Eurozone small-cap equity funds cannot exactly count on warm interest from investors. The assets under management are considerably lower than for funds within the European small-cap category, for example. Moreover, investors have been withdrawing money from the funds on balance for years. This year, this waning interest will not change given the mediocre performance over the first seven months.
European investors have little interest in funds in the Morningstar Eurozone Equity Small-Cap category, as evidenced by the low assets of just under EUR 5 billion invested in such funds. By comparison, funds in the Europe Small-Cap Equity category, which can invest not only in Eurozone countries but also in countries such as the UK, Sweden and Switzerland, manage over €24 billion.
The category has been experiencing declining interest for years, as the assets under management have been fluctuating around the current level for quite some time. Admittedly, until about eight years ago, total fund assets for this category amounted to less than EUR 2 billion, so on balance there has been a significant increase in fund assets.
Positive returns
However, this growth in assets is largely due to positive returns. Apart from a strong inflow of new investor money in 2017 (over EUR 1.6 billion inflow), investors have mainly withdrawn money from Eurozone small-cap equity funds in recent years.
2022 is unlikely to be the year that changes the mediocre investor interest in smaller companies within the Eurozone. With a return of -14.4% (for the MSCI EMU Small-Cap index) for the period from January to the end of July, small-cap stocks in the Eurozone are one of the worst-performing equity market segments among developed countries.
On the one hand, this is due to the fact that Europe is out of favour with investors and, for example, US stocks are performing much better. On the other hand, investors have turned away from shares of companies with smaller market capitalisations a little more this year.
MSCI EMU
By way of comparison, the MSCI EMU index, the stock market indicator for larger companies in the Eurozone, also recorded a loss this year, but with a return of -12.7%, this is slightly lower than that for small-caps.
The MSCI EMU Small-Cap index consists mainly of German, French and Italian equities. The combined exposure to these three countries is approximately 53%. Dutch equities form the fourth largest exposure. The three largest countries all underperformed the index on average (ranging from -15.1% to -16.2%), while Dutch equities performed relatively well, losing only 7.7% on average.
This week’s top five shows the five best-performing funds (of which a distribution fee-free share class is available in the Netherlands) in the Morningstar Eurozone Small-Cap Equity category based on their performance in 2022 through the end of July.
Midlin takes first place
In first place is Midlin, which comes from the stable of Teslin, a Dutch fund house founded by Frederik van Beuningen and specialising in small-caps. In line with its house philosophy, this fund invests for the long term in small companies with strong growth potential that pay an attractive dividend and are well-managed. The experienced Rombout Houben is the main manager of this fund and has held this position since July 2007.
The concentrated portfolio has only 16 positions and the manager has a preference for companies from the Netherlands, Germany and Belgium, as the companies from these three countries together represent 81.3% of the portfolio. Among the standouts in the portfolio this year are mainly u-Blox Holding (70.08%) and Barco (34.76%).
The second fund in the ranking is also of Dutch origin. Monolith is the only fund offered by the fund house of the same name and is managed by the experienced manager Daan van Vlaardingen. He applies a value-oriented private equity approach, in which the presence of a catalyst that can eliminate undervaluation is also a requirement.
Long investment horizon
This approach is reflected in the portfolio in particular in a very high concentration with only eight positions and a long investment horizon. Here too we find a preference for Germany (four positions) and the Netherlands (three positions).
Just off the podium in spot four is iShares MSCI EMU Small Cap ETF. The tracker has a Morningstar Analyst Rating of Bronze. As the name of the ETF suggests, the tracker follows the MSCI EMU Small Cap index, a widely spread index with its 461 positions.
Investors do get more exposure to shares from the financial services sector, including the two largest index positions Bank of Ireland and ASR Nederland. This is at the expense of the weighting of the technology sector, as evidenced by the average overweight position of active managers compared to the index.
Ronald van Genderen is senior manager research analyst at Morningstar. Morningstar analyses and evaluates investment funds based on quantitative and qualitative research. Morningstar is one of Investment Officer’s knowledge partners and ranks five investment funds or providers each week, appearing in English on Investment Officer Luxembourg on Fridays.