EN 
SE 
Will the spread narrow?
As you may remember, we wrote in last month's report that the difference between the Small Cap Index* and the Mid Cap Index** has never been so great if you look at e.g. 1-year, 2-year and 18-year history. We continue to think that the smaller small caps are more affordable than ever before if you look at their key figures in comparison to Large Cap*** and larger Mid Cap companies. The spread between Small Cap and Mid Cap Index is in 1 year approx. 27 percentage points and increased by 2 percentage points from last month.
With the Riksbank lowering the interest rate and announcing that more reductions may be coming, the smallest small companies took off. The interest-rate and sentiment-driven med-tech companies gained real momentum, and when Calliditas received a bid, we saw several price increases in the sector. We simply have to see if the spread will decrease or increase in line with lower interest rates and reduced yield requirements. We believe it will decrease.
*Small Cap Index consists of companies that have a company value of less than approximately SEK 1.5 billion.
**Mid Cap Index consists of companies that have a company value between approximately SEK 1.5 -12 billion.
***Large Cap Index consists of companies that have a company value greater than approximately SEK 12 billion.
May
The NAV rate for the fund in May is 119.25. The stock market had a positive development during the month of May and the market with small companies at the forefront gained momentum and increased confidence from the Riksbank's interest rate cut. The fund's A-class rose by 12.07 % in May. Since the beginning of the year, the fund's A class has returned 13.52 %, which is 2.26 % units better than the fund's reference index OMX Small Cap. The OMXS30, the index of the 30 largest companies on the stock exchange, rose during the same period by only 1.80 %.
Best and worst companies in the portfolio during the month:
| Best company | Return during April |
|---|---|
| Calliditas Therapeutics AB | 106,10 % |
| Xspray Pharma AB | 68,15 % |
| Itab Shop AB | 58,84 % |
| Hansa Biopharma AB | 52,04 % |
| Egetis Therapeutics AB | 6,52 % |
| Worst company | Return during April |
|---|---|
| Catena Media PLC | -31,22 % |
| Sivers Semiconductors AB | -30,92 % |
| Tobii AB | -20,72 % |
| Railcare Group AB | -11,24 % |
| Profoto Holding AB | -8,94 % |
| Traction AB | -7,80 % |
Strategy
The fund carries out equal weighting of all positions every six months, and at the end of April and May, the equal weighting was carried out and all companies received a weight of approximately 0.8 %. Historically, the recognized strategy of equally weighting a broad equity portfolio has resulted in a higher risk-adjusted return compared to portfolios weighted by market value. This outperformance is because the strategy is better equipped to handle downturns compared to value-weighted portfolios, which often have a high concentration of 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 fund's strategy is based on being trend-following between the equal weightings, with a focus on companies that show low volatility and a clear positive trend. On occasions when the portfolio is balanced, the trend-following strategy is not applied.
Finserve Micro Cap invests in companies that are listed on the regulated market. The portfolio currently consists of approximately 130 companies that are on OMX Small Cap and OMX Mid Cap. The companies have an average company value of approximately SEK 2.9 billion, which is significantly lower than the average among the competitors' micro cap and small company funds. The fund owns many companies that other funds do not have in their portfolio due to liquidity restrictions and a low proportion of shares available for trading. This makes the fund suitable for combining with other equity funds in order for the investor to get a better spread of the risks in his equity portfolio. The fund has a low correlation with traditional funds due to the deviation from the index, the trend strategy and the fact that the fund is the sole fund owner of many companies.
Forecast
There is a risk of increased volatility on both the interest rate and equity markets in the shadow of the geopolitical risks and a strong American labor market that can quickly lead to overheating. The fear index, VIX, is at its lowest level since January 2020, and historically, volatility tends to be significantly higher on average. Today the VIX stands at 13.15 and historically it has been around 20 on average. A normal value for the VIX is between 13 and 19.
"The interest rate controls the stock market, not the other way around." More interest rate cuts will take place in 2024, but they may be fewer than expected. It is no longer as certain that the Riksbank will lower the interest rate at the ECB's next meeting in June. The krona has strengthened against the dollar and if this continues, the decision to cut interest rates at the ECB meeting or after the summer will become more likely.
The return requirement is reduced, which benefits the stock market in general. The rule of thumb says that if the required return goes down one percent, the stock market goes up 10%. We believe that falling yield requirements and upcoming interest rate cuts will affect the smallest small companies more than large companies. Many small companies find it difficult to finance themselves. Even if the interest rate differential is low, it will, in combination with the reduction in the required rate of return, make it easier for companies to finance themselves. The med-tech sector has long been depressed due to low risk appetite and expensive financing, now we see signs that companies in the sector are recovering.
Now is an excellent time to invest in "genuine" small companies.
Did you know that?
The Small Cap Index has fallen the least in recent major stock market crashes** when compared to the Large Cap and Mid Cap Index.
*Micro cap companies (fund industry definition) are companies whose market value is less than 0.1 % of the total market value on the stock exchange. Today, this corresponds to a company value of approximately SEK 14 billion.
**Since 2006 when the respective Nasdaq index started.
Read myou