Asset Management

EXCLUSIVE: Spotlight On Small-Mid Cap Equities In Europe, UK – Quaero Capital

Amanda Cheesley Deputy Editor 30 May 2024

EXCLUSIVE: Spotlight On Small-Mid Cap Equities In Europe, UK – Quaero Capital

Philip Best and Marc Saint John Webb, co-fund managers of Quaero's Argonaut fund, discuss the performance of small-mid cap equities across Europe and the UK over the last 20 years, the outlook and their fund’s performance.

This month, Phillip Best (pictured) and Marc Saint John Webb at Quaero Capital highlighted how small-mid cap equities across Europe and the UK have been overlooked over the past six years, but the tide is starting to change.

“We’ve seen some of the worst outflows since the financial crisis,” Best, founding partner of Quaero Capital, told WealthBriefing in an exclusive interview. “Small caps were out of favour as an asset class but the tide is starting to change. We’ve seen better results in our fund in the first quarter of this year, outperforming the index, and we believe that the outlook is good.”

“Investors tend to buy small caps when interest rates fall, and the expectation is that rates will come down this year, boosting their performance,” Saint John Webb explained, “with valuations low, now is a very interesting entry point.” 

The Argonaut Fund, launched in May 2003, was born from the idea of investing in European small and micro caps (including Switzerland and the UK). Best and Saint John Webb dig around for small, mis-valued, often overlooked unpopular stocks, saying this is where the money is made.

The fund has generated a cumulative performance of +740.7 per cent net of all fees. This compares with 515 per cent for the benchmark Emix Smaller European Companies Index over the same period.

“We go for stocks with low valuations that are under-priced. The fund is heavily invested in France, followed by Switzerland and Italy,” Saint John Webb continued. “We are also starting to invest more in Germany and the UK, as firms are undervalued there. We recently bought two firms in Germany, including online eyewear firm Mister Spex, and two in the UK. We also invest a lot in tech and industrials.”

Alec Cutler at Orbis Investments also favours small-mid caps in the UK and is heavily overweight in UK equities. See more commentary here 

Quaero's Argonaut fund
The fund, which is managed with a “value investing” philosophy, aims to limit potential downside in the selected shares to ensure a “margin of safety,” in view of pension funds being long-term investors. It focuses on little-known or poorly followed smaller companies and situations that have been ignored by mainstream investors. The fund targets companies with a market capitalisation of less than €1 billion ($1.12 billion). The result is a concentrated portfolio of some 50 to 60 holdings, with low turnover (less than 25 per cent) and generally trading with a forward PE of 10 per cent to 20 per cent below that of the index.

The fund managers also consider ESG analysis to be an important part of the investment process and encourage the companies in which they invest to improve their communication on these areas, to integrate them more into their governance and strategy, and to set clear targets. The fund falls into the Article 8 category of the EU’s Sustainable Financial Disclosure Regulation.

The largest holdings include Heijmans, a Dutch housebuilding and infrastructure firm, although Saint John Webb said they trimmed it slightly recently as it is doing so well. They also include Pricer, a Swedish specialist in electronic shelf labels' system, VIEL &Cie, an inter-dealer broker, and Safilo Group, an Italian eyewear manufacturer.

Founded in Geneva, Quaero Capital is a specialist fund management group which offers a range of investment strategies through its Luxembourg, Swiss and Irish regulated funds as well as private equity funds investing in European infrastructure and French real estate.

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