Smith says that China is turning to German manufacturing to revamp its industry and kick-start its economy, giving engineering exporters a boost, and that profiting from this dynamic is a major theme in his five crown-rated portfolio.
"There has been a slowdown in China although things seem to be picking up lately. But what’s going on in China now, in the manufacturing space, is that they need to start automating; for this they need big capital equipment."
"The Chinese don’t need persuading to buy German goods. The Chinese see German capital goods as the best in the world, anything made anywhere else is seen as inferior."
"I can therefore see a huge pick-up in demand for German manufacturing," he added.
Smith says the second theme in the portfolio is how German goods are becoming more popular across the Atlantic.
"There has been a lot of talk about the re-industrialisation of the US. One of the companies we hold, HOMAG – which produces woodworking machinery – had previously exported a huge amount to the US."
"However, the company it sold to had shifted to more low-cost countries for its manufacturing over the last decade. Now this company has told HOMAG that it is moving its production back to the US as it is cheaper for it to do so."
He added: "If this wholesale re-industrialisation is from a cost perspective, then you are obviously going to want the best capital equipment around. That suggests to me that German equipment is set to prosper."
The manager believes the slowdown in German manufacturing is over and investors should look to jump on the current low valuations before the export market booms.
"Corporate earnings remain high in Germany yet its market valuation is trading on a discount compared to wider Europe," he said.
"Anyone investing in Europe should just stick with Germany. It has lower valuations, higher corporate earnings and a larger export market than the rest of Europe."
Smith has managed the Baring German Growth fund since late 2008, having previously run BAM UK Equity Mid Cap.
Performance of fund vs index since November 2008
Source: FE Analytics
According to FE Analytics, since Smith began running the £286.9m fund it has returned 83.81 per cent. This beats the HDAX index it takes as its benchmark, which has returned 54.16 per cent over the same period.
Smith says the fund has a small to mid cap bias, but FE data shows it also counts Volkswagen as one of its top-10 holdings.
The manager is playing a wait-and-see strategy in relation to the wider German car manufacturing sector.
He believes its sales figures could be the driver for the general economy and will re-position his portfolio accordingly to a risk-on approach if the news is good.
"Right now the fund has been on the defensive a bit. The key point for me is the automotive chain, as it is highly cyclical. The main point for the German markets is the automotive value chain and the monthly car sales."
"We expect figures for November and the start of December to remain weak, but if the supply picks up at the start of January, then it will be very good news for the economy; though if it is delayed by just a week it will put a real dent in Q1 figures."
"This supply issue is the key determinate as we would move our current underweight to either a neutral or even overweight position in the automotive sector. This would go hand-in-hand with us getting rid of our defensive holdings," he added.
Baring German Growth has a minimum investment of £1,000 and total expense ratio of 1.60 per cent.