Update on Echiquier Agenor SRI Mid Cap Europe
After a challenging year for the fund’s strategy in 2022 due to the sudden and steep rise in interest rates and an absence of interest for small and midcaps, the situation has stabilised in the equity markets since the end of 2022. The outlook is for renewed interest in this asset class, which has historically outperformed large caps.
Small and midcaps have been underperforming the market for two years. Over the last decade, European small and midcaps had amply outperformed the European market, generating some excesses in terms of valuation. At the end of 2021, small and midcaps were trading at a valuation premium of around 40%, twice the historical average. Over the past two years, the asset class, and growth stocks in particular, has suffered from a very sharp narrowing of multiples, compounded by an unfavourable interest rate environment. In this environment, investors have also reduced the level of risk in their portfolios by favouring the most liquid assets. The large-scale redemptions faced by small and midcap funds have weighed on the short-term performance of this asset class.
Over the last two years, the fund’s performance has been greatly influenced by the big fall in valuation multiples: between September 2021 and September 2023, the fund’s derating exceeded 30%, at a time when portfolio companies’ earnings were growing at an average of more than 10% a year. A large part of the portfolio continued to derate early this year, despite solid half-year reports.
In 2023, the fund benefited from two acquisitions, Simcorp and Dechra, at substantial premiums of over 40%. The market welcomed good results from Moncler, Edenred, Recordati and Scout 24. The semiconductor sector, a recent portfolio diversification, performed particularly well, driven by the rise of artificial intelligence. Among disappointments, the healthcare sector (Carl Zeiss, Sartorius, etc.) continues to suffer from inventory reductions and the slowdown in the Chinese market.
Small and midcaps are currently trading at an all-time low premium of 4% to large caps, which compares very favourably with the historical average premium of close to 20%. Our view is that valuations at these levels offer a good entry point for investors with a long-term investment horizon.
We are also witnessing a resurgence of M&A activity in the asset class, which is a particularly attractive pool for private equity funds, industrialists and family shareholders. Several deals have already taken place in our universe since the beginning of 2023, at significant premiums that in our view reflect the significant undervaluation of the asset class. Lastly, small and midcaps outperform large caps over the long term, driven by structurally superior earnings growth.
While the issues of inflation and interest rate hikes are probably behind us, fears about economic growth should refocus investors’ attention on companies’ earnings momentum. This is a more favourable backdrop for our stock-picking strategy, which focuses on the quality of fundamentals and resilient business growth.
Disclaimers: Past performance is not an indication of future performance. The fund is primarily exposed to the risk of capital loss, equity risk, small and mid-cap investment risk and discretionary management risk.
The stocks referred to are given by way of example. Neither their presence in the portfolio nor their performance are guaranteed. The opinions expressed in this document are the authors’ own. LFDE shall not be held liable for these opinions in any way.
For more information on the characteristics, risks, and costs of these funds, and before investing, we invite you to read the regulatory documents available on our website at www.lfde.com.
 S&P (Capital IQ)
 Goldman Sachs (data sourced from FactSet)
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