Growth opportunities in the European small- and mid-cap sectors are being found among turnaround companies, disruptive technology firms and banking stocks, according to TR European Growth Trust manager Ollie Beckett.
Sentiment towards European small- and mid-cap stocks had dipped in recent years and faces further uncertainty in 2017, with several elections being held against a backdrop of growing support for right-wing populist movements.
The outcome of French and German elections later this year will set the direction of the eurozone for years to come, while the triggering of Article 50 by the UK government and exit from the EU is likely to add further instability.
This has been coupled with weak returns in recent years as European governments have dealt with the fall-out of the sovereign debt crisis in 2009 and ongoing support for some of the eurozone’s weakest economies.
Performance of indices over 5yrs
Source: FE Analytics
Indeed, the MSCI Europe ex UK has been one of the worst performing markets over the past three years (26.81 per cent) – narrowly beating only the FTSE All Share (23.06 per cent) over the period.
Beckett said: “When I go around I just get political noise thrown back at me – understandably so.
“Whether it’s the US election, the UK election, the Italian referendum there’s always a reason not to invest in European smaller companies.
“I don’t want you to get the violins out but that’s probably reflected in the fact that we trade always at a 14 to 15 per cent discount – or a much wider discount than my large cap counterparts – as is the same in the UK.”
However, small-caps in Europe have returned 45.02 per cent over the last three years, and Beckett says “you can make some good money in this space”.
He has three main areas of focus for 2017, beginning with technology, where he sees a number of opportunities at the lower end of the market.
His trust, TR European Growth Trust, is overweight technology (14.7 per cent) and he particularly likes the e-commerce space where he sees a number of different avenues to the market. 
“People tend to think of online retailers and we can get exposure to that through Net-a-Porter which is an Italian retailer,” Beckett (pictured) said.
Another option is Verkkokauppa, founded by a “young Finnish guy out of the back of his garage”, according to Beckett. The firm is now the number one Finnish online retailer.
“They’re all there and we can get exposure to those but you have got to think further afield. If we do more shopping online there’s more warehouses and that means more automated warehouses, which Jungheinrich provides. It means more forklift trucks,” he said.
“And then you get very exciting companies like Criteo which is a French company listed on Nasdaq which is that company is sending you the targeted adverts online - so be careful what you look at because those adverts are targeted at you.
“They are getting their clients millions of click-through sales every day and they are very much leading the way – so there are a lot of ways to play this sector.”
The other area the £385m investment trust is overweight is in financials stocks representing 15.4 per cent of the portfolio, which he says offer valuation opportunities.
The manager said: “We are overweight banks and were overweight throughout 2016 because that’s where I saw value but fortunately in smaller companies I can get at banks where things are happening and changing.
“We didn’t go overweight banks because of some great top-down decision, we went overweight banks because that’s where there was value – they were simply undervalued.”
His first example is Van Lanschot a Dutch bank that is transitioning towards being a pure wealth manager as they own Kempen for example the asset manager.
Beckett said: “There was an opportunity here because Delta Lloyd owned a large stake – almost 25 per cent – Goldman Sachs did the placing and they work for Delta Lloyd so they didn’t care what price the placing was done at and that was the opportunity.
“This bank is transforming itself and it will give you a very healthy return and if it grows its assets I could be very special.”
The other holding in the sector held by the trust is Italian start-up Fineco, which Beckett says is ideally positioned to take advantage of current banking trends.
“If you were starting a bank today this is what it would look like. It would have a leading online platform, up-to-date IT systems, not legacy systems or branch networks – and that’s what this company is doing,” he said.
Another area of interest to investors in smaller companies looking for growth is when a management reshuffle takes place, as has happened with companies such as sports retailer Puma.
He said: “Puma had lost its way a bit and had tried to be a street brand for want of a better way of putting it – think cool kids on skateboards – but unfortunately that comes in and out of fashion.
“A guy called Björn Gulden took over and I knew Björn because I had invested in Pandora when he became CEO and he managed to turn that company around and he moved from Pandora to Puma because his family were in Germany and he’s an ex-professional footballer – he was in his dream job.
“And he’s turned it around. He’s got it back to football again and he may have got lucky with the likes of Leicester City but it is working.”
He says this idea of new management gaining fresh perspective and returning to the basics of the company is what he looks for.
Beckett said: “Another example is Nobia, they make kitchens – the largest kitchen manufacturer in Europe.
“Here new management came in in 2011 from Electrolux and optimised the company, reduced the number of products they made – you don’t need 45 different white kitchen doors – and they turned it around.
“They own Magnet which is why since Brexit they have had it a bit tough and everyone has assumed that they are having a hard time.”
This approach has worked for his TR European Growth which has been a consistent performer over the last decade, returning 120.78 per cent, and the trust has been the best performer in the IT European Smaller Companies over one, three and five years, though there are four funds in the sector.
Performance of fund vs sector and benchmark since manager start date
Source: FE Analytics
Having taken over the trust in July 2011 it has returned 117.12 per cent, and last year the fund performed particularly well, returning 19.62 per cent – the best in the sector.
“Last year TR European Growth which we run delivered 30 per cent NAV growth so there is definitely money to be made. This is where there is growth,” Beckett said.
The trust is on an 11.8 per cent discount, is 10 per cent geared and yields 1.1 per cent with a 1.18 per cent clean ongoing charges figure including performance fees, according to the latest data from the AIC.