Sustainable Equities European Smaller Companies
Thinking and acting like co-owners
Many small-sized European companies are market leaders and innovators in their respective niche markets. This potentially allows them to generate higher margins and, given their size, may allow them to operate more flexibly than large-cap companies, enabling them to respond faster to changing market and business conditions.
From 2013 to 2018, European small-caps outperformed the broader market, having benefitted from much stronger sales and earnings growth.
Because analyst coverage of smaller companies tends to be lower, there is more potential for security-mispricing, thus offering active managers the opportunity to add additional performance through strong stock-picking.
Our strategy is focused on investing in innovative, well-managed companies with strong balance sheets, solid cash flows and leading market positions. We think and act like co-owners in each company we are invested in, and place special emphasis on smaller companies and industrials that are well positioned to benefit from macro trends leading to structural growth.
Our strategy rests on four core investment principles:
- Focus on fundamentals: We prefer companies that can create value through operational improvements
- Valuations matter: We prefer cash-based valuations, which are less subject to management discretion
- Looking for tangible change: Financial markets are driven by changes in market participants’ understanding of fundamentals. We form clear expectations of these changes and then look for tangible evidence
- Sustainability Delivers Deeper Insights: We integrate sustainability in every step of our investment process
As a pioneer in sustainable investing, we have been integrating environmental, social and governance factors (ESG) into traditional financial analysis since the late eighties. We believe that such an approach is not only good for society, but also makes sense from an investor’s point of view. Many companies have long understood that making sustainability a priority is beneficial to their business. For example, an efficient use of energy and resources reduces costs, making innovative products results in higher sales, fostering quality management leads to customer loyalty and preventing corruption builds a better reputation.
We are convinced that long-term sustainable returns can only be realized if the livelihood of future generations is preserved. Today, this requires dramatic ecological, social and regulatory changes, which sustainable investors can contribute to through their actions. Identifying these developments early and integrating them into our investment process helps us to benefit from better opportunities, while mitigating risks.
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