At a media event in London last week, UK-based Chelverton Asset Management identified investment opportunities in the European small and micro-cap arena which it said are being overlooked.
Chelverton Asset Management believes that the EU’s response to the energy crisis has added weight to the momentum powering the energy transition and has enhanced the outlook for firms facilitating the required digitalisation.
The headwind of a burdensome EU regulatory environment has become a tailwind given the support measures introduced to underpin the energy transition. The competitive advantage is with companies that have not only a strong ESG focus, but well-developed management and reporting capabilities, the firm said in a statement.
The commodities and energy transition and digitalisation clusters represent more than 70 per cent of the holdings in the MI Chelverton European Select Fund, which sits in the IA Europe ex UK sector, and is co-managed by Dale Robertson and Gareth Rudd.
Rudd said: “Europe is providing a fantastic opportunity to gain exposure to what are, we believe, the two largest megatrends of our generation – energy transition and digitalisation. The real opportunity, in our opinion, lies at the smaller end of the market cap spectrum, which has underperformed (against trend) in recent years. We are very well positioned to capitalise on these factors going forward.”
Robertson added: “When we launched the fund five years ago, we had a 40 to 45 per cent allocation to small and mid-cap; today this number is around 75 per cent.” He highlighted the investment opportunities in renewable energy, such as in wind power and solar energy, to meet the EU’s net zero goals.
Rudd continued: “We are continually finding a good stream of investment opportunities which are in our sweet spot, where the market is simply not recognising the growth potential of these businesses. These companies are profitable, cash generative, and well capitalised.”
MI Chelverton European Select Fund
The fund, which posted modest gains in February and has performed quite well over the past five years, aims to deliver long-term capital growth to investors by investing in a diversified portfolio of European (ex-UK) companies. It invests across the size spectrum down to a minimum market capitalisation of about €50 million ($54 million).
Top holdings focus on the commodities and energy transition space, including Dutch-listed firm Brunel, an international staffing company that provides engineers and consultants to the energy and commodities sectors. Management is predicting double-digit top-line growth for the medium term, the firm said. With a free cashflow yield approaching 10 per cent, a dividend yield of 5 per cent, and a net cash balance sheet, Rudd believes that the prospects for Brunel are excellent, and the valuation is attractive. It contributed to the fund’s performance in February.
Another top holding is the Advanced Metallurgical Group which extracts ferrovanadium from spent catalytic converters used in the oil and gas sector; the ferrovanadium is then used as an additive to strengthen steel, consistent with the shift towards a circular economy, Rudd continued. AMG also owns lithium spodumene mines, from which lithium is extracted; lithium-ion batteries play a key role in vehicle electrification. On a free cashflow yield approaching 9 per cent, the company is expected to enjoy double-digit revenue growth for the coming years.
Ox2, a European wind project developer, is another top holding. Its portfolio includes solar and energy products too, but it is onshore and offshore wind where it has built its widely-envied track record. It is involved in all aspects of wind farm development, from planning through to construction, sale, and operation – having been involved with more than 70 sites, Rudd said. It has been profitable and cash generative for some years now and has a net cash balance sheet. Growth of more than 25 per cent per annum is expected over the medium term, financed entirely by internally generated free cashflow.
In February, the firm also added three new holdings to the commodity and energy transition cluster, including Zaptec, a European provider of electric vehicle technology.