MONTANARO EUROPEAN: Big returns from small firms

London-based investment manager Montanaro eats, sleeps and breathes ‘good’ smaller companies. Its investment view is simple: smaller companies offer the potential to deliver investors stellar long-term returns, especially if they are also run with a firm eye on the environment, adopt fair work practices and do not promote boardroom greed. 

It’s a philosophy that underpins the £3billion of assets Montanaro runs on behalf of investors – with all its funds and trusts having at least 60 per cent of their investments in ‘good’ smaller firms. A team of 11 in-house analysts constantly scour the world in search of hidden investment gems that the managers can then include. 

Nowhere has this commitment to minnows proved more successful than at investment trust Montanaro European Smaller Companies. The performance of this £282million fund over the past year in the face of the pandemic storm – an overall return of 44 per cent – has been exceptional and is far superior to other trusts specialising in this particular area. Its three- and five-year investment records also knock spots off its competitors. 

The manager is George Cooke, who has had a hand on its tiller for the past eight years. He is keen to play down his role in its success. He says the trust’s performance is primarily a vindication of the meticulous investment approach adopted by Montanaro towards smaller companies. 

This ensures no manager can buy any stock without it first being approved by the company’s internal investment committee. It also means a holding must be quickly offloaded if the same committee believes it has outlived its purpose. In other words, no fund manager is allowed to go off piste. It’s a team approach. 

‘European smaller companies are an overlooked investment space,’ says Cooke. ‘Collectively, they represent an asset class that is not easy to cover and is labour intensive in terms of analysis. But for those happy to do the hard graft, which our analysts are, there are some rich pickings to be had.’ 

Although Cooke says many UK investors remain lukewarm to investing in Europe, he believes some of the smaller businesses based in Germany and Sweden are among the best in the world. 

‘There are a huge number of entrepreneurs in Europe running good quality, high growth smaller companies,’ he says. ‘Most go under the radar of investors.’ 

The trust currently has 56 holdings, all of which are listed – Montanaro does not invest in unquoted companies. The biggest holding is Swedish accountancy software company Fortnox, which dominates its home market. ‘The more work we did on this business, the more we liked it,’ says Cooke. ‘We first invested back in September 2017 and then bought more shares in early 2019. It’s been so successful we have had to trim our holding a little bit so it doesn’t become too dominant in the portfolio.’ 

Cooke, who has his own money in the trust, says most of the businesses in the portfolio are immune to any fallout from the recent Brexit deal. The bigger ‘risk’, he believes, is future underperformance against rival funds. This tends to happen when stock markets are in bullish mood and do not put a price premium on the kind of quality companies he prefers. 

It’s a point also made by James Carthew, head of investment trusts at research company QuotedData. He says: ‘A focus on quality may mean you get left behind as a fund manager when investors are engaged in a ‘dash for trash’. But over the long term, the quality approach adopted by Cooke should pay off.’ 

The trust’s stock market identification code is 0454351. 

This post first appeared on Dailymail.co.uk