Dutch equities: Looking to add value

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Being an active manager is not an easy task in today’s volatile market environment. Even more so if active management is combined with conviction based bottom up stock picking of Dutch small-and mid-cap stocks.But Willem Burgers and Hilco Wiersma, fund managers on the Add Value Fund are upbeat on the prospects for Dutch equities.

“Despite the fact that many Dutch small cap companies have managed to grow their profits there is currently an enormous discrepancy in the valuation between, for example, German or French small cap equities on the mone hand and the Dutch market on the other hand,” says Wiersma.

“Compared to the indices which track small and mid caps in France or Germany, the valuation of Dutch small and mid caps is lagging behind substantially and has grown at a much slower pace over the last few years.”

Other structural drivers are the devaluation of the euro, which benefits export oriented Dutch firms, and the growth of M&A, which has had a beneficial impact on the valuations of some of the fund’s key holdings.

Launched in 2007, the Add Value Fund invests in small and mid cap value stocks with market valuation between €20m and €7.5bn, while pursuing an unconstrained selection approach based on bottom up analysis. It currently holds some 14 Dutch companies, including the biggest single holding ASM International – 12.2% of the fund – and window manufacturer Hunter Douglas, which constitutes 11.7% of the portfolio.

“If you want to be a specialist in a limited field, or, as we often say, know a lot about not very much, you will have to restrict your investment universe, which is why we aim to look primarily at quality, rather than quantity,” explains Wiersma.

By definition, this strategy is subject to liquidity constraints and volatility, and therefore not for the faint hearted, as has been illustrated over the past three years, when the monthly realised returns of the fund fluctuated by for example -9,5% in February 2013 and +11,8% in February 2015.

Perhaps it is Wiersma’s background as a trader in options, or Burgers’ decades of experience with Dutch stocks, but neither seems to fear volatility: “We invest in a lot of companies which aren’t tracked by analysts,” says Wiersma. With a concentrated portfolio of smaller companies, a challenge in an individual company can have a severe impact.

In 2013, when an accounting scandal unravelled at technical services provider Imtech, the firm happened to be Add Value’s biggest holding. The fund’s monthly return dropped in February 2013 by -9.5% after a gain of 6.8% the previous month.

Nevertheless, over a period of more than a year, Burgers and Wiersma decided to keep faith that the Imtech board would manage to steer the company out of the crisis, until they saw themselves forced to completely sell their position. Still, they managed to sell their holdings at break even.

“We have learned that we need to dig even deeper, never trust the other parties’ figures, and we have chosen to become even more cautious with companies, for example, in construction projects and the financial sector,”Wiersma concludes.

Yet the bottom line of this experience seems to be that within the given strategy, long-term results remain key. Its investors, who are predominantly wealthy individuals as well as institutional investors should commit to investments over a three to five year horizon, says Wiersma.

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