Emma Wall: Hello, and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Andrew Paisley, Manager of the Standard Life European Smaller Companies Fund.
Hello, Andrew.
Andrew Paisley: Hi.
Wall: So, lots of negative headlines surrounding Europe at the moment. We've got Trump threatening trade tariffs. You've got the rise of anti-Europe rhetoric within politics. Immigration crisis. As a European equities manager how concerned are you by these sorts of macro threats?
Paisley: Sure. You know, the headlines – a number of negative headlines. But I guess what I'd say to that is, it's ever been thus in Europe. Europe has coped with any number of different geopolitical risks over many years. Perhaps slightly more heightened at the moment. But as ever, we focus entirely on the bottom-up rather than worrying about macro factors which, to be honest, we haven't really got any particular insight into. So, of more importance to us is to take risks where we do have an edge which is at the micro level and focus on stock-specific risk which is currently around about 75% in the fund. So, trying to minimise the factor risks in the fund and maximise the stock-specific risks. So, at the micro level where we do think we have an edge.
Wall: And despite some of these threats it's an area that has done quite well in recent years. You and I spoke last year and if we'd spoken a couple of years before that, valuations would have looked a lot more compelling. Where are we sitting now?
Paisley: Well, interestingly, valuations still look pretty reasonable. So, the P/E on the small-cap benchmark is around about 16, which is not particularly expensive or cheap. So, what has really been the key driver has been the earnings growth in small-caps which has really been quite strong over the last couple of years in Europe. And that has meant that P/E ratio on the market as a whole is still perfectly reasonable. But again, we worry less about the aggregate value of the market across 1,000 stocks that we have in the universe and worry much, much more about the 44 holdings that we currently have in the portfolio and what's going on at the individual company level.
Wall: Let's get to those stock specifics then. Are there any particular sectors or indeed, companies, where you think this looks great at the moment?
Paisley: To be honest, there's lots of them, which is one of the great things about small-cap is, you know, the growth that we're able to access in small-caps is really quite exciting. So, we've had some very strong performers over the last six to 12 months in particular. But to be honest, across a wide range of different industries from Nemetschek in the software industry to Teleperformance in the customer relationship management sector. So, as ever, we don't really look at things from the top-down and looking at particular trends. It's all about individual stock ideas and very eclectic mix of ideas across the portfolio, to be honest.
Wall: Is there anything particular characteristic when you are looking at a company that could potentially make it into the portfolio whittling down that 1,000 to 44 which is found across the board in those stocks, which is your, kind of, one rule of it must have?
Paisley: Absolutely. So, we have a very strict process. It's been in place now for 21 years, tried and tested through four economic cycles. And what it's typically in terms of characteristics looking to identify are high-quality companies with good growth prospects and strong operating momentum. So, those are the traits that you'll find in common across the entirety of the portfolio.
Wall: Are there any particular sectors or countries, not because of macro reasons but because perhaps some new ones to the market means that you just aren't finding those characteristics at the moment? Is it industrials? Is it Italy?
Paisley: Yeah. So, within the early stage type companies – so, it's not within particular sectors, although these do tend to be a bit more prevalent in oil and gas and in biotechnology, for example. But we have a clear policy of not investing in loss makers or speculative businesses and that has stood us in good stead over a long time period. These high-risk businesses are quite binary in outcome, are not the right risk appetite for us.
Wall: So, small-cap but not start-ups?
Paisley: Exactly right, yeah. So, not micro-caps. Small-caps are generally always well-established, have a good track record and turnover, profitability and are generally paying a dividend.
Wall: And there's plenty of them?
Paisley: Absolutely. Yeah. So, you know, it's quite exciting – well, it's always exciting in small-cap, but you will feel very positive about the opportunities that are out there.
Wall: Andrew, thank you very much.
Paisley: Thanks very much.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
