Stockholm (HedgeNordic) – Finnish fund managers Jan Brännback and Janne Lähdesmäki joined Schroders last year to launch two funds focused on Nordic small- and micro-cap companies. Launched in early March 2022, just one week after Russia invaded Ukraine, the two one-year-old funds have been tested in some of the most challenging, volatile, and uncertain market environments investors experienced in recent decades.
“We launched the funds a week after the invasion of Ukraine midst of all the uncertainty surrounding the war, so we certainly experienced volatile markets right from inception,” Jan Brännback tells HedgeNordic. The small- and micro-cap corners of equity markets are even more prone to risk-off scenarios and increased risk aversion. “The volatility in the small- and micro-cap end of the market tends to be more exaggerated due to illiquidity. The risk aversion of investors has been even more pronounced in these segments,” recalls Brännback, who joined Schroders alongside Janne Lähdesmäki in early 2022. “We are glad to have been able to launch the funds, Schroders Nordic Smaller Companies and Schroders Nordic Micro Cap, in this kind of environment.”
“We are glad to have been able to launch the funds in this kind of environment.”
The duo joined British asset manager Schroders from Finnish asset manager Aktia Asset Management, with Brännback working there for more than 11 years and Lähdesmäki for more than eight years. They joined Schroders to run their investment philosophy of seeking quality growth at a reasonable price – quality GARP – in the universe of Nordic small- and micro-cap stocks. Some of their long-standing clients have followed the duo to join them under the umbrella of Schroders. “We have been able to add net assets over the past four months, so we are grateful to our long-standing clients who joined us on our new journey,” says Brännback.
“Return on invested capital is the one metric that best crystalizes a well-run operation…”
The one main defining characteristic of a quality business is the ability to generate high and consistent returns on invested capital, according to the duo. “Return on invested capital is the one metric that best crystalizes a well-run operation, so we need to see a healthy return on capital otherwise the business is destroying value over time,” explains Brännback. In the micro-cap space, the team is ready to invest in businesses with a healthy growth profile and a high gross margin before the high returns on capital start being reflected in financial statements. “This is a place where smaller companies are in investment mode by growing through plowing back the cash flows into reinvestment opportunities,” says Brännback. “We are prepared to invest into more early-stage growth companies where we can model a healthy return on capital a few years out.”
Fruitful Hunting Ground
While every market-cap category may offer opportunities to outperform through active management, the small- and micro-cap space can be an especially fruitful hunting ground for active managers. About 90 percent of the listed universe in the Nordics represents small- and micro-cap companies. “You have an abundance of selection in the Nordics, about 1.500 out of the 1.700 listed companies are small and micro-caps,” says Lähdesmäki. “If you look at the index level, the long-term sales growth, earnings growth, cash flow growth for smaller companies are all higher than for larger companies,” Lähdesmäki explains the attractiveness of smaller-sized businesses.
“If you look at the index level, the long-term sales growth, earnings growth, cash flow growth for smaller companies are all higher than for larger companies.”
“Larger companies don’t have as big reinvestment opportunities as smaller companies,” says Lähdesmäki. “The base is so big for a large company that even if an additional 100 million euro reinvested in the business might not move the needle, while a smaller company has a smaller base to work on,” he elaborates. “Every basis point of market share taken away from the large-cap peers is so much more in terms of growth potential for the smaller companies.”
With Nordic countries representing a relatively small home market for most businesses, “most smaller-sized companies in the Nordics focus on international growth quite early on,” emphasizes Lähdesmäki “The growth opportunity for those companies is very sizable.” With years of experience behind their backs, Brännback and Lähdesmäki continue their journey of finding and capturing potential in small- and micro-caps with limited or no sell-side coverage after successfully navigating a volatile first year of operations.