ChampionsNews: Mr Hoffmann, the German stock market has been highly volatile since June. What is your outlook until the end of the year, particularly for your preferred small cap sector?
Hoffmann: Uncertainty in the markets including in Germany has increased significantly, also because investors have priced in risks that do not even exist in our opinion. If the economy powers ahead as expected and interest rates rise, stocks whose values are based on expectations of significant long-term earnings growth will come under pressure while companies with low valuations that will outperform in this scenario will attract new money. We hold some of these stocks in the FPM Funds Stockpicker Germany Small/Mid Cap because their downside is limited and they offer a lot of upside. Many of these companies also benefit from a rise in interest rates as it translates into lower pension provisions.
Uncertainty in the markets has increased significantly.Raik Hoffmann
ChampionsNews: Why is a focus on small caps so beneficial? Which stock has proven particularly successful in the portfolio?
Hoffmann: We focus on certain business models in the small cap segment in order to follow certain trends more precisely. The German start-up HelloFresh, for instance, is the global market leader in its industry and even the most successful outfit of its kind in the US. This provider of meal kits delivered about 6.6 million meals to its fast-growing client base of 1.9 million users in the first quarter of this year. After direct sourcing from farmers, the ingredients are processed and packed. Delivery is most often performed by logistics companies. Its business model allows HelloFresh to operate with almost no storage and only low receivables. Ultimately, the company has negative working capital, which enables very high returns on capital employed. Thanks to the growing client base, orders to distributors can be placed efficiently and there is room for advantageous expansion of the product offering. In one of the last inefficient sectors on the planet, HelloFresh has learned how to consistently automate individual production stages and generate economies of scale as a result.
ChampionsNews: Why do you predominantly rely on German stocks? Won’t this overly restrict your investment universe?
Hoffmann: This focus has invariably lead to very good results for our investors over the past 18 years. The closeness to the companies from a geographical, language and informal point a view enables us to regularly end intensively challenge the portfolio candidates and their development. So far, our value approach enabled us to always find a sufficient number of promising stocks in this about 400 companies strong universe.
ChampionsNews: Your strategy has so far failed to deliver year-to-date. What went wrong in your view?
Hoffmann: The uncertainties in trade led to a strong flight in growth stocks that are significantly overvalued in our opinion. On the other hand, companies that already traded at low multiples were sold over ever fresh concerns. This in some circumstances excessively priced-in safety ends up being no safety at all in our view if the insurance premium is higher than the potential damage. The valuation discrepancies between the two market segments have now reached levels that should lead to a convergence.
Our year-to-date performance is certainly nothing to shout about. However we know that there will always be times in which our approach temporarily underperforms the market. The important thing is not to lose money over the long term, though. We believe that our approach of buying undervalued stocks and waiting patiently for their repricing is safer than taking higher risks with expensive momentum stocks and likely losing that money for ever if the market turns.
Author: Raik Hoffmann and Timo Lüllau
Date of issue: 9/25/2018
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