03. Jul 2019 Equities

Small and mid-cap stocks have what it takes to play the lead in equity portfolios

Listed small and mid-cap German companies offer great return opportunities, believes DWS fund manager Valerie Schueler.

  • When picking stocks, investors should not just consider the blue chips in the Dax, but also small and medium-sized companies.
  • However, if you want to make the most of the broad range available, you do need to carry out extensive equity research and limit risks.
  • This is where actively managed funds come into their own, investing in the most promising shares in a highly diversified portfolio.
3 minutes to read

Valerie, you run the DWS German Small/Mid Cap fund. What advantages do small and mid-cap stocks have over larger blue chips?

If you only invest in large German blue chips, you are passing up return opportunities. In fact, you are actually ignoring a considerable part of the value created by listed companies. Stock selection is certainly more difficult in the small and mid-cap sector. Investment banks’ equity research on small and medium-sized companies is generally patchy, and analysts often don’t have much experience of them. This is largely because there are significantly more small and mid-caps than blue chips. Analysis is therefore more time-consuming, creating an information gap that can open up interesting investment ideas for us that other market participants perhaps haven’t yet discovered.

How do you go about selecting small and mid-cap stocks? Which criteria do you apply when deciding where to invest?

Our priority is fundamental data analysis. I focus above all on companies’ business models, as well as looking at various financial indicators and the general market outlook. A decisive factor for investment decisions is regular direct discussions with company management. That means I receive information first-hand information and am better able to evaluate changed situations. As one of the largest asset managers in Germany, DWS has excellent company access.

"The information gap can open up interesting investment ideas for us that other market participants haven’t yet discovered."

Valerie Schueler, Fundmanager

Valerie Schueler

Fundmanager

What makes German small and mid caps so interesting?

These companies often operate in niches but are market leaders in those niches and usually do business internationally. Smaller companies generally have higher growth potential. It is easier to double a turnover of a few hundred million euros than to double revenue that is already in the billions. Often, these companies are also still managed by their founders, who have invested their own assets in them. They may be able to react more nimbly to changes in circumstances, thanks to flatter hierarchies. But higher growth opportunities are balanced by higher risk. Small and mid caps’ profits are sometimes less stable than those of large established companies, and their share prices can also be more volatile.

How can higher risks be mitigated?

Diversification is everything when it comes to small and mid-cap stocks. The DWS German Small/Mid Cap fund operates in a universe that consists of about 300 stocks. The fund usually invests in 50 to 100 companies, which creates the kind of broad diversification individual investors normally couldn’t achieve. But you do have to be aware that stronger price fluctuations are part and parcel of investing in the smaller-stocks sector. This has some advantages. It means opportunities to buy into promising companies cheaply occur more frequently.

Since the beginning of the year, the DWS German Small/Mid Cap fund has outperformed its benchmark by around two percent. Which sectors and trends are you currently focusing on?

At present, I am focusing more strongly on consumer and industrial stocks. These stocks contributed to our good performance this year. However, individual stock selection is the most important factor. In the consumer sector, we’re concentrating mainly on business models that can profit from the shift from high-street to online retail and therefore produce strong growth. In the industrial sector, the fund has recently benefited from companies that are piggybacking on structural trends such as e-mobility and automation and are therefore uncorrelated with the general economic environment.

"Simply because of their smaller size, small and mid caps have greater growth potential."

Valerie Schueler, Fundmanager

"Investing in trends requires a long-term view."

Valerie Schueler, Fundmanager

Since the beginning of the year, the DWS German Small/Mid Cap fund has outperformed its benchmark by around two percent. Which sectors and trends are you currently focusing on?

At present, I am focusing more strongly on consumer and industrial stocks. These stocks contributed to our good performance this year. However, individual stock selection is the most important factor. In the consumer sector, we’re concentrating mainly on business models that can profit from the shift from high-street to online retail and therefore produce strong growth. In the industrial sector, the fund has recently benefited from companies that are piggybacking on structural trends such as e-mobility and automation and are therefore uncorrelated with the general economic environment.

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