Speaker 0:
Hello and welcome to this. Funds in focus. I'm Rory Palmer. Today. We're looking at the outlook for European smaller companies and joining me here in the studio to discuss that. We've got Charles Eunice, head of manager selection at F E Fund Info. Farhad Hassan, chief investment officer at Albemarle Street Partners, and Andy Merrick, farm manager at eight AM Global.

Speaker 0:
We're going to kick off with the Janice Henderson European Smaller Companies Fund. And Charles, if I could start with you. If you give us a nice little intro into the fund, how it works and maybe a bit on the style.

Speaker 1:
Yes, sure. So, uh, the fund is managed by Rory Stokes and Beckett. They've been running European small companies for a long time, especially for Rory. Just joined the team in 2015.

Speaker 1:
Uh, they split the responsibilities, uh, together to look at the different companies to do the individual company analysis and, um, they're also quite distinct in their portfolio construction. So they have their own power management responsibilities. So will we be really responsible for the phone we're talking about today? While is more responsible for the investment trust and the but there's a 60% of our labs. Obviously, the ID are coming from the same team.

Speaker 1:
What we really like about this fund is really it's a core smaller companies fund I A lot of their peers are targeting smaller companies with strong growth characteristics targeting the top line a line, while clearly they try to invest across what they call the business cycle. So it's why this fund, compared to a lot of S p, is more balanced. They have obviously 50% of the profit allocated to to kind of companies I just mentioned.

Speaker 1:
But another 50% of the portfolios is invested more like mature or even restructuring companies that you can find with a market cap below €1.5 billion. So we always feel like for investor, I want you to get a core exposure to your personal companies. This is a very consistent fund,

Speaker 1:
so I will not shoot the I will not under perform significantly, but we have consistent return of our time.

Speaker 0:
And for how, What kind of companies are they looking for? Is it more value? Is it more growth? How does it work?

Speaker 1:
So they've got a, uh, value, uh, component to the process, but they're also looking at sort of, um, quality metrics, uh, such as return on capital. So, uh, one of the things they refer to, uh, in their literature or or when you meet them is, uh c f r o I,

Speaker 1:
which is, uh, something that is, uh, sort of looking at the return on invested capital within the business. And, uh, once they've done that, uh, that's when they apply that value screen to make sure that they're not over paying. Uh, for those, uh, stock. So it's more of a sort of gap type process, Uh, but very sort of quantitative in terms of how they evaluate that.

Speaker 0:
And and it's at the smaller end of the smaller cap space. Is that quite a difficult pool to fish in?

Speaker 0:
Um, not if you're a specialist fisherman in that area, and and that's what I quite like is that I like I like funds that are a little bit different, and yeah, the fact that they they are prepared to go right down the market cap scale is is is attractive because if they're good, then they're going to find opportunities there and and yeah, I mean, the results seem to show that that you know that they they're quite good at what they do. So So, yeah, it's an attractive part of it

Speaker 0:
and not constrained by valuations, really, for the managers, how important is that? When you're looking at that core allocation there, I

Speaker 1:
think it's it's really it's really important. And that's why the fund has done so much better compared to peers. In two different market cycle, you have 2020 where the key character was all about growth, and they are 50% of their investing to other companies, and they've done very well in 2020.

Speaker 1:
But conversely, 2022 was just more about the valuation and making sure, like not only you investing in the growth part, but also companies with more cyclical revenues. And they also have this in a. That's why they also done well in 2022

Speaker 1:
and why they be able to capture and navigate those two market development is because of the strict evaluation discipline that they have provided by this quantitative, very heavier approach that they have. But they have a very strict in evaluation, and I think that's a key different factor for these funds compared to peers

Speaker 0:
and just going back, sort of a core holding for that could also be a nice satellite option, too.

Speaker 1:
Um, it can Yeah. No, Absolutely. So if if your, uh, focus,

Speaker 1:
this is more large, cap, uh, then owning European smaller companies can sometimes be a bit difficult. Uh, so, uh, your your exposure needs to have those sort of risk limitations in terms of, uh, you know, keeping you right for the right point of the market cycle. Because when you do make that decision, uh, you don't want to sort of catch it just at the wrong point in time. Uh, so you need that discipline from the underlying manager, which these guys do have,

Speaker 1:
uh uh, to navigate, uh, periods where valuations may be too high and then they'll be buying into those, uh, cheaper value stocks. Uh, and what that does is it means that you can leave those allocations in there for longer, uh, without sort of, uh, you know, suffering the downturn that sometimes a European smaller companies can suffer.

Speaker 0:
And Andy, looking at the holdings, looking at the portfolio more generally, these sort of sectors that really stand out or any holdings in particular that you quite like the look of

Speaker 0:
and I I'll be honest. A lot of the, uh, the individual stocks are not particularly familiar. And I think that's a good thing for a smaller companies fund that we shouldn't know everything that's in there. And I I did say that it was, um, overweight consumer discretionary,

Speaker 0:
which you probably expect from a, uh, from A a European fund. Um, underweight financials, which again? The small cap you'd expect.

Speaker 0:
Um, but I I like the I like the way they they

Speaker 0:
that they allocate it. They got four different buckets. Really? Uh, they call it their rockets, which hopefully is better than the virgin ones. But, um, and quality growth, um, mature and and turnaround that that was was mentioned. And, um, I think it's good to have a structure in a farm where you can actually see exactly what, where these these stocks are going into which bucket they, they, they they fit into

Speaker 0:
on consumers.

Speaker 1:
Or if we can help a bit handy on that. Um, clearly, if you look at the attribution over time have done very well with financials like, can you just mentioned industrials is another core sector where they have done very well, less so on the health care, Uh, which is a bit problematic. Even it's a large component of the index.

Speaker 1:
Uh, I will also point out that they had issues in the past with some IP o names. They have a Swedish, uh, IP o name last year called, which really drag on the performance a lot. The change, the structure of the process on I PR names. Uh, but yeah, if you talk about specific records, that's I think that's the point you need to mention. Yeah,

Speaker 0:
I had just picking up again on turnaround companies just for for people who were watching you might missed it. What does that really mean?

Speaker 1:
Uh, what that means is, uh, there are particular problems that individual companies can go through, um, either through

Speaker 1:
a acquisition that they've made or, uh, a particular product that they've launched. That hasn't worked out, Uh, particularly when they're small. Uh, that can cause near term pressure. The overall franchise, uh, is likely to sustain itself. And if you are focused on those longer term return on sort of capital type metrics, which these guys are. And then what that means is the company has the wherewithal to survive

Speaker 1:
that blip in its in its fortunes, as it were. So you need to make sure that the company is generating cash, uh, during those periods and that it doesn't have significant leverage on the balance sheet that that can make things even more difficult. Uh, during those tougher, tougher periods. So I think they they they understand that. And they sort of walk into these situations understanding that the other thing is just talking about the structure of

Speaker 1:
the fund. Uh, it is a part of a broader portfolio, and they understand that. And so those allocations to turnarounds tend to be a bit smaller than, uh to their, you know, longer term, higher quality names, which they own in the fund for far

Speaker 0:
longer. And it's been a good long term performer, but not so much in the short term. What do you think the outlook is looking like for European smaller companies? I I tend to be a smaller company fan over longer term, and, you know, if there's any

Speaker 0:
sustained period of underperformance, then usually that that's a good opportunity to to get in for the longer term again. Um, and I don't think they're alone in having short term underperformance in 2022. It was, uh, you know, a lot of a lot of companies suffered and and were caught off guard with there. So So, yeah, I think you know, it's it's set up as a

Speaker 0:
as a good long term proposition, which it has been previously. And Charles, what do you think? We're here to talk about European small companies, but I haven't asked you. What's your outlook like for that space?

Speaker 1:
Yeah, So I think as everyone talks about the recession and can't put any date when this will happen, it's It was tough for small gaps. They tend to underperform in the period leading to the recession and tend to out perform when recession hits.

Speaker 1:
Um, but contrary to the US, European and UK, smaller companies found are cheap. If you look at the premium between large gap and small cap over the long term, the current premium that is historic lows. So contrary to the US, you have a kind of a valuation safety cushion

Speaker 1:
to buy into Europeans Moro companies now, So we are becoming more positive recently on European and UK Moro companies. Maybe it will be too early on the recession train, but at least it's variation here is to give us comfort into coming back into Europeans, Moro companies

Speaker 0:
And for these companies have they got some real strong quality characteristics, too?

Speaker 1:
Uh, some of them do. Um, clearly, this fund invests in those as a core part of his strategy. Uh, but then there are all sorts of other sort of opportunities available. So, uh, you know, there's small sort of tech services companies. Uh, there's, uh, you know, companies that could really be, you know, good growth stocks, uh, for the future. Um, uh, but the

Speaker 1:
aspect of it, I think, is a core differentiator for the European smaller companies sector versus make me something like the UK. Uh, where we tend to have more sort of cyclical, lower quality, uh, companies, uh, making up large parts of that benchmark. So I think Europe does stand out from that standpoint. Um, and, um, because you don't have the amount of capital chasing

Speaker 1:
those smaller companies, valuations tend to be a bit more appropriate as well. Uh, so that's the advantage versus the US where, you know, there's large pools of capital chasing small cap Premier Uh, whereas in Europe, uh, it's it's a bit, you know, smaller that part. And therefore the valuations are closer to where you'd want them to be, uh, to be investing in those smaller companies.

Speaker 0:
I think that's a really good point to leave it. Thank you all. Thank you.

Speaker 0:
So now we're moving on to the Fidelity European Smaller Companies Fund and in its sector, it's the largest by quite some way, Charles, I want to start here with you, Does a fund when it invests in small cap companies find it quite difficult when it gets quite large.

Speaker 1:
Yes, definitely. I mean, if you want to, uh, fish into the right pot, you need to get a decent, um, tool to use it. And definitely as you grow bigger, you obviously need to look at your liquidity. You need to look at your potentially,

Speaker 1:
um, risk. And, uh, being becoming too big just completely can destroy your hard fast. So contrary to the large gap or the income manager for smaller companies managing their liquidity and managing the funds. Capacity is key and something that fund sector needs to pay more attention than anything else

Speaker 0:
for her. It's over a billion euros now, kind of going off Charles' point. What are the main risks here when you're too big as a fund?

Speaker 1:
Uh, when you are too big as a fund, uh, allocating smaller companies. What you tend to do is you dilute uh, the sources of Alpha uh, that you have. So, uh, because the underlying positions are part of access where you know you're ending up earning too much of a particular stock or a particular style of investing. What you tend to do is you think about risk first, return afterwards, and what that tends to do is it ends up causing you to look a lot like the underlying

Speaker 1:
benchmark, uh, that you're trying to beat. Uh, so, uh, well, that's what you know I find with this fund as well, in terms of its sort of factor exposures very similar, uh, to the underlying index. Uh, and what that does is essentially it creates an index like, uh, outcome over the very long term.

Speaker 0:
And and, you know, you get a company. You put it in the portfolio and then you become too big and the impact of that company is reduced. Do you think the managers have a certain number in mind when they start the fund?

Speaker 0:
In my 30 plus years? I I think, um, history is littered with fund managers, fund management companies that say that size doesn't matter, that they can continue to manage through a certain

Speaker 0:
certain barrier. Um, a billion is is often AAA figure that's given, but it it's a bit random just to pick a figure like that. But But that that's often the the figure they they they say they can manage comfortably. Um, practise rarely backs that up. But also, I do question why fund selectors keep feeding a smaller company fund that is is increasing and increasing and increasing in size

Speaker 0:
because there there are options. And you, you you you know, I I'd like to know who who it is that that keeps it going. Um, if it's just a long term holder that's benefited from underlying growth of the fund. Brilliant. But you know, there there there has to be question marks over allocating to to smaller companies funds that are getting up towards that sort of size because you, you're you're asking for for issues to to be shown.

Speaker 0:
If I had with a fund like this when it becomes too big, this sort of drift into those bigger names and do you think investors would want them to rein that in a little bit?

Speaker 1:
Uh, they do tend to drift into those bigger names. And, uh, the issue is that, uh, the capacity is is paramount, uh, with regards to the investment style.

Speaker 1:
So while investors may want that, uh, the fund managers can't deliver on on, uh, what they've promised the underlying investor at that stage, uh, what we found with this fund specifically is that, you know, it has a slightly different sort of bent in terms of its allocation. Uh, it has a very sort of large UK allocation,

Speaker 1:
Uh, and and that allocation is is presumably there to fulfil that need for capacity. Essentially, when? When you know you can't chase european smaller companies, you you end up owning a broader subset of equities, and that includes UK for this fund, specifically, uh, they've got quite a lot of UK exposures in there. Uh, so that's worth pointing out

Speaker 1:
That you aren't just getting European smaller companies here. You are actually accessing UK. So if you already have a UK allocation somewhere else, it might be worth considering that you're doubling up,

Speaker 0:
Charles, is that UK allocation size? Worry you a bit.

Speaker 1:
Yeah, obviously UK fund. So we are searching for European UK and not the pan Moroccan pen fund. And actually, if you look at the short term and of the fund,

Speaker 1:
pretty much this is most explained by the country that they are taking. Interestingly, if you look at the preference of the UK smaller companies index compared to European one in local and in standing terms, we took about difference of 20% over the last three years. So it's really easy to understand why this form is that I think 35 to 40% of UK has been beyond its sector peers.

Speaker 1:
Yeah, please. Yeah. No, that that That explains the gap largely. And and and unfortunately, uh, the UK sector does tend to have, uh, more fickle capital. Uh, sitting sitting behind it, we've seen large outflows, uh, out of those smaller companies.

Speaker 1:
Uh, sort of type funds, and that's had the impact of, uh, eroding valuations to a point where they are historically very, very cheap. Uh, but, uh, it has meant that, you know, there's been significant underperformance of UK smaller companies over the last year,

Speaker 0:
so only picking up on what for had said there about historically cheap, uh, smaller companies. Do you think this fund in particular is well positioned for that?

Speaker 0:
Yes, from a valuation perspective, but But I think I again I'll echo what the the the panellists have said about the, you know, the the high UK content in there. I saw from the March fact sheet that that was issued that the top holding in the fund is the Euro stops 50 in passive ETF, which you have to question why that's in there. If it's not for liquidity purposes, then why? Why is that there?

Speaker 0:
Biggest UK holding is be for BT, which I wouldn't have thought personally. It was a smaller company. It's more of a mid 2 50.

Speaker 0:
Um so, yes, the fund is set up to to benefit from from valuations, but I think anyone who buys it needs to be aware of exactly what they are buying. And that isn't to say it's a bad fund and because it does have a a UK exposure, I'm sure there'll be times that that it will outperform. But it's just it's not a normal European smaller companies fund that I think most people would think of initially. Charles, do you think investors would be aware of really, what's under the bonnet here?

Speaker 1:
Um, I I don't think so, I think, uh, coming from a UK perspective, you feel like the UK small companies market has very different feature for Japan's small companies market, and therefore you might want two different specialists one for the UK market, one for the European market to do the job and what two different pos I just just mentioned different in terms of industrial location, the more cyclical buyer of the UK market as compared to Japan, which is more quality and growth.

Speaker 1:
So, um, that's definitely a risk, and I'm not sure whether the fund has been or just you just need to add a little word pan, and I guess people will better understand what's beyond under the bonnet

Speaker 0:
and for smaller companies in Europe, historically very cheap at the moment.

Speaker 0:
What do you think is gonna happen with a lot of these businesses?

Speaker 1:
Uh, so it's it's difficult to say. I I know. Uh, my colleagues here have, uh, sort of mentioned the fact that, uh, they've started to buy more into Europe. We're sort of holding on that for now. Uh, but we understand that that is the direction of travel. So, uh, the risk around a recession, I I've obviously been reflected

Speaker 1:
in those valuations coming down, but the recession is yet to hit. And what tends to happen in those recession periods is in addition to, uh, valuations coming down, you get the earnings coming down as well.

Speaker 1:
Uh, so that's one last shoot for, uh, from our standpoint before we, uh, maybe delve, uh, a bit more into buying, uh, some of these, uh, funds, Uh, and, uh, smaller companies more broadly as well, uh, because we see the opportunity. But what we're worried about is those earnings declines maybe aren't quite reflecting how bad things, uh, may turn out to be, Uh, but the direction of travel clearly, uh, is in

Speaker 1:
favour of, uh, smaller companies exposures, uh, both in Europe. and, uh, UK as well, more broadly

Speaker 0:
and Charles last point before we wrap this particular fund up in recessionary periods, small caps tend to do well. But at what point in the recessionary cycle do they really start to see an

Speaker 1:
uptick? So you have for me once again a study in academics and show it's typically leading to a session. 1 to 3 months period is when small caps really started to

Speaker 1:
to out perform a large gap. But more importantly, is the recovery because, contrary to large caps, the kind of earnings sensitivity is higher for small caps. And then, once the recession is here, people are starting to reassess their expectations for earnings. Going into the recession, people are downgrading, downgrading company are adjusting their earnings estimate. But once recession eats and you are at a low level in terms of your earnings, you quickly adjust. You have the positive surprise, and small caps contribute to large gap. Have a higher sensitivity to earnings, so

Speaker 1:
1 to 3 months before recession, and then the recovery is when you want to get your small cap. That's why we've been a bit, maybe early, but we are hoping that the recession is going to come in next 3 to 6 months and we're gonna not going to miss on that rally.

Speaker 0:
The next fund we're gonna look at is the Lombard O. D. A Continental European Family Leaders fund, and it's a slightly different one compared to its peers. It's looking for those family owned businesses. And Charles, if I could start with you, it's quite a different mandate this one. But do you think it has some real benefits finding those family owned businesses?

Speaker 1:
Yes, if that's, um for published a white paper a few years ago showing the added value of our business, of course, of our long term to,

Speaker 1:
um, buy into those family owned company question on capital allocation. Question around the capacity to invest over us around the term and forget about the short term noise. Adapt to a new market because you want to pass your company to the younger generations of your family. So you

Speaker 1:
OK to get part of those technology or transformation. But you know it's gonna take more time in the UK to adapt to that long time. So from a fundamental point of view, I completely understand why this fund has been structured and the investment process behind it. Now, obviously, it's about applying that process. Uh, but from a fundamental point of view, it makes a lot of sense to align your interests with one of a family which is keen on keeping its interest into a business and add value over a very long time

Speaker 0:
horizon.

Speaker 0:
I thought those are the more positive side. Any negatives?

Speaker 1:
Uh, there are negatives. Yes. Um, so, um, I I grew up in, uh, US Markets and US markets tend to sort of favour publicly listed businesses. And I know there's a tendency in Europe, uh, to maybe list your equity as late as possible and not to source external sort of investors. Uh, and that sort of hesitancy, uh, is because of the, uh, discipline, uh, that outside investors bring,

Speaker 1:
uh, sometimes, you know, family structures. Uh, can, you know, be rather inefficient.

Speaker 1:
Uh, from a capital standpoint, you know, they can keep capital locked up in businesses that maybe are underperforming, don't have the margins, don't have the growth and so on and so forth. So, uh, just because, uh, a family, uh, has a a big part of a business doesn't mean they'll take the logical decisions that are necessary. Uh, over the very long term, they may choose to sort of continue to invest into parts of the business that, you know, the the Founder has a particular liking for, for example, uh, rather than tilting in an efficient manner

Speaker 0:
and Andy this kind of, uh, transgenerational skin in the game type of approach, it's very niche. But for an investor who's looking for that type of fund, it's pretty perfect, right? If you're if you're looking for a fund like that, yeah, um, I think it's I felt I felt this fund. I like quirky funds. I like fans that are different. Um, that this fund did remind me a bit of when you see something you really fancy on the menu,

Speaker 0:
and then you're a bit disappointed with with after you after you tried it because, um, you can see the principles. Uh, but it doesn't actually seem to be borne out in the the actual performance. Um, I did notice, though, that there's 31% in held in Italy,

Speaker 0:
which is unusual, Um, and like in the past, there's some

Speaker 0:
Italian families probably got their own way of running businesses. And, uh, you know, don't Don't take kindly to to, uh, intrusions, I think, Yeah, that's a It's a strange It's a strange fund. It's a different fund, and I really want it to do well because it's different. Charles, do you think this is quite a uniquely European fund? Would you get these kind of trust or sorry funds anywhere

Speaker 1:
else? No, actually, you can find a lot of those funds. Maybe not in the UK, but on the European market.

Speaker 1:
Because once again, if you look at the European market, you're gonna look at Italy, you're gonna get Scandinavia, France, Spain. A lot of those businesses were listed late and owned by a family, So it's not unusual to have this approach and to align your clients interests with one of a family. Um, it's just because the market poor is simply a lot of those companies can't ignore them.

Speaker 1:
Um, so yeah, um, it's more common that you you would think

Speaker 0:
that it would be wrong to mention this fund without talking about sustainability in E. S G. When you're thinking about handing down money to future generations. Sustainability is really the key,

Speaker 1:
right? It is the key. And absolutely And and having those long term relationships, uh, with stakeholders, Uh, so your suppliers understanding,

Speaker 1:
uh, that you've got a responsibility there and understanding your responsibility to the broader community people you employ? Uh, who may be your neighbours, for example. I think, uh, that is a is a very, very important angle. Uh, whether, you know, it actually leads to sort of long term outperform, Uh, that, you know, that will be proven, uh, in time, uh, to Andy's point. Um and, uh, I think it's very, very important. So those two things are aligned.

Speaker 1:
Um, And, uh, I do have, uh, some question marks about, you know, whether these smaller businesses will find it difficult, more difficult going forward, uh, to play a play, a role in that environmental angle on things. They can do that from a company structure point of view. Will they be able to participate in in in the broader sort of environmental sustainability goal? Um, because, uh, the US has just made a significant push in that direction.

Speaker 1:
And what tends to happen is efficiency and scale tends to win uh, so, uh, because we are early in that sort of journey from a societal point of view, these companies obviously had a role to play. I wonder whether longer term that role is taken up by more or larger companies, basically.

Speaker 0:
So staying on that, Do you think they could then drift into less family owned businesses?

Speaker 1:
Well, uh, no, I I I would assume that they would continue to own a smaller

Speaker 1:
scale businesses that may end up being eaten up by larger competitors, which will then feed into that performance. And, uh, you know, maybe the fund does better, as some of their, you know, unique R and D or uh, sort of skill sets are are then acquired by companies who want to do it on a larger scale.

Speaker 0:
And it's for point there about smaller companies and almost taking quite a big gamble on these companies being the the stewardship players in the future. Um,

Speaker 0:
do you think you know the smaller companies fund is might not be suited for this kind of it. It's interesting that, um,

Speaker 0:
it's more common to hear precisely the opposite point of view that that are making about family businesses. I mean, it wasn't long ago that, uh, I was talking to a fund manager

Speaker 0:
who saw the family ownership as an absolute negative because, um, certainly towards the diversity and gender end of it, because within the family, um, it doesn't tend to be that diversity and and that the family, his his criticism, this fundamental criticism was you know, that they seem to think that the very best people to run this company was a member of the family again,

Speaker 0:
and it and it was restricting. Well, it was quite ironic that he actually worked for a family owned large asset management company. And, uh, yeah, but But it's so it it can work it it it depends on the companies, and I suppose it's a it's a bit of a risk to take it on, but it it could work.

Speaker 0:
And, uh, there's no great evidence. I don't think I saw a quote related to that. It was I can't remember who it was from, but it was nepotism works when they were talking about those family run businesses. Um, but you're right from, uh, the the E s g side of things. Maybe not, but Charles.

Speaker 0:
It's quite a small fund compared to, say, the other ones that we've looked at. That kind of nimble approach is really, really good for investing in smaller companies. It's even

Speaker 1:
more prevalent for this fund because if you think the family owns a large chunk of the business, so liquidity pool that they have is restricted compared to

Speaker 1:
the fund we just discussed. So obviously it's it's important for this phone to stay small. And I guess alpha billion capacity is the maximum this phone could reach. Um, just because the contact and floating shares are not identical, it's owned by family.

Speaker 0:
What about the style? Because we looked at the staff for most of the other funds. It's quite growth. This one, isn't it?

Speaker 1:
Yeah, and it it's It's more growth and just going back to, uh, the the the the point that Charles made in terms of the, uh, position sizing, I think they've deliberately kept position sizing quite small. So they've got far smaller positions, um, in in this fund, Uh, because of that risk of, uh, being, uh, you know,

Speaker 1:
having lower liquidity with regards to the underlying holding. It is more gross. It has, uh, suffered in the last year because of that growth bias. Um, and, uh, but, you know, that is part and parcel, maybe of investing in some of these sort of smaller, uh, companies that are family owned. Um, uh, the the the greater point from my standpoint, is this point. With regards to geographical allocation,

Speaker 1:
you've got geographic risk on top of, uh, a growth risk there, uh, that can, uh, sometimes work against you. We saw that during the European financial crisis. Uh, and, uh, that that could become problematic. Uh, and so that's something worth highlighting, I think. Did some

Speaker 0:
of the geographic split surprise you

Speaker 1:
looking at? Yeah. Yeah, absolutely. I I suppose it didn't surprise me from the standpoint that I kind of understood that. You know, Italian businesses tend to be more family owned. Uh, but, uh, the fact that they were willing to go that far down,

Speaker 1:
uh, into, uh, sort of geographic concentration. I think that is slightly problematic. So I think over time. So you mentioned the point that the fund is, uh, quite small. It is, you know, launched recently, uh, I think over time, what they'll find is they want to sort of, uh, increase that diversification within the fund holdings. That

Speaker 0:
that's a good point. And And do you think because it's such a new fund, we need to see a bit more performance for it before we make a real solid judgement? Oh, definitely. I think. Um,

Speaker 0:
I I think it it it's it's strange that, you know, the the geographic allocation is so different from the benchmark and yet the returns are very close to the benchmark.

Speaker 0:
So at the moment, give it a bit of time because something isn't quite working. Uh, but but give it time and and you may see that that divergence there between benchmark performance and and the performance of the fund.

Speaker 0:
Um, but but yeah, be be interesting to keep watching it, but, uh, I think it needs to

Speaker 0:
needs to prove itself a bit yet. And Charles going back to the sustainability E s g angle. Do you think for for smaller companies in particular, it is quite challenging because they haven't had the track record of, say, a larger company to then meet all of the various metrics that people want to see in E S G. I

Speaker 1:
think it's even more important because a lot of times

Speaker 1:
flash cap they can disclose all the information that a fund manager will need. Small cap. You don't have this external rating. You have to do your own work. But I believe this is where you add the most value where you don't rely on any external. You can do your own e g work. You can really see the G programme. You can

Speaker 1:
measures the risk accordingly, and obviously it is coming to your different financial metrics. And it's also in terms of engagement with companies where you can do some more work and come back to your unit holders and be like we've been engaging with all those companies. This is how they've been delivering over time. So where I think he actually works best is probably with small caps

Speaker 0:
and on that engagement angle that do you think engagement works better with family owned businesses, or perhaps without it

Speaker 1:
can depend. So, um,

Speaker 1:
uh, if it is not working, then it is, uh, the responsibility of the fund manager to then walk away from the position at some stage. So obviously, uh, you know, if you own something. You expect some level of engagement?

Speaker 1:
Uh, and, uh, some level of change from the underlying holding. Uh, but if it isn't going in the right direction or if, uh, you know, a key sort of performance indicators that you set the company whether it be on carbon or diversity or anything, If they're not meeting those goals, then it becomes incumbent on the fund manager to say, Well, OK, we'll we'll go and invest somewhere else. And I think it it is a two way, uh, sort of, uh,

Speaker 1:
relationship there. Uh, so, uh, the fund manager has to be willing, uh, to de deinvest from that position at that stage. But it does work really well to your point in smaller companies because, uh, you know, they've got a more concentrated group of investors and, uh, you know, they should be listening because a lot of these e S G benchmarks are are, uh, by companies that are far bigger than them.

Speaker 1:
And it pays, uh, to follow, uh, in that direction. Uh, because you're learning from people who've built much bigger businesses,

Speaker 1:
and that is normally for a reason that they've been able to get bigger, Uh, because the, you know, the direction of travel around, uh, board structure or, you know, staff diversity. How you how you treat various, uh, sort of stakeholders and stuff is important. Um, and that kind of gives them an edge as well, going forward versus those larger companies because, uh, the smaller sort of relationships, uh, matter, uh, to smaller companies, more so

Speaker 1:
than they do to larger ones. Larger companies will get that business regardless. Smaller companies sometimes have to fight for it, particularly when there's skill shortages. Uh, when there's, uh, sourcing issues like we've had over the pandemic.

Speaker 0:
And I'm gonna come to you for the last point. Now you're an investor. You're looking at this fund. Are you going to core holding or satellite? What do you think? Um,

Speaker 0:
you'd be brave to make it a cool holding, I think.

Speaker 0:
Um, yeah, I think certainly a a satellite. Um, but I'm a family man, so I like them. That's a great point to leave on. Um, Well, thank you very much for watching this funds in focus. I'd like to thank my guest, Charles for, and Andy. And I'll see you here for the next one on Asset TV.