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August 19, 2016

Fund Manager Briefing: Mirabaud Pan Europe Small & Mid Cap Fund

by Jake Moeller.

Ken Nicholson has recently returned to funds management after a year-long sabbatical. This followed the completion of a 14-year stint as one of Standard Life Investment’s (SLI) fund manager best kept secrets. It is a considerable boon to Mirabaud to have secured his services since late 2015. The Swiss banking group continues to quietly enhance its reputation in the U.K. and European funds market with an increasingly comprehensive suite of boutique active funds.

A stockpicker philosophy

This is a traditional stockpicking fund based on fundamental analysis and valuations. Mr. Nicholson stresses that Europe is economically developed, rich, and mature, meaning it is unlikely “to be seen as an exciting growth market.” For him the discovery of “hidden champions” underpins this high-conviction pan-European smaller-companies fund (there is also an ex-U.K. sister version of this fund).

Ken Nicholson, Portfolio Manager - Mirabaud Asset Management. With permission

Ken Nicholson, Portfolio Manager – Mirabaud Asset Management.

Mr. Nicholson seeks companies that dominate their market with durable customer bases and a high share of recurring revenues. “Many European smaller firms have been around for a long-time,” states Mr. Nicholson, “often 100 years plus, with family control and generational ownership. Therefore, a company’s ability to innovate and constantly adapt is key for us.”

Company visits are a key component of this fund, with Mr. Nicholson and his assistant–Portfolio Manager Trevor Fitzgerald–undertaking more than 300 meetings, calls and visits each year. The fund seeks to achieve higher risk-adjusted returns over its benchmark (the MSCI Europe Small Cap Index) over three years.

Portfolio construction

This fund usually contains around 40 stocks drawn predominately from the 800 or so companies in the MSCI European Smaller Companies Index; it has a tracking-error range between 4%-7%. Holdings typically are below €5 billion in market capitalization and are mostly characterized by poor analyst coverage–a factor key to Mr. Nicholson’s investment approach. “Nestlé has over 80 analysts covering it, but a stock such as Kardex has only two,” states Mr. Nicholson.

Stocks are screened and valued using traditional metrics such as PE, PBV, PCF, dividend yield, and DCF analysis. Mr. Nicholson is also unapologetic for relatively high portfolio turnover around 100% per year. “If turnover drops below 100%,” he states, “we are not working hard enough to find new ideas.”

Liquidity is an important consideration. The average holding capitalization of the fund is currently around €2 billion, but 90% of the portfolio is able to be liquidated within five trading days.

There is certainly a niche feel to the portfolio, with the portfolio consisting of a highly diversified set of businesses. Koenig and Bauer exemplifies Mr. Nicholson’s approach. Formed in 1812 as a newspaper printer, it has been able to reinvent itself as a packaging printing specialist and is now well established to benefit from growth in consumer packaging.

Exhibit 1. One-year share price history of K&B (to August 19, 2016 in Euro)

Source: Eikon

Fund performance

This fund was launched in November 2015 and of itself has only a short history. However, Mr. Nicholson had built up an impressive seven-year track record at SLI, managing a comparable fund with an identical process and philosophy.  This performance has also not come at the expense of risk, with Mr. Nicholson’s composite appearing in the lower end of the North-East risk/ return quadrant over five years (see Exhibit 3 below).

Exhibit 2. Composite performance of Mr. Nicholson* (to August 13, 2016, in Euros)

Source: Lipper, Lipper for Investment Management

Considerations on “Brexit”

“Brexit was only of passing interest to us,” states Mr. Nicholson. “Europe has already been in a low-growth environment for ten years, so this is just the ‘new normal’.” He believes that his diversified portfolio, with no dominating style bias, inoculates investors from macroeconomic risk. “We aim to achieve the highest degree of certainty before we invest and were happy with our portfolio prior to the Brexit outcome.”

Following the vote, there have been only marginal changes in the portfolio, with no shift–as has been common with some other fund managers–into dollar earners, defensives, or staples. “We didn’t win or lose from the Brexit vote, and we didn’t intend to either,” Mr. Nicholson states.

Exhibit 3. Five-year risk/return chart of Mr. Nicholson’s composite* performance (to July 31, 2016 in Euro)

Source: Lipper, Lipper for Investment Management

Macro outlook

Mr. Nicholson’s outlook for Europe is not one that is particularly buoyant from a macroeconomic perspective, and he also acknowledges that valuations are not overwhelmingly compelling. “Don’t buy the fund because you think European smaller companies are cheap–they’re not,” Mr. Nicholson warns. However, he encourages investors to reconsider valuations in light of the ongoing low-interest-rate environment.

He believes that a low-growth trajectory for Europe should be expected in an “unpromising backdrop.” However, macro factors are at best only incidental to his stock selection process. “We don’t know what Dhragi is going to do next,” he states, but he points to his historical track record of outperforming in a range of differing market conditions.

Conclusion

While strictly speaking this fund isn’t style agnostic, its objective to deliver performance using multiple sources of alpha without reliance on any single bet, tilt, or beta play might make it a difficult proposition for a fund selector purist who is seeking a style box into which to place it. However, it ought to still appeal to the essence of active fund management.

Mr. Nicholson seems genuinely relaxed after his break and clearly appears very comfortable with his new colleagues and the environment at Mirabaud. He has a remarkable risk-adjusted performance history and strong pedigree with smaller-company stocks. As this is a young fund of only €100 million, with an estimated capacity for €1 billion, it allows potential investors a short period of time to undertake their own due-diligence.

Jake Moeller met with Ken Nicholson, Portfolio Manager, and James Southern, Sales Director- Mirabaud Asset Management, on August 12, 2016.

* The composite performance has been calculated by combining SLI Glo Sicav European Smaller Companies Fund from 26 September 2007 to  August 2014. Then the MSCI Europe Smaller Smaller Companies Index to November 2015 (as a proxy while Mr Nicholson was on sabbatical). After which his Mirabaud fund performance from November 2015 to present.

 

Disclaimer: 
This material is provided for as market commentary and for educational purposes only and does not constitute investment research or advice. Refinitiv cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice. The author does not own shares in this investment.

 

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