growth trends that we have chosen to invest in. The demographic change in the world, where the population is getting older and wants to continue to live a decent and active life, offers great opportunities among the stock market’s smaller companies in medical technology, health care and consumer products. The wave of digitalization that we are witnessing in our daily lives provides good opportunities for companies in software and IT services, especially among the smaller companies, as there are only a few larger companies in Europe that are driven by this strong trend, to grow over time. The world’s and Europe’s focus on the environment and the environment in which we live, finding companies whose products and services work towards a cleaner environment where we conserve resources and save energy, is a key driver of growth in Fondita’s small cap funds.

The problems of global supply chains and component shortages in recent years, combined with increased geopolitical concerns, mean that we are seeing an increased level of investment in our immediate vicinity within areas such as production capacity and local logistics chains. This in turn is leading to increased investment in automation and process technology in the manufacturing industry. Here we are keen to find companies that will benefit from these upcoming investments. These are all structural changes that are driving the fund’s investments in this decade.

In Fondita European Micro Cap we find companies such as pharmaceutical manufacturer PharmaNutra, industrial technology company Stemmer Imagine, contract manufacturer Note, biogas and hydrogen power plant manufacturer 2G Energy and payment services company Boku. European micro cap companies in Germany and in Sweden look particularly attractive after a very weak performance last year due to concerns about a broad and deep energy crisis in Europe as well as concerns about a major real estate and housing crisis in Sweden. The fund has increased its exposure to these regions, as we see these concerns as exaggerated and we still see great potential in the smallest quality companies in these countries.

Kenneth Blomqvist, portfolio manager