367. Patience, discipline and the hunt for undervalued growth

18 September 2025 (pre-recorded 17 September 2025)

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Please remember we’ve been discussing individual companies to bring investing to life for you. It’s not a recommendation to buy or sell. The fund may or may not still hold these companies at your time of listening.

[INTRODUCTION]

Staci West (SW): Welcome back to the Investing on the go podcast brought to you by FundCalibre. European markets have faced tariffs, geopolitical tensions, and persistent uncertainty, yet opportunities continue to emerge. This week we discuss where smaller companies are finding growth, and why overlooked sectors may provide unique advantages for investors.

James Yardley (JY): I’m James Yardley and today I’m joined by David Walton, the fund manager of the Marlborough European Special Situations fund. David, thank you very much for joining us today.

David Walton (DW): Thank you James. Pleasure to be here.

[INTERVIEW]

JY: So David, I mean, this year has brought us tariffs, the usual political uncertainty and we’ve still got the war going on in Ukraine. I mean, what does this mean for European equities and your companies, in particular?

DW: I think James, we have a very diverse range of companies in the portfolio, which is one of its strengths. So as it means different things, different companies. For the firm’s biggest holding Sarantis, one of their big products is sun cream, and it’s still sunny in Greece. So good news, their sales are current growing this year because they’re not reliant upon US tariffs, they don’t sell much into the US.

Other companies we hold such as Fope, which is a luxury jewellery company, has strong growth this year, despite the fact that US customers are perhaps being a bit more cautious, other companies are more mixed. So we have a company called ProAct IT Group, which sells it hardware and data storage solutions in Europe. They have seen a slowdown as their corporate customers press the pause button as they are concerned about the tariff implications for their business.

Equally, company we hold in market research, IPSOS has seen a slowdown as well. Again, customers pressing the pause button. So I think some companies are sailing on really pretty well. Others, others are slowing down and other companies such as our holding R&S Group in Suite and Switzerland’s, which sells transformers, is experiencing continued strong growth because there is a large deficit in the investments in electricity grids in Europe.

JY: Yeah, no, very interesting. I mean, and we should probably explain to the listeners what your fund does and and what you look for because I mean, correct me if I’m wrong, but my understanding is it’s a multi-cap fund, but with a particular focus on smaller and micro-cap companies. I mean, can you explain what you mean by these micro-cap companies and we’ve seen an interesting period, I think it’s been a very tough period for small and mid-cap companies the last few years, but has that started to turn around this year now?

DW: Yes, it has James, the smaller company equity indices in Europe have outperformed the large cut ones this year to date this year, and that’s the first time in three years we’ve seen that. So that’s a good sign really, that investors are returning to look at smaller companies. They were trading in a large discount, so eventually that did temp investors to buy. And you know, looking forward, obviously can that continue, small companies are more exposed to domestic economic sectors in Europe such as construction, house building, retail, these sorts of areas. And there is some, there are signs of life there in those sectors which have been somewhat depressed previously. House building is beginning to grow again from lower levels in a number of European countries, albeit gradually. But this is still a promising sign and obviously, you know, those sectors are more independent of geopolitical events such as tariffs or other events which can affect the global equity markets.

JY: Yeah, I mean, I guess the trouble with Europe is the headlines are always negative somewhere, right? So at the moment it’s France and concerns about the government collapsing there. Obviously in the past we were worried about Spain and Italy and so forth, and maybe now they’re doing better. So it always almost feels like there’s never a good time to buy Europe. And then kind of the narrative is always negative, but actually the companies seem to tick along and, you know, your fund has certainly ticked along over the years and done well. So I mean, what are the characteristics you are looking for in those companies? I mean, and is there, is there actually growth there in Europe, which is kind of, I guess perceived as a lower growth or stagnant region?

DW: Yeah, I think you make some important points there James. And I think the main thing to say is that there’s a big difference between the fairly slow rate of economic growth in Europe, which we expect will continue, and the rather fast direct growth that can be achieved by certain smaller companies which are based in Europe.

So I gave examples of R&S Group in Switzerland, which is selling transformers to the electricity grid, which is experiencing double digit growth because it is in a sector or even a sub-sector, which has got particular strong growth drivers. So that’s really the point here is we are trying to seek out those companies which are in certain sub-sectors where there are different growth drivers compared to the wider European economies, which yeah, are slow growth economies and we’re not expecting that to change. And certainly the success we’ve had with the funds over a longer period of time has been down to certain investments in companies which have materially outgrown the European economies despite being based in Europe.

JY: And is there still value to go in businesses like that? I mean, the transformer shortage I guess has been talked about quite a bit now. Is that story still got further to play out? And I guess the other big theme in Europe this year and last year has been the rise of the defence stocks obviously is yes, more and more money is going into defence from governments. Is that something you can access in the small-cap exposure or is is, has that story now played out and maybe those stocks are too expensive?

DW: Yeah, I mean we have had a couple of investments in that sector, albeit perhaps smaller than it might have been, but we have made money there. We’ve reduced one holding data zero actually in that sector, and the other one has received a takeover offer. So we’ve made good money there for the funds. And I think currently the momentum is very strong in that sector in terms of expectations remain very, very positive.

Our strategy is to invest in companies with strong growth potential, which we think are, is not recognised by the markets in that respect. It’s not an obvious one for us to buy into the defence sector or to increase the funds waiting in that sector now, because I couldn’t really say that the sector is undervalued or, you know, not particularly well recognised by analysts and other investors. I think it’s probably a pretty hot sector, so I’m not saying it’s going to be a badly, but our approach is just to be invest a little bit off the beaten track and then be patient and wait for those companies to come.

JY: Yeah, I mean I guess that’s one of the big advantages you have when you are looking at these small, and particularly the micro-cap companies, is of course they’re not gonna be as well covered or well known about by other investors. And so hopefully you can find things before, you know, the story becomes obvious. I mean, how often do you how important is it for you to meet company management face to face and do you find that adds value or…

DW: Absolutely. Yeah, that’s a really important part of our process because we are doing our research ourselves. So we’re, you know, as well as doing our own analysis, building our own financial models, documenting company acquisitions, et cetera, we also meet the companies to get an impression of the managements, the people who are running the company.

For example, we hold us the Italian luxury jewellery company Fope, which is a pretty small company, but we’ve met the company a number of times, also visited their shop as well. So it is just getting the basics right, meet the company, understand its business model, what it does, see the company in action if it’s a retailer for example. These are all just very basic things which we have to do. It’s more to identify any weaknesses in the company, which we perhaps weren’t aware of just from looking at their presentation material.

JY: And why might an investor consider holding your fund alongside a larger European focused fund?

DW: I think because we’re offering something different, particularly investing in quite small companies below 1 billion euro market cap, where we have a fair amount of portfolio and those sorts of companies which are not really owned very much by other fund managers. Also, as I was saying before, our strategy is to look a little bit off the beaten track for companies that are under appreciated and then wait for them to come good, which means that we’re not necessarily buying into sectors that are particularly hot at the moment. So we hold one bank in Italy, which is more of an asset manager than a bank, but generally we have pretty much zero exposure to banks. We have a very low wasting and defence, which, you know, if for good or a bad. That’s how we are. So we are offering something different and yeah, we’re prepared to back our own judgment and not necessarily just follow the market and have a high weighting in sectors, which are doing well at the moment because, you know, as we both know, sectors do well until they don’t. It’s very hard to predict when they don’t, but that day will always come.

JY: Yeah, absolutely. And I mean, you’ve talked about a few of your companies there. Can you talk about some of the most exciting picks you’ve got in the fund at the moment which you’re really excited about?

DW: Yeah, I mean, I’m mentioning Fope which sells jewellery. I mean they grew their sales in the first half of this year by 45%, which was pretty impressive. And they are outgrowing their larger competitors thanks to a good design of products and a gradual rollout of their products across more partner retailers across North America, Middle East and Europe.

JY: How do you judge though the kind of the fashion element of a business like that? Because you often see it with these luxury names that, you know, they can go in and out of fashion. And is that a potential risk with a business like that? That what, right now everyone may love it yes, it love the product, but will that be the case in a couple of years time?

DW: Yes, well, that’s a good point in terms of Fope that the main product is a bracelet, which is about 5,000 euro, which is a more sort of timeless product. So they’ve been selling that for years and years, and they’re not particularly, you know, selling products which are linked to particular, you know, years events or to particular influencers or media stars. So they have a more kind of, you know, greater longevity of their product designs. But I have to admit that I’m not the best person to assess the fashion appeal of jewellery. So I’m more also going with the evidence that the company has shown to me of its records the way they have really carefully mapped out the expansion program, et cetera, et cetera.

JY: Yeah, I mean, well those numbers sound very impressive. I mean, my perception was that luxury had kind of cooled off a bit the last few years after a strong period and some of the luxury names had derated a bit like the likes of LVMH. I don’t know if that’s changed recently, but…

DW: That is true, yeah. Alone within that luxury sector, the jewellery sub-sector is actually doing better than the other luxury products. So if you look at the results of Fope, they also are doing better in jewellery effects currently. So that also we quite like Einhell, which is a manufacturer and vendor of power tools to the consumer markets. So they are competing with Bosch and Stanley Black and Decker for example. And you know, they are smaller than those two large competitors, but they have superior product design, they’re more innovative, they’ve been more aggressive in extending their product range, which has a single battery to fit all the products. So it kind of locks in the customer. They were able to identify that advantage fairly early on and really press hard with the single battery functionality across their product range. So that’s a very impressive company which has grown its sales 10% a year over the last seven years, and they grew their sales 9% in the first half of this year. So that is obviously over a period of, you spoke about at the start this sort of geopolitical volatility, economic volatility between 2017 and 2024. So this company has grown at sales 10% a year throughout that period.

JY: Yeah, that’s pretty impressive. I mean, what sort of valuation do you have to pay for a business like that?

DW: Einhell is on a PE of 13 times this year’s earnings. They’re still on a really a pretty modest valuation, which is really because I think investors perhaps still are not quite sure about a company which is making power tools, selling them through DIY stores. So it doesn’t appear to be an obvious one to buy. People think about DIY and they think about, well, it’s a mature sector, but actually, you know, there is room to grow here because this company is taking market share. And it’s basically, it is growing, its shelf space with its DIY retailer partners.

JY: Yeah, very interesting stuff. And how do you approach managing your kind of underperforming holdings? Are you willing to kind of hold some of the under-performers for the longer term or do you tend to cut things quite quickly?

DW: We try to understand why the company’s underperforming, so we do monitor them more carefully. We have a sort of a short list of companies which have, let’s say, disappointed somehow, or they’ve not fulfilled their original expectations that we had in terms of the investment case. So we monitor them more carefully. We tend not to add to them certainly, and then we will reduce them if we think that the investment cases isn’t gonna work out. But we try to be patient because quite often a company will have a short term setback in its expansion program, and then it can be a mistake to then sell the shares in that situation.

So obviously we have a sort of a very large number of examples there during the COVID lockdown period, which initially was very negative for share prices, but then it suddenly became the resulting unlocking of the world became quite positive. So would’ve been a mistake to have sold Einhell, for example, during the initial lockdown period, even though people couldn’t go to stores because it soon turned around. You know, and more recently I think we are seeing companies which are in the industrial sector experiencing slower demands as the economy in North America have slowed down as well as the economies in Europe. But we are not macro economic forecasters, so have to have some patience here that there may well be some improvement in the world economies around the corner, and it can be a mistake to sell these companies due to a short weakness and demand.

JY: Yeah, no, that makes a lot of sense. And so just finally then, David, I mean, looking ahead, I mean, what do you see as the biggest risks and opportunities for European equities? And I mean, how are you feeling about the fund going forward, given where we are at the moment with the outlook and with the current valuations? I mean, where is your enthusiasm relative to history, I guess given you’ve obviously seen many, many different markets over the years.

DW: Yeah, I would say that I’m not really a particularly excitable person, <laugh>, so I keep it quite, quite steady. And our job is to identify undervalued growth companies and then to be reasonably patient and hold them and give them time to develop their businesses and get a rewriting of their share prices. So that’s really what our job is. And I think the conditions are quite good for that because as you mentioned at the start, the headlines around Europe are often negative. This creates opportunity to buy some of these companies at fairly attractive share prices.

So I think we can certainly, we’re quite busy researching new ideas at the moment. We often are, there’s nothing, nothing new, but that remains the case. And then certainly the actual equity market itself, I think we’ve had any number of geopolitical shocks, which have depressed the European equity markets over the last really five years. And I think going back to 2020, even before that, we had a slowdown in 2018. So we’ve got a really a number of setbacks recently. Also, obviously the tariff issue is the latest shock. So I think, this sounds a bit naive, but if there was a simple, if there were fewer of these shocks, then that in itself would be a positive. Doesn’t have to be an amazingly positive development, just has to be a lack of these quite negative shocks.

JY:  Brilliant. Well, David, as always, that’s been really interesting. So thank you very much for joining us today.

DW: Thank you, James. It was great to be here.

SW: This fund invests in European businesses of all sizes but focuses on the continent’s minnows. This is a true stock picker’s fund with David scouring the market for under-the-radar opportunities. For more information on the IFSL Marlborough European Special Situations fund, please visit fundcalibre.com

Please remember, we’ve been discussing individual companies to bring investing to life for you. It’s not a recommendation to buy or sell. The fund may or may not still hold these companies at the time of listening. Elite Ratings are based on fun caliber’s research methodology and are the opinion of FundCalibre’s research team only.