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Markets fell sharply in the first few days of August due to weak US market data and increased geopolitical risks. We can expect a volatile market going forward, and central banks may act more quickly than previously expected. Valuations in the US tech sector are seen by many investors as challenging. Many of the companies, which have been buoyed by high expectations for AI growth, now appear to be adjusting down. Even if the Fed communicates an interest rate cut, there is a high risk that the market value of many of the larger tech companies will continue to fall.
The share prices of many Swedish companies have been strong since October 2023 despite showing weak figures. This is mainly due to expectations of lower interest rates and flow-driven movements. Larger small caps with moderate liquidity have been pushed up because they have many funds as owners. If the larger small company funds have an outflow, this could lead to significant price falls.
Despite a sharply declining market on some days, there are companies that shine green with positive returns, mainly smaller companies. This is because small companies have a low correlation with large companies and indexes, which happens because these companies have more company risk than market risk. The low liquidity of some companies makes it difficult for institutional investors to own them, which also affects the correlation with larger companies and indices.
The difference between larger small companies and smaller small companies is still large and can be measured by looking at the large cap*** and mid cap index** compared to the small cap index*. The difference is significant regardless of whether one looks at 1-year, 2-year, 5-year or 18-year history. Between the mid cap index and the small cap index, the difference on 2-year history is 25 percentage points, down 6 percentage points from last month.
*Small Cap Index: Company value less than approximately SEK 1.5 billion.
**Mid Cap Index: Company value between approximately SEK 1.5 and 12 billion.
***Large Cap Index: Company value greater than approximately SEK 12 billion.
July month
The stock market had a positive development during July. The NAV rate for the fund's A class was 118.80 in July. The fund's A class rose by 3.27% in July and since the beginning of the year has returned 13.09%, which is 3.67% percentage points better than the fund's reference index OMX Small Cap which rose by 2.15% during the month. The OMX Mid Cap index rose by 3.92% and the OMXS30 by 1.55% during the month of July.
Best and worst companies in the portfolio during the month
Best company (Return during July):
- Nelly Group AB: 47,81%
- Catena Media PLC: 31,81%
- Hoist Finance AB: 28,81%
- Sivers Semiconductors AB: 25,25%
- Egetis Therapeutics AB: 24,84%
Worst company (Return during July):
- Xspray Pharma: -36.82%
- Cantargia AB: -17,73%
- Vicore Pharma Holding AB: -15,23%
- CTT Systems AB: -15,17%
- BE Group AB: -13,37%
Best companies under the trend strategy (Performance during July)
- Nelly Group A; 47.81%
- Hoist Finance AB: 23,81%
- Netel Holding AB: 22,08%
- MedCap AB: 20,44%
- Alligator Bioscience AB: 20,00%
Strategy
Now is the time to separate the chaff from the wheat. In a possibly upcoming turbulent market with a trend of negative market returns, there are still companies, mainly small small companies, that show positive price trends. Through our trend model, we can identify them.
The fund carries out equal weighting of all positions every six months, and the most recent equal weighting was carried out at the turn of April and May, which resulted in all companies receiving a weight of approximately 0.8%. Historically, the strategy of equal weighting a broad equity portfolio has resulted in higher risk-adjusted returns compared to broad market value weighted portfolios. This outperformance can be attributed to the strategy's ability to better handle downturns, unlike value-weighted portfolios which are often heavily concentrated in individual stocks.
The fund's goal is to perform a good risk-adjusted return, offer equity exposure to companies that few other funds own, and to weather downturns well through equal weighting and even sector exposure. The strategy is based on trend-following investments between the equal weightings, with a focus on companies that show low volatility and a clear positive trend. However, in the cases of equal weighting, the trend-following strategy is not applied. Finserve Micro Cap invests in companies listed on the regulated market. The portfolio currently consists of approximately 127 companies listed with a market value of less than approximately SEK 12 billion and with an average company value of approximately SEK 2.6 billion. This value is significantly lower than the average among competitors' micro cap and small cap funds. Thanks to regular equal weighting, the trend strategy and the fact that the fund is one of the few fund owners in many of the companies, the fund has a low correlation with traditional micro cap and small cap funds.
Forecast
We expect continued high volatility after the market turbulence of the past few days. We may have to wait until the fall before the market stabilizes, provided the geopolitical risk decreases. Long-term interest rates fell at the beginning of August worldwide. There was no Swedish interest rate cut in June and an American one in July. We expect interest rate cuts at the next respective central bank meeting. The Fed will probably communicate something before the September meeting indicating a 50 basis point cut. The Economic Institute and others are calling for more interest rate cuts in 2024, and that is to be expected from both the Riksbank and the Fed.
We believe that falling yield requirements together with future interest rate cuts will affect the smallest small companies more than large companies. Many small companies find it difficult to finance themselves in this interest rate climate. The real estate sector stood strong in the market turmoil at the beginning of August and we are seeing signs of a recovery from low levels. We believe that the real estate sector along with med-tech will be winning sectors when interest rates are reduced and risk appetite is back.
Now is an excellent time to invest in "genuine" small companies that have low correlation with large companies and indexes.
Did you know that?
Over time, small cap indices have the lowest risk measured in volatility compared to mid cap and large cap indices. (Source: Nasdaq OMX Nordic, data: 2006-2024)
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