Erik Esselink, Invesco
The strategy tries to identify durable companies, a non-consensual thesis and asymmetry of valuation (a so-called “DNA framework”), in order to construct a portfolio of assets which can outperform over time.
“We focus on only the best 50-80 stocks in a universe of literally thousands of stocks using a very simple, repeatable investment process,” Erik Esselink, portfolio manager at Invesco, told FSA.
“Risk analysis is taken very seriously at all stages of the investment process, ensuring stock specifics drive our performance and unwanted exposures to factors, countries or sectors do not,” he added.
The €558.2m ($653.6m) Invesco Continental European Small Cap Equity Fund has posted a 52.21% three-year cumulative return in US dollars, outperforming its EMIX Smaller Europe ex UK Index-NR benchmark (47.57%) and sector average (34.45%), according to FE Fundinfo.
As at 31 July 2021, the top five holdings were Nordex from Germany, SkiStar (Sweden), Bankinter (Spain), TKH DR (Netherlands) and Peugeot Invest (France). Geographically, its top five allocations are to the Netherlands, France, Germany, Italy and Switzerland.
Esselink believes that Europe is embarking upon a period of above trend economic growth. Positive influences include the EU Recovery Fund, with stimulus feeding directly into the economy in a variety of ways, most notably into the green economy.
Post-covid normalisation
Furthermore, as Europe gets back to some sort of normality post-Covid, the consumer, who has generally been well protected in Europe through furlough schemes, has only just begun spending some of the excess savings which have built up during the past year, according to Esselink.
The continent has a vast array of companies – some large caps which are household names – but more significantly a lot of small caps which are global leaders in what they do.
“Very often these have industry leading positions as suppliers to larger companies, and given the backdrop outlined above, it is precisely these sorts of small caps where we see opportunities,” said Esselink.
He also expects to see a large number of “highly innovative, disruptive, leading-edge” companies come to the market. “For small cap investors, IPO activity is important for multiple reasons: not only do some of these IPO’s provide us with interesting investment opportunities, but they also highlight the opportunities in the rest of the asset class.”
The fund has exposure to the technology sector through allocations to semiconductor companies, software and services.
The strategyalso finds opportunities in some of the traditional value areas of the market, such as banks, insurers and building materials companies that are cheap by historical standards. It is focused on companies that should meet earnings targets (which are expected to normalise within its investment horizon of three years) and the durability of their businesses.
Most importantly, the impact of stimulus will boost economic growth for years to come, with the winners in the “green economy” benefiting disproportionately, according to Esselink.
ESG awareness in 2021 will broaden out further into the circular economy, water and bio-diversity, and other sectors, he said. “However, valuations in this space tend to move quite ‘far ahead of the music’ and we want to remain valuation disciplined.”
Yet, Esselink and his team have found new ideas in the hydrogen, recycling and water treatment sectors that meet their valuation criteria and have not been discovered by other ESG investors.
Invesco Continental European Small Cap Equity fund vs benchmark and sector average
