Small cap star targets indirect emerging Europe growth

Eastern Europe has bags of potential but concerns over corporate governance and political risk makes Austrian investments an ideal way to capture it, according to Euro Stars A-rated manager Daniel Lenz.

Lenz, who co-runs the €115.7 million Schroder ISF European Small & Mid Cap fund and three Swiss equity funds, said he has 20% of his fund exposed to Austria stocks, with a main driver of this being the access these names offer on its Eastern border.

‘Austria is a niche market but it has very attractive valuations and another main reason is we are interested by the opportunities in Eastern Europe,’ he said. ‘Many Austrian companies have good access into these markets.’

Lenz said the Vienna Insurance Group - a minor position in the strategy – is an example of a solid Austrian stock which has focused a lot of its growth outside of its domestic market.

‘The home market is a small part of its focus and they are looking at big increases in the Eastern Europe markets. If you compare it to, let’s say, a Polish insurance company, Vienna Insurance has a cheaper valuation and also better corporate governance.’

Ignore the UK

While Lenz is seeking indirect access to Eastern Europe, he is steering well clear of UK small and mid-cap companies and has no exposure to the UK market in his fund.

‘The UK is an area where we don’t find many attractive companies and it is also quite a crowded market because there are a lot of asset managers and investment companies there,’ he said.

‘It is a big and liquid market for many investors, but for us this is not that attractive and we have no holdings there at all. We prefer to look at neglected markets.’

He has a very low stock turnover of around 10-15% and the average holding period is five years. The most recent changes in the fund has seen a gradual reduction and then full removal of Finnish elevator firm Kone at the end of December.

Lenz said the stock had become too expensive and he has instead followed more contrarian bets such as a minor position in French cement company Vicat (0.6%).

He said this stock is benefiting from improved links with the emerging markets, most noticeably Egypt, but is undervalued due to concerns over the potential political risks involved.

In the 25 months since its launch, the Schroder ISF European Small & Mid-Cap Value fund has returned 6.9% in euro terms. This is while its Citywire benchmark, the MSCI Europe Small Mid Cap TR EUR, rose 13.4%.