Blended investment approach
“This achievement is due to several factors that have come together,” said Mr Fitzgerald, explaining this strong performance in a competitive segment. “In an environment characterised by change [COVID, interest rates, slowdown in European economies…] having a balanced portfolio has proved to be the right blend.”
“Rather than favouring a growth or value investment style, we have been open to many types of opportunity, sticking to our convictions while adapting to the wider economic environment,” he added. “Sometimes focussing on being a growth or value investor works well, but other times it’s not the flavour of the month, year, or decade.”
We focus on stock picking and looking in parts of the market where a lot of people don't go
Three themes
Don noted that the Archer Mid-Cap Europe portfolio is structured around three themes related to selecting undervalued or underexploited stocks “We focus on stock picking and looking in parts of the market where a lot of people don't go,” he said.
The main target are “compounders”: companies with the prospect of organic growth, and some inorganic growth. These account for about half of the portfolio. The fund also considers companies undergoing a considerable change to their corporate structure or their business model. Finally, they also look for exposure to fundamentally strong companies that have suffered from an external shock but maintain considerable potential for recovery and value creation.
Option to most options
“We will look at almost every business sector,” said Mr Fitzgerald. “We tend to shy away from heavily regulated industries such as utilities, banking and telecoms, particularly if they have very complicated financials,” he said. He notes that such firms can tend to have a restricted ability to adapt, as their business models are often structured around meeting regulatory demands.
The fund is also wary of companies which are dependent upon commodity prices. “Other people are better than us at predicting oil prices and the like, and earnings can be too volatile in these types of companies.”
Healthy EU small cap potential
Going forward, he sees potential for growth as European mid-caps catch up with recent large cap growth in Europe. He cites European SME’s exposure to variable interest rates as being a major factor in limiting recent growth; a situation he expects will even out over the medium term. Much also remains to be seen about the potential for fiscal expansion in Europe as the continent adjusts to changing geopolitical realities. There are also the risks from any future global trade war to be managed.
“It won't go up in a straight line, but for the long term, patient investor, European small-caps are probably going to work out quite well over the next three-to-five years,” he said.
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