Asked to describe the ideal investing conditions, I'd mention the following: lots of companies to choose from, across a range of countries and industries;a market that is poorly researched and understood, giving greater scope to gain advantage through doing our own research; and the opportunity to find companies with real potential ahead of the crowd, and so generate significant outperformance. All of these factors can be found relatively close to home in the European small-cap market.
Europe and its economic problems have been in the news for all the wrong reasons in recent years. But anyone focusing on the big picture would be missing out on some really interesting, profitable opportunities. Many European smaller companies look attractive relative to both their history and to other regional markets. Investing in smaller firms is often seen as involving greater levels of risk than investing in larger stocks, including problems with liquidity (the ability to buy and sell quickly and inexpensively). However, I would argue that because of the sheer number of opportunities available, we can find niche businesses that can grow whatever the economic conditions. Many European small caps also do business successfully around the world another positive when conditions are tough at home.
At F&C we believe that doing our own research is crucial. We work hard to understand a company's financial position and favour those businesses with a strong competitive position, a robust business model, and a positive growth outlook. Meeting those in charge is key: we want to invest in companies with a proven, committed management team whose interests are aligned with those of shareholders.
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Among our current favourites is Devro (LSE: DVO), a leading supplier of synthetic sausage skins. The company operates within a global oligopoly. Demand for synthetic sausage skins is growing globally, in part because of changing emerging-market diets, but also because collagen skins are replacing gut casing. Collagen skins make manufacturing more efficient and so are increasingly a source of productivity gains, as gut casings become more expensive. This stock gives you access to this long-term growth trend. The management team has a proven record, and is aligned with shareholders.
Irish-listed Origin Enterprises (Dublin: OGN) makes most of its money in Britain. The company is the top agronomist in the UK, offering advice and yield-enhancing products to British farmers. In a challenging environment of unpredictable weather patterns and global food pressures, Origin provides the answers that British food producers need.
Amer Sports (Helsinki: AMEAS) is a mid-cap Finnish business that owns a collection of global sporting brands: Wilson, Atomic, Salomon, Arc'teryx, Mavic and Suunto. The business had great potential, but had been run poorly. We invested when a new management team from Procter & Gamble came on board. We are now starting to see the economics of the business improve as they integrate and make better use of these global brands to produce higher growth and better returns on capital. It's still early days in this process, but the potential is very exciting.
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