SKAGEN Focus: Exploiting market inefficiencies in global small and mid-caps

Investment Strategy

SKAGEN Focus is a global equity fund tilted towards small and mid-cap companies. The portfolio managers target stocks they believe to be materially undervalued and find the greatest mispricing opportunities in smaller companies where they believe the market is inefficient. In recent years market and regulatory factors have driven analyst coverage towards larger, more liquid stocks at the expense of smaller ones, which are increasingly under-researched.

The portfolio managers therefore believe they possess an informational advantage, resulting in a portfolio which typically trades at a steep discount to the broader market based on traditional valuation metrics and with a strong bias towards small and mid-cap companies, diversified by country and sector.

SKAGEN Focus is actively managed and expected to deviate substantially from underlying global equity markets over time. The portfolio managers apply a contrarian and price-driven investment process, built on the following pillars:

Small / mid-cap focus – The fund has a broad mandate with the flexibility to accommodate companies across the market capitalisation spectrum, but the majority of portfolio exposure is to small and mid-cap companies. The portfolio managers believe that market inefficiencies related to smaller companies create mispricing opportunities that can be exploited to create value for unitholders over time.

High conviction – The portfolio is constructed upon a number of core positions with the top 10 holdings typically representing 30-50 percent of assets. This high conviction investment approach results in an extremely high active share and substantial deviations from the underlying market over time.

Independent thinking – The portfolio managers believe that all companies are potentially attractive at the right valuation. They are unafraid to invest in deeply undervalued and unpopular companies, provided they can identify a clear pathway to a re-rating. This contrarian, price-driven investment approach means that they don’t discriminate against any investment opportunity on the grounds of sector, geography or perceived market quality.

Price discipline – A minimum 50 percent share price upside is targeted for every investment. The portfolio managers avoid stocks trading at or above their estimate of fair value and any revision to their original investment thesis requires substantial and fundamental change in the company’s prospects.

‘Buy vs. Build’ valuation framework – The fund applies a strict bottom-up equity valuation framework. Each stock is valued using a balance sheet-focused, private equity-type approach with an economic return estimate based on steady state or normalised earnings power.

Investment horizon – Clear and viable catalysts are identified as part of each company’s investment case. The portfolio managers’ investment horizon is typically 2-3 years, but companies may be held for longer, consistent with SKAGEN’s long-term approach.

Portfolio Characteristics

SKAGEN Focus is unconstrained by an underlying index, allowing the portfolio managers maximum flexibility to find value and select their best ideas to optimise the fund’s long-term risk-adjusted returns. Its benchmark is the MSCI All Country World Index but the portfolio's strong tilt towards smaller and undervalued companies means that significant deviations should be expected.  

In addition to the above criteria, the portfolio managers use an extensive due diligence checklist to analyse investment cases which includes assessing a company’s business model, financial statements, competitive landscape, ownership structure and ESG factors. They are comfortable investing in complex or cyclical companies, or those in restructuring or turnaround situations.

Read the Investment strategy PDF for SKAGEN Focus