One of Europe’s Top Stock Pickers Is Buying Swedish Small Caps
One of this year’s best-performing European equity investors is benefiting from big gains in Swedish and Italian equities.
The Berenberg European Micro Cap and European Small Cap funds are up 31% and 27%, respectively, in 2021, beating 99% and 98% of peers, according to data compiled by Bloomberg. Lead manager Peter Kraus said the funds have thrived by sticking to their strategy of buying shares of fast-growing, innovative companies that have solid financials.
Lately that search has turned up a lot of names from opposite ends of the continent. Stockholm-listed companies make up four of the 10 biggest holdings in the small-company fund, while Italian information-technology stocks are among the largest positions as well.
“Where are the hot spots? Sweden is a good example because of the country’s innovation culture in IT and health care,” Kraus said in a phone interview. “And very surprising to most investors, Italy. Italy is not known for being an economic powerhouse, but from a bottom-up perspective, we have been really successful in stock picking strong growth companies in industrial and in technology.”
Kraus, the head of small-cap equities at Berenberg Wealth & Asset Management in Frankfurt, runs the funds with co-managers Michael Schopf, Katharina Raatz and Johann Abrahams.
They look mainly in the technology, health care and industrials sectors, and they’re not afraid to pay a high multiple of earnings for a company that’s posting big growth.
Kraus focuses on what he calls “multiple arbitrage:” A company with fast-growing earnings that seems expensive today at 40 times estimated profit will be selling at only 15 times in three or four years, for example.
“We don’t mind if this means we have to pay a higher price for quality,” he said. “A high multiple today is actually a really cheap one in that long-term time horizon.”
Medical-equipment developer Surgical Science Sweden AB was the biggest position in both funds as of Aug. 31. Other top holdings from Sweden include biotechs Vitrolife AB, BICO Group AB and Genovis AB, while Italy is represented by IT services companies Digital Value SpA and Reply SpA.
To be sure, the funds have been hurt by the market’s pullback this month, with rising Treasury yields especially hitting more expensive sectors like tech. Still, Kraus is staying focused on bottom-up stock picking.
“I cannot think of any occasion in the last 30 years where growth stocks were not under attack, where there aren’t any risks in interest rates, economy, politics, some military conflicts,” he said. “What I look for is quality growth companies that can generate double-digit growth over the long term.”
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