Small is beautiful

European small-cap market goes ahead

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The European small-cap market fared well in 2003 and has continued to perform well this year despite worries of an over-inflated euro. With current jitters in equity markets investors may well be tempted to an arena that can go against the flow and add another level of diversification to their portfolio.

The Fortis L Fund Equity Small Caps Europe is certainly one fund that managed to post some good-looking figures last year. It notched up a return of over 31 per cent in 2003. Fortis points out Micropal’s statistics that European small-cap equity funds achieved average returns of 30 per cent in 2003, compared with 15 per cent for ordinary European equity funds.

The fund’s managers, Bart Geukens and Ellen Eiking, believe that the small-cap market presents many inefficiencies in stock prices and that these constitute opportunities for investors. They seek to pick out these inefficiencies in order to target returns above the MSCI European Small Caps Index. It is also thought that these stocks are not perfectly correlated to equity markets or to the exposure in the euro/dollar exchange rate.

The Paris-based duo concentrate on stock selection, though no one sector receives more than a 2.5 per cent weighting in order further to diversify the stocks. This is important, as the fund does have quite a high volatility rate of 23.05 per cent over 36 months. Although there are some 2,000 European small-cap stocks out there, Fortis weeds this down to a watch-list of 170 and finally to an allocation to the fund of 100. Companies are vetted for their size (holding a market capitalisation of EUR200m–2.5bn) and liquidity (in excess of EUR0.5m per day), as well as for their quality and growth prospects.

Companies are also favoured if they are able to reposition themselves in order to increase sales. As an example, Fortis cites Umicore, which had traditionally produced copper and zinc but has now branched out to manufacture high-value items such as batteries for mobile phones and laptop computers.

Although this fund should not be the main holding in your portfolio ,Fortis says it may well provide a good source of diversification alongside other asset classes such as emerging-market securities and real estate.

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