Value investing in Swiss small and mid-sized companies

Photo: Alps

Can you explain the strategy? What sets you apart from other managers in this space?

At QUAERO CAPITAL we believe that the best returns are often to be found in the companies that are the least well-followed. In spite of the fact that there are only 247 shares quoted on the SIX exchange, there are over 60 companies where there is no research coverage. Many of these companies are small and liquidity problems can deter larger fund managers. QUAERO CAPITAL can use its size to our advantage and invest in companies where others cannot.

What is your investment approach? How do you unearth great companies?

We believe in spending as much time as possible “on the road”. Some managers spend too much of their time behind the Bloomberg and not out meeting companies. We firmly believe that the best invest­ment ideas are the ones that you find for yourself, and this often means contacting a company directly and setting up a meeting in their offices, and visiting their production plants and facilities. We also see companies that are on “roadshows” visiting potential investors, but on the whole the companies will be visiting a large number of institutions and if there is an interesting angle it’s likely to have been spotted by other managers. We tend to find that proactive visits and conference calls with management of companies is the best way to stay ahead of the pack.

The SMI is heavily weighted to defensive compa­nies. Is your portfolio similar?

We are great believers that investing in small cap stocks need not be more “risky” than investing in large cap. BUT it depends on what TYPE of small cap stocks you buy. We are happy to buy large positions in relatively illiquid stocks, but we do not want to buy into “risky” businesses (ie monoproduct companies, highly leveraged companies, highly expensive companies) and as a result avoid whole sectors (biotech, mining and commodities, start-ups and companies with short trading histories). In fact, we believe that outper­formance tends to depend on avoiding the disasters and so, yes, we do like investing in “defensive” stocks.

You’ve managed to limit drawdowns compared to your peers. Why is this?

Our investment philosophy is firmly based on “Value Investing”. This means buying shares on the basis of what we estimate they are worth NOW, rather than what they MIGHT be worth in the future. We aim to buy companies that are cheap in terms of price/book ratio, price-to-peak-earnings ratio etc. and get the ENTRY point right. As Buffett would say, “the profit is in the buying”. As a result of buying shares that are out of fashion and which may have been “de-rated” by the market our companies tend to fall less in market shake outs. Once again, investing in small companies does not necessarily mean a higher level of risk – it depends what you buy.

Swiss small and mid-caps have performed strongly over the past few years. What’s been driving this trend?

Small cap stocks outperform in the long term – it’s a well acknowledged fact- but on top of that Swiss small cap stocks have outperformed the rest of Europe over the past 20 years. This is due to many factors: the long term strength of the currency has forced companies to innovate, focus on areas where they add the most value and have pricing power, and make productivity gains in order to be able to compete in international markets. Swiss companies have been very successful at this and for a small country it punches way above its weight in corporate terms. However if the discipline brought by a strong currency is advantageous in the long run, in the short run it can be difficult and it is well known that a lot of Swiss companies were hit badly when the SNB abandoned the Euro peg in 2015. More recently however companies have been benefitting from the relative weakness of the CHF against the Euro, and this has helped propel small caps higher.

Do you think this can continue? What trends are you following closely?

We are now nine years into a bull market and small cap stocks have provided exceptional performance. It is undoubtedly harder to find value in the market but we find that it is important to dig deeper for ideas and look at stocks that have been rejected by others. The recent implementation of MIIFID II will almost certainly lead to poorer coverage of small cap stocks by analysts which is highly regrettable for the correct functioning of the capital markets, but which will be advantageous to investors like ourselves who actively seek out companies that are poorly covered.

How can the strategy complement an equity portfolio?

We have been doing this now for almost 15 years and believe that our value-driven, under-the-radar, stock-picking approach will continue to provide consistent returns over time that are ahead of the main indexes.