The SWMC Small Cap European Fund currently has a gross exposure of 131%, which is a sharp rise on the 111% level at the end of 2014. The Fund’s net exposure has jumped to almost 80%, which is also a historically elevated level.
“These exposures are not indicative of any change in approach, and are not reflective of any abnormally high level of conviction or a super bullish view. It is simply testament to the plethora of ideas we are finding,” says Carter.
“What fills us with excitement is that the fundamental attractiveness of companies is hardly being recognised. Small cap stocks are being grossly overlooked by nearly all market participants.”
Carter believes the investor move towards European equities has only just started.
“Ownership of European equities, let alone small caps, is exceedingly low with nearly all investors we meet dramatically underweight in the region. However, most people are aware of this gaping omission in their portfolios. When money flows make their way into individual shares we could see something of a ‘melt-up’,” Carter explains.
“So far, all the moves in markets have been driven by index and futures buying. The dash to gain exposure has been indiscriminate. It is no wonder smaller companies have been left behind. Investors have simply been buying whatever they can get hold of quickly to reduce hugely underweight positions, typically ETFs or options.
“We have seen this lag for small cap stocks numerous times, both on the way up and on the way down. The catch up will undoubtedly come and this fills me with great optimism for the next few months.”
Long positions featured in the US$145.6m strategy include Zooplus, a German-listed online seller of pet products.
“Zooplus reported numbers that dramatically beat even recently upgraded guidance.
“The company’s high profitability and top line momentum, combined with a low valuation, has led the stock to rise by more than 20% since late January.”
Biotechnology
Carter also holds BioGaia, a biotechnology firm developing a range of products with probiotics, and Italian company Space.
“We are also bullish on BioGaia, a biotechnology developing range of products with probiotics. Its founder is Peter Rothschild, who is still very much active in the business. This is a company growing top line by 25% and bottom line by 40%, while still executing many distribution deals.
“Italian company Space is another quality under the radar stock. It recently acquired Fila, the leading producer of coloured pencils globally. It is another company with fascinating plans to expand in the market.”
While Carter is optimistic on equity markets, he has also increased the number of positions in his short book.
“This may seem counter-intuitive given our very positive outlook for the market in both the short and medium term. However, we are finding new ideas in a variety of industries and countries,” he adds.
All of the Fund’s short positons are in the ‘core’ European markets, particularly the UK and the Netherlands, and across a variety of sectors, especially industrials and consumer services.
