Fund Management

Focus On Small-Cap Effect – Quaero Capital

Amanda Cheesley Deputy Editor 18 July 2023

Focus On Small-Cap Effect – Quaero Capital

On Quaero Capital's 20th anniversary, Philip Best and Marc Saint John Webb, co-fund managers of the Quaero's Argonaut fund, discuss its performance.

This month, Phillip Best and Marc Saint John Webb at Quaero Capital highlighted how the Argonaut Fund, launched in May 2003, has generated a cumulative performance of +740.7 per cent net of all fees. This compared with 515 per cent for the benchmark Emix Smaller European Companies Index over the same period.

“The fund was born with the idea of investing in European small and micro caps (including Switzerland and the UK),” Best told WealthBriefing in an exclusive interview. He digs around for small, mis-valued, often overlooked unpopular stocks, rather than the latest sexy ones, saying this is where the money is made.

“Buying solid small cap stocks with good businesses and strong balance sheets is preferable to trying to chase fashionable growth stocks which double and then halve (or more). But somehow people can’t resist “sexy” ideas and get sucked in and it always ends the same way,” he continued.

Best believes that the “small cap effect” works, arguing that money left invested for the long term in small cap stocks will outperform most asset classes. “It is not worth trying to be clever and “timing” the moment to invest in small cap and coming in and out. One should just make a certain allocation and leave it there,” he said. “Trying to time when to “get into” and “get out of” small cap is a very difficult game and does not add value. And from our point of view, we end up seeing very clearly that most people end up getting in too high and out too low,” he added.

“We go for stocks with low valuations and there’s quite a lot in the tech sector. For instance, we invest in U-blox, a Swiss company that designs microchips for navigation purposes,” Best said.

“As we invest in small firms, we have to do all the research ourselves and visit the companies,” Saint John Webb added. “We don’t invest much in healthcare, banks, insurance of commodities which narrows it down to tech and industrials.”

The fund is managed with a “value investing” philosophy, aiming to limit potential downside in the selected shares, ensuring a “margin of safety.” It 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 essential 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 Quadient, a mail services and software firm, agricultural producer Camellia as well as Safilo Group, an Italian eyewear manufacturer. Top destinations are France, followed by Switzerland, Italy, Germany and the UK.  See here other articles about the firm.

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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