A Swiss opportunity? The best of Swiss entrepreneurship.
Switzerland has long been recognized as a country of innovators. Year after year the country is topping the list of most innovative and competitive markets. What is lesser known is the fact that the core of the country consists of small and mid-sized companies. This might be because the large world-known conglomerates (Nestlé, Novartis, Roche to name a few) are taking the limelight away from very creative, profitable, family-owned companies. The quality and innovation of these companies did not only come by choice. Their largest client base can be found in the neighbouring EU countries and so are their competitors.
After years of CHF-safe haven strengthening, the exporting pressure increased steadily. Switzerland suffered in particular, given that this country has one of the highest exports worldwide. The only way to stay competitive for these small- and mid-sized companies was by delivering the most efficient, highest quality machinery one could. The Swiss brand does reflect this to a large extent.
How can investors benefit from this? Contrary to the large index which has an overweight of large defensive giants, the lesser known SPI Extra index has some raw diamonds for investors. Given that the weight is a slightly more on the cyclical stocks and that the economic cycle is favouring these kind of stocks we thought it would be good to find an investor with experience in this field. A second good reason to consider this is the recent evolution of the Swiss Franc, freeing up some uncounted profits for the exporting companies.
An interesting characteristic for Swiss small caps versus the large caps is that over time not only the performance is beating the large caps, but it is doing so with less volatility
In our search to find a good manager we found a Zurich based specialist who won several awards with this strategy. They achieved a profit of 83 per cent in the past three years outpacing the main competition in this field with an even lower risk exposure, at that. The Sharpe Ratio is 2.12 and is unequalled in a 36-month comparison.
Whoever suspects a gambler behind the asset manager in view of the high profits generated is off the mark. On the contrary, this investment manager sounds like a conservative investor: “We don’t risk a crash. In such cases we rather keep our hands off of a turn-around candidate.” In the last five years, we have not seen a single investment with a loss of more than 20 per cent.
To avoid mistakes, investments are only made into companies that they are convinced of after a thorough study. The focus is on Swiss small- and mid-caps. Forty-five preselected companies are analysed in detail, 20 to 30 are added to the portfolio. The demands on the chosen ones are high. Balance sheet quality is what matters. They do not believe in high debt or great takeover goodwill. Healthy balance sheets limit the risk of crashes. Shares with a double-digit return on equity are welcomed. “Whenever there is a bad result, the prices of such shares fall less sharply,” Despite the focus on solid balance sheets, the money manager does not avoid companies with high growth rates.
Applying an approach that mixes value and growth, the potential is also bought at a higher price. “A company that is growing rapidly and profitably may be expensive”. Looking towards the future, one observes what analysts forecast, but relies on one’s own figures. The forecasts for sales and earnings growth across a period of two years are made in-house.
WHEN IN DOUBT – CONSERVATIVE
If the shares become too expensive, they are ejected from the account. “We are consistent and, in case of doubt, rather conservative,” Their 2018 award is not an isolated case. The company already won the rating the previous year and has been standing out from the crowd for years. The managed client funds have increased accordingly. The team of 13 mainly looks after the money of institutional investors and families.