We look for structural winners in the niche
With the DJE - Mittelstand & Innovation, DJE bundles high-growth and innovative companies from Germany, Austria and Switzerland in one fund. Its concentrated portfolio includes many of the "hidden champions" from this region, which has recently been somewhat out of investors' focus, but whose strong Mittelstand companies are still worth a close look.
By Philipp Stumpfegger, Co-Fundmanager DJE – Mittelstand & Innovation at DJE Kapital AG
Why should investors focus on small and medium-sized enterprises (SME, “Mittelstand”) and innovation potential from this region in the current crisis-ridden market environment?
With its focused portfolio, the DJE - Mittelstand & Innovation can represent a very promising addition with a generally low correlation to investors' portfolios - with tactical added value even in the current environment.
What exactly has made life so difficult for growth stocks this year?
Volatility has increased noticeably over the course of the year in the wake of the turnaround in interest rates, which has been particularly hard on growth stocks. Strongly growing companies, such as those prominently represented in the Mittelstand & Innovation, are particularly affected by rising interest rates, for example. Financing growth simply costs more now than it did in the days of zero-interest monetary policy. In addition, the price and availability of energy play a major role for German industry.
In addition, the region is often hardly investable anymore for international investors, not least because of the war in Ukraine and the energy issue due to the aforementioned challenges. Many asset managers have drastically reduced their investment quotas in Europe and thus also in the Germany/Austria/Switzerland region. Large corporations and medium-sized companies are already suffering from this in particular. In other words, many companies that are actually healthy have been put on the back foot here.
Why does the Germany/Austria/Switzerland region offer great potential despite some reservations?
The region is very well positioned in terms of hidden champions, especially in the SME sector. Per million inhabitants, Germany, Austria and Switzerland have the largest number of hidden champions. With around 1,500 SMEs, it is therefore the core region of hidden champions worldwide. The SMEs - rather than the large corporations - are the innovation, technology and economic drivers of this region.
What strategy does the fund pursue?
We look for the market leaders in the niche: The investment focus is on high-growth and innovative companies from Germany, Austria and Switzerland. The active mix of structural, cyclical and potential growth stocks results in a structured and balanced growth approach. With 50 to 80 individual stocks, the fund offers a concentrated investment strategy based on high-quality stock selection with a focus on company fundamentals.
How do you select stocks?
When it comes to selection, investors can rely on our research-based approach, which has been tried and tested for decades and does not just apply to "big" stocks. Rather, we have a proven ability to cover smaller segments as well and to map them in products. To this end, we offer a highly focused portfolio in the form of DJE - Mittelstand & Innovation.
On this analysis-based foundation, we position the M&I very clearly, rely on a precise and transparent stock selection in the universe and deal with each individual company very intensively. Transparency also applies to the structure of the fund. We do not use bonds or hedges in the fund that require explanation. This gives investors a very easy-to-understand overview of the stocks in the fund. This also includes some established dividend stocks from the M-Dax. Although these are not the focus of the fund, they still contribute to its performance.
How do you diversify your portfolio?
We see ourselves as an active manager and do not follow any benchmark in this fund. We use our in-house FMM method (fundamental, monetary and market), supported by our FMM 2.0 database. Overall, the focus on medium-sized companies and hidden champions in the Germany/Austria/Switzerland region offers a promising investment strategy in addition to an attractive risk-reward profile. DJE - Mittelstand & Innovation focuses on technological trends in various sectors. Segments in focus are: Cyber Security, Personalized Medicine, Industry 4.0 and Semiconductors, Renewable Energies, IT Services and Big Data as well as Autonomous Driving and Electromobility.
What makes these medium-sized companies attractive to investors with a long-term focus?
We look for innovative and high-growth SMEs that are well positioned in their niche, allocate high budgets to research and development, and thus also have strong growth opportunities - with a focus on structural growth. The long-term mindset of management is also crucial: When investors talk to a DAX board member, the focus is often on the next quarter, the next reporting season. The perspective is often comparatively short-term. With a family- or owner-managed company, we talk about the next few years or even decades. In many parameters, medium-sized companies are also better positioned than large corporations, for example in terms of research and development spending, the number of patents, the length of time the boss stays with the company, or the proportion of trainees.
How does the M&I currently stay on course in the best possible way?
Overall, we are more defensively positioned than we were a year ago. This applies not least to technology stocks. Since the fund invests at least 51 percent in companies with a market capitalization of less than five billion euros, these stocks are not generally in the focus of analysts. However, the less a stock is in the focus of analysts, the greater the opportunity to generate alpha through our own research. Therefore, we are confident that the fund can deliver very good growth and performance data over the long term.
Looking ahead to 2023, what do you expect for your fund?
We believe the macroeconomic and monetary policy environment will remain challenging in early 2023. In addition, there are various political issues that create additional uncertainty, such as the China-Taiwan conflict or the war in Ukraine, which is why we are currently still quite defensively positioned. However, it should be noted that the market is looking six to twelve months ahead and we should see significantly lower inflation rates towards the middle of 2023. This means that the central banks should also act somewhat less restrictively again in the near future. Growth or technology stocks in particular, which tend to be overweighted in the M&I, should then benefit from this scenario.
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 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. A summary of investors' rights can be obtained free of charge in English in electronic form on the website at https://www.dje.de/de-en/summary-of-investor-rights. The funds described in this marketing document may have been notified for distribution in different EU Member States. Investors' attention is drawn to the fact that the relevant management company may decide to withdraw the arrangements it has made for the distribution of the units of its funds in accordance with Article 93a of Directive 2009/65/EC and Article 32a of Directive 2011/61/EU.