René Kerkhoff, fund manager of the DJE - Mittelstand & Innovation
Structural growth preferred
The DJE- Mittelstand und Innovation was launched five years ago and René Kerkhoff has been responsible for the fund since 2018, first as co- and since the beginning of 2019 as senior fund manager. In the interview he talks about the structural potential of growth stocks, the digitalization of life and why his job appeals to him.
Mr. Kerkhoff what attracts you about your job?
My curiosity: I always enjoy getting to know new companies and their fields of business or well-known companies with new approaches and strategies. Over the years as a fund manager and analyst I have had many very enlightening conversations with responsible people and have always found promising arguments for an investment. I would be a pleasure for me to continue this way.
When selecting stocks you look for structural, cyclical and potential growth. Would you please explain that more precisely?
The fund's investment strategy is based on these three pillars: The majority of the titles in the portfolio show structural growth. These companies are established and are market leaders in their market niche. If this niche grows faster than the market as a whole, these companies benefit. We take cyclical growth into account. This means that we also invest in companies whose incoming orders show strong momentum and which are growing at a temporarily above-average rate. The third pillar is the potential growth that companies can achieve thanks to their innovative strength. In other words through new products or by penetrating new countries and opportunities.
Consequently your investment approach is very growth-oriented. Do you consider it to be strongly dependent on the economy or subject to cyclical fluctuations?
No, growth orientation and cyclical dependency are two different things. Cyclical sectors such as oil, chemicals, banking or automotive do well when the economy recovers or booms. But we have large underweight in these sectors. Instead the fund focuses on the sectors technology, healthcare and e-commerce. These sectors have a rather non-cyclical character. This is not surprising in the case of healthcare, but perhaps it is in the case of technology and e-commerce. But these segments are now like "utilities", offering services such as cloud, software, video conferencing or streaming that many companies and consumers would not want to miss. This has resulted in well-established customer relationships. The growth of these companies is therefore structural and therefore interesting for us in the long run. In contrast sales in some cyclical sectors have collapsed by almost 60%.
When would it become rather difficult for your fund?
Over the past 20 years, growth stocks have been the main beneficiaries. However, sector rotations occur from time to time, i.e. phases in which the cyclical and value stocks from the so-called old economy take the lead. Then things generally do not go so well. Of course in such phases it is also possible to give cyclical stocks a stronger weighting. But in the long term, I am convinced that the new economy will outperform the old economy.
Your focus is on German-speaking countries. Why? Are there any attractive potential medium-sized companies elsewhere?
The D-A-CH region with about 1,500 companies is the epicenter within Europe for medium-sized, often still owner-managed companies, the so-called "hidden champions" who hold a leading position in one or more market niches. We, i.e. DJE, are a medium-sized company ourselves and know the needs of these companies well: high legal security, stable economic situation, widespread good educational facilities and a large pool of potential employees and consumers ... this offers an excellent breeding ground for medium-sized companies. But back to your question: We also find attractive opportunities elsewhere, for example in Scandinavia, the Netherlands or Luxembourg, which we add to the mix.
Is it a sign of quality for you that a company is family-run? Aren’t actually the financial figures decisive?
The structure and the way of thinking are different. Owners often hold a significant share in their companies and are therefore more interested in how the share develops. An employed management deals differently with a company and its employees than owners do. Some think in terms of the quarters of a regulatory accounting season, others in terms of decades. This has an impact on the strategy and innovative strength of companies. It is no coincidence that owner-managed companies train more people, keep their employees longer and conduct their research and development more intensively. Their innovative strength is higher and so is their growth potential in the end.
Environmental and sustainability aspects (ESG) also play a role for all DJE funds. How does this apply to your fund?
We cooperate with MSCI ESG Research to ensure that the companies we invest in are compliant with ESG standards. However, many small and medium-sized companies do not have an ESG rating. That's why I regularly raise the issue at meetings with the responsible parties, because environmental aspects are also important to me personally.
What do you do to avoid high drawdowns? For example, how did you react to Corona?
At the time when Corona was spreading in Europe but had not yet reached its peak we increased the cash ratio of the fund and reduced the equity risk through derivatives. In total we were only around 70% invested in March. We also reduced cyclical companies and gave preference to those with we considered having very solid business models, including utilities such as solar parks, real estate companies and the aforementioned technology, healthcare and e-commerce sectors. In this way we have reduced volatility.
And what about now? What is the key to stock selection now?
The Corona pandemic has revealed and reinforced strengths and weaknesses that were also present before. Values that were strong during Corona are now becoming even stronger. Corona has also triggered an unprecedented surge in digitization. As if in fast motion we have seen digitization investments and offensives within two to three months that would have taken two to three years under normal circumstances. This trend will continue and supports technology and e-commerce titles and presently the end is not yet visible. Therefore, in my view, the valuations of these stocks are high but not exaggerated. Healthcare is also benefiting from the pandemic. Therefore these three sectors remain the focus of the fund.
What do you expect for the rest of the year?
I invest on a long-term basis and believe it is important to stick to a proven investment style regardless of Corona waves or vaccine development. This is not calculable for me. But the possible growth potential of a company is. Should the markets decline again, I would consider this a buying opportunity for good owner-managed companies.
As a fund manager, do you exclusively follow the results of your analyses or (sometimes) your instincts?
Yes, I sometimes listen to my instincts too. But to do so, you have to be very close to the market and also be familiar with the companies. Impulses can certainly develop from this. However, I don't make a gut decision if I don't know a company well enough.
Note: All information published is for your information only and does not constitute investment advice or other recommendation. Long-term experience and awards do not guarantee investment success. Securities are subject to market-related price fluctuations which may not be compensated for by the active management of the asset manager or investment advisor. This information cannot replace a personal consultation. All information has been provided with care and to the best of our knowledge at the time of preparation. Despite all due care the data may have changed in the meantime. Further information on opportunities and risks can be found on the website www.dje.de. The sales prospectus and further information are available free of charge in German from DJE Investment S.A. or at www.dje.de The fund management company is DJE Investment S.A. DJE Kapital AG is the distribution agent.