A portfolio of European small and mid cap stocks with a focus on balance, diversification and stock-specific risk.
European small caps are attractively valued on a historic basis both relative to their European large cap and US small cap peers. The diversification to other global indices is also a key benefit to the strategy given the high levels of concentration in other areas of the market.
Like in other regions small caps have a history of outperforming large.
The chances of ‘mis-valuation’ in small caps are higher, benefitting fundamental investors such as Invesco.
Small caps have low correlation both to large caps and inter-regions.
Our investment process focuses on repeatable, sustainable alpha generation via a three-pillar framework, our investment ‘DNA’:
This consistent investment approach together with our focus on balanced portfolio construction leads to an emphasis on diversified, stock specific risk rather than factor risk and enables it to adapt to changing market conditions. We believe this leads to better long-term risk-adjusted returns.
Small caps are less well researched than larger cap stocks and so the chances of ‘mis-valuation’ in small caps are therefore higher. This makes the asset class especially interesting for fundamental investors like us who can rely on their own breadth of research to uncover opportunities for alpha.
Access the Invesco Continental European Small Cap Equity Fund product page to view KIDs/KIIDs and factsheets. The investment concerns the acquisition of units in an actively managed fund and not in a given underlying asset.
James Matthews and Michael Oliveros manage the fund’s stock selection. They have a combined investment experience of more than 40 years.
"Our commitment to building balanced, diversified portfolios - characterised by high stock-specific and low factor risks - stems from our recognition of the uncertainty of the future. This approach emphasises incorporating a margin of safety into our process and staying adaptable to change."
James Matthews, European Small Cap Equities Fund Manager
We believe that the scene is being set for a stronger macroeconomic backdrop in Europe; yes, the overall picture is complicated and not helped by politics, but the underlying data is slowly encouraging. Inventory levels are normalising; interest rates are coming down from their highs and so corporate loan demand is increasing and the supply side is easing; at the consumer level, mortgage demand and supply is also improving; European consumers have also enjoyed a year of real wage growth which, together with the current high savings rates, gives them spending power for when their confidence returns – this is important for an economy where the consumer accounts for over 50% of GDP. As consumer spending picks up, so will corporate confidence improve and capex there likely grow, too, and so the circularity continues.
Like in other regions, small caps have a history of outperforming large cap stocks. Some of the beneficial characteristics of European small caps are:
We screen for valuation scenarios. Our goal is to try and understand the range of possible outcomes, the valuation of the security, and the margin of safety for the stock. From there it is about being patient and waiting for an entry point. When that entry point presents, we consider if the stock is better or different than what we currently hold in the portfolio as we look to manage the portfolio balance.
You can invest in the European stock market by investing in actively managed mutual funds or exchange traded funds (ETFs). Invesco offers a broad range of actively managed funds and ETFs.
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